Net Income Included One-Time Charges of $189
Million Resulting from Actions Taken by the Company in Connection
with the Tax Cuts and Jobs Act
Discover Financial Services (NYSE: DFS) today reported net
income of $387 million or $0.99 per diluted share for the fourth
quarter of 2017, as compared to $563 million or $1.40 per diluted
share for the fourth quarter of 2016. The company’s return on
equity for the fourth quarter of 2017 was 14%. Net income included
non-recurring charges of $189 million resulting from actions taken
by the company in connection with the Tax Cuts and Jobs Act ("Tax
Act"). These charges had the effect of reducing diluted earnings
per share by $0.52.
Fourth Quarter Highlights
- Total loans grew $7.0 billion (9%) from
the prior year to $84.2 billion.
- Credit card loans grew $5.8 billion
(9%) to $67.3 billion, on Discover card sales volume of $35.3
billion.
- Total net charge-off rate excluding PCI
loans increased 53 basis points from the prior year to 2.92% and
the total 30+ day delinquency rate excluding PCI loans increased 23
basis points from the prior year to 2.20%.
- Consumer deposits grew $3.4 billion
(9%) from the prior year to $39.4 billion.
- Payment Services transaction dollar
volume was $54.0 billion, up 17% from the prior year.
- Income tax expense includes a one-time
adjustment of $179 million to reflect the impact of the Tax
Act.
“Our earnings in the fourth quarter and full year were driven by
strong loan and revenue growth across our businesses, the result of
continued execution of our strategy,” said David Nelms, chairman
and CEO of Discover. “As we move forward in 2018, this strong
momentum, enhanced by the favorable economic environment, should
position us well for sustained growth, strong ROE and continued
return of excess capital to shareholders. While the new tax law
impacted the current quarter, I am excited about the opportunity it
provides to further invest in growth, our people and our
communities."
Segment Results:
Direct Banking
Direct Banking pretax income of $870 million in the quarter rose
by $2 million from the prior year as increased revenue was largely
offset by higher provision for loan losses and operating
expenses.
Total loans ended the quarter at $84.2 billion, up 9% compared
to the prior year. Credit card loans ended the quarter at $67.3
billion, up 9% from the prior year. Personal loans increased $893
million (14%) from the prior year. Private student loans increased
$183 million (2%) year-over-year, and grew $683 million (11%)
excluding purchased student loans.
Net interest income increased $228 million (12%) from the prior
year, driven by loan growth and a higher net interest margin. Net
interest margin was 10.28%, up 21 basis points from the prior year.
Card yield was 12.79%, an increase of 17 basis points from the
prior year because of increases in the prime rate, partially offset
by higher interest charge-offs and a change in portfolio mix.
Interest expense as a percent of total loans increased 16 basis
points from the prior year, as higher market rates were partially
offset by tighter credit spreads on refinanced long-term debt.
Other income increased $22 million (5%) from the prior year,
driven by higher discount and interchange revenue.
The delinquency rate for credit card loans over 30 days past due
was 2.28%, up 24 basis points from the prior year and 14 basis
points from the prior quarter. The credit card net charge-off rate
for the fourth quarter was 3.03%, up 56 basis points from the prior
year and 23 basis points from the prior quarter. The student loan
net charge-off rate excluding purchased credit-impaired ("PCI")
loans was 1.34%, down 8 basis points from the prior year. The
personal loans net charge-off rate of 3.62% increased by 92 basis
points from the prior year. Net charge-off rates were generally
higher because of supply-driven credit normalization and the
seasoning of loan growth from the last few years.
Provision for loan losses of $678 million increased $99 million
from the prior year due to higher net charge-offs, partially offset
by a smaller reserve build. The reserve build for the fourth
quarter of 2017 was $94 million, compared to a reserve build of
$144 million in the fourth quarter of 2016.
Expenses increased $149 million from the prior year as a result
of higher employee compensation, marketing and professional fees.
Employee compensation increased as a result of higher staffing
levels and higher average salaries. In addition, employee
compensation includes a $16 million charge associated with a
one-time bonus granted to eligible employees following passage of
the new tax legislation. Marketing expenses increased as a result
of higher acquisition costs and brand advertising relative to the
fourth quarter of 2016. The increase in professional fees is
primarily due to investments in technology and analytic
capabilities.
Payment Services
Payment Services pretax income was $29 million in the quarter,
up $14 million from the prior year, primarily driven by lower
operating expenses as well as higher transaction processing and
interchange revenue.
Payment Services transaction dollar volume was $54.0 billion, up
17% versus the prior year. PULSE transaction dollar volume was up
19% year-over-year. Diners Club volume increased 14% year-over-year
driven by continued strength of newer franchise relationships.
Share Repurchases
During the fourth quarter of 2017, the company repurchased
approximately 8.1 million shares of common stock for $555 million.
Shares of common stock outstanding declined by 2.2% from the prior
quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its fourth
quarter results on Wednesday, January 24, 2018, at 4:00 p.m.
