Discover Financial Services (NYSE: DFS) today reported net
income 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 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.
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 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 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, 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.
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 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 (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 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 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 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 107 102 144 Total Other
Expense 797 784 820 Income Before Income Taxes
1,015 1,022 981 Tax Expense 371 391 379 Net
Income $644 $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 $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
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
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 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 % 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 $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 %
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 % 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 $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 % 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 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 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).
Discover Financial ServicesInvestors:Bill
Franklin,
224-405-1902williamfranklin@discover.comorMedia:Jon
Drummond, 224-405-1888jondrummond@discover.com
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