RIVERWOODS, Ill.--(BUSINESS WIRE)--Discover Financial Services (NYSE: DFS) today reported net income of $612 million or $1.38 per diluted share for the third quarter of 2015, as compared to $644 million or $1.37 per diluted share for the third quarter of 2014. The company's return on equity for the third quarter of 2015 was 22%.
Third Quarter Highlights
- Total loans grew $2.7 billion, or 4.0%, from the prior year to $70.1 billion.
- Credit card loans grew $2.0 billion, or 3.6%, to $55.7 billion and Discover card sales volume increased 2.6% from the prior year or approximately 7% excluding gas purchases.
- Net charge-off rate for credit card loans decreased 12 basis points from the prior year to 2.04% and the credit card delinquency rate for loans over 30 days past due decreased 6 basis points to 1.65%.
- Payment Services transaction dollar volume for the segment was $46.0 billion, down 7% from the prior year.
"Strong credit performance and continued share buybacks drove earnings per share growth," said David Nelms, chairman and CEO of Discover. "While total loan growth slowed slightly due to consumer spending levels, it remained solid. In addition, we achieved the highest level of new card accounts since the recession, which should bode well for the future."
Segment Results:
Direct Banking
Direct Banking pretax income of $950 million in the quarter was down $31 million, or 3%, driven by higher expenses in part due to previously announced anti-money laundering remediation expenses, partially offset by a lower provision for loan losses.
Total loans ended the quarter at $70.1 billion, up 4.1% compared to the prior year. Credit card loans ended the quarter at $55.7 billion, up 3.6% from the prior year. Personal loans increased $595 million, or 12.3%, from the prior year and private student loans increased $275 million, or 3.2%, from the prior year. Excluding purchased student loans, private student loans grew $814 million, or 17.3%, from the prior year.
Revenue net of interest expense increased $7 million, relatively flat to the prior year.
Net interest income increased $47 million, or 3%, from the prior year, benefiting from loan growth partially offset by margin compression. Net interest margin was 9.63%, down 16 basis points from the prior year primarily due to an increase in funding costs. Interest expense as a percent of total loans increased 13 basis points from the prior year due to funding mix and higher rates. Credit card yield was 12.03%, a decrease of 1 basis point from the prior year.
Other income decreased $40 million, or 8%, from the prior year due to run-off in mortgage origination income, lower protection products revenue and higher rewards expense.
The delinquency rate for credit card loans over 30 days past due was 1.65%, down 6 basis points from the prior year and up 10 basis points from the prior quarter. Credit card net charge-off rate for the third quarter was 2.04%, down 12 basis points from the prior year and down 24 basis points from the prior quarter. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 0.94%, down 20 basis points from the prior year. The personal loans net charge-off rate of 1.99% increased by 7 basis points from the prior year.
Provision for loan losses of $332 million decreased $24 million from the prior year primarily due to a smaller reserve build. The reserve build for the third quarter of 2015 was $8 million, versus a $32 million reserve build in the prior year. Net charge-offs were flat year-over-year.
Expenses increased $62 million, or 8%, from the prior year mostly driven by higher regulatory and compliance costs. Professional fees increased in part due to $28 million in look back related anti-money laundering remediation expenses. Employee compensation increased largely due to increased staffing driven in part by regulatory and compliance activities. Wind down and exit expenses associated with the closure of the Home Loans business totaled $23 million in the quarter.
Payment Services
Payment Services pretax income was $24 million in the quarter, down $4 million from the prior year. Payment Services transaction dollar volume was $46.0 billion, down 7% from the prior year. PULSE transaction dollar volume was down 11% year- over-year due to the loss of some volume from a large debit issuer. Network Partners volume was up $1.0 billion, or 47% from the prior year driven by AribaPay volume.
Share Repurchases
During the third quarter of 2015, the company repurchased approximately 8 million shares of common stock for $435 million. Shares of common stock outstanding declined by 1.8% from the prior quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its third quarter results on Tuesday, October 20, 2015, at 4:00 p.m. Central time. Interested parties can listen to the conference call via a live audio webcast at http://investorrelations.discoverfinancial.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 merchant 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 (http://investorrelations.discoverfinancial.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; losses as a result of mortgage loan repurchase and indemnification obligations to secondary market purchasers; 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, 2014 and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, 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 | |||||||||
