RIVERWOODS, Ill.--(BUSINESS WIRE)--Discover Financial Services (NYSE: DFS):
Second Quarter Results |
|||
|
2019 |
2018 |
YOY Change |
Total loans, end of period (in billions) |
$90.2 |
$84.8 |
6% |
Total revenue net of interest expense (in millions) |
$2,852 |
$2,603 |
10% |
Total net charge-off rate |
3.22% |
3.11% |
11 bps |
Net income (in millions) |
$753 |
$669 |
13% |
Diluted EPS |
$2.32 |
$1.91 |
21% |
Discover Financial Services (NYSE: DFS) today reported net income of $753 million or $2.32 per diluted share for the second quarter of 2019, as compared to $669 million or $1.91 per diluted share for the second quarter of 2018. The company’s return on equity for the second quarter of 2019 was 26%.
“We are pleased to report another quarter of solid growth in earnings and a strong ROE, as we continue to focus on disciplined execution while delivering products and service that exceed our customers' expectations," said Roger Hochschild, CEO and president of Discover. "Key drivers of our performance continue to be our investment in the Discover brand as well as delivering a differentiated customer experience, which led to our being ranked highest by J.D. Power for customer satisfaction among credit card mobile apps and websites."
Segment Results:
Direct Banking
Direct Banking pretax income of $941 million increased by $104 million from the prior year driven by higher net interest income, partially offset by an increase in the provision for loan losses and higher operating expenses.
Total loans ended the quarter at $90.2 billion, up 6% compared to the prior year. Credit card loans ended the quarter at $72.4 billion, up 7% from the prior year. Personal loans increased $110 million, or 2%, from the prior year. Private student loans increased $273 million, or 3%, year-over-year, and grew $683 million, or 9%, excluding purchased student loans.
Net interest income increased $202 million, or 9%, from the prior year, driven by loan growth and net interest margin expansion. Net interest margin was 10.47%, up 26 basis points versus the prior year. Card yield was 13.44%, an increase of 56 basis points from the prior year primarily due to prime rate increases and portfolio mix, partially offset by higher interest charge-offs. Interest expense as a percent of total loans increased 46 basis points from the prior year, primarily as a result of higher market rates.
Other income increased $38 million, or 10%, from the prior year, driven by higher discount and interchange revenue.
The 30+ day delinquency rate for credit card loans was 2.34%, up 18 basis points from the prior year and down 11 basis points from the prior quarter. The credit card net charge-off rate was 3.49%, up 15 basis points from the prior year and down 1 basis point from the prior quarter. The student loan net charge-off rate, excluding PCI loans, was 0.73%, down 43 basis points from the prior year. The personal loans net charge-off rate of 4.33% increased by 36 basis points from the prior year. Net charge-off rates were generally higher due to the seasoning of recent years' loan growth and supply-driven credit normalization.
Provision for loan losses of $787 million increased $45 million from the prior year as higher net charge-offs were partially offset by a lower reserve build. The reserve build for the second quarter of 2019 was $69 million, compared to a reserve build of $93 million in the second quarter of 2018.
Expenses were up $91 million from the prior year primarily as a result of increases in employee compensation, professional fees and information processing. Employee compensation increased as a result of higher average salaries and benefits. Professional fees increased primarily due to achieving a higher level of recoveries. The increase in information processing was due to continued investments in infrastructure and analytic capabilities.
Payment Services
Payment Services pretax income was $46 million in the quarter, up $6 million from the prior year, due to higher revenue driven by transaction volume growth.
Payment Services transaction dollar volume was $61.8 billion, up 8% versus the prior year. PULSE transaction dollar volume was up 7% year-over-year, which reflects strong growth from existing issuers, the impact of new issuers on the network, and expanded support for our PINless products. Network Partners volume increased by 29% from the prior year driven by AribaPay.
