Discover Financial Services Reports First Quarter Results: Net Loss of $104 Million or $0.22 Per Share

Results include the recently announced addition to loss reserves of $305 million

RIVERWOODS, Ill.--(BUSINESS WIRE)--Discover Financial Services (NYSE: DFS) today reported a net loss for the first quarter of 2010 of $104 million, as compared to net income of $120 million for the first quarter of 2009. Results for the first quarter of 2010 included a pre-tax addition to loan loss reserves of $305 million ($185 million after tax), which brings the company’s reserve coverage to approximately 12 months of losses. Net income for the first quarter of 2009 included approximately $297 million (after tax) related to the Visa/MasterCard antitrust litigation settlement.

“Management’s Discussion and Analysis of Financial Condition and Results of Operations”

The company has received regulatory approval to redeem the $1.2 billion of preferred stock that it issued to the U.S. Treasury under the TARP Capital Purchase Program. Prior to such redemption, Discover Bank will issue $350 million of tier 2 qualifying capital in the form of subordinated debt. The subordinated debt offering is expected to be completed during the second quarter, subject to market conditions.



First Quarter Highlights

• Discover card sales volume increased 5% from the prior year to $22 billion.


• Loans were approximately $50 billion. The student loan portfolio grew $2 billion from the prior year, while credit card loans decreased $3 billion.


• The first-quarter net charge-off rate was 8.51%, and the over 30 days delinquency rate was 5.05%.


• Expenses were down 15% from the prior year.


• Payment Services segment profit before tax was up 28% to $37 million, and transaction volume was $36 billion, a 2% increase from the prior year.


• Deposit balances originated through direct-to-consumer and affinity relationships were $14.8 billion, an increase of $2.3 billion from the prior quarter.

"Discover's performance this quarter reflects the emergence of a more favorable economic environment, as our Discover card sales volume has now shown four consecutive months of year-over-year growth and delinquency levels have declined," said David Nelms, chairman and chief executive officer of Discover. "We were also pleased with the continued strong growth of our direct-to-consumer deposit business."

"Our reserve addition this quarter is consistent with our conservative balance sheet management approach," Nelms added. "By continuing to strengthen our foundation and invest in the Discover franchise, we believe we are well-positioned to deliver on our strategy of becoming the leader in direct banking and payment services, particularly as the U.S. economy improves."



Segment Results:

The company manages its business activities in two segments: Direct Banking and Payment Services. The company changed the names of its segments to better reflect the nature of products and services included in each.

Beginning with the first quarter of 2010, the trusts used in securitization activities are included in the company’s results¹. In order to provide more meaningful historical comparisons for analyzing data, schedules have been prepared to reflect the results for 2009 on an “as adjusted” basis. The as adjusted basis assumes that the trusts used in the company’s securitization activities were consolidated into the financial results for 2009. The as adjusted basis also excludes from results income received in connection with the company’s settlement of its antitrust litigation with Visa and MasterCard for each quarter of 2009 and the income statement impact of the Morgan Stanley special dividend agreement dispute in the fourth quarter of 2009.



Direct Banking

The table below reconciles all numbers in the discussion that follows that would be reflected differently on an as reported basis. The discussions that follow will compare the first quarter of 2010 to 2009 on an as adjusted basis².

			Quarter Ended						Quarter Ended
			February 28, 2009						February 28, 2009
			Managed - As Reported			Adjustments			As Adjusted
Credit Card Interest Yield			12.28%			0.09%			12.37%
Net Yield on Loan Receivables			9.11%			0.08%			9.19%
Other Income			$863			($376)			$487
Provision for Loan Losses			$1,334			$143			$1,477
Income Before Taxes			$167			($509)			($342)
Allowance for Loan Losses			$1,879			$1,523			$3,402
Reserve Rate			6.70%			(0.01%)			6.69%
			Quarter Ended						Quarter Ended
			November 30, 2009						November 30, 2009
			Managed - As Reported			Adjustments			As Adjusted
Credit Card Interest Yield			12.75%			0.01%			12.76%
Net Yield on Loan Receivables			9.37%			0.01%			9.38%
Allowance for Loan Losses			$1,758			$2,144			$3,902
Reserve Rate			7.44%			0.23%			7.67%

A pretax loss of $208 million in the first quarter of 2010 was a $135 million improvement from the first quarter of 2009, as adjusted.



