Discover Financial Services (NYSE: DFS) today reported net
income of $537 million or $1.00 per diluted share for the second
quarter of 2012, as compared to $600 million or $1.09 per share for
the second quarter of 2011. Strong year-over-year revenue growth
was offset by lower reserve releases. The company’s return on
equity was 24%.
Second Quarter Highlights
- Total loans grew $4.5 billion, or 9%,
from the prior year to $57.1 billion.
- Credit card loans grew $1.6 billion to
$46.6 billion and Discover card sales volume increased 5% from the
prior year.
- Credit card loan delinquencies and net
charge-offs reached historic lows with a delinquency rate for loans
over 30 days past due of 1.91% and a net charge-off rate of
2.79%.
- Payment Services pretax income was up
10% from the prior year to $47 million. Transaction volume for the
segment was $51.4 billion in the quarter, an increase of 12% from
the prior year.
"Our results this quarter reflect outstanding fundamental
performance in both of our business segments and continued
improvement in credit performance," said David Nelms, chairman and
chief executive officer of Discover. "In addition to the strong
financial results for the quarter, I am excited about our recent
expansion into three new products. Discover now offers mortgages
through the recently acquired Home Loan Center platform, a fixed
rate private student loan product to better meet the tuition
funding needs of our customers and our first major affinity credit
card. We believe these new products lay a foundation for additional
revenue and asset growth in the future."
Segment Results:
Direct Banking
Direct Banking pretax income of $820 million in the quarter was
down $63 million, or 7%, from the prior year.
Discover card sales volume grew 5% from the prior year to $26.1
billion. Credit card loans ended the quarter at $46.6 billion, up
4%, or $1.6 billion, from the prior year.
Total loans ended the quarter at $57.1 billion, up $4.5 billion,
or 9%, compared to the prior year. Private student loans increased
$2.9 billion, including the acquisition of a $2.4 billion student
loan portfolio in the fourth quarter of 2011. Personal loans
increased $703 million from the prior year.
Net interest margin was 9.31%, up 16 basis points from the prior
year and 28 basis points from the prior quarter. The increase in
net interest margin from the prior year reflects decreased funding
costs partially offset by lower credit card yield. Credit card
yield was 12.35%, a decrease of 22 basis points from the prior year
and an increase of 14 basis points from the prior quarter. The
decline in credit card yield from the prior year reflects a decline
in higher rate balances and an increase in promotional rate
balances, partially offset by lower interest charge-offs. Interest
expense as a percent of total loans decreased 50 basis points from
the prior year and 5 basis points from the prior quarter as the
company continued to take advantage of available low rate
funding.
Net interest income increased $122 million, or 10%, from the
prior year, benefiting from loan growth and lower interest expense.
This was partially offset by a decline in credit card and student
loan yields.
The delinquency rate for credit card loans over 30 days past due
was 1.91%, an improvement of 88 basis points from the prior year,
and 31 basis points from the prior quarter. The credit card net
charge-off rate decreased to 2.79% for the second quarter of 2012,
down 222 basis points from the prior year and 28 basis points from
the prior quarter.
Charge-offs were down $235 million from the prior year as a
result of the continued decline in delinquencies. Provision for
loan losses of $232 million increased $56 million, or 32%, from the
prior year, driven by a lower reserve release partially offset by
the decline in charge-offs. The reserve release for the second
quarter of 2012 was $110 million reflecting the impact of a 23
basis point decline in the reserve rate from the prior quarter
partially offset by additional reserves due to loan growth. The
second quarter of 2011 included a reserve release of $401
million.
Other income decreased $21 million, or 4%, from the prior year
due to lower late fee assessments, lower transition services
revenue related to the Student Loan Corporation and a decline in
protection products revenue. The second quarter of 2011 included an
increase in the value of loans held for sale.
Expenses were up $108 million, or 18%, from the prior year. The
increase is primarily due to a $71 million year-over-year increase
in legal reserve expense, as the company added $90 million to the
legal reserves in the quarter. Excluding the change in legal
reserve expense, expenses increased 6% essentially in line with
revenue and receivable growth.
Payment Services
Payment Services pretax income was $47 million in the quarter,
up $4 million, or 10%, from the prior year. Revenue increased $10
million, primarily driven by an increase in higher margin
point-of-sale transactions on the PULSE network and increased
third-party issuer volume partially offset by higher incentives.
Expenses were up $6 million from the prior year.
Payment Services dollar volume was $51.4 billion for the second
quarter of 2012, up 12% from the prior year, driven by higher PULSE
and third-party issuer volume.
