RIVERWOODS, Ill.--(BUSINESS WIRE)--Discover Financial Services (NYSE: DFS) today reported net income for the fourth quarter of 2010 of $350 million, as compared to net income of $353 million for the fourth quarter of 2009. The results for the prior year included approximately $285 million (after tax) related to the Visa/MasterCard antitrust litigation settlement.“Reconciliation of GAAP to As Adjusted Data”
Full year 2010 net income was $765 million, as compared to $1.3 billion for the full year 2009 which included $1.2 billion (after-tax) related to the Visa/MasterCard antitrust litigation settlement.
Fourth Quarter Highlights
- Discover card sales volume was $23 billion in the quarter, an increase of 6% from the prior year.
- Net interest margin of 9.28% improved 12 basis points as compared to the prior quarter, reflecting the sale of lower yielding federal student loans.
- Credit performance continued to improve, with net charge-offs down $103 million from the prior quarter and a net charge-off rate for the fourth quarter of 6.58%. The delinquency rate for loans over 30 days past due was 3.89%, with delinquent balances declining $181 million in the quarter.
- The outlook for continuing improvement in credit performance led to a $414 million release of loan loss reserves.
- Payment Services processed record transaction volume in the quarter of $40.4 billion with profit before tax up 32% from the prior year.
- Deposit balances originated through direct-to-consumer and affinity relationships grew $1.5 billion in the quarter to $20.6 billion.
"The sustained and significant improvement in the credit performance of the Discover card portfolio led to another very strong earnings performance this quarter," said David Nelms, chairman and chief executive officer of Discover. "We continue to invest in marketing and business development in all of our businesses, which contributed to another quarter of growth in Discover Card spending, as well as record transaction volumes in our third-party credit and debit network businesses. We look forward to capitalizing on the opportunities ahead of us in 2011, including our acquisition of The Student Loan Corporation as we strengthen our competitive position in private student loans."
Segment Results:
Direct Banking
The discussion that follows compares amounts reported for the fourth quarter of 2010 to 2009 on an “as-adjusted” basis1.
The table below reconciles the 2009 as-adjusted amounts with the relevant measure on an as reported basis where appropriate, and shows the comparable 2010 U.S. GAAP results.
| Quarter Ended | Quarter Ended | Quarter Ended | |||||||
| November 30, 2009 | November 30, 2009 | November 30, 2010 | |||||||
| Managed - As Reported | Adjustments | As Adjusted | GAAP | ||||||
| Credit Card Interest Yield | 12.75% | 0.01% | 12.76% | 12.68% | |||||
| Net Interest Margin | 9.37% | 0.01% | 9.38% | 9.28% | |||||
| Other Income | $924 | ($434) | $490 | $404 | |||||
| Provision for Loan Losses | $989 | $269 | $1,258 | $383 | |||||
| Direct Banking Income Before Taxes | $546 | ($673) | ($127) | $554 | |||||
| Allowance for Loan Losses | $1,758 | $2,144 | $3,902 | $3,304 | |||||
| Reserve Rate | 7.44% | 0.43% | 7.87% | 6.87% | |||||
Direct Banking pretax income of $554 million in the fourth quarter of 2010 was a $681 million improvement from the fourth quarter of 2009, as adjusted.
Discover card sales volume grew 6% from the prior year, the fourth consecutive quarter of year-over-year growth. Credit card loans were $45.2 billion, essentially unchanged from the prior quarter and down $2.3 billion from the prior year, driven by a reduction in promotional rate balances and an increase in the payment rate.
Total loans ended the quarter at $48.8 billion, down 4% compared to the prior year reflecting a decline in credit card loans as well as the previously disclosed $1.5 billion sale of federal student loans. The company classified the remaining $800 million in federal student loan balances as held for sale in the fourth quarter of 2010 in anticipation of selling them in 2011.
Net interest margin was 9.28%, a decrease of 10 basis points from the prior year as adjusted and up 12 basis points from the prior quarter. The decrease from the prior year primarily reflects the impact of legislative changes on credit card yield partially offset by lower interest charge-offs. Net interest margin was up from the prior quarter reflecting the impact of the sale of lower rate federal student loans partially offset by the impact of legislative changes and a higher level of promotional rate balances.
The delinquency rate for loans over 30 days past due declined to 3.89%, an improvement of 142 basis points from the prior year, and 27 basis points from the prior quarter. The net charge-off rate decreased to 6.58% for the fourth quarter of 2010, down 185 basis points from the prior year and 60 basis points from the prior quarter.
Provision for loan losses of $383 million decreased $876 million from the prior year, as adjusted, driven by lower charge-offs and a reduction in the allowance for loan losses. Improvement in the outlook for credit performance over the next twelve months led to a reduction in the loan loss reserve rate, which resulted in a reserve release of $414 million in the fourth quarter of 2010 versus a reserve build of $195 million in the fourth quarter of 2009.
Other income decreased $87 million, or 18% from the prior year as adjusted. The decline was primarily due to lower late fees, the discontinuance of overlimit fees beginning in February 2010 and a $28 million charge related to federal student loans classified as held for sale.
Expenses were up $49 million, or 9%, from the prior year, reflecting increased marketing and advertising spending as well as costs related to The Student Loan Corporation acquisition.
Payment Services
Payment Services pretax income of $31 million in the quarter was up $8 million, or 32%, from the prior year. Revenues were up $9 million, reflecting increased volumes from new and existing clients, as well as higher margins from transactions on the PULSE ATM/Debit network.
Payment Services dollar volume was a record $40.4 billion for the fourth quarter, up 21% from the prior year, driven by higher PULSE and third-party issuer volume. The number of transactions on the PULSE network increased 33%.
Dividends
The company’s board declared a cash dividend of $0.02 per share of common stock, payable on Jan. 20, 2011, to stockholders of record at the close of business on Dec. 29, 2010.
Conference Call and Webcast Information
The company will host a conference call to discuss its fourth quarter results on Thursday, Dec. 16, 2010, at 10:00 a.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 operates the Discover card, America's cash rewards pioneer, and offers personal and student loans, online savings accounts, certificates of deposit and money market accounts through its Discover Bank subsidiary. Its payment businesses consist 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 in more than 185 countries and territories. For more information, visit www.discoverfinancial.com.
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 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).
