Discover Financial Services (NYSE: DFS) today reported net
income of $546 million or $1.40 per diluted share for the second
quarter of 2017, as compared to $616 million or $1.47 per diluted
share for the second quarter of 2016. The company’s return on
equity for the second quarter of 2017 was 19%.
Second Quarter Highlights
- Total loans grew $6.1 billion (8%) from
the prior year to $78.0 billion.
- Credit card loans grew $4.6 billion
(8%) to $61.8 billion and Discover card sales volume increased 5%
from the prior year.
- Total net charge-off rate excluding PCI
loans increased 52 basis points from the prior year to 2.79% and
the total delinquency rate over 30 days past due excluding PCI
loans increased 33 basis points from the prior year to 1.93%.
- Consumer deposits grew $3.6 billion
(11%) from the prior year to $37.7 billion.
- Payment Services transaction dollar
volume was $50.1 billion, up 12% from the prior year.
“We delivered profitable loan growth, strong revenue growth and
positive operating leverage, which helped to offset normalizing
credit costs,” said David Nelms, chairman and CEO of Discover. “Our
new capital plan includes higher dividends and planned share
repurchases, and we expect to continue to deliver a leading yield
to our shareholders."
Segment Results:
Direct Banking
Direct Banking pretax income of $831 million in the quarter
declined $37 million (4%) from the prior year as higher provision
for loan losses more than offset higher net interest income.
Total loans ended the quarter at $78.0 billion, up 8% compared
to the prior year. Credit card loans ended the quarter at $61.8
billion, up 8% from the prior year. Personal loans increased $1.2
billion (22%) from the prior year. Private student loans increased
$191 million (2%) year-over-year, and grew $703 million (12%)
excluding purchased student loans.
Net interest income increased $187 million (11%) from the prior
year, driven by loan growth and a higher net interest margin. Net
interest margin was 10.11%, up 16 basis points from the prior year.
Card yield was 12.66%, an increase of 24 basis points from the
prior year because of increases in the prime rate, partially offset
by higher interest charge-offs. Interest expense as a percent of
total loans increased 16 basis points from the prior year,
primarily because of higher market rates and a change in funding
mix.
Other income increased $12 million (3%) from the prior year,
driven by higher discount and interchange revenue.
The delinquency rate for credit card loans over 30 days past due
was 2.00%, up 37 basis points from the prior year and down 6 basis
points from the prior quarter. The credit card net charge-off rate
for the second quarter was 2.94%, up 55 basis points from the prior
year and 10 basis points from the prior quarter. The student loan
net charge-off rate excluding purchased credit-impaired ("PCI")
loans was 1.15%, up 5 basis points from the prior year. The
personal loans net charge-off rate of 3.18% increased by 80 basis
points from the prior year. Net charge-off rates were generally
higher because of supply-driven credit normalization and the
seasoning of loan growth from the last few years.
Provision for loan losses of $639 million increased $228 million
from the prior year primarily because of higher net charge-offs.
The reserve build for the second quarter of 2017 was $119 million,
compared to a reserve build of $27 million in the second quarter of
2016.
Expenses increased $8 million from the prior year as higher
employee compensation was partially offset by a decline in
information processing, mainly due to infrastructure efficiencies.
Employee compensation increased mostly because of higher staffing
levels, as well as higher average salaries.
Payment Services
Payment Services pretax income was $36 million in the quarter,
up $6 million from the prior year, primarily driven by higher
transaction processing revenue and lower operating expense.
Payment Services transaction dollar volume was $50.1 billion, up
12% versus the prior year. PULSE transaction dollar volume was up
15% year-over-year. Diners Club International volume increased 8%
from the prior year, driven by growth across all regions.
Share Repurchases
During the second quarter of 2017, the company repurchased
approximately 7.2 million shares of common stock for $450 million.
Shares of common stock outstanding declined by 1.9% from the prior
quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its fourth
quarter results on Wednesday, July 26, 2017, at 4:00 p.m. Central
time. Interested parties can listen to the conference call via a
live audio webcast at https://investorrelations.discover.com.
About Discover
Discover Financial Services (NYSE: DFS) is a direct banking and
payment services company with one of the most recognized brands in
U.S. financial services. Since its inception in 1986, the company
has become one of the largest card issuers in the United States.
The company issues the Discover card, America's cash rewards
pioneer, and offers private student loans, personal loans, home
equity loans, checking and savings accounts and certificates of
deposit through its direct banking business. It operates the
Discover Network, with millions of retail and cash access
locations; PULSE, one of the nation's leading ATM/debit networks;
and Diners Club International, a global payments network with
acceptance in more than 185 countries and territories. For more
information, visit www.discover.com/company.
