Revenues of $2.0 Billion, up 10% over the Prior Year
RIVERWOODS, Ill.--()--Discover Financial Services (NYSE: DFS) today reported net income of $627 million or $1.21 per diluted share for the third quarter of 2012, as compared to $649 million or $1.18 per share for the third quarter of 2011. The company’s return on equity was 28%. Strong year-over-year revenue growth and lower charge-offs were offset by lower loan loss reserve releases and increased legal expense due to accruals associated with the recently concluded Federal Deposit Insurance Corporation (FDIC) and Consumer Financial Protection Bureau (CFPB) regulatory matter.
“Our business segments demonstrated solid performance during the quarter”
Third Quarter Highlights
- Total loans grew $5.1 billion, or 9%, from the prior year to $59.2 billion.
- Credit card loans grew $1.9 billion, or 4%, to $48.1 billion and Discover card sales volume increased 4% from the prior year.
- Credit card loan delinquencies and net charge-offs reached historic lows with a delinquency rate for loans over 30 days past due of 1.81% and a net charge-off rate of 2.43%.
- Payment Services pretax income was up 31% from the prior year to $49 million. Transaction volume for the segment was $50.3 billion in the quarter, an increase of 13% from the prior year.
“Our business segments demonstrated solid performance during the quarter,” said David Nelms, chairman and CEO of Discover. “Card sales and receivables grew in a challenging environment while credit quality continued to improve. We successfully launched Discover Home Loans in June, which expanded our direct banking product suite. In payments, we signed agreements with PayPal, Industrial and Commercial Bank of China, and most recently Russian Standard Bank to enhance our global presence and leverage our existing infrastructure.”
Segment Results:
Direct Banking
Direct Banking pretax income of $963 million in the quarter was down $46 million, or 5%, from the prior year.
Discover card sales volume grew 4% from the prior year to $27.2 billion. Credit card loans ended the quarter at $48.1 billion, up 4%, or $1.9 billion, from the prior year.
Total loans ended the quarter at $59.2 billion, up $5.1 billion, or 9%, compared to the prior year. Private student loans increased $2.9 billion, including the acquisition of a $2.4 billion student loan portfolio in the fourth quarter of 2011. Personal loans increased $675 million from the prior year.
Net interest margin was 9.44%, up 18 basis points from the prior year. The increase in net interest margin from the prior year reflects decreased funding costs partially offset by lower total yield. Credit card yield was 12.27%, a decrease of 19 basis points from the prior year. The decline in credit card yield from the prior year reflects a decline in higher rate balances and an increase in promotional rate balances, partially offset by lower interest charge-offs. Interest expense as a percent of total loans decreased 47 basis points from the prior year as the company continued to take advantage of available low rate funding.
Net interest income increased $133 million, or 11%, from the prior year, benefiting from loan growth and lower interest expense. This was partially offset by a decline in credit card and student loan yields. The delinquency rate for credit card loans over 30 days past due was 1.81%, an improvement of 62 basis points from the prior year. The credit card net charge-off rate decreased to 2.43% for the third quarter of 2012, down 142 basis points from the prior year.
Net charge-offs were $151 million lower than the prior year as a result of the continued decline in delinquencies and bankruptcies. Provision for loan losses of $126 million increased $26 million, or 26%, from the prior year, driven by a lower reserve release partially offset by the decline in charge-offs. The reserve release for the third quarter of 2012 was $182 million reflecting the impact of a 43 basis point decline in the reserve rate from the prior quarter partially offset by additional reserves due to loan growth. The third quarter of 2011 included a reserve release of $359 million.
Other income increased $25 million, or 5%, from the prior year primarily due to revenue from Discover Home Loans, which was launched in June 2012 after acquiring Home Loan Center assets from Tree.com, and higher interchange revenue. Increases in other income were partially offset by higher customer rewards.
Expenses were up $178 million, or 29%, from the prior year. The increase was primarily due to a $94 million year-over-year increase in expenses for legal reserves associated primarily with the FDIC and CFPB matter. Excluding the change in legal reserves, expenses increased 14% from the prior year primarily due to the Home Loan Center acquisition, higher marketing expenses and higher headcount.
Payment Services
Payment Services pretax income was $49 million in the quarter, up $11 million, or 31%, from the prior year. Revenue increased $17 million, primarily driven by an increase in higher margin point-of-sale transactions on the PULSE network. Expenses were up $6 million from the prior year.
Payment Services dollar volume was $50.3 billion for the third quarter of 2012, up 13% from the prior year, driven by higher PULSE and third-party issuer volume.
Share Repurchases
In the third quarter of 2012, the company repurchased approximately 10 million shares of common stock for $350 million. Shares outstanding declined by 1.9% from prior quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its third quarter results on Thursday, September 27, 2012, at 9:00 am. 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 home loans, private student loans, personal loans, online savings accounts, certificates of deposit and money market accounts through its direct banking business. 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 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 (http://investorrelations.discoverfinancial.com).
