Board of Directors Declares Semi-Annual
Dividend for Preferred Stock and Quarterly Dividend for Common
Stock
Discover Financial Services (NYSE: DFS):
Second Quarter 2023
Results
2023
2022(1)
YOY Change
Total loans, end of period (in
billions)
$117.9
$99.3
19%
Total revenue net of interest expense (in
millions)
$3,878
$3,213
21%
Total net charge-off rate
3.22%
1.80%
142 bps
Net income/(loss) (in millions)
$901
$1,103
(18)%
Diluted EPS
$3.54
$3.93
(10%)
Note(s)
1. The comparative prior quarter ended
June 30, 2022 has been restated to reflect immaterial corrections
to the financial statements. See Reconciliation of Prior Periods
below for reconciliation to previously reported results.
Discover Financial Services (NYSE: DFS) today reported net
income of $901 million or $3.54 per diluted share for the second
quarter of 2023, as compared to a net income of $1.1 billion or
$3.93 per diluted share for the second quarter of 2022.
“This quarter again showed the strength of Discover’s business
model, as revenue growth offset the impact of normalizing
charge-offs, and our deposit base grew another 4%. We are also
seeing positive early results from the relaunch of our cash back
debit product, an important strategic milestone,” said Roger
Hochschild, Discover’s CEO and President. “We are actively
enhancing our governance and oversight structures and are making
significant investments in our compliance management system. We
remain deeply committed to achieving excellence in all these
areas.”
Segment Results
Digital Banking
Digital Banking pretax income of $1.1 billion for the quarter
was $322 million lower than the prior year period reflecting a
higher provision for credit losses and higher operating expenses,
partially offset by increased revenue net of interest expense.
Total loans ended the quarter at $117.9 billion, up 19%
year-over-year, and up 5% sequentially. Credit card loans ended the
quarter at $94.0 billion, up 19% year-over-year. Personal loans
increased $2.0 billion, or 27%, and private student loans increased
$167 million, or 2%, year-over-year. The organic student loan
portfolio, which excludes purchased loans, increased $311 million,
or 3% from the prior year period.
Net interest income for the quarter increased $567 million, or
22% driven by higher average receivables and net interest margin
expansion. Net interest margin was 11.06%, up 12 basis points
versus the prior year. Card yield was 15.14%, up 233 basis points
from the prior year primarily driven by higher market rates and
higher revolve rate, partially offset by higher interest
charge-offs and a slightly higher mix of receivables at a
promotional rate. Interest expense as a percent of total loans
increased 260 basis points from the prior year period, primarily
driven by higher funding costs.
Non-interest income increased $40 million, or 7%, from the prior
year period, mainly driven by higher loan fee income and
discount/interchange revenue, partially offset by higher rewards
cost driven by a change in the 5% category from gas to
restaurants.
The total net charge-off rate of 3.22% was 142 basis points
higher versus the prior year period reflecting credit normalization
across the portfolio. The credit card net charge-off rate was
3.68%, up 167 basis points from the prior year period and up 58
basis points from the prior quarter. The 30+ day delinquency rate
for credit card loans was 2.86%, up 110 basis points year-over year
and up 10 basis points from the prior quarter. The student loan net
charge-off rate was 1.25%, up 17 basis points from the prior year
and up 21 basis points from the prior quarter. Personal loans net
charge-off rate of 2.28% was up 107 basis points from the prior
year and up 34 basis points from the prior quarter.
Provision for credit losses of $1.3 billion increased $756
million from the prior year driven by a $263 million higher reserve
build in the current quarter and a $495 million increase in
net-charge offs.
Total operating expenses were up $173 million year-over year, or
15%, across most line items primarily driven by investment in
compliance management systems. The increase in employee
compensation was due to higher headcount. Professional fees
increased due to higher technology and consulting costs, partially
offset by a one-time adjustment related to collection fee expense.
Marketing increased primarily due to investments in consumer
banking products. Other expense increased due to legal reserve and
remediation costs.
Payment Services
Payment Services pretax income of $70 million was up $50 million
year-over-year. Higher revenue was driven by $42 million net losses
on equity investments in the prior year quarter.
Payment Services volume was $89.3 billion, up 8% year-over-year.
