Discover Financial Services (NYSE: DFS) today reported net
income of $631 million for the first quarter of 2012, as compared
to $465 million for the first quarter of 2011.
First Quarter Highlights
- Total loans grew $4.6 billion, or 9%,
from the prior year to $56.3 billion.
- Credit card loans grew $1.6 billion to
$45.9 billion and Discover card sales volume was up 7%.
- The delinquency rate for credit card
loans over 30 days past due declined to 2.22% and the credit card
net charge-off rate declined to 3.07%, each of which were record
lows.
- Payment Services pretax income was up
21% from the prior year to $52 million. Transaction volume for the
segment was $46.7 billion in the quarter, an increase of 8% from
the prior year.
"Our results this quarter represent record first quarter
earnings for Discover and are a great start for 2012," said David
Nelms, chairman and chief executive officer of Discover. "Continued
improvements in credit performance, solid organic growth in each of
our lending products and strong volume growth across our networks
were key drivers of this quarter's earnings. We also recently
announced that our board of directors approved a new $2 billion
share repurchase authorization. This action, along with the two
dividend increases we announced last year, reflect the strength of
our capital base and our confidence in the future earnings power of
the company."
Segment Results:
Direct Banking
Direct Banking pretax income of $962 million in the quarter was
up $285 million, or 42%, from the prior year.
Discover card sales volume grew 7% from the prior year to $25.6
billion, primarily driven by an increase in the number of customers
using their Discover card. Credit card loans increased, ending the
quarter at $45.9 billion, up $1.6 billion from the prior year.
Total loans ended the quarter at $56.3 billion, up $4.6 billion,
or 9%, compared to the prior year. Private student loans increased
$3.0 billion, including the acquisition of a $2.4 billion student
loan portfolio in the fourth quarter of 2011. Personal loans
increased $764 million from the prior year. The company sold its
remaining $698 million of federal student loans in the first
quarter of 2012.
Net interest margin was 9.03%, down 19 basis points from the
prior year and 7 basis points from the prior quarter. The decrease
in net interest margin from the prior year reflects an increase in
lower yielding student loans as well as a decline in credit card
yield, partially offset by lower funding costs. Credit card yield
was 12.21%, a decrease of 44 basis points from the prior year and
15 basis points from the prior quarter. The decline in credit card
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 total loans decreased
55 basis points from the prior year and 13 basis points from the
prior quarter as the company continued to take advantage of
available low rate funding.
Net interest income increased $123 million, or 11%, from the
prior year, primarily driven by an increase in income from student
and personal loans and lower interest expense. Interest income on
credit card loans increased modestly from the prior year as an
increase in loan balances was partially offset by the decline in
yield.
The delinquency rate for credit card loans over 30 days past due
was 2.22%, an improvement of 137 basis points from the prior year,
and 17 basis points from the prior quarter. The credit card net
charge-off rate decreased to 3.07% for the first quarter of 2012,
down 289 basis points from the prior year and 17 basis points from
the prior quarter.
Provision for loan losses of $152 million decreased $266
million, or 64%, from the prior year, primarily driven by lower
charge-offs as a result of the continued decline in delinquencies.
The reserve release for the first quarter of 2012 was $226 million,
versus a release of $271 million in the first quarter of 2011.
Other income decreased $22 million, or 5%, from the prior year.
The first quarter of 2011 included a $16 million bargain purchase
gain estimate related to the acquisition of The Student Loan
Corporation.
Expenses were up $82 million, or 15%, from the prior year, due
to increased compensation and benefits costs reflecting increased
staffing, an increase in reserves related to litigation and
regulatory matters, investments in growth initiatives and
infrastructure, and higher fraud costs.
Payment Services
Payment Services pretax income was a record $52 million in the
quarter, up $9 million, or 21%, from the prior year. Revenue
increased $9 million, primarily driven by an increase in higher
margin point-of-sale transactions on the PULSE network. Expenses
were relatively flat, as higher compensation costs were offset by
lower marketing costs related to the timing of programs.
Payment Services dollar volume was $46.7 billion for the first
quarter, up 8% from the prior year, driven by higher PULSE,
third-party issuer and Diners Club International volume.
Share Repurchases
As previously announced, the company’s board of directors
approved a new share repurchase program authorizing the company to
purchase up to $2 billion of its common stock and also terminated
the prior share repurchase program. The company had repurchased a
total of 18 million shares for $425 million under the prior
program, all of which occurred in fiscal year 2011.