Share Repurchases
In the second quarter of 2012, the company repurchased 13.5
million shares of common stock for $447 million. Shares outstanding
declined by 2.4% from prior quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its second
quarter results on Tuesday, June 19, 2012, at 10:00 am. 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 home
loans, private student loans, personal loans, online savings
accounts, certificates of deposit and money market accounts through
its direct banking business. 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.
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 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 29, 2012 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, Feb 29, May
31, 2012 2012 2011
EARNINGS
SUMMARY
Interest Income $1,656 $1,646 $1,573 Interest Expense 341
353 380 Net Interest Income 1,315 1,293 1,193
Discount/Interchange Revenue 514 500 489 Rewards 248 236
223 Discount and Interchange Revenue, net 266 264 266
Protection Products Revenue
101 105 105 Loan Fee Income 77 85 81 Transaction Processing Revenue
52 53 45 Other Income 37 43 47 Total Other
Income 533 550 544 Revenue Net of
Interest Expense 1,848 1,843 1,737 Provision for Loan Losses
232 152 176 Employee Compensation and Benefits 249 247 230
Marketing and Business Development 119 131 124 Information
Processing & Communications 72 70 66 Professional Fees 110 100
105 Premises and Equipment 19 17 18 Other Expense 180 112
92 Total Other Expense 749 677 635
Income Before Income Taxes 867 1,014 926 Tax Expense 330
383 326 Net Income $537 $631
$600 Net Income Allocated to Common Stockholders $532
$624 $593
PER SHARE
STATISTICS
Basic EPS $1.01 $1.18 $1.09 Diluted EPS $1.00 $1.18 $1.09 Common
Stock Price (period end) $33.11 $30.01 $23.84 Book Value per share
$17.20 $16.66 $13.79
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $820 $962 $883 Payment Services 47 52
43 Total $867 $1,014 $926
BALANCE SHEET
SUMMARY
Total Assets $72,083 $70,486 $63,438 Total
Liabilities
$63,184
$61,657
$55,915
Total Equity 8,899 8,829 7,523 Total
Liabilities and Stockholders' Equity $72,083 $70,486
$63,438
TOTAL LOAN
RECEIVABLES STATISTICS
Ending Loans 1, 2
$57,058 $56,299 $52,510 Average Loans 1, 2 $56,180 $57,606 $51,727
Interest Yield 11.55 % 11.36 % 11.93 % Net Principal
Charge-off Rate 2.42 % 2.64 % 4.42 % Net Principal Charge-off Rate
excluding PCI Loans 3 2.66 % 2.90 % 4.69 % Delinquency Rate (over
30 days) 3 1.81 % 2.08 % 2.68 % Delinquency Rate (over 90 days) 3
0.91 % 1.08 % 1.44 % Net Principal Charge-off Dollars $342 $378
$577 Net Interest and Fee Charge-off Dollars $110 $123 $192 Loans
Delinquent Over 30 Days 3 $941 $1,066 $1,329 Loans Delinquent Over
90 Days 3 $474 $554 $715 Allowance for Loan Loss (period
end) $1,869 $1,979 $2,632 Change in Loan Loss Reserves ($110 )
($226 ) ($401 ) Reserve Rate 4 3.28 % 3.51 % 5.01 %
Reserve Rate Excluding PCI Loans 2, 4
3.59 % 3.87 % 5.31 %
CREDIT CARD LOANS
STATISTICS
Ending Loans $46,610 $45,918 $44,961 Average Loans $45,772 $46,919
$44,288 Interest Yield 12.35 % 12.21 % 12.57 % Net Principal
Charge-off Rate 2.79 % 3.07 % 5.01 % Delinquency Rate (over 30
days) 1.91 % 2.22 % 2.79 % Delinquency Rate (over 90 days) 0.99 %
1.18 % 1.51 % Net Principal Charge-off Dollars $322 $358 $559 Loans
Delinquent Over 30 Days $890 $1,019 $1,256 Loans Delinquent Over 90
Days $459 $540 $681 Allowance for Loan Loss (period end)
$1,713 $1,835 $2,519 Change in Loan Loss Reserves ($122 ) ($235 )
($420 ) Reserve Rate 3.68 % 4.00 % 5.60 % Total Discover
Card Volume $28,140 $27,370 $26,927 Discover Card Sales Volume
$26,115 $25,604 $24,844
NETWORK
VOLUME
PULSE Network $42,001 $37,577 $36,719 Third-Party Issuers 2,189
2,037 1,838 Diners Club International 5 7,205 7,100
7,380 Total Payment Services 51,395 46,714 45,937 Discover
Network - Proprietary 26,985 26,482 25,684
Total $78,380 $73,196 $71,621
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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