Discover Financial Services Reports Second Quarter Net Income of $644 Million or $1.35 Per Diluted Share

8/10/2019 Discover Financial Services Reports Second Quarter Net Income of $644 Million or $1.35 Per Diluted Share

1/25

Discover Financial Services Reports Second Quarter Net

Income of $644 Million or $1.35 Per Diluted Share

RIVERWOODS, Ill.--(BUSINESS WIRE)--Discover Financial Services (NYSE: DFS) today reported netincome of

$644 million or $1.35 per diluted share for the second quarter of 2014,

as compared to $602 million or $1.20 per diluted share for the second

quarter of 2013. The company's return on equity for the second quarter

of 2014 was 23%.

Second Quarter Highlights

Revenue net of interest expense was up $131 million, or 6%, from the

prior year to $2.2 billion.

Total loans grew $4.2 billion, or 7%, from the prior year to $65.9

billion.

Credit card loans grew $3.0 billion, or 6%, to $52.7 billion and

Discover card sales volume increased 6% from the prior year.

Net charge-off rate for credit card loans decreased 1 basis point from

the prior year to 2.33% and the delinquency rate for loans over 30

days past due increased 5 basis points to 1.63%.

Payment Services pretax income was $31 million. Transaction dollar

volume for the segment was $50.9 billion, up 3% from the prior year.

"Our record earnings per share this quarter reflect outstanding

fundamental performance in our Direct Banking segment in terms of loan

growth and credit performance," said David Nelms, chairman and CEO of

Discover. "Our continued focus on gaining wallet share with existing

customers and acquiring new accounts with Discover IT drove strong card


2/25

receivables and sales growth of 6%."

Segment Results:

Direct Banking

Direct Banking pretax income of $984 million in the quarter was down $18

million, or 2%, from the prior year.

Total loans ended the quarter at $65.8 billion, up 7% compared to the

prior year. Credit card loans ended the quarter at $52.7 billion, up 6%

from the prior year. Personal loans increased $949 million, or 26%, from

the prior year and private student loans increased $370 million, or 5%,

from the prior year. Excluding purchased student loans, private student

loans grew $889 million, or 26%, from the prior year.

Revenue net of interest expense increased $131 million, up 7% from the

prior year due to loan growth and net interest margin expansion.

Net interest income increased $159 million, or 11%, from the prior year,

benefiting from loan growth, lower interest expense and higher loan

yield. Net interest margin was 9.85%, up 41 basis points from the prior

year. The increase in net interest margin reflects decreased funding

costs and higher loan yield. Credit card yield was 12.10%, an increase

of 13 basis points from the prior year. The increase in credit card

yield reflects a higher portion of customers revolving balances and

lower interest charge-offs. Interest expense as a percent of total loans

decreased 25 basis points from the prior year as the company continued

to take advantage of available low rate funding.

Other income decreased $28 million, or 5%, from the prior year due to

lower direct mortgage related income and lower protection product

revenue, which were somewhat offset by higher interchange revenue.


3/25

The delinquency rate for credit card loans over 30 days past due was

1.63%, up 5 basis points from the prior year and down 9 basis points

compared to the prior quarter. Credit card net charge-off rate for the

second quarter was 2.33%, down 1 basis point from the prior year and up

1 basis point from the prior quarter. The student loan net charge-off

rate excluding PCI loans was 1.30%, down 28 basis points from the prior

year. The personal loans net charge-off rate of 1.95% decreased by 29

basis points from the prior year.

Provision for loan losses of $360 million increased $135 million from

the prior year primarily due to an increase in loan loss reserves. The

reserve build for the second quarter of 2014 was $23 million. The second

quarter of 2013 included a reserve release of $93 million.

Expenses increased $14 million, or 2%, from the prior year primarily due

to increased headcount and higher professional fees, partially offset by

lower marketing expense.

Payment Services

Payment Services pretax income was $31 million in the quarter, up $52

million from the prior year. The second quarter of 2013 had total pretax

charges of $55 million, including a $15 million increase in loan loss

provisions, related to supporting Diners Club International franchises


4/25

in Europe.

Payment Services dollar volume was $50.9 billion for the second quarter

of 2014, up 3% from the prior year. PULSE transaction dollar volume was

up 4% year-over-year.

Share Repurchases

During the second quarter of 2014, the company repurchased approximately

3 million shares of common stock for $177 million. Shares of common

stock outstanding declined by 1% from the prior quarter.

Conference Call and Webcast Information

The company will host a conference call to discuss its second quarter

results on Tuesday, July 22, 2014, at 4:00 p.m. Central time. Interested

parties can listen to the conference call via a live audio webcast athttp://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 home

loans, private student loans, personal loans, home equity loans,

checking and savings accounts, certificates of deposit and money market

accounts 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.


5/25

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


6/25

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 full card acceptance across its networks

and maintain relationships with network participants; the company's

ability to sustain and grow its private student loan portfolio and

mortgage loan products; losses as a result of mortgage loan repurchase

and indemnification obligations to secondary market purchasers; the

company's ability to manage its credit risk, market risk, liquidity

risk, operational risk, legal and compliance 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

increase or sustain Discover card usage or attract new customers; the

company's ability to maintain relationships with current merchants; the

effect of political, economic and market conditions, geopolitical events

and unforeseen or catastrophic events; the company's ability to


7/25

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; difficulty obtaining regulatory approval for,

financing, closing, transitioning, integrating or managing the expenses

of acquisitions of or investments in new businesses, products or

technologies; 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, 2013 and under

"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 March 31, 2014, which are filed with the SEC and available

at the SEC's internet site (http://www.sec.gov).