| Sep 30, | Jun 30, | Sep 30, | |||||||
| 2015 | 2015 | 2014 | |||||||
|
EARNINGS SUMMARY |
|||||||||
| Interest Income | $2,008 | $1,947 | $1,926 | ||||||
| Interest Expense | 323 | 311 | 288 | ||||||
| Net Interest Income | 1,685 | 1,636 | 1,638 | ||||||
| Discount/Interchange Revenue | 614 | 612 | 598 | ||||||
| Rewards Cost | 326 | 314 | 303 | ||||||
| Discount and Interchange Revenue, net | 288 | 298 | 295 | ||||||
| Protection Products Revenue | 62 | 68 | 78 | ||||||
| Loan Fee Income | 87 | 80 | 85 | ||||||
| Transaction Processing Revenue | 39 | 40 | 46 | ||||||
| Other Income | 27 | 53 | 48 | ||||||
| Total Other Income | 503 | 539 | 552 | ||||||
| Revenue Net of Interest Expense | 2,188 | 2,175 | 2,190 | ||||||
| Provision for Loan Losses | 332 | 306 | 354 | ||||||
| Employee Compensation and Benefits | 337 | 326 | 320 | ||||||
| Marketing and Business Development | 168 | 199 | 182 | ||||||
| Information Processing & Communications | 84 | 90 | 87 | ||||||
| Professional Fees | 160 | 153 | 111 | ||||||
| Premises and Equipment | 24 | 23 | 23 | ||||||
| Other Expense | 109 | 136 | 104 | ||||||
| Total Other Expense | 882 | 927 | 827 | ||||||
| Income Before Income Taxes | 974 | 942 | 1,009 | ||||||
| Tax Expense | 362 | 343 | 365 | ||||||
| Net Income | $612 | $599 | $644 | ||||||
| Net Income Allocated to Common Stockholders | $599 | $586 | $630 | ||||||
|
PER SHARE STATISTICS |
|||||||||
| Basic EPS | $1.38 | $1.33 | $1.37 | ||||||
| Diluted EPS | $1.38 | $1.33 | $1.37 | ||||||
| Common Stock Price (period end) | $51.99 | $57.62 | $64.39 | ||||||
| Book Value per share | $26.32 | $25.75 | $24.82 | ||||||
|
SEGMENT- INCOME BEFORE INCOME TAXES |
|||||||||
| Direct Banking | $950 | $914 | $981 | ||||||
| Payment Services | 24 | 28 | 28 | ||||||
| Total | $974 | $942 | $1,009 | ||||||
|
BALANCE SHEET SUMMARY |
|||||||||
| Total Assets | $85,611 | $84,911 | $80,596 | ||||||
| Total Liabilities | 74,308 | 73,648 | 69,295 | ||||||
| Total Equity | 11,303 | 11,263 | 11,301 | ||||||
| Total Liabilities and Stockholders' Equity | $85,611 | $84,911 | $80,596 | ||||||
|
TOTAL LOAN RECEIVABLES |
|||||||||
| Ending Loans 1, 2 | $70,078 | $69,028 | $67,366 | ||||||
| Average Loans 1, 2 | $69,462 | $68,100 | $66,481 | ||||||
| Interest Yield | 11.37% | 11.35% | 11.36% | ||||||
| Gross Principal Charge-off Rate | 2.51% | 2.76% | 2.63% | ||||||
| Gross Principal Charge-off Rate excluding PCI Loans 3 | 2.64% | 2.91% | 2.79% | ||||||
| Net Principal Charge-off Rate | 1.85% | 2.05% | 1.94% | ||||||
| Net Principal Charge-off Rate excluding PCI Loans 3 | 1.94% | 2.16% | 2.06% | ||||||
| Delinquency Rate (over 30 days) excluding PCI Loans 3,4 | 1.60% | 1.49% | 1.64% | ||||||
| Delinquency Rate (over 90 days) excluding PCI Loans 3,4 | 0.72% | 0.69% | 0.75% | ||||||
| Gross Principal Charge-off Dollars | $440 | $469 | $440 | ||||||
| Net Principal Charge-off Dollars | $324 | $347 | $324 | ||||||
| Net Interest and Fee Charge-off Dollars | $81 | $87 | $85 | ||||||
| Loans Delinquent Over 30 Days 3,4 | $1,070 | $980 | $1,043 | ||||||
| Loans Delinquent Over 90 Days 3,4 | $481 | $450 | $476 | ||||||
| Allowance for Loan Loss (period end) | $1,743 | $1,735 | $1,644 | ||||||
| Change in Loan Loss Reserves | $8 | ($41) | $30 | ||||||
| Reserve Rate | 2.49% | 2.51% | 2.44% | ||||||
| Reserve Rate Excluding PCI Loans 3 | 2.57% | 2.60% | 2.54% | ||||||
|
CREDIT CARD LOANS |
|||||||||
| Ending Loans | $55,655 | $54,949 | $53,699 | ||||||
| Average Loans | $55,281 | $53,987 | $53,130 | ||||||
| Interest Yield | 12.03% | 12.04% | 12.04% | ||||||
| Gross Principal Charge-off Rate | 2.83% | 3.14% | 2.99% | ||||||
| Net Principal Charge-off Rate | 2.04% | 2.28% | 2.16% | ||||||
| Delinquency Rate (over 30 days) 4 | 1.65% | 1.55% | 1.71% | ||||||
| Delinquency Rate (over 90 days) 4 | 0.78% | 0.75% | 0.82% | ||||||
| Gross Principal Charge-off Dollars | $394 | $423 | $400 | ||||||
| Net Principal Charge-off Dollars | $285 | $307 | $289 | ||||||
| Loans Delinquent Over 30 Days 4 | $919 | $850 | $920 | ||||||
| Loans Delinquent Over 90 Days 4 | $437 | $414 | $440 | ||||||
| Allowance for Loan Loss (period end) | $1,459 | $1,441 | $1,388 | ||||||
| Change in Loan Loss Reserves | $18 | ($51) | $29 | ||||||
| Reserve Rate | 2.62% | 2.62% | 2.58% | ||||||
| Total Discover Card Volume | $32,971 | $32,299 | $32,091 | ||||||
| Discover Card Sales Volume | $30,374 | $30,017 | $29,609 | ||||||
| Rewards Rate | 1.07% | 1.05% | 1.02% | ||||||
|
NETWORK VOLUME |
|||||||||
| PULSE Network | $36,267 | $37,162 | $40,636 | ||||||
| Network Partners | 3,206 | 3,536 | 2,185 | ||||||
| Diners Club International 5 | 6,560 | 6,773 | 6,777 | ||||||
| Total Payment Services | 46,033 | 47,471 | 49,598 | ||||||
| Discover Network - Proprietary | 31,408 | 31,084 | 30,577 | ||||||
| Total | $77,441 | $78,555 | $80,175 | ||||||
|
1 Total Loans includes mortgages 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 During the first quarter of 2015, we implemented payment processing changes which had the effect of contributing favorably to the delinquencies of certain accounts. These changes partially contributed to the decline in the delinquency rate. |
|
5 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). |