Loans ended the quarter at $50 billion, down 2% compared to the prior year. Student loans grew $2 billion to $2.8 billion while credit card loans declined $3 billion to $45.8 billion. The decline in credit card loans reflects lower balance transfer activity, partially offset by increased sales volumes. Sales volume increased 5% compared to the prior year, while balance transfer volume declined 53% from the prior year as the company reduced its marketing of promotional rate balance transfer offers.



Net yield on loan receivables was 9.01%, a decrease of 18 basis points and 37 basis points from the prior year and the prior quarter as adjusted, respectively. The net yield decreased from both periods primarily due to the increase in lower rate student loan balances and higher funding costs. The interest yield on credit card loans increased 33 basis points from the prior year as adjusted and decreased 6 basis points from the prior quarter as adjusted. The increase from the prior year reflects a reduction in promotional rate balances and higher interest rates on standard balances, partially offset by higher interest charge-offs.



The net charge-off rate increased to 8.51% for the first quarter of 2010, up 203 basis points and 8 basis points from the prior year and the prior quarter, respectively. The increase in both periods reflects elevated levels of consumer bankruptcies and unemployment, partially offset by a higher mix of student loans which have a lower charge-off rate. The net charge-off rate for the second quarter of 2010 is expected to be between 8.0% and 8.5%.



The over 30 days delinquency rate was 5.05%, an improvement of 21 basis points from the prior year and 26 basis points from the prior quarter, reflecting better overall credit trends. Based on these trends, the company believes that the amount of delinquent loan balances may have peaked in the fourth quarter of 2009.



Provision for loan losses decreased $90 million, or 6%, from the prior year as adjusted, due to a lower reserve build, partially offset by higher net charge-offs. The allowance for loan losses increased $805 million from the prior year as adjusted, and $305 million from the prior quarter as adjusted. The reserve rate increased to 8.40%, up 171 basis points and 73 basis points from the prior year and prior quarter as adjusted, respectively. The reserve addition in the quarter was a result of a new analytical process that enhances management’s ability to estimate incurred losses on non-delinquent accounts, which brings the company’s reserve coverage to approximately 12 months of losses.



Other income decreased $6 million from the prior year as adjusted, primarily due to the discontinuance of overlimit fees beginning in February 2010 and a decline in merchant fees, partially offset by higher discount and interchange revenue reflecting higher sales volume.



Expenses were down $81 million, or 15% from the prior year, reflecting the impact of cost containment initiatives and lower marketing expense, as well as a $23 million benefit related to the settlement of the Morgan Stanley special dividend agreement dispute.  

Payment Services

Pretax income of $37 million in the quarter was up $8 million, or 28%, from the prior year. Revenues were up $5 million, reflecting an increase in the number of transactions and higher margin volume on the PULSE network and lower incentive payments. Expenses were down $3 million.

Payment Services dollar volume of $36 billion for the first quarter was up 2% from the prior year. Third-Party Issuer dollar volume was up 15% from the prior year and Diners Club dollar volume was up 4%. The dollar volume on the PULSE network increased 1% and number of transactions increased 5% to 720 million due to increased volume from new and existing clients.



Capital/Dividends

The company’s board declared a cash dividend of $0.02 per share of common stock, payable on April 22, 2010, to stockholders of record at the close of business on April 1, 2010. Capital increased $34 million as a result of the settlement of the Morgan Stanley special dividend agreement dispute.



Conference Call and Webcast Information

The company will host a conference call to discuss its first quarter results on Tuesday March 16, 2010, at 4:00 p.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).

Green Dot Corporation Files for a $150 Million IPO

Green Dot Corporation, which provides general purpose reloadable prepaid debit cards (GPR cards) under its Green PlaNET platform, filed on Friday with the SEC to raise up to $150 million in an initial public offering. The Monrovia, CA-based company was founded in 1999 as Next Estate Communications and changed its name to Green Dot Corporation in 2005. The prepaid debit card company booked $235 million in sales over the last 12 months and plans to list its Class A shares on the NYSE. J.P. Morgan and Morgan Stanley are the lead underwriters on the deal, for which pricing terms and timing were not disclosed. Green Dot, which is 33% owned by Sequoia Capital, is the fifth venture capital-backed company to file for an IPO so far this month.

View IPO Profile: GDC         

Related Links: Recently Filed IPOs

Source: www.RenaissanceCapital.com

Thanks for Visiting - Bookmark us or Add to your Favorites and Find Out What's Going on Tomorrow in the Payments Industry

Discover settles Morgan Stanley suit for $775 million

NEW YORK (Reuters) - Discover Financial Services (DFS.N) paid Morgan Stanley (MS.N) $775 million to settle claims related to sharing proceeds from an antitrust suit against credit card networks Visa Inc (V.N) and MasterCard Inc (MA.N), according to a regulatory filing on Friday.