PULSE dollar volume was up 10% primarily driven by increased debit
transaction volume. Diners Club volume was up 18% year-over-year
reflecting an increase in corporate spending and an improvement in
global T&E. Network Partners volume decreased 10% from the
prior year primarily reflecting lower transaction volume.
Background on Card Product Misclassification
Beginning around mid-2007, Discover incorrectly classified
certain credit card accounts into our highest merchant and merchant
acquirer pricing tier. Incremental revenue resulting from this card
product misclassification amounted to less than 1% of our
cumulative discount and interchange revenue, gross, since that
time, or less than two basis points as a percentage of sales over
this timeframe. The misclassification affected pricing for certain
merchants and merchant acquirers, but not for cardholders. Based on
information available as of June 30, 2023, the Company determined
that the revenue impact of the incorrect card product
classification was not material to the consolidated financial
statements of the Company for any of the impacted periods.
Notwithstanding, for go-forward comparative purposes, the Company
corrected the recognition of discount and interchange revenue as
well as the related impacts to assets, liabilities and retained
earnings in all prior periods presented. After adjusting for tax
effects, the cumulative impact to beginning retained earnings as of
April 1, 2023, was a decrease of $255 million, and the impact to
net income for the quarter ended March 31, 2023, was a reduction of
$8 million. As of June 30, 2023, the Company’s consolidated
financial statements reflect a liability of $365 million within
accrued expenses and other liabilities to provide refunds to
merchants and merchant acquirers as a result of the card product
misclassification.
Management is taking actions to correct the card product
misclassification going forward and to prepare a program to
compensate affected direct merchants and merchant acquirers.
However, given differences in individual merchant agreements,
changes in network terms, and availability of historical data, it
is difficult to determine the final amount of potential refunds at
this time. An investigation into this issue by an external law firm
working at the direction of the Audit Committee of the Board of
Directors is ongoing.
Discover is in discussions with its regulators regarding this
matter and corporate governance and risk management. In addition,
the Company received a proposed consent order from the FDIC in
connection with consumer compliance. This proposed consent order
does not include the card product classification matter. Additional
supervisory actions could occur.
Share Repurchase
During the second quarter of 2023, the company repurchased
approximately 6.8 million shares of common stock for $700 million.
Shares of common stock outstanding declined by 2.6% from the prior
quarter. The Company has decided to pause share repurchases while
the internal review of compliance, risk management and corporate
governance is pending.
Dividend Declaration
The Board of Directors of Discover Financial Services declared a
semi-annual cash dividend on its Fixed Rate Non-Cumulative
Perpetual Preferred Stock, Series C, in the amount of $2,750 per
share. The dividend equals $27.50 per depositary share, each
representing 1/100th interest in a share of the Series C Preferred
Stock. The dividend will be payable on October 30, 2023, to the
holders of record at the close of business on October 13, 2023.
The Board of Directors of Discover Financial Services declared a
semi-annual cash dividend on its Fixed Rate Non-Cumulative
Perpetual Preferred Stock, Series D, in the amount of $3,062.50 per
share. The dividend equals $30.625 per depositary share, each
representing 1/100th interest in a share of the Series D Preferred
Stock. The dividend will be payable on September 25, 2023, to the
holders of record at the close of business on September 8,
2023.
The Board of Directors declared a quarterly cash dividend of
$0.70 per share of common stock payable on September 7, 2023, to
holders of record at the close of business on August 24, 2023.
