Discover Financial Services (NYSE: DFS) today reported net
income of $600 million for the second quarter of 2011, as compared
to $258 million for the second quarter of 2010.
Second Quarter Highlights
- Discover card sales volume showed
strong year-over-year growth of 9% with $25 billion in volume in
the quarter.
- Total loans increased 5% from the prior
year to $52.5 billion, while credit card loans declined 1%. Credit
card loan balances grew $644 million, or 1% from the prior
quarter.
- The delinquency rate for credit card
loans over 30 days past due reached a 25-year record low of 2.79%
and the credit card net charge-off rate declined to 5.01%.
- Payment Services continued to produce
strong results with pretax income of $43 million, up 19% from the
prior year. Transaction volume for the segment was $46 billion in
the quarter, an increase of 24% from the prior year.
"Our all-time record results this quarter reflect the
effectiveness of the Discover business model," said David Nelms,
chairman and chief executive officer of Discover. "Sustained
improvements in credit performance have driven substantial releases
of credit loss reserves, a portion of which has been reinvested for
growth. The benefits of these investments can be seen in both our
Direct Banking and Payment Services results this quarter. Our
capital levels have also benefited from this outstanding
performance, leading us to our recent announcement of a $1 billion
share repurchase program. While the U.S. economy has yet to show
significant strengthening, we are confident that we can continue to
achieve profitable growth in all of our lending businesses,
complemented by the contribution from our payments activities."
Segment Results:
Direct Banking
Direct Banking pretax income of $883 million in the second
quarter of 2011 was a $497 million improvement from the second
quarter of 2010. Pretax income included $25 million related to The
Student Loan Corporation.
Total loans ended the quarter at $52.5 billion, up 5% compared
to the prior year, reflecting a $3.7 billion increase in private
student loans and a $640 million increase in personal loans,
partially offset by a $367 million decline in credit card loans.
The increase in student loans includes the acquisition of $3.1
billion in private student loans in the first quarter of 2011.
Credit card loans grew $644 million, or 1%, from the prior quarter,
ending the quarter at $45.0 billion. Discover personal loans
increased $193 million, or 10%, from the prior quarter as the
company continues to diversify its loan portfolio.
Net interest margin was 9.15%, relatively unchanged from the
prior year and down 7 basis points from the first quarter of 2011.
Credit card yield decreased 36 basis points from the prior year and
8 basis points from the prior quarter. The decline in yield
reflects the impacts of the CARD Act and an increase in promotional
rate balances, partially offset by lower interest charge-offs.
Interest expense as a percent of loans decreased 31 basis points
from the prior year and 10 basis points from the prior quarter as
the company continued to take advantage of available low rate
funding.
Net interest income increased $46 million from the prior year,
primarily driven by an increase in loan balances related to the
student loan acquisition and lower funding related costs. This was
partially offset by a decrease in interest income on credit cards
reflecting the lower yield.
The delinquency rate for credit card loans over 30 days past due
reached an all-time low of 2.79%, an improvement of 206 basis
points from the prior year, and 80 basis points from the prior
quarter. The credit card net charge-off rate decreased to 5.01% for
the second quarter of 2011, down 355 basis points from the prior
year and 95 basis points from the prior quarter.
Provision for loan losses of $176 million decreased $548
million, or 76%, from the prior year, driven by lower charge-offs
and a reduction in the allowance for loan losses. Principal
charge-offs decreased $424 million from the prior year. Improvement
in the outlook for credit performance resulted in a reserve release
of $401 million in the second quarter of 2011 versus a release of
$277 million in the second quarter of 2010.
Other income increased $22 million, or 5%, from the prior year.
The second quarter of 2010 included a reduction in income related
to overlimit fee charge-offs. The second quarter of 2011 included
transition services revenue related to The Student Loan Corporation
and an increase in the value of the federal student loans held for
sale.
Expenses were up $119 million, or 25%, from the prior year,
reflecting higher investments in marketing and advertising, higher
compensation expense, higher costs related to recovering
charged-off accounts, increased fraud costs and expenses related to
The Student Loan Corporation. The second quarter of 2011 also
included reserves for various pending litigation.