A financial summary follows. Financial, statistical, and
business related information, as well as information regarding
business and segment trends, is included in the financial
supplement filed as Exhibit 99.2 to the company's Current Report on
Form 8-K filed today with the Securities and Exchange Commission
(“SEC”). Both the earnings release and the financial supplement are
available online at the SEC's website (http://www.sec.gov) and the
company's website (https://investorrelations.discover.com).
This press release contains forward-looking statements within
the meaning of the Private Securities Litigation Reform Act of
1995. Such statements, which speak to our expected business and
financial performance, among other matters, contain words such as
“believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,”
“may,” “should,” “could,” “would,” “likely,” and similar
expressions. Such statements are based upon the current beliefs and
expectations of the company's management and are subject to
significant risks and uncertainties. Actual results may differ
materially from those set forth in the forward-looking statements.
These forward-looking statements speak only as of the date of this
press release, and there is no undertaking to update or revise them
as more information becomes available.
The following factors, among others, could cause actual results
to differ materially from those set forth in the forward-looking
statements: changes in economic variables, such as the availability
of consumer credit, the housing market, energy costs, the number
and size of personal bankruptcy filings, the rate of unemployment,
the levels of consumer confidence and consumer debt, and investor
sentiment; the impact of current, pending and future legislation,
regulation, supervisory guidance, and regulatory and legal actions,
including, but not limited to, those related to financial
regulatory reform, consumer financial services practices,
anti-corruption, and funding, capital and liquidity; the actions
and initiatives of current and potential competitors; the company's
ability to manage its expenses; the company's ability to
successfully achieve card acceptance across its networks and
maintain relationships with network participants; the company's
ability to sustain and grow its non-card products; difficulty
obtaining regulatory approval for, financing, closing,
transitioning, integrating or managing the expenses of acquisitions
of or investments in new businesses, products or technologies; the
company's ability to manage its credit risk, market risk, liquidity
risk, operational risk, compliance and legal risk, and strategic
risk; the availability and cost of funding and capital; access to
deposit, securitization, equity, debt and credit markets; the
impact of rating agency actions; the level and volatility of equity
prices, commodity prices and interest rates, currency values,
investments, other market fluctuations and other market indices;
losses in the company's investment portfolio; limits on the
company's ability to pay dividends and repurchase its common stock;
limits on the company's ability to receive payments from its
subsidiaries; fraudulent activities or material security breaches
of key systems; the company's ability to remain organizationally
effective; the company's ability to increase or sustain Discover
card usage or attract new customers; the company's ability to
maintain relationships with merchants; the effect of political,
economic and market conditions, geopolitical events and unforeseen
or catastrophic events; the company's ability to introduce new
products or services; the company's ability to manage its
relationships with third-party vendors; the company's ability to
maintain current technology and integrate new and acquired systems;
the company's ability to collect amounts for disputed transactions
from merchants and merchant acquirers; the company's ability to
attract and retain employees; the company's ability to protect its
reputation and its intellectual property; and new lawsuits,
investigations or similar matters or unanticipated developments
related to current matters. The company routinely evaluates and may
pursue acquisitions of or investments in businesses, products,
technologies, loan portfolios or deposits, which may involve
payment in cash or the company's debt or equity securities.
Additional factors that could cause the company's results to
differ materially from those described in the forward-looking
statements can be found under “Risk Factors,” “Business -
Competition,” “Business - Supervision and Regulation” and
“Management's Discussion and Analysis of Financial Condition and
Results of Operations” in the company's Annual Report on Form 10-K
for the year ended December 31, 2016, and "Management's Discussion
& Analysis of Financial Condition and Results of Operations" in
the company's Quarterly Report on Form 10-Q for the quarter ended
March 31, 2017, which are filed with the SEC and available at the
SEC's internet site (http://www.sec.gov).
