Discover Financial Services (NYSE: DFS):
Third Quarter Results
2020
2019
YOY Change
Total loans, end of period (in
billions)
$88.7
$92.5
(4%)
Total revenue net of interest expense (in
millions)
$2,714
$2,900
(6%)
Total net charge-off rate
3.00%
3.05%
-5 bps
Net income/(loss) (in millions)
$771
$770
—%
Diluted EPS
$2.45
$2.36
4%
Discover Financial Services (NYSE: DFS) today reported net
income of $771 million or $2.45 per diluted share for the third
quarter of 2020, as compared to net income of $770 million or $2.36
per diluted share for the third quarter of 2019.
“While the economic environment remains challenging, I am
encouraged by the positive developments we saw, with a return to
growth in sales in September and very solid credit performance
across all of our loan products,” said Roger Hochschild, CEO and
President of Discover. “Our results this quarter demonstrate the
benefit of actions we took in the first half of the year to
mitigate credit risk and align expenses with the economic
environment and we continue to invest in core capabilities to drive
earnings growth and long-term value.”
Segment Results:
Direct Banking
Direct Banking pretax income of $917 million for the quarter was
$26 million lower than pretax income for the prior year period
primarily driven by lower net interest income partially offset by
lower operating expenses and a decrease in the provision for credit
losses.
Total loans ended the quarter at $88.7 billion, down 4%
year-over-year. Credit card loans ended the quarter at $69.7
billion, down 6% year-over-year. Personal loans decreased $385
million, or 5%, year-over-year. Private student loans increased
$280 million, or 3%, year-over-year. The organic student loan
portfolio, which excludes purchased loans, increased $594 million,
or 7% year-over-year.
Net interest income for the quarter decreased $137 million, or
6%, from the prior year period, driven by an unfavorable net impact
from lower market rates and lower average receivables. Net interest
margin was 10.19%, down 24 basis points versus the prior year
period. Card yield was 12.40%, a decrease of 95 basis points from
the prior year period primarily driven by a lower prime rate
modestly offset by favorable portfolio mix. Interest expense as a
percent of total loans decreased 90 basis points from the prior
year period, primarily as a result of lower market rates.
The overall net charge-off rate was 5 basis points lower
reflecting stable credit across the portfolio. The credit card net
charge-off rate was 3.45%, up 13 basis points from the prior year
and down 45 basis points from the prior quarter. The 30+ day
delinquency rate for credit card loans was 1.91%, down 59 basis
points year-over year and down 26 basis points from the prior
quarter. The student loan net charge-off rate was 0.58%, down 1
basis point from the prior year and down 4 basis point from the
prior quarter. The personal loans net charge-off rate of 2.69% was
down 130 basis points from the prior year and down 74 basis points
from the prior quarter.
Provision for credit losses of $750 million decreased $49
million from the prior year period driven by the impact of lower
net charge-offs and a lower reserve build. The reserve build for
the third quarter of 2020 was $42 million, compared to a reserve
build of $98 million in the third quarter of 2019.
Total operating expenses were down $100 million year-over year
primarily driven by decreased marketing expense and professional
fees, partially offset by higher employee compensation and
information processing. Marketing decreased driven by reductions in
brand and acquisition expense. Professional fees decreased
primarily due to lower collection fees which were impacted by court
closures. Employee compensation increased as a result of higher
average salaries and headcount. Information processing increased
reflecting ongoing investments in technology capabilities and
infrastructure.
Payment Services
Payment Services pretax income was $42 million in the quarter,
down $9 million year-over-year driven by lower PULSE and Network
Partners revenue.
Payment Services volume was $69.7 billion, up 11%
year-over-year. PULSE dollar volume was up 16% year-over-year
driven by higher average spend per transaction related to the
pandemic and the impact of stimulus funds available to consumers.
Network Partners volume increased by 34% year-over-year driven by
growth in AribaPay.
Share Repurchases
The company suspended its share repurchase program in March 2020
in response to the economic environment at that time. The share
repurchase program remains suspended. Shares of common stock
outstanding were flat to the prior quarter.