Payment Services
Payment Services pretax income of $43 million in the quarter was
up $7 million, or 19%, from the prior year driven principally by a
$9 million increase in revenues partially offset by a $2 million
increase in expenses. The increase in revenue was driven by an
increase in transactions on the PULSE network and higher
margins.
Payment Services dollar volume was a record $45.9 billion for
the second quarter, up 24% from the prior year, driven by higher
PULSE, Diners Club International and third-party issuer volume. The
number of transactions on the PULSE network increased 25%.
Effective Tax Rate
The company's effective tax rate was 35.2% for the second
quarter of 2011 compared to 38.9% in the second quarter of 2010.
The second quarter of 2011 included a tax benefit due to the
reversal of a tax valuation allowance related to a previous
realized capital loss.
Share Repurchase Program
On June 15, 2011, the company announced that its Board of
Directors has approved a share repurchase program, authorizing the
company to purchase up to $1 billion of its common stock. The
program expires on June 14, 2013, and may be terminated at any
time. The company expects to make share repurchases under the
program from time to time based on market conditions and other
factors, subject to legal and regulatory restrictions.
Proposed Acquisition of Mortgage Origination Business
On May 12, 2011, the company announced it had reached a
definitive agreement to acquire substantially all of the operating
and related assets of Home Loan Center, a subsidiary of Tree.com,
Inc., for approximately $55.9 million, which will add a residential
mortgage component to Discover's direct-to-consumer banking
business. The company intends to originate eligible consumer
mortgages to sell in secondary markets on a servicing-released
basis. The acquisition is subject to closing conditions, including
the approvals of regulators and Tree.com, Inc. stockholders, and is
expected to close by the end of 2011.
Conference Call and Webcast Information
The company will host a conference call to discuss its second
quarter results on Thursday, June 23, 2011, at 10:00 a.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 operates the Discover card, America's cash rewards
pioneer, and offers personal and student loans, online savings
accounts, certificates of deposit and money market accounts through
its Discover Bank subsidiary. Its payment businesses consist 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 in more than 185 countries and territories. For more
information, visit www.discoverfinancial.com.
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
and the levels of consumer confidence and consumer debt, and
investor sentiment; the impact of current, pending and future
legislation, regulation and regulatory and legal actions, including
new laws and rules related to financial regulatory reform, new laws
and rules limiting or modifying certain credit card practices, new
laws and rules affecting securitizations, funding and liquidity,
and bank holding company regulations and supervisory guidance; 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 private student loan business; 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; restrictions on the
company’s operations resulting from financing transactions; the
company’s ability to increase or sustain Discover card usage or
attract new customers; the company’s ability to attract new
merchants and maintain relationships with current merchants; the
effect of political, economic and market conditions, geopolitical
events and unforeseen or catastrophic events; fraudulent activities
or material security breaches of key systems; the company’s ability
to introduce new products or services; the company’s ability to
sustain its investment in new technology and manage its
relationships with third-party vendors; 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, 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. The company’s upcoming acquisition of
the mortgage origination business of Tree.com, Inc. is subject to
closing conditions including, among others, approvals of regulators
and Tree.com, Inc. stockholders. For additional information
regarding the acquisition, see the company’s Current Report on Form
8-K filed with the SEC on May 12, 2011.