DISCOVER FINANCIAL SERVICES (unaudited, in
millions, except per share statistics) Quarter
Ended June 30, March 31,
June 30, 2017 2017 2016
EARNINGS
SUMMARY
Interest Income $2,338 $2,278 $2,090 Interest Expense 400 386 339
Net Interest Income 1,938 1,892 1,751 Discount/Interchange
Revenue 666 596 636 Rewards Cost 388 363 371 Discount and
Interchange Revenue, net 278 233 265 Protection Products Revenue 56
58 59 Loan Fee Income 83 89 79 Transaction Processing Revenue 42 39
39 Other Income 22 28 23 Total Other Income 481 447 465
Revenue Net of Interest Expense 2,419 2,339 2,216 Provision
for Loan Losses 640 586 412 Employee Compensation and
Benefits 367 363 340 Marketing and Business Development 192 168 198
Information Processing & Communications 77 80 89 Professional
Fees 156 147 150 Premises and Equipment 23 25 23 Other Expense 97
102 106 Total Other Expense 912 885 906 Income
Before Income Taxes 867 868 898 Tax Expense 321 304 282 Net Income
$546 $564 $616 Net Income Allocated to Common Stockholders
$532 $551 $602
PER SHARE
STATISTICS
Basic EPS $1.41 $1.43 $1.47 Diluted EPS $1.40 $1.43 $1.47 Common
Stock Price (period end) $62.19 $68.39 $53.59 Book Value per share
$30.01 $29.46 $28.03
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $831 $824 $868 Payment Services 36 44 30 Total $867
$868 $898
BALANCE SHEET
SUMMARY
Total Assets $93,757 $94,795 $87,511 Total Liabilities 82,498
83,530 76,114 Total Equity 11,259 11,265 11,397 Total Liabilities
and Stockholders' Equity $93,757 $94,795 $87,511
TOTAL LOAN
RECEIVABLES
Ending Loans 1, 2 $77,997 $75,853 $71,924 Average Loans 1, 2
$76,854 $76,185 $70,810 Interest Yield 11.98% 11.94% 11.72%
Gross Principal Charge-off Rate 3.36% 3.25% 2.87% Gross Principal
Charge-off Rate excluding PCI Loans 3 3.47% 3.37% 2.99% Net
Principal Charge-off Rate 2.71% 2.60% 2.18% Net Principal
Charge-off Rate excluding PCI Loans 3 2.79% 2.69% 2.27% Delinquency
Rate (over 30 days) excluding PCI Loans 3 1.93% 1.97% 1.60%
Delinquency Rate (over 90 days) excluding PCI Loans 3 0.88% 0.92%
0.71% Gross Principal Charge-off Dollars $645 $611 $505 Net
Principal Charge-off Dollars $520 $489 $384 Net Interest and Fee
Charge-off Dollars $110 $106 $84 Loans Delinquent Over 30 Days 3
$1,457 $1,445 $1,104 Loans Delinquent Over 90 Days 3 $667 $675 $491
Allowance for Loan Loss (period end) $2,384 $2,264 $1,949
Change in Loan Loss Reserves $120 $97 $28 Reserve Rate 3.06% 2.98%
2.71% Reserve Rate excluding PCI Loans 3 3.11% 3.04% 2.77%
CREDIT CARD
LOANS
Ending Loans $61,797 $59,757 $57,219 Average Loans $60,700 $60,122
$56,124 Interest Yield 12.66% 12.65% 12.42% Gross Principal
Charge-off Rate 3.71% 3.61% 3.21% Net Principal Charge-off Rate
2.94% 2.84% 2.39% Delinquency Rate (over 30 days) 2.00% 2.06% 1.63%
Delinquency Rate (over 90 days) 0.98% 1.03% 0.78% Gross Principal
Charge-off Dollars $561 $535 $448 Net Principal Charge-off Dollars
$445 $422 $334 Loans Delinquent Over 30 Days $1,237 $1,233 $933
Loans Delinquent Over 90 Days $603 $616 $444 Allowance for
Loan Loss (period end) $1,980 $1,892 $1,603 Change in Loan Loss
Reserves $88 $102 $13 Reserve Rate 3.21% 3.17% 2.80% Total
Discover Card Volume $35,297 $32,406 $33,409 Discover Card Sales
Volume $32,172 $29,134 $30,702 Rewards Rate 1.20% 1.25% 1.21%
NETWORK
VOLUME
PULSE Network $38,848 $36,066 $33,856 Network Partners 3,461 3,661
3,713 Diners Club International 4 7,800 7,382 7,198 Total Payment
Services 50,109 47,109 44,767 Discover Network - Proprietary 33,342
29,859 31,780 Total $83,451 $76,968 $76,547 1 Total Loans includes
Home Equity and other loans. 2 Purchased Credit Impaired
("PCI") loans are loans that were acquired in which a deterioration
in credit quality occurred between the origination date and the
acquisition date. These loans were initially recorded at fair value
and accrete interest income over the estimated lives of the loans
as long as cash flows are reasonably estimable, even if the loans
are contractually past due. PCI loans are private student loans and
are included in total loan receivables. 3 Excludes PCI loans
(described above) which are accounted for on a pooled basis. Since
a pool is accounted for as a single asset with a single composite
interest rate and aggregate expectation of cash flows, the past-due
status of a pool, or that of the individual loans within a pool, is
not meaningful. Because the Company is recognizing interest income
on a pool of loans, it is all considered to be performing. 4
Volume is derived from data provided by licensees for Diners Club
branded cards issued outside of North America and is subject to
subsequent revision or amendment.
Note: See Glossary for definitions of
financial terms in the financial supplement which is available
online at the SEC's website (http://www.sec.gov) and the Company's
website (http://investorrelations.discoverfinancial.com).
View source
version on businesswire.com: http://www.businesswire.com/news/home/20170726006351/en/
Discover Financial ServicesInvestors:Tim Schmidt,
224-405-4996timothyschmidt@discover.comorMedia:Jon Drummond,
224-405-1888jondrummond@discover.com
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