Conference Call and Webcast Information
The company will host a conference call to discuss its second
quarter results on Thursday, July 20, 2023, 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 merchants
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," "forecast," and
similar expressions. Such statements are based on the current
beliefs and expectations of our 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 accounting
guidance, 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; our ability to manage our expenses; our ability to
successfully achieve card acceptance across our networks and
maintain relationships with network participants and merchants; our
ability to sustain and grow our private student loan, personal loan
and home loan 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; our ability to manage our 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 our investment portfolio; limits on our
ability to pay dividends and repurchase our common stock; limits on
our ability to receive payments from our subsidiaries; fraudulent
activities or material security breaches of our or others' key
systems; our ability to remain organizationally effective; our
ability to increase or sustain Discover card usage or attract new
customers; our ability to maintain relationships with merchants;
the effect of political, economic and market conditions,
geopolitical events, climate change, pandemics and unforeseen or
catastrophic events; our ability to introduce new products and
services; our ability to manage our relationships with third-party
vendors, as well as those with which we have no direct relationship
such as our employees' internet service providers; our ability to
maintain current technology and integrate new and acquired systems
and technology; our ability to collect amounts for disputed
transactions from merchants and merchant acquirers; our ability to
attract and retain employees; our ability to protect our reputation
and our intellectual property; our ability to comply with
regulatory requirements; and new lawsuits, investigations or
similar matters or unanticipated developments related to current
matters. We routinely evaluate and may pursue acquisitions of or
investments in businesses, products, technologies, loan portfolios
or deposits, which may involve payment in cash or our 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, 2022, "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 March 31, 2023 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 June
30,2023 March 31,20231 June 30,20221
EARNINGS SUMMARY Interest
Income
$4,290
$4,077
$2,915
Interest Expense
1,113
945
305
Net Interest Income
3,177
3,132
2,610
Discount/Interchange Revenue
1,158
1,046
1,122
Rewards Cost
788
716
743
Discount and Interchange Revenue, net
370
330
379
Protection Products Revenue
44
43
42
Loan Fee Income
186
166
142
Transaction Processing Revenue
72
67
61
Gains/Losses on Equity Investments
1
(18
)
(42
)
Other Income
28
22
21
Total Non-Interest Income
701
610
603
Revenue Net of Interest Expense
3,878
3,742
3,213
Provision for Credit Losses
1,305
1,102
549
Employee Compensation and Benefits
588
625
515
Marketing and Business Development
268
241
254
Information Processing & Communications
150
139
121
Professional Fees
216
232
189
Premises and Equipment
20
22
24
Other Expense
162
124
120
Total Operating Expense
1,404
1,383
1,223
Income/(Loss) Before Income Taxes
1,169
1,257
1,441
Tax Expense
268
289
338
Net Income/(Loss)
$901
$968
$1,103
Net Income/(Loss) Allocated to Common Stockholders
$895
$931
$1,097
PER SHARE
STATISTICS Basic EPS
$3.54
$3.55
$3.93
Diluted EPS
$3.54
$3.55
$3.93
Common Stock Price (period end)
$116.85
$98.84
$94.58
Book Value per share
$55.44
$54.79
$49.11
BALANCE SHEET SUMMARY
Total Assets
$138,082
$133,141
$114,678
Total Liabilities
124,226
119,081
101,159
Total Equity
13,856
14,060
13,519
Total Liabilities and Stockholders' Equity
$138,082
$133,141
$114,678
TOTAL LOAN RECEIVABLES
Ending Loans 2
$117,906
$112,674
$99,301
Average Loans 2
$115,259
$112,049
$95,736
Interest Yield
14.17
%
14.06
%
12.00
%
Gross Principal Charge-off Rate
4.01
%
3.50
%
2.76
%
Net Principal Charge-off Rate
3.22
%
2.72
%
1.80
%
Delinquency Rate (30 or more days)