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 November 30, 2010 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
February 28, 2011, 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 May 31, 2011 Feb 28, 2011
May 31, 2010
EARNINGS
SUMMARY
Interest Income $1,573 $1,553 $1,552 Interest Expense 380
383 405 Net Interest Income 1,193 1,170 1,147
Discount/Interchange Revenue 489 468 443 Rewards 223 207
174 Discount and Interchange Revenue, net 266 261 269
Fee Products Revenue 105 108 101 Loan Fee Income 81 86 70
Transaction Processing Revenue 45 43 36 Other Income 47 65
37 Total Other Income 544 563 513
Revenue Net of Interest Expense 1,737 1,733 1,660
Provision for Loan Losses 176 418 724 Employee
Compensation and Benefits 230 213 203 Marketing and Business
Development 124 136 98 Information Processing & Communications
66 65 63 Professional Fees 105 90 78 Premises and Equipment 18 17
18 Other Expense 92 74 54 Total Other Expense
635 595 514 Income Before Income Taxes 926 720
422 Tax Expense 326 255 164 Net Income $600
$465 $258 Net Income Allocated to
Common Stockholders $593 $459 $185
PER SHARE
STATISTICS
Basic EPS $1.09 $0.84 $0.34 Diluted EPS $1.09 $0.84 $0.33 Common
Stock Price (period end) $23.84 $21.75 $13.45 Dividend per share
$0.06 $0.06 $0.02 Book Value per share $13.79 $12.65 $11.10
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $883 $677 $386 Payment Services 43 43
36 Total $926 $720 $422
BALANCE SHEET
SUMMARY
Total Assets $63,438 $63,507 $62,154 Total
Liabilities
$55,915
$56,608
$56,116
Total Equity 7,523 6,899 6,038 Total
Liabilities and Stockholders' Equity $63,438 $63,507
$62,154
TOTAL LOAN
RECEIVABLES STATISTICS
Ending Loans 1, 2 $52,510 $51,663 $50,025 Average Loans 1, 2
$51,727 $51,488 $49,819 Interest Yield 11.93 % 12.10 % 12.25
% Net Principal Charge-off Rate 4.42 % 5.42 % 7.97 % Net Principal
Charge-off Rate Excluding PCI Loans 3 4.69 % 5.64 % 7.97 %
Delinquency Rate (over 30 days) 3 2.68 % 3.44 % 4.52 % Delinquency
Rate (over 90 days) 3 1.44 % 1.88 % 2.45 % Net Charge-off Dollars
$577 $689 $1,001 Loans Delinquent Over 30 Days 3 $1,329 $1,673
$2,264 Loans Delinquent Over 90 Days 3 $715 $915 $1,225
Allowance for Loan Loss (period end) $2,632 $3,033 $3,931 Change in
Loan Loss Reserves ($401 ) ($271 ) ($277 ) Reserve Rate 4 5.01 %
5.87 % 7.86 % Reserve Rate Excluding PCI Loans 3, 4 5.31 % 6.23 %
7.86 %
CREDIT CARD LOANS
STATISTICS
Ending Loans $44,961 $44,317 $45,328 Average Loans $44,288 $45,443
$45,280 Interest Yield 12.57 % 12.65 % 12.93 % Net Principal
Charge-off Rate 5.01 % 5.96 % 8.56 % Delinquency Rate (over 30
days) 2.79 % 3.59 % 4.85 % Delinquency Rate (over 90 days) 1.51 %
1.99 % 2.63 % Net Charge-off Dollars $559 $668 $977 Loans
Delinquent Over 30 Days $1,256 $1,590 $2,196 Loans Delinquent Over
90 Days $681 $882 $1,193 Allowance for Loan Loss (period
end) $2,519 $2,939 $3,826 Change in Loan Loss Reserves ($420 )
($270 ) ($266 ) Reserve Rate 5.60 % 6.63 % 8.44 % Total
Discover Card Volume $26,927 $25,759 $24,247 Discover Card Sales
Volume $24,844 $23,990 $22,859
NETWORK
VOLUME
PULSE Network $36,719 $34,380 $28,646 Third-Party Issuers 1,838
1,772 1,678 Diners Club International 5 7,380 6,998
6,708 Total Payment Services 45,937 43,150 37,032 Discover
Network - Proprietary 25,684 24,784 23,632
Total $71,621 $67,934 $60,664
1 Total Loans includes mortgages and other
loans.
2 Purchased Credit Impaired ("PCI") loans
were acquired in The Student Loan Corporation transaction on
December 31, 2010. PCI loans are loans for 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)
that were acquired as part of The Student Loan Corporation
transaction 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 The Reserve Rate includes federal
student loans held for sale.
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: A Glossary of Financial Terms is
included in the financial supplement filed as Exhibit 99.2 to the
company's Current Report on Form 8-K. This is available online at
the SEC's website (http://www.sec.gov) and the company's website
(http://investorrelations.discoverfinancial.com).
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