Revenues of $2.0 Billion, up 10% over the Prior Year
RIVERWOODS, Ill.--()--Discover Financial Services (NYSE: DFS) today reported net income of $627 million or $1.21 per diluted share for the third quarter of 2012, as compared to $649 million or $1.18 per share for the third quarter of 2011. The company’s return on equity was 28%. Strong year-over-year revenue growth and lower charge-offs were offset by lower loan loss reserve releases and increased legal expense due to accruals associated with the recently concluded Federal Deposit Insurance Corporation (FDIC) and Consumer Financial Protection Bureau (CFPB) regulatory matter.
“Our business segments demonstrated solid performance during the quarter”
Third Quarter Highlights
- Total loans grew $5.1 billion, or 9%, from the prior year to $59.2 billion.
- Credit card loans grew $1.9 billion, or 4%, to $48.1 billion and Discover card sales volume increased 4% from the prior year.
- Credit card loan delinquencies and net charge-offs reached historic lows with a delinquency rate for loans over 30 days past due of 1.81% and a net charge-off rate of 2.43%.
- Payment Services pretax income was up 31% from the prior year to $49 million. Transaction volume for the segment was $50.3 billion in the quarter, an increase of 13% from the prior year.
“Our business segments demonstrated solid performance during the quarter,” said David Nelms, chairman and CEO of Discover. “Card sales and receivables grew in a challenging environment while credit quality continued to improve. We successfully launched Discover Home Loans in June, which expanded our direct banking product suite. In payments, we signed agreements with PayPal, Industrial and Commercial Bank of China, and most recently Russian Standard Bank to enhance our global presence and leverage our existing infrastructure.”
Segment Results:
Direct Banking
Direct Banking pretax income of $963 million in the quarter was down $46 million, or 5%, from the prior year.
Discover card sales volume grew 4% from the prior year to $27.2 billion. Credit card loans ended the quarter at $48.1 billion, up 4%, or $1.9 billion, from the prior year.
Total loans ended the quarter at $59.2 billion, up $5.1 billion, or 9%, compared to the prior year. Private student loans increased $2.9 billion, including the acquisition of a $2.4 billion student loan portfolio in the fourth quarter of 2011. Personal loans increased $675 million from the prior year.
Net interest margin was 9.44%, up 18 basis points from the prior year. The increase in net interest margin from the prior year reflects decreased funding costs partially offset by lower total yield. Credit card yield was 12.27%, a decrease of 19 basis points from the prior year. The decline in credit card yield from the prior year reflects a decline in higher rate balances and an increase in promotional rate balances, partially offset by lower interest charge-offs. Interest expense as a percent of total loans decreased 47 basis points from the prior year as the company continued to take advantage of available low rate funding.
Net interest income increased $133 million, or 11%, from the prior year, benefiting from loan growth and lower interest expense. This was partially offset by a decline in credit card and student loan yields. The delinquency rate for credit card loans over 30 days past due was 1.81%, an improvement of 62 basis points from the prior year. The credit card net charge-off rate decreased to 2.43% for the third quarter of 2012, down 142 basis points from the prior year.
Net charge-offs were $151 million lower than the prior year as a result of the continued decline in delinquencies and bankruptcies. Provision for loan losses of $126 million increased $26 million, or 26%, from the prior year, driven by a lower reserve release partially offset by the decline in charge-offs. The reserve release for the third quarter of 2012 was $182 million reflecting the impact of a 43 basis point decline in the reserve rate from the prior quarter partially offset by additional reserves due to loan growth. The third quarter of 2011 included a reserve release of $359 million.
Other income increased $25 million, or 5%, from the prior year primarily due to revenue from Discover Home Loans, which was launched in June 2012 after acquiring Home Loan Center assets from Tree.com, and higher interchange revenue. Increases in other income were partially offset by higher customer rewards.
Expenses were up $178 million, or 29%, from the prior year. The increase was primarily due to a $94 million year-over-year increase in expenses for legal reserves associated primarily with the FDIC and CFPB matter. Excluding the change in legal reserves, expenses increased 14% from the prior year primarily due to the Home Loan Center acquisition, higher marketing expenses and higher headcount.
Payment Services
Payment Services pretax income was $49 million in the quarter, up $11 million, or 31%, from the prior year. Revenue increased $17 million, primarily driven by an increase in higher margin point-of-sale transactions on the PULSE network. Expenses were up $6 million from the prior year.
Payment Services dollar volume was $50.3 billion for the third quarter of 2012, up 13% from the prior year, driven by higher PULSE and third-party issuer volume.
Share Repurchases
In the third quarter of 2012, the company repurchased approximately 10 million shares of common stock for $350 million. Shares outstanding declined by 1.9% from prior quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its third quarter results on Thursday, September 27, 2012, at 9:00 am. 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 home loans, private student loans, personal loans, online savings accounts, certificates of deposit and money market accounts through its direct banking business. 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 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 (http://investorrelations.discoverfinancial.com).
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