Adoption of Accounting Standard for Measurement of Credit
Losses
The company’s results for the third quarter of 2020 reflect the
January 1, 2020 adoption of Accounting Standards Update No.
2016-13, Financial Instruments-Credit Losses (Topic 326):
Measurement of Credit Losses on Financial Instruments for the
Company (the “ASU”). For purposes of calculating the company’s
regulatory capital, the company has elected to defer recognition of
the estimated impact of the ASU on regulatory capital for two years
in accordance with the interim final rule adopted by federal bank
regulatory agencies on March 27, 2020. Pursuant to the interim
final rule, the estimated impact of the ASU on regulatory capital
will be phased in over a three year period beginning in 2022.
Conference Call and Webcast Information
The company will host a conference call to discuss its third
quarter results on Thursday, October 22, 2020, at 7:00 a.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 digital 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
loans, checking and savings accounts and certificates of deposit
through its banking business. It operates the Discover Global
Network comprised 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 around the world. 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: the effect of the coronavirus disease 2019 ("COVID-19")
pandemic and measures taken to mitigate the pandemic, including
their impact on our credit quality and business operations as well
as their impact on general economic and financial markets, 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, 2019, "Risk Factors" and
“Management's Discussion & Analysis of Financial Condition and
Results of Operations” in the company's Quarterly Report on Form
10-Q for the quarter ended June 30, 2020 and March 31, 2020, which
is filed with the SEC and available at the SEC's internet site
(http://www.sec.gov) and subsequent reports on Forms 8-K and 10-Q,
including the company's Current Report on Form 8-K filed today with
the SEC.
DISCOVER FINANCIAL SERVICES (unaudited, in millions,
except per share statistics) Quarter Ended September
30,2020 June 30,2020 September 30,2019
EARNINGS SUMMARY Interest
Income
$2,681
$2,672
$3,040
Interest Expense
416
482
638
Net Interest Income
2,265
2,190
2,402
Discount/Interchange Revenue
752
622
775
Rewards Cost
514
385
520
Discount and Interchange Revenue, net
238
237
255
Protection Products Revenue
44
44
48
Loan Fee Income
100
85
120
Transaction Processing Revenue
50
49
52
Other Income
17
57
23
Total Non-Interest Income
449
472
498
Revenue Net of Interest Expense
2,714
2,662
2,900
Provision for Credit Losses
750
2,046
799
Employee Compensation and Benefits
471
452
439
Marketing and Business Development
140
129
230
Information Processing & Communications
111
117
96
Professional Fees
151
181
189
Premises and Equipment
26
27
26
Other Expense
106
171
127
Total Operating Expense
1,005
1,077
1,107
Income/(Loss) Before Income Taxes
959
(461
)
994
Tax Expense
188
(93
)
224
Net Income/(Loss)
$771
($368
)
$770
Net Income/(Loss) Allocated to Common Stockholders
$751
($369
)
$749
PER SHARE
STATISTICS Basic EPS
$2.45
($1.20
)
$2.36
Diluted EPS
$2.45
($1.20
)
$2.36
Common Stock Price (period end)
$57.78
$50.09
$81.09
Book Value per share
$33.45
$31.47
$37.20
BALANCE SHEET SUMMARY
Total Assets
$124,349
$113,792
$110,786
Total Liabilities
114,097
104,149
99,069
Total Equity
10,252
9,643
11,717
Total Liabilities and Stockholders' Equity
$124,349
$113,792
$110,786
TOTAL LOAN RECEIVABLES
Ending Loans 1
$88,660
$88,927
$92,493
Average Loans 1
$88,422
$89,771
$91,345
Interest Yield
11.78
%
11.70
%
12.76
%
Gross Principal Charge-off Rate 2
3.78
%
4.26
%
3.87
%
Net Principal Charge-off Rate 2
3.00
%
3.44
%
3.05
%
Delinquency Rate (30 or more days)
1.77
%
1.98
%
2.33
%
