Thursday, June 23, 2011

Discover Breakes it's All-Time Record Quarterly Income with $600 Million Q2

Discover Financial Services Reports All-Time Record Quarterly Net Income of $600 Million or $1.09 Per Diluted Share

RIVERWOODS, Ill.--(BUSINESS WIRE)--Discover Financial Services (NYSE: DFS) today reported net income of $600 million for the second quarter of 2011, as compared to $258 million for the second quarter of 2010.
http://www.discoverfinancial.com
“Management’s Discussion and Analysis of Financial Condition and Results of Operations”
Second Quarter Highlights
  • Discover card sales volume showed strong year-over-year growth of 9% with $25 billion in volume in the quarter.
  • Total loans increased 5% from the prior year to $52.5 billion, while credit card loans declined 1%. Credit card loan balances grew $644 million, or 1% from the prior quarter.
  • The delinquency rate for credit card loans over 30 days past due reached a 25-year record low of 2.79% and the credit card net charge-off rate declined to 5.01%.
  • Payment Services continued to produce strong results with pretax income of $43 million, up 19% from the prior year. Transaction volume for the segment was $46 billion in the quarter, an increase of 24% from the prior year.
"Our all-time record results this quarter reflect the effectiveness of the Discover business model," said David Nelms, chairman and chief executive officer of Discover. "Sustained improvements in credit performance have driven substantial releases of credit loss reserves, a portion of which has been reinvested for growth. The benefits of these investments can be seen in both our Direct Banking and Payment Services results this quarter. Our capital levels have also benefited from this outstanding performance, leading us to our recent announcement of a $1 billion share repurchase program. While the U.S. economy has yet to show significant strengthening, we are confident that we can continue to achieve profitable growth in all of our lending businesses, complemented by the contribution from our payments activities."
Segment Results:
Direct Banking
Direct Banking pretax income of $883 million in the second quarter of 2011 was a $497 million improvement from the second quarter of 2010. Pretax income included $25 million related to The Student Loan Corporation.
Total loans ended the quarter at $52.5 billion, up 5% compared to the prior year, reflecting a $3.7 billion increase in private student loans and a $640 million increase in personal loans, partially offset by a $367 million decline in credit card loans. The increase in student loans includes the acquisition of $3.1 billion in private student loans in the first quarter of 2011. Credit card loans grew $644 million, or 1%, from the prior quarter, ending the quarter at $45.0 billion. Discover personal loans increased $193 million, or 10%, from the prior quarter as the company continues to diversify its loan portfolio.
Net interest margin was 9.15%, relatively unchanged from the prior year and down 7 basis points from the first quarter of 2011. Credit card yield decreased 36 basis points from the prior year and 8 basis points from the prior quarter. The decline in yield reflects the impacts of the CARD Act and an increase in promotional rate balances, partially offset by lower interest charge-offs. Interest expense as a percent of loans decreased 31 basis points from the prior year and 10 basis points from the prior quarter as the company continued to take advantage of available low rate funding.
Net interest income increased $46 million from the prior year, primarily driven by an increase in loan balances related to the student loan acquisition and lower funding related costs. This was partially offset by a decrease in interest income on credit cards reflecting the lower yield.
The delinquency rate for credit card loans over 30 days past due reached an all-time low of 2.79%, an improvement of 206 basis points from the prior year, and 80 basis points from the prior quarter. The credit card net charge-off rate decreased to 5.01% for the second quarter of 2011, down 355 basis points from the prior year and 95 basis points from the prior quarter.
Provision for loan losses of $176 million decreased $548 million, or 76%, from the prior year, driven by lower charge-offs and a reduction in the allowance for loan losses. Principal charge-offs decreased $424 million from the prior year. Improvement in the outlook for credit performance resulted in a reserve release of $401 million in the second quarter of 2011 versus a release of $277 million in the second quarter of 2010.
Other income increased $22 million, or 5%, from the prior year. The second quarter of 2010 included a reduction in income related to overlimit fee charge-offs. The second quarter of 2011 included transition services revenue related to The Student Loan Corporation and an increase in the value of the federal student loans held for sale.
Expenses were up $119 million, or 25%, from the prior year, reflecting higher investments in marketing and advertising, higher compensation expense, higher costs related to recovering charged-off accounts, increased fraud costs and expenses related to The Student Loan Corporation. The second quarter of 2011 also included reserves for various pending litigation.
Payment Services
Payment Services pretax income of $43 million in the quarter was up $7 million, or 19%, from the prior year driven principally by a $9 million increase in revenues partially offset by a $2 million increase in expenses. The increase in revenue was driven by an increase in transactions on the PULSE network and higher margins.
Payment Services dollar volume was a record $45.9 billion for the second quarter, up 24% from the prior year, driven by higher PULSE, Diners Club International and third-party issuer volume. The number of transactions on the PULSE network increased 25%.
Effective Tax Rate
The company's effective tax rate was 35.2% for the second quarter of 2011 compared to 38.9% in the second quarter of 2010. The second quarter of 2011 included a tax benefit due to the reversal of a tax valuation allowance related to a previous realized capital loss.
Share Repurchase Program
On June 15, 2011, the company announced that its Board of Directors has approved a share repurchase program, authorizing the company to purchase up to $1 billion of its common stock. The program expires on June 14, 2013, and may be terminated at any time. The company expects to make share repurchases under the program from time to time based on market conditions and other factors, subject to legal and regulatory restrictions.
Proposed Acquisition of Mortgage Origination Business
On May 12, 2011, the company announced it had reached a definitive agreement to acquire substantially all of the operating and related assets of Home Loan Center, a subsidiary of Tree.com, Inc., for approximately $55.9 million, which will add a residential mortgage component to Discover's direct-to-consumer banking business. The company intends to originate eligible consumer mortgages to sell in secondary markets on a servicing-released basis. The acquisition is subject to closing conditions, including the approvals of regulators and Tree.com, Inc. stockholders, and is expected to close by the end of 2011.
Conference Call and Webcast Information
The company will host a conference call to discuss its second quarter results on Thursday, June 23, 2011, 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.

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