Discover Financial Services (NYSE: DFS) today reported net
income of $602 million or $1.20 per diluted share for the second
quarter of 2013, as compared to $525 million or $0.99 per diluted
share for the second quarter of 2012. The company's return on
equity was 23%.
Second Quarter Highlights
- Total loans grew $3.7 billion, or 6%,
from the prior year to $61.7 billion.
- Credit card loans grew $2.3 billion, or
5%, to $49.8 billion and Discover card sales volume increased 4%
from the prior year.
- Credit card loan delinquencies over 30
days past due reached a record low of 1.58%. Credit card net
charge-off rate decreased 2 basis points sequentially to
2.34%.
- Payment Services pretax income was down
$71 million from the prior year to a pretax loss of $21
million.
"Discover's strong overall results were driven by profitable
growth in Direct Banking and continued improvement in credit offset
to a small degree by a loss in Payment Services as we supported
Diners franchises in Europe," said David Nelms, chairman and CEO of
Discover.
Segment Results:
Direct Banking
Direct Banking pretax income of $1.0 billion in the quarter was
up $206 million, or 26%, from the prior year.
Discover card sales volume grew 4% from the prior year to $27.6
billion. Credit card loans ended the quarter at $49.8 billion, up
5% from the prior year.
Total loans ended the quarter at $61.7 billion, up 6% compared
to the prior year. Private student loans increased $390 million, or
5%, from the prior year and personal loans increased $652 million,
or 22%, from the prior year.
Revenue net of interest expense increased $182 million, up 10%
from the prior year due to loan growth, revenue from Discover Home
Loans, which was launched in June 2012 after acquiring Home Loan
Center assets from Tree.com, and lower funding costs.
Net interest margin was 9.44%, up 16 basis points from the prior
year. The increase in net interest margin from the prior year
reflects decreased funding costs partially offset by lower loan
yield. Credit card yield was 11.97%, a decrease of 24 basis points
from the prior year. The decline in credit card yield from the
prior year reflects an increase in promotional rate balances and a
decline in higher rate balances, partially offset by lower interest
charge-offs. Interest expense as a percent of total loans decreased
39 basis points from the prior year as the company continued to
take advantage of available low rate funding.
Net interest income increased $116 million, or 9%, from the
prior year, benefiting from loan growth and lower interest expense,
which was partially offset by a decline in loan yield.
Other income increased $66 million, or 14%, from the prior year
primarily due to revenue from Discover Home Loans and higher net
interchange revenue as a result of increased sales.
The delinquency rate for credit card loans over 30 days past due
was 1.58%, an improvement of 27 basis points from the prior year,
and a decrease of 19 basis points from the prior quarter. Credit
card net charge-off rate for the second quarter was 2.34%, down 38
basis points from the prior year, and down 2 basis points from the
prior quarter. The student loan net charge-off rate excluding PCI
loans was 1.58%, up 85 basis points from the prior year and 76
basis points sequentially, due to a larger portion of the portfolio
entering repayment and seasonality, respectively. Personal loan net
charge-off rate decreased 1 basis point from the prior year and 6
basis points sequentially to 2.24%.
Provision for loan losses of $225 million decreased $37 million
from the prior year, driven by a decline in charge-offs and a
higher reserve release. The reserve release for the second quarter
of 2013 was $93 million reflecting the impact of a 21 basis point
decline in the reserve rate from the prior quarter partially offset
by additional reserves due to loan growth. The second quarter of
2012 included a reserve release of $73 million. Net principal
charge-offs were $17 million lower than the prior year as a result
of the continued decline in delinquencies and bankruptcies.
Expenses were up $13 million, or 2%, from the prior year. The
increase in expenses was due to higher employee compensation and
marketing associated with the Home Loan Center acquisition,
increased card marketing initiatives and higher headcount. The
second quarter of 2012 included a $90 million addition to legal
reserves.
Payment Services
Payment Services pretax loss for the quarter was $21 million as
expenses increased $49 million from the prior year. Total pretax
charges related to supporting Diners Club International franchises
during the quarter were $55 million, which included a $15 million
increase in loan loss provisions for prior franchise loans.
Payment Services dollar volume was $49.4 billion for the second
quarter of 2013, down 2% from the prior year. PULSE transaction
dollar volume declined by 3% year-over-year due to merchant routing
and competitor actions.
