Discover Financial Services (NYSE: DFS) today reported net
income of $599 million or $1.33 per diluted share for the second
quarter of 2015, as compared to $644 million or $1.35 per diluted
share for the second quarter of 2014. The company's return on
equity for the second quarter of 2015 was 21%.
Second Quarter Highlights
- Total loans grew $3.2 billion, or 4.8%,
from the prior year to $69.0 billion.
- Credit card loans grew $2.2 billion, or
4.2%, to $54.9 billion and Discover card sales volume increased
2.3% from the prior year or approximately 5% excluding gas
purchases.
- Net charge-off rate for credit card
loans decreased 5 basis points from the prior year to 2.28% and the
delinquency rate for loans over 30 days past due decreased 8 basis
points to 1.55%.
- Payment Services transaction dollar
volume for the segment was $47.5 billion, down 7% from the prior
year.
“We once again generated solid loan growth amid heightened
competition, marking more than four years of quarterly card
receivables growth,” said David Nelms, chairman and CEO of
Discover. “Our results benefited from strong credit results with
both overall charge-off and delinquency rates declining versus last
year.”
Segment Results: Direct Banking
Direct Banking pretax income of $914 million in the quarter was
down $70 million, or 7%, driven by lower other income and higher
expenses in part due to $42 million of expenses related to the exit
of the Home Loans business and previously announced anti-money
laundering and related compliance program enhancements.
Total loans ended the quarter at $69.0 billion, up 4.8% compared
to the prior year. Credit card loans ended the quarter at $54.9
billion, up 4.2% from the prior year. Personal loans increased $604
million, or 13.2%, from the prior year and private student loans
increased $269 million, or 3.3%, from the prior year. Excluding
purchased student loans, private student loans grew $803 million,
or 18.5%, from the prior year.
Revenue net of interest expense increased $12 million, up 1%
from the prior year.
Net interest income increased $47 million, or 3%, from the prior
year, benefiting from loan growth partially offset by margin
compression. Net interest margin was 9.63%, down 22 basis points
from the prior year primarily due to an increase in funding costs
and a decline in card yield. Interest expense as a percent of total
loans increased 13 basis points from the prior year as a result of
actions taken in prior quarters to extend funding duration. Credit
card yield was 12.04%, a decrease of 6 basis points from the prior
year due to portfolio mix.
Other income decreased $35 million, or 7%, from the prior year
due to higher rewards expense and lower protection products
revenue.
The delinquency rate for credit card loans over 30 days past due
was 1.55%, down 8 basis points from the prior year and down 9 basis
points from the prior quarter. Credit card net charge-off rate for
the second quarter was 2.28%, down 5 basis points from the prior
year and down 12 basis points from the prior quarter. The student
loan net charge-off rate excluding purchased credit- impaired
("PCI") loans was 1.02%, down 28 basis points from the prior year.
The personal loans net charge-off rate of 2.10% increased by 15
basis points from the prior year.
Provision for loan losses of $306 million decreased $54 million
from the prior year. Net charge-offs increased $10 million due
primarily to several years of consistent loan growth. The reserve
release for the second quarter of 2015 was $41 million due to an
improved outlook for card credit, versus a $23 million reserve
build in the prior year.
Expenses increased $136 million, or 18%, from the prior year
partially driven by higher regulatory and compliance costs.
Professional fees increased in part due to $19 million in costs
associated with anti-money laundering and related compliance
program enhancements. Marketing expenses increased due to higher
spending across lending products and the discontinuation of a
previously recurring postal rebate that was in the prior year.
Employee compensation increased largely due to increased staffing
driven in part by regulatory and compliance needs. Non-recurring
pretax charges associated with the closure of the Home Loans
business totaled $23 million.
Payment Services
Payment Services pretax income was $28 million in the quarter,
down $3 million from the prior year. Payment Services dollar volume
was $47.5 billion, down 7% from the prior year. PULSE transaction
dollar volume was down 10% year-over-year due to the loss of some
volume from a large debit issuer. Network Partners volume was up
$919 million, or 35% from the prior year driven by AribaPay
volume.
Share Repurchases
During the second quarter of 2015, the company repurchased
approximately 7 million shares of common stock for $425 million.