Delinquency Rate (30 or more days) excluding Purchased Loans 3
1.76
%
1.98
%
2.32
%
Delinquency Rate (90 or more days)
0.80
%
1.03
%
1.06
%
Delinquency Rate (90 or more days) excluding Purchased Loans 3
0.80
%
1.04
%
1.06
%
Gross Principal Charge-off Dollars 2
$842
$950
$891
Net Principal Charge-off Dollars 2
$668
$767
$702
Net Interest and Fee Charge-off Dollars
$141
$169
$156
Loans Delinquent 30 or more days
$1,567
$1,763
$2,153
Loans Delinquent 30 or more days excluding Purchased Loans 3
$1,544
$1,739
$2,114
Loans Delinquent 90 or more days
$708
$916
$978
Loans Delinquent 90 or more days excluding Purchased Loans 3
$702
$911
$968
Allowance for Credit Losses (period end) 4
$8,226
$8,184
$3,299
Reserve Change Build/(Release) 5, 6, 7
$42
$1,271
$97
Reserve Rate
9.28
%
9.20
%
3.57
%
CREDIT CARD LOANS Ending
Loans
$69,656
$70,201
$73,968
Average Loans
$69,643
$70,848
$73,248
Interest Yield
12.40
%
12.34
%
13.35
%
Gross Principal Charge-off Rate
4.33
%
4.84
%
4.25
%
Net Principal Charge-off Rate
3.45
%
3.90
%
3.32
%
Delinquency Rate (30 or more days)
1.91
%
2.17
%
2.50
%
Delinquency Rate (90 or more days)
0.93
%
1.21
%
1.21
%
Gross Principal Charge-off Dollars
$759
$852
$784
Net Principal Charge-off Dollars
$604
$688
$611
Loans Delinquent 30 or more days
$1,328
$1,523
$1,847
Loans Delinquent 90 or more days
$650
$846
$897
Allowance for Credit Losses (period end) 4
$6,491
$6,491
$2,799
Reserve Change Build/(Release) 5, 6
$-
$1,185
$106
Reserve Rate
9.32
%
9.25
%
3.78
%
Total Discover Card Volume
$39,783
$33,105
$41,168
Discover Card Sales Volume
$37,134
$30,721
$37,432
Rewards Rate
1.38
%
1.24
%
1.38
%
SEGMENT- INCOME/(LOSS) BEFORE
INCOME TAXES Direct Banking
$917
($484
)
$943
Payment Services
42
23
51
Total
$959
($461
)
$994
NETWORK VOLUME PULSE
Network
$54,993
$52,859
$47,535
Network Partners
8,917
7,280
6,656
Diners Club International 8
5,839
4,339
8,386
Total Payment Services
69,749
64,478
62,577
Discover Network - Proprietary
38,699
32,349
38,722
Total
$108,448
$96,827
$101,299
1 Total Loans includes Home Equity and other loans. 2 Prior to
adoption of ASU No. 2016-13 on January 1, 2020, net charge-offs on
Purchased Credit Impaired ("PCI") loans generally did not result in
a charge to earnings 3 Prior to adoption of ASU No. 2016-13 on
January 1, 2020, Purchased loans (formerly referred to as PCI) were
accounted for on a pooled basis. Since a pool was 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, was not meaningful. Because
the Company was recognizing interest income on a pool of loans, it
was all considered to be performing 4 Prior to adoption of ASU No.
2016-13 on January 1, 2020, credit losses were estimated using the
incurred loss approach. Under the new current expected credit loss
(“CECL”) approach, reserves are now recorded for expected losses,
not simply those deemed to be already incurred, and the loss
estimate period is extended to include the entire life of the loan
5 Prior to adoption of ASU No. 2016-13 on January 1, 2020, the
allowance for credit loss included the net change in reserves on
PCI pools having no remaining non-accretable difference which did
not impact the reserve change build/(release) in provision for
credit losses 6 Excludes January 1, 2020 CECL day one impact 7
Excludes any build/release of the liability for expected credit
losses on unfunded commitments as the offset is recorded in accrued
expenses and other liabilities in the Company's condensed
consolidated statements of financial condition 8 Volume is derived
from data provided by licencees 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: https://www.businesswire.com/news/home/20201021005995/en/
Investors: Craig Streem, 224-405-5923
craigstreem@discover.com
Media: Jon Drummond, 224-405-1888
jondrummond@discover.com
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