Share Repurchases
During the second quarter of 2013, the company repurchased
approximately 7 million shares of common stock for $340 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 23, 2013, at 4:00 p.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 issues the Discover card, America's cash rewards
pioneer, and offers home loans, private student loans, personal
loans, checking and 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, 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 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, 2012 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, 2013, 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 Jun 30, 2013 Mar 31,
2013 Jun 30, 2012
EARNINGS
SUMMARY
Interest Income $1,727 $1,708 $1,646 Interest Expense 297
298 332 Net Interest Income 1,430 1,410 1,314
Discount/Interchange Revenue 546 492 519 Rewards 238 229
246 Discount and Interchange Revenue, net 308 263 273
Protection Products Revenue 88 88 102 Loan Fee Income 76 81 78
Transaction Processing Revenue 47 53 56 Other Income 92 97
43 Total Other Income 611 582 552
Revenue Net of Interest Expense 2,041 1,992 1,866
Provision for Loan Losses 240 159 262 Employee
Compensation and Benefits 285 290 253 Marketing and Business
Development 185 169 121 Information Processing & Communications
85 78 71 Professional Fees 101 104 108 Premises and Equipment 20 19
19 Other Expense 144 93 186 Total Other
Expense 820 753 758 Income Before Income Taxes
981 1,080 846 Tax Expense 379 407 321 Net
Income $602 $673 $525 Net Income
Allocated to Common Stockholders $588 $659 $520
PER SHARE
STATISTICS
Basic EPS $1.20 $1.33 $0.99 Diluted EPS $1.20 $1.33 $0.99 Common
Stock Price (period end) $47.64 $44.84 $34.58 Book Value per share
$21.52 $20.90 $17.36
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $1,002 $1,033 $796 Payment Services (21 ) 47
50 Total $981 $1,080 $846
BALANCE SHEET
SUMMARY
Total Assets $74,944 $76,139 $73,238 Total
Liabilities 64,496 65,840 64,298 Total Equity 10,448 10,299
8,940 Total Liabilities and Stockholders' Equity
$74,944 $76,139 $73,238
TOTAL LOAN
RECEIVABLES
Ending Loans 1, 2
$61,703 $60,384 $58,051 Average Loans 1, 2 $60,793 $60,903 $56,929
Interest Yield 11.24 % 11.22 % 11.45 % Net Principal
Charge-off Rate 2.10 % 2.08 % 2.37 % Net Principal Charge-off Rate
excluding PCI Loans 3 2.27 % 2.25 % 2.60 % Delinquency Rate (over
30 days) excluding PCI Loans 3 1.50 % 1.68 % 1.75 % Delinquency
Rate (over 90 days) excluding PCI Loans 3 0.73 % 0.84 % 0.87 % Net
Principal Charge-off Dollars $318 $313 $335 Net Interest and Fee
Charge-off Dollars $85 $93 $104 Loans Delinquent Over 30 Days 3
$861 $940 $929 Loans Delinquent Over 90 Days 3 $419 $469 $460
Allowance for Loan Loss (period end) $1,556 $1,634 $1,898
Change in Loan Loss Reserves ($78 ) ($154 ) ($73 ) Reserve Rate
2.52 % 2.71 % 3.27 % Reserve Rate Excluding PCI Loans 3 2.72 % 2.93
% 3.57 %
CREDIT CARD
LOANS
Ending Loans $49,791 $48,655 $47,451 Average Loans $49,002 $49,267
$46,484 Interest Yield 11.97 % 11.94 % 12.21 % Net Principal
Charge-off Rate 2.34 % 2.36 % 2.72 % Delinquency Rate (over 30
days) 1.58 % 1.77 % 1.85 % Delinquency Rate (over 90 days) 0.80 %
0.91 % 0.94 % Net Principal Charge-off Dollars $286 $287 $314 Loans
Delinquent Over 30 Days $789 $862 $879 Loans Delinquent Over 90
Days $398 $442 $445 Allowance for Loan Loss (period end)
$1,360 $1,453 $1,739 Change in Loan Loss Reserves ($93 ) ($160 )
($83 ) Reserve Rate 2.73 % 2.99 % 3.66 % Total Discover Card
Volume $29,684 $26,880 $28,579 Discover Card Sales Volume $27,574
$24,864 $26,411
NETWORK
VOLUME
PULSE Network $40,060 $39,919 $41,207 Network Partners 2,442 2,246
2,195 Diners Club International 4 6,848 6,644 7,184
Total Payment Services 49,350 48,809 50,586 Discover Network
- Proprietary 28,551 25,738 27,279 Total
$77,901 $74,547 $77,865 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 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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