The settlement came after Discover won $2.75 billion in a separate suit which accused the rival card networks of harming its business by preventing banks that issue MasterCard and Visa cards from also issuing Discover cards.

Related articles by Zemanta

• Morgan Stanley Wins Suit Against Discover (nytimes.com)


• Feature Story: Is Online PIN Debit More Secure? (pindebit.blogspot.com)


• A PIN for All Reasons - GreenSheet (pindebit.blogspot.com)

Discover Releases 4Q Results

Discover releases fourth quarter results

Riverwoods, Ill., Dec. 18, 2008 -- Discover Financial Services (NYSE: DFS) today reported results for the quarter and year ended November 30, 2008 as follows:

Full year income from continuing operations was $1.1 billion, up 10% from last year. Fourth quarter income from continuing operations was $444 million, up from $210 million in the fourth quarter of 2007. Income from continuing operations includes antitrust litigation settlement proceeds of approximately $535 million (after-tax) in the fourth quarter of 2008. Discontinued operations relates to the sale of the Goldfish business.

Fourth Quarter Highlights

• The company grew managed loans 6% from last year to $51 billion; Discover Card sales declined 2% to $22 billion.
• The fourth-quarter managed net charge-off rate was 5.48% and the managed over 30 days delinquency rate was 4.56%.
• The company added reserves in excess of charge-offs of $415 million.
• Owned loans grew $3.5 billion from the third quarter, including $2.6 billion due to maturing securitizations retained on the balance sheet.
• Total deposits grew 15% to $29 billion, including $6 billion of direct-to-consumer deposit balances.
• Third-Party Payments segment volume grew 39% to $34 billion, including $7 billion of Diners Club International volume.
  

“Our results and financial position reflect our conservative orientation toward growth, credit risk and capital management as we position Discover to weather the economic downturn,” said David Nelms, chief executive officer of Discover Financial Services. “As part of our capital management, we are seeking to participate in the Treasury’s Capital Purchase Program which will further support our consumer lending operations.”

Settlement of Antitrust Litigation

On October 27, 2008 Discover reached a $2.75 billion settlement of its antitrust lawsuit with Visa and MasterCard. Discover received an $863 million payment in November 2008, and expects to receive the remaining proceeds in equal $472 million installments over the four quarters of 2009. The proceeds will be reflected as revenue in Discover’s U.S. Card segment in the period earned.

At the time of the spin-off of the company, Morgan Stanley and Discover entered into an agreement governing the manner in which the antitrust case was to be pursued and settled and how proceeds of the litigation were to be shared. The company has notified Morgan Stanley that it breached the agreement and the amount of the dividend to Morgan Stanley, if any, is a matter of dispute.

Liquidity and Capital

The company continues to maintain liquidity and capital positions that it believes are appropriate for the current environment. Cash liquidity was $9.4 billion and tangible equity was $5.5 billion, or 11.0% of net managed receivables, at November 30, 2008. The company applied to the U.S. Treasury to participate in the Capital Purchase Program and to the Federal Reserve to become a bank holding company. Segment Results (Managed Basis):

U.S. Card

Managed loans grew to $51 billion, up 6% from last year and 1% from last quarter as decreased consumer spending and balance transfer activity were offset by lower cardmember payments and growth in installment loans. Sales volume decreased 2% versus fourth quarter of 2007, and increased 2% on a full year basis.

Credit performance of the Card portfolio was consistent with Discover’s expectation as charge-offs rose, reflecting the deteriorating economic environment. The managed over 30 days delinquency rate of 4.56% was up 71 basis points from the third quarter of 2008, and 98 basis points from last year. The managed net chargeoff rate increased to 5.48% for the fourth quarter of 2008, up 28 and 163 basis points, respectively, from last quarter and last year. The full year net charge-off rate was 5.01% up 118 basis points from last year. Based on current trends within the portfolio and in the economic environment, the company believes that the managed net charge-off rate in the first quarter of 2009 will exceed 6%.

Fourth Quarter

Pretax income was $646 million in the fourth quarter of 2008, including other income of $863 million related to proceeds from the antitrust settlement. Pretax income was $321 million for the fourth quarter of 2007.