Central time. Interested parties can listen to the conference call
via a live audio webcast at
https://investorrelations.discover.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 and certificates of
deposit through its direct banking business. It operates the
Discover Network, with millions of retail 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 (https://investorrelations.discover.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 tax reform,
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; 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, 2016, and "Management's Discussion
& Analysis of Financial Condition and Results of Operations" in
the company's Quarterly Report on Form 10-Q for the quarters ended
September 30, 2017, June 30, 2017, and March 31, 2017, 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 December September
December
31, 2017 30, 2017
31, 2016
EARNINGS
SUMMARY
Interest Income $2,556 $2,476 $2,258 Interest Expense 436 426 366
Net Interest Income 2,120 2,050 1,892 Discount/Interchange
Revenue 717 675 665
Rewards Cost
434 417 411 Discount and Interchange Revenue, net 283 258 254
Protection Products Revenue 54 55 59 Loan Fee Income 96 95 93
Transaction Processing Revenue 43 43 40 Other Income 18 24 20 Total
Other Income 494 475 466 Revenue Net of Interest Expense
2,614 2,525 2,358 Provision for Loan Losses 679 674 578
Employee Compensation and Benefits 411 371 352 Marketing and
Business Development 213 203 176 Information Processing &
Communications 80 78 81 Professional Fees 189 163 152 Premises and
Equipment 26 25 23 Other Expense 117 108 113 Total Other Expense
1,036 948 897 Income Before Income Taxes 899
903 883 Tax Expense 512 301 320 Net Income $387 $602 $563
Net Income Allocated to Common Stockholders $359 $589 $550
PER SHARE
STATISTICS
Basic EPS $0.99 $1.59 $1.40 Diluted EPS $0.99 $1.59 $1.40 Common
Stock Price (period end) $76.92 $64.48 $72.09 Book Value per share
$30.43 $30.56 $29.13
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $870 $867 $868 Payment Services 29 36 15 Total $899
$903 $883
BALANCE SHEET
SUMMARY
Total Assets $100,087 $97,608 $92,308 Total Liabilities 89,195
86,421 80,985 Total Equity 10,892 11,187 11,323 Total Liabilities
and Stockholders' Equity $100,087 $97,608 $92,308
TOTAL LOAN
RECEIVABLES
Ending Loans 1, 2 $84,248 $80,443 $77,254 Average Loans 1, 2
$81,802 $79,189 $74,775 Interest Yield 12.14% 12.15% 11.88%
Gross Principal Charge-off Rate 3.45% 3.26% 2.91% Gross Principal
Charge-off Rate excluding PCI Loans 3 3.54% 3.35% 3.02% Net
Principal Charge-off Rate 2.85% 2.63% 2.31% Net Principal
Charge-off Rate excluding PCI Loans 3 2.92% 2.71% 2.39% Delinquency
Rate (over 30 days) excluding PCI Loans 3 2.20% 2.05% 1.97%
Delinquency Rate (over 90 days) excluding PCI Loans 3 0.99% 0.91%
0.87% Gross Principal Charge-off Dollars $711 $651 $548 Net
Principal Charge-off Dollars $583 $527 $435 Net Interest and Fee
Charge-off Dollars $119 $107 $94 Loans Delinquent Over 30 Days 3
$1,806 $1,605 $1,469 Loans Delinquent Over 90 Days 3 $815 $709 $652
Allowance for Loan Loss (period end) $2,621 $2,531 $2,167
Reserve Change Build/ (Release) 4 $96 $147 $143 Reserve Rate 3.11%
3.15% 2.80% Reserve Rate excluding PCI Loans 3 3.15% 3.20% 2.86%
CREDIT CARD
LOANS
Ending Loans $67,291 $63,475 $61,522 Average Loans $64,791 $62,647
$59,121 Interest Yield 12.79% 12.83% 12.62% Gross Principal
Charge-off Rate 3.73% 3.53% 3.19% Net Principal Charge-off Rate
3.03% 2.80% 2.47% Delinquency Rate (over 30 days) 2.28% 2.14% 2.04%
Delinquency Rate (over 90 days) 1.12% 1.02% 0.97% Gross Principal
Charge-off Dollars $612 $555 $474 Net Principal Charge-off Dollars
$496 $439 $369 Loans Delinquent Over 30 Days $1,532 $1,359 $1,252
Loans Delinquent Over 90 Days $751 $646 $597 Allowance for
Loan Loss (period end) $2,147 $2,091 $1,790 Reserve Change Build/
(Release) $56 $111 $129 Reserve Rate 3.19% 3.29% 2.91% Total
Discover Card Volume $38,574 $35,581 $35,440 Discover Card Sales
Volume $35,339 $32,161 $32,486 Rewards Rate 1.23% 1.30% 1.26%
NETWORK
VOLUME
PULSE Network $42,386 $39,828 $35,554 Network Partners 3,280 3,811
3,235 Diners Club International 5 8,373 7,989 7,334 Total Payment
Services 54,039 51,628 46,123 Discover Network - Proprietary 36,267
33,576 34,029 Total $90,306 $85,204 $80,152 1 Total Loans includes
Home Equity 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 Allowance for loan loss includes the net
change in reserves on PCI pools having no remaining non-accretable
difference which does not impact the reserve change build/(release)
in provision for loan losses.
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/20180124006230/en/
Discover Financial ServicesInvestors:Craig Streem,
224-405-5923craigstreem@discover.comorMedia:Jon Drummond,
224-405-1888jondrummond@discover.com
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