DISCOVER FINANCIAL SERVICES


8/25

(unaudited, in millions, except per share statistics)

Quarter Ended

Jun 30,

Mar 31,

Jun 30,

2014

2014

2013

EARNINGS SUMMARY

Interest Income

$1,863

$1,833

$1,727

Interest Expense

274

270

297

Net Interest Income


9/25

1,589

1,563

1,430

Discount/Interchange Revenue

595

519

546

Rewards Cost

268

265

238

Discount and Interchange Revenue, net

327

254

308

Protection Products Revenue

78

83

88

Loan Fee Income

80

83


10/25

76

Transaction Processing Revenue

46

44

47

Other Income

52

51

92

Total Other Income

583

515

611

Revenue Net of Interest Expense

2,172

2,078

2,041

Provision for Loan Losses


11/25

360

272

240

Employee Compensation and Benefits

301

307

285

Marketing and Business Development

168

169

185

Information Processing & Communications

87

84

85

Professional Fees

112

99

101

Premises and Equipment

22

23

20

Other Expense

107


12/25

102

144

Total Other Expense

797

784

820

Income Before Income Taxes

1,015

1,022

981

Tax Expense

371

391

379

Net Income

$644


13/25

$631

$602

Net Income Allocated to Common Stockholders

$630

$618

$588

PER SHARE STATISTICS

Basic EPS

$1.35

$1.31

$1.20

Diluted EPS

$1.35

$1.31

$1.20

Common Stock Price (period end)

$61.98

$58.19


14/25

$47.64

Book Value per share

$24.46

$23.53

$21.52

SEGMENT- INCOME BEFORE INCOME TAXES

Direct Banking

$984

$994

$1,002

Payment Services

31

28

(21

)

Total

$1,015

$1,022

$981


15/25

BALANCE SHEET SUMMARY

Total Assets

$78,937

$79,584

$74,944

Total Liabilities

67,556

68,563

64,496

Total Equity

11,381

11,021

10,448

Total Liabilities and Stockholders' Equity

$78,937

$79,584

$74,944


16/25

TOTAL LOAN RECEIVABLES

Ending Loans 1, 2

$65,875

$63,852

$61,703

Average Loans 1, 2

$64,728

$64,227

$60,793

Interest Yield

11.42

%

11.44

%

11.24

%

Gross Principal Charge-off Rate

2.82

%

2.82

%

2.99

%

Gross Principal Charge-off Rate excluding PCI Loans 3


17/25

3.01

%

3.01

%

3.23

%

Net Principal Charge-off Rate

2.08

%

2.08

%

2.10

%

Net Principal Charge-off Rate excluding PCI Loans 3

2.22

%

2.22

%

2.27

%

Delinquency Rate (over 30 days) excluding PCI Loans 3

1.56

%

1.65

%

1.50


18/25

%

Delinquency Rate (over 90 days) excluding PCI Loans 3

0.73

%

0.80

%

0.73

%

Gross Principal Charge-off Dollars

$455

$447

$453

Net Principal Charge-off Dollars

$337

$329

$318

Net Interest and Fee Charge-off Dollars

$87

$89

$85

Loans Delinquent Over 30 Days 3

$964

$985

$861

Loans Delinquent Over 90 Days 3

$451


19/25

$478

$419

Allowance for Loan Loss (period end)

$1,614

$1,591

$1,556

Change in Loan Loss Reserves

$23

($57

)

($78

)

Reserve Rate

2.45

%

2.49

%

2.52

%

Reserve Rate Excluding PCI Loans 3

2.56

%

2.61

%

2.72


20/25

%

CREDIT CARD LOANS

Ending Loans

$52,742

$50,879

$49,791

Average Loans

$51,718

$51,347

$49,002

Interest Yield

12.10

%

12.14

%

11.97

%

Gross Principal Charge-off Rate

3.22

%

3.22

%

3.41

%


21/25

Net Principal Charge-off Rate

2.33

%

2.32

%

2.34

%

Delinquency Rate (over 30 days)

1.63

%

1.72

%

1.58

%

Delinquency Rate (over 90 days)

0.80

%

0.87

%

0.80

%

Gross Principal Charge-off Dollars

$415

$408

$417

Net Principal Charge-off Dollars


22/25

$300

$294

$286

Loans Delinquent Over 30 Days

$860

$876

$789

Loans Delinquent Over 90 Days

$420

$442

$398

Allowance for Loan Loss (period end)

$1,359

$1,342

$1,360

Change in Loan Loss Reserves

$17

($64

)

($93

)

Reserve Rate

2.58

%

2.64


23/25

%

2.73

%

Total Discover Card Volume

$31,732

$28,077

$29,684

Discover Card Sales Volume

$29,341

$25,697

$27,574

NETWORK VOLUME

PULSE Network

$41,500

$41,927

$40,060

Network Partners

2,617

2,381

2,442

Diners Club International 4

6,733

6,527


24/25

6,848

Total Payment Services

50,850

50,835

49,350

Discover Network - Proprietary

30,342

26,547

28,551

Total

$81,192

$77,382

$77,901

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


25/25

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).

Documents

Discover Financial Services Reports Second Quarter Net Income of $644 Million or $1.35 Per Diluted Share