Share Repurchases
During the second quarter of 2019, the company repurchased approximately 6.0 million shares of common stock for $461 million. Shares of common stock outstanding declined by 1.8% from the prior quarter.
2019 Capital Plan
On June 27, 2019, the Company announced that its capital plan for the four quarters ending June 30, 2020 contemplates share repurchases of up to $1.63 billion and an increase in the company's quarterly dividend from $0.40 to $0.44 per share of common stock.
The capital plan contemplates actions that maintain capital ratios to meet regulatory and legal requirements and support the company’s funding and other capital markets activities. The timing and exact amount of repurchases under the new repurchase program will be based on market conditions and other factors, including Accounting Standards Update 2016-13, Financial Instruments - Credit Losses, commonly known as CECL, which becomes effective on January 1, 2020, and will change how financial institutions, including the company, account for expected credit losses.
Conference Call and Webcast Information
The company will host a conference call to discuss its first quarter results on Tuesday, July 23, 2019, 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 Global Network, comprised of 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 around the world. 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 tax reform, 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, 2018, 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, 2019, 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, 2019 | March 31, 2019 | June 30, 2018 | |||
| EARNINGS SUMMARY | |||||
| Interest Income | $2,977 |
$2,937 |
$2,636 |
||
| Interest Expense | 645 |
632 |
507 |
||
| Net Interest Income | 2,332 |
2,305 |
2,129 |
||
| Discount/Interchange Revenue | 759 |
677 |
724 |
||
| Rewards Cost | 460 |
446 |
461 |
||
| Discount and Interchange Revenue, net | 299 |
231 |
263 |
||
| Protection Products Revenue | 49 |
49 |
50 |
||
| Loan Fee Income | 102 |
104 |
95 |
||
| Transaction Processing Revenue | 48 |
46 |
42 |
||
| Other Income | 22 |
28 |
24 |
||
| Total Other Income | 520 |
458 |
474 |
||
| Revenue Net of Interest Expense | 2,852 |
2,763 |
2,603 |
||
| Provision for Loan Losses | 787 |
809 |
742 |
||
| Employee Compensation and Benefits | 427 |
425 |
400 |
||
| Marketing and Business Development | 224 |
195 |
224 |
||
| Information Processing & Communications | 101 |
99 |
86 |
||
| Professional Fees | 183 |
167 |
161 |
||
| Premises and Equipment | 26 |
28 |
24 |
||
| Other Expense | 117 |
110 |
89 |
||
| Total Other Expense | 1,078 |
1,024 |
984 |
||
| Income Before Income Taxes | 987 |
930 |
877 |
||
| Tax Expense | 234 |
204 |
208 |
||
| Net Income | $753 |
$726 |
$669 |
||
| Net Income Allocated to Common Stockholders | $747 |
$705 |
$663 |
||
| PER SHARE STATISTICS | |||||
| Basic EPS | $2.32 |
$2.15 |
$1.91 |
||
| Diluted EPS | $2.32 |
$2.15 |
$1.91 |
||
| Common Stock Price (period end) | $77.59 |
$71.16 |
$70.41 |
||
| Book Value per share | $35.97 |
$34.60 |
$31.66 |
||
| SEGMENT- INCOME BEFORE INCOME TAXES | |||||
| Direct Banking | $941 |
$879 |
$837 |
||
| Payment Services | 46 |
51 |
40 |
||