2.56
%
2.48
%
1.63
%
Delinquency Rate (90 or more days)
1.15
%
1.14
%
0.70
%
Gross Principal Charge-off Dollars
$1,153
$966
$659
Net Principal Charge-off Dollars
$924
$750
$429
Net Interest and Fee Charge-off Dollars
$202
$169
$92
Loans Delinquent 30 or more days
$3,019
$2,791
$1,621
Loans Delinquent 90 or more days
$1,353
$1,290
$694
Allowance for Credit Losses (period end)
$8,064
$7,691
$6,757
Reserve Change Build/(Release) 3
$373
$385
$110
Reserve Rate
6.84
%
6.83
%
6.80
%
CREDIT CARD LOANS Ending
Loans
$93,955
$89,755
$79,237
Average Loans
$91,825
$89,460
$75,917
Interest Yield
15.14
%
15.06
%
12.81
%
Gross Principal Charge-off Rate
4.59
%
3.99
%
3.10
%
Net Principal Charge-off Rate
3.68
%
3.10
%
2.01
%
Delinquency Rate (30 or more days)
2.86
%
2.76
%
1.76
%
Delinquency Rate (90 or more days)
1.35
%
1.34
%
0.80
%
Gross Principal Charge-off Dollars
$1,051
$879
$587
Net Principal Charge-off Dollars
$842
$684
$381
Loans Delinquent 30 or more days
$2,689
$2,477
$1,392
Loans Delinquent 90 or more days
$1,269
$1,204
$633
Allowance for Credit Losses (period end)
$6,525
$6,135
$5,307
Reserve Change Build/(Release) 3
$390
$318
$187
Reserve Rate
6.94
%
6.84
%
6.70
%
Total Discover Card Volume
$58,774
$54,129
$57,384
Discover Card Sales Volume
$55,229
$50,588
$53,860
Rewards Rate
1.42
%
1.41
%
1.37
%
SEGMENT- INCOME/(LOSS) BEFORE
INCOME TAXES Digital Banking
$1,099
$1,210
$1,421
Payment Services
70
47
20
Total
$1,169
$1,257
$1,441
NETWORK VOLUME PULSE
Network
$69,008
$65,268
$62,992
Network Partners
10,408
10,628
11,532
Diners Club International 4
9,897
9,211
8,381
Total Payment Services
89,313
85,107
82,905
Discover Network - Proprietary
57,099
51,826
55,838
Total
$146,412
$136,933
$138,743
1 The comparative prior quarters ended March 31, 2023 and
June 30, 2022 have been restated to reflect immaterial corrections
to the financial statements. See Reconciliation of Prior Periods
for reconciliation to previously reported results. 2 Total
Loans includes Home Equity and other loans. 3 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 4 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).
RECONCILIATION OF PRIOR PERIOD RESTATED
FINANCIAL RESULTS Quarter Ended - March 31.
2023
As Previously Reported
Restated Impacts
As Restated
EARNINGS SUMMARY
Discount/Interchange Revenue
$1,057
($11
)
$1,046
Discount and Interchange Revenue, net
341
(11
)
330
Total Non-Interest Income
621
(11
)
610
Revenue Net of Interest Expense
$3,753
($11
)
$3,742
Income/(Loss) Before Income Taxes
$1,268
($11
)
$1,257
Tax Expense
292
(3
)
289
Net Income/(Loss)
$976
($8
)
$968
Net Income/(Loss) Allocated to Common Stockholders
$939
($8
)
$931
PER SHARE STATISTICS
Basic EPS
$3.58
($0.03
)
$3.55
Diluted EPS
$3.58
($0.03
)
$3.55
Book Value per share
$55.79
($1.00
)
$54.79
BALANCE SHEET SUMMARY
Total Assets
$133,061
$80
$133,141
Total Liabilities
118,746
335
119,081
Total Equity
14,315
(255
)
14,060
Total Liabilities and Stockholders' Equity
$133,061
$80
$133,141
SEGMENT- INCOME/(LOSS) BEFORE
INCOME TAXES Digital Banking
$1,221
($11
)
$1,210
Quarter Ended - June 30, 2022
As Previously Reported
Restated Impacts
As Restated
EARNINGS SUMMARY
Discount/Interchange Revenue
$1,133
($11
)
$1,122
Discount and Interchange Revenue, net
390
(11
)
379
Total Non-Interest Income
614
(11
)
603
Revenue Net of Interest Expense
$3,224
($11
)
$3,213
Income/(Loss) Before Income Taxes
$1,452
($11
)
$1,441
Tax Expense
341
(3
)
338
Net Income/(Loss)
$1,111
($8
)
$1,103
Net Income/(Loss) Allocated to Common Stockholders
$1,105
($8
)
$1,097
PER SHARE STATISTICS
Basic EPS
$3.96
($0.03
)
$3.93
Diluted EPS
$3.96
($0.03
)
$3.93
Book Value per share
$50.00
($0.89
)
$49.11
BALANCE SHEET SUMMARY
Total Assets
$114,600
$78
$114,678
Total Liabilities
100,836
323
101,159
Total Equity
13,764
(245
)
13,519
Total Liabilities and Stockholders' Equity
$114,600
$78
$114,678
SEGMENT- INCOME/(LOSS) BEFORE
INCOME TAXES Digital Banking
$1,432
($11
)
$1,421
View source
version on businesswire.com: https://www.businesswire.com/news/home/20230718420848/en/
Investors: Eric Wasserstrom, 224-405-4555
investorrelations@discover.com
Media: Matthew Towson, 224-405-5649
matthewtowson@discover.com
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