Managed net interest income increased $162 million, or 18%, an improvement of 79 basis points over fourth quarter of 2007. Higher net interest income benefited from lower cost of funds, growth in loan balances and accretion of balance transfer fees previously included in loan fee revenue, partially offset by higher interest chargeoffs. Provision for loan losses increased $521 million, or 89%, due to higher net chargeoffs and an increase in loan loss reserves in excess of charge-offs in the quarter. The reserve increase in excess of charge-offs of $415 million resulted from a higher reserve rate as well as higher on-balance sheet loans due to maturing securitizations.

Other income increased $630 million, reflecting the antitrust settlement partially offset by a reduction in the fair value of the interest-only strip receivable. The decline in the fair value of the interest-only strip receivable was due to no securitization gains in the fourth quarter as the company did not enter into new securitization transactions, along with higher anticipated charge-offs in the current environment.

Expenses decreased $54 million, or 9%, primarily attributable to lower compensation and marketing expense partially offset by increased professional fees. Compensation expense included a $39 million one-time benefit due to curtailment of the company’s pension plan. Marketing declined due to lower account acquisition and balance transfer volume as well as lower advertising costs.

Full Year

Pretax income was $1.6 billion in 2008, including other income of $863 million related to the antitrust settlement. Pretax income was $1.5 billion for 2007. Managed net interest income increased $551 million, or 15%, an improvement of 79 basis points over 2007, reflecting an increase in interest income and a decrease in interest expense. Interest income benefited from growth in loan balances and the transfer of balance transfer fees to interest income, partially offset by higher interest charge-offs and lower investment income. Interest expense decreased reflecting a lower cost of funds, partially offset by higher borrowings to fund higher loan balances.

Provision for loan losses increased $1.2 billion, or 66%, due to higher net chargeoffs and an increase in loan loss reserves in excess of charge-offs during the year. The reserve increase in excess of charge-offs of $615 million resulted from a higher reserve rate as well as higher on-balance sheet loans due to maturing securitizations.

Other income increased $673 million reflecting the antitrust settlement and higher discount and interchange revenue, partially offset by a write-down of the interest4 only strip receivable and the transfer of balance transfer fees to interest income. Discount and interchange revenue benefited from growth in sales volume. Expenses decreased $79 million, or 3%, primarily attributable to the pension curtailment benefit; lower account acquisition and promotional marketing activity; and a decrease in costs related to litigation.

Third-Party Payments

Fourth Quarter

The Third-Party Payments segment transaction volume was $34 billion, up 39% from last year, reflecting the addition of Diners Club International volume of $7 billion, as well as increased volumes on the PULSE and Discover networks. Pretax income of $21 million was up $13 million from the fourth quarter of 2007. Diners Club International contributed $4 million to the segment’s pretax income. Revenue increased $24 million due to increased volumes and fee revenues, as well as a $15 million contribution from Diners Club International. Expenses increased $11 million due to the inclusion of Diners Club International.

Full Year

The Third-Party Payments segment transaction volume was a record $125 billion, up 36% from last year, reflecting the addition of Diners Club International volume of $13 billion, as well as increased volumes on the PULSE and Discover networks. Pretax income of $81 million was up $44 million from 2007 including $11 million related to Diners Club International, which was acquired in June 2008. Revenue increased $61 million due to increased volumes and fee revenues as well as a $28 million contribution from Diners Club International. Expenses increased $17 million due to the inclusion of Diners Club International.

Discontinued Operations

Discontinued operations represent the company’s Goldfish business in the United Kingdom, which was sold to Barclays Bank PLC on March 31, 2008. In the fourth quarter of 2008, the company recognized a loss from discontinued operations, net of tax, of $12 million versus a loss of $266 million in the fourth quarter of 2007. The fourth quarter of 2007 included an impairment charge to write down goodwill and intangibles to fair value of $279 million, after-tax.

Dividend Declaration/Stock Repurchase Program

The company’s board declared a cash dividend of $.06 per share, payable on Jan. 22, 2009, to stockholders of record at the close of business on Jan. 2, 2009. No stock repurchases were conducted under the stock repurchase program during the fourth quarter.

Conference Call and Webcast Information

The company will host a conference call to discuss its fourth quarter results on Thursday, Dec. 18, 2008, at 10 a.m. Central time. Interested parties can listen to the conference call via a live audio webcast at http://investorrelations.discoverfinancial.com .


Source: Company press release.

discover, fourth quarter results, antitrust

Related articles by Zemanta

• David (Discover) Nelms at Executives Club of Chicago
• Discover Card Buys Citigroup's Diners Club
• Goldman Sachs Reports $2.1 Billion Quarterly Loss
• Stocks retreat after Morgan Stanley posts loss