| Total | $987 |
$930 |
$877 |
||
| BALANCE SHEET SUMMARY | |||||
| Total Assets | $110,707 |
$110,720 |
$102,751 |
||
| Total Liabilities | 99,214 |
99,461 |
91,862 |
||
| Total Equity | 11,493 |
11,259 |
10,889 |
||
| Total Liabilities and Stockholders' Equity | $110,707 |
$110,720 |
$102,751 |
||
| TOTAL LOAN RECEIVABLES | |||||
| Ending Loans 1, 2 | $90,229 |
$88,743 |
$84,789 |
||
| Average Loans 1, 2 | $89,358 |
$89,353 |
$83,648 |
||
| Interest Yield | 12.82% |
12.79% |
12.28% |
||
| Gross Principal Charge-off Rate | 4.03% |
4.02% |
3.78% |
||
| Gross Principal Charge-off Rate excluding PCI Loans 3 | 4.10% |
4.10% |
3.87% |
||
| Net Principal Charge-off Rate | 3.22% |
3.25% |
3.11% |
||
| Net Principal Charge-off Rate excluding PCI Loans 3 | 3.27% |
3.31% |
3.18% |
||
| Delinquency Rate (30 or more days) excluding PCI Loans 3 | 2.18% |
2.28% |
2.08% |
||
| Delinquency Rate (90 or more days) excluding PCI Loans 3 | 1.04% |
1.10% |
0.99% |
||
| Gross Principal Charge-off Dollars | $898 |
$887 |
$789 |
||
| Net Principal Charge-off Dollars | $718 |
$715 |
$649 |
||
| Net Interest and Fee Charge-off Dollars | $158 |
$158 |
$138 |
||
| Loans Delinquent 30 or more days 3 | $1,939 |
$1,988 |
$1,725 |
||
| Loans Delinquent 90 or more days 3 | $922 |
$959 |
$821 |
||
| Allowance for Loan Loss (period end) | $3,202 |
$3,134 |
$2,828 |
||
| Reserve Change Build/(Release) 4 | $69 |
$94 |
$93 |
||
| Reserve Rate | 3.55% |
3.53% |
3.34% |
||
| Reserve Rate excluding PCI Loans 3 | 3.58% |
3.57% |
3.38% |
||
| CREDIT CARD LOANS | |||||
| Ending Loans | $72,393 |
$70,789 |
$67,812 |
||
| Average Loans | $71,492 |
$71,363 |
$66,594 |
||
| Interest Yield | 13.44% |
13.42% |
12.88% |
||
| Gross Principal Charge-off Rate | 4.43% |
4.40% |
4.12% |
||
| Net Principal Charge-off Rate | 3.49% |
3.50% |
3.34% |
||
| Delinquency Rate (30 or more days) | 2.34% |
2.45% |
2.16% |
||
| Delinquency Rate (90 or more days) | 1.18% |
1.26% |
1.09% |
||
| Gross Principal Charge-off Dollars | $789 |
$774 |
$684 |
||
| Net Principal Charge-off Dollars | $623 |
$616 |
$555 |
||
| Loans Delinquent 30 or more days | $1,692 |
$1,731 |
$1,466 |
||
| Loans Delinquent 90 or more days | $857 |
$891 |
$743 |
||
| Allowance for Loan Loss (period end) | $2,691 |
$2,622 |
$2,334 |
||
| Reserve Change Build/(Release) | $69 |
$94 |
$82 |
||
| Reserve Rate | 3.72% |
3.70% |
3.44% |
||
| Total Discover Card Volume | $39,935 |
$36,386 |
$38,430 |
||
| Discover Card Sales Volume | $36,664 |
$32,899 |
$35,077 |
||
| Rewards Rate | 1.25% |
1.35% |
1.31% |
||
| NETWORK VOLUME | |||||
| PULSE Network | $47,389 |
$47,106 |
$44,308 |
||
| Network Partners | 5,950 |
5,663 |
4,602 |
||
| Diners Club International 5 | 8,472 |
8,278 |
8,417 |
||
| Total Payment Services | 61,811 |
61,047 |
57,327 |
||
| Discover Network - Proprietary | 37,891 |
34,051 |
36,339 |
||
| Total | $99,702 |
$95,098 |
$93,666 |
||
| 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 Allowance for loan loss includes the net change in reserves on PCI pools having no remaining non-accretable difference which does not impact the reserve change build/(release) in provision for loan losses. | |||||
| 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). | |||||