Shares of common stock outstanding declined by 1.6% from the prior
quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its second
quarter results on Wednesday, July 22, 2015, at 5:00 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 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 card acceptance across its networks and
maintain relationships with network participants; the company's
ability to sustain and grow its non-card products; losses as a
result of mortgage loan repurchase and indemnification obligations
to secondary market purchasers; difficulty obtaining regulatory
approval for, financing, closing, transitioning, integrating or
managing the expenses of acquisitions of or investments in new
businesses, products or technologies; the company's ability to
manage its credit risk, market risk, liquidity risk, operational
risk, compliance and legal 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 remain organizationally effective; the
company's ability to increase or sustain Discover card usage or
attract new customers; the company's ability to maintain
relationships with 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; 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, 2014 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
March 31, 2015, 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,
2015
2015 2014
EARNINGS
SUMMARY
Interest Income $1,947 $1,929 $1,863 Interest Expense 311 300 274
Net Interest Income 1,636 1,629 1,589 Discount/Interchange
Revenue 612 536 595 Rewards Cost 314 268 268 Discount and
Interchange Revenue, net 298 268 327 Protection Products Revenue 68
71 78 Loan Fee Income 80 81 80 Transaction Processing Revenue 40 42
46 Other Income 53 80 52 Total Other Income 539 542 583
Revenue Net of Interest Expense 2,175 2,171 2,172 Provision
for Loan Losses 306 390 360 Employee Compensation and
Benefits 326 331 301 Marketing and Business Development 199 182 168
Information Processing & Communications 90 88 87 Professional
Fees 153 127 112 Premises and Equipment 23 24 22 Other Expense 136
121 107 Total Other Expense 927 873 797 Income
Before Income Taxes 942 908 1,015 Tax Expense 343 322 371 Net
Income $599 $586 $644 Net Income Allocated to Common
Stockholders $586 $573 $630
PER SHARE
STATISTICS
Basic EPS $1.33 $1.28 $1.35 Diluted EPS $1.33 $1.28 $1.35 Common
Stock Price (period end) $57.62 $56.35 $61.98 Book Value per share
$25.75 $25.22 $24.46
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $914 $881 $984 Payment Services 28 27 31 Total $942
$908 $1,015
BALANCE SHEET
SUMMARY
Total Assets $84,911 $84,178 $78,937 Total Liabilities 73,648
72,967 67,556 Total Equity 11,263 11,211 11,381 Total Liabilities
and Stockholders' Equity $84,911 $84,178 $78,937
TOTAL LOAN
RECEIVABLES
Ending Loans 1, 2 $69,028 $67,648 $65,875 Average Loans 1, 2
$68,100 $68,148 $64,728 Interest Yield 11.35% 11.37% 11.42%
Gross Principal Charge-off Rate 2.76% 2.82% 2.82% Gross Principal
Charge-off Rate excluding PCI Loans 3 2.91% 2.98% 3.01% Net
Principal Charge-off Rate 2.05% 2.14% 2.08% Net Principal
Charge-off Rate excluding PCI Loans 3 2.16% 2.26% 2.22%
Delinquency Rate (over 30 days) excluding
PCI Loans 3,4
1.49% 1.57% 1.56%
Delinquency Rate (over 90 days) excluding
PCI Loans 3,4
0.69% 0.78% 0.73% Gross Principal Charge-off Dollars $469 $474 $455
Net Principal Charge-off Dollars $347 $360 $337 Net Interest and
Fee Charge-off Dollars $87 $95 $87
Loans Delinquent Over 30 Days 3,4
$980 $1,006 $964
Loans Delinquent Over 90 Days 3,4
$450 $500 $451 Allowance for Loan Loss (period end) $1,735
$1,776 $1,614 Change in Loan Loss Reserves ($41) $30 $23 Reserve
Rate 2.51% 2.63% 2.45% Reserve Rate Excluding PCI Loans 3 2.60%
2.72% 2.56%
CREDIT CARD
LOANS
Ending Loans $54,949 $53,499 $52,742 Average Loans $53,987 $54,038
$51,718 Interest Yield 12.04% 12.05% 12.10% Gross Principal
Charge-off Rate 3.14% 3.21% 3.22% Net Principal Charge-off Rate
2.28% 2.40% 2.33%
Delinquency Rate (over 30 days) 4
1.55% 1.64% 1.63%
Delinquency Rate (over 90 days) 4
0.75% 0.86% 0.80% Gross Principal Charge-off Dollars $423 $428 $415
Net Principal Charge-off Dollars $307 $319 $300
Loans Delinquent Over 30 Days 4
$850 $879 $860
Loans Delinquent Over 90 Days 4
$414 $458 $420 Allowance for Loan Loss (period end) $1,441
$1,492 $1,359 Change in Loan Loss Reserves ($51) $18 $17 Reserve
Rate 2.62% 2.79% 2.58% Total Discover Card Volume $32,299
$28,725 $31,732 Discover Card Sales Volume $30,017 $26,379 $29,341
Rewards Rate 1.05% 1.02% 0.91%
NETWORK
VOLUME
PULSE Network $37,162 $40,814 $41,500 Network Partners 3,536 2,949
2,617
Diners Club International 5
6,773 6,474 6,733 Total Payment Services 47,471 50,237 50,850
Discover Network - Proprietary 31,084 27,324 30,342 Total $78,555
$77,561 $81,192 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 During the first quarter of 2015, we
implemented payment processing changes which had the effect of
contributing favorably to the delinquencies of certain accounts.
These changes partially contributed to the decline in the
delinquency rate.
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).
View source
version on businesswire.com: http://www.businesswire.com/news/home/20150722006344/en/
Discover Financial ServicesInvestors:Bill Franklin,
224-405-1902williamfranklin@discover.comorMedia:Jon
Drummond, 224-405-1888jondrummond@discover.com
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