Conference Call and Webcast Information
The company will host a conference call to discuss its first
quarter results on Wednesday, March 21, 2012, at 4:00 pm. 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,
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 those related to financial regulatory reform, consumer
financial services practices, 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; 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;
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 attract new
merchants and 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 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. The company’s pending acquisition of the mortgage
origination business of Tree.com, Inc. is subject to closing
conditions including, among others, approvals of regulators.
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, 2011 which is 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 Feb 29, Nov 30, Feb 28, 2012
2011 2011
EARNINGS
SUMMARY
Interest Income $1,646 $1,620 $1,553 Interest Expense 353
360 383 Net Interest Income 1,293 1,260 1,170
Discount/Interchange Revenue 500 489 468 Rewards 236 215
207 Discount and Interchange Revenue, net 264 274 261
Fee Products Revenue 105 107 108 Loan Fee Income 85 87 86
Transaction Processing Revenue 53 48 43 Other Income 43 30
65 Total Other Income 550 546 563
Revenue Net of Interest Expense 1,843 1,806 1,733
Provision for Loan Losses 152 319 418 Employee
Compensation and Benefits 247 229 213 Marketing and Business
Development 131 144 136 Information Processing & Communications
70 69 65 Professional Fees 100 114 90 Premises and Equipment 17 18
17 Other Expense 112 95 74 Total Other Expense
677 669 595 Income Before Income Taxes 1,014
818 720 Tax Expense 383 305 255 Net Income
$631 $513 $465 Net Income Allocated to
Common Stockholders $624 $508 $459
PER SHARE
STATISTICS
Basic EPS $1.18 $0.95 $0.84 Diluted EPS $1.18 $0.95 $0.84 Common
Stock Price (period end) $30.01 $23.82 $21.75 Book Value per share
$16.66 $15.59 $12.65
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $962 $776 $677 Payment Services 52 42
43 Total $1,014 $818 $720
BALANCE SHEET
SUMMARY
Total Assets $70,486 $68,784 $63,507 Total
Liabilities $61,657 $60,542 $56,608 Total Equity 8,829 8,242
6,899 Total Liabilities and Stockholders' Equity
$70,486 $68,784 $63,507
TOTAL LOAN
RECEIVABLES STATISTICS
Ending Loans 1, 2
$56,299
$57,337 $51,663 Average Loans 1, 2
$57,606
$55,539 $51,488 Interest Yield 11.36 % 11.56 % 12.10 % Net
Principal Charge-off Rate 2.64 % 2.81 % 5.42 % Net Principal
Charge-off Rate excluding PCI Loans 3 2.90 % 3.05 % 5.64 %
Delinquency Rate (over 30 days) 3 2.08 % 2.30 % 3.44 % Delinquency
Rate (over 90 days) 3 1.08 % 1.14 % 1.88 % Net Principal Charge-off
Dollars $378 $387 $689 Interest and Fee Charge-off Dollars $123
$128 $224 Loans Delinquent Over 30 Days 3 $1,066 $1,200 $1,673
Loans Delinquent Over 90 Days 3 $554 $596 $915 Allowance for
Loan Loss (period end) $1,979 $2,205 $3,033 Change in Loan Loss
Reserves ($226 ) ($68 ) ($271 ) Reserve Rate 4 3.51 % 3.85 % 5.87 %
Reserve Rate Excluding PCI Loans 3, 4 3.87 % 4.23 % 6.23 %
CREDIT CARD LOANS
STATISTICS
Ending Loans $45,918 $46,639 $44,317 Average Loans $46,919 $45,756
$45,443 Interest Yield 12.21 % 12.36 % 12.65 % Net Principal
Charge-off Rate 3.07 % 3.24 % 5.96 % Delinquency Rate (over 30
days) 2.22 % 2.39 % 3.59 % Delinquency Rate (over 90 days) 1.18 %
1.20 % 1.99 % Net Charge-off Dollars $358 $370 $668 Loans
Delinquent Over 30 Days $1,019 $1,117 $1,590 Loans Delinquent Over
90 Days $540 $560 $882 Allowance for Loan Loss (period end)
$1,835 $2,070 $2,939 Change in Loan Loss Reserves ($235 ) ($84 )
($270 ) Reserve Rate 4.00 % 4.44 % 6.63 % Total Discover
Card Volume $27,370 $26,946 $25,759 Discover Card Sales Volume
$25,604 $25,033 $23,990
NETWORK
VOLUME
PULSE Network $37,577 $33,911 $34,380 Third-Party Issuers 2,037
1,939 1,772 Diners Club International 5 7,100
7,469
6,998 Total Payment Services 46,714
43,319
43,150 Discover Network - Proprietary 26,482 25,926
24,784 Total $73,196
$69,245
$67,934 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 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: 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).
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