Discover Financial Services (NYSE: DFS) today reported net
income of $500 million or $1.14 per diluted share for the fourth
quarter of 2015, as compared to $404 million or $0.87 per diluted
share for the fourth quarter of 2014. The company's return on
equity for the fourth quarter of 2015 was 18%.
Fourth Quarter Highlights
- Total loans grew $2.4 billion, or 3.5%,
from the prior year to $72.4 billion.
- Credit card loans grew $1.8 billion, or
3.1%, to $57.9 billion and Discover card sales volume increased
2.6% from the prior year or approximately 5% excluding gas
purchases.
- Total net charge-off rate excluding PCI
loans decreased 7 basis points from the prior year to 2.11% and the
total delinquency rate excluding PCI loans over 30 days past due
increased 1 basis point from the prior year to 1.67%.
- Reserve build was $126 million in the
quarter, up $24 million from the prior year.
- Payment Services transaction dollar
volume for the segment was $45.9 billion, down 10% from the prior
year.
"We once again delivered a solid return on equity in the fourth
quarter. While we achieved record annual originations in both
Student Loans and Personal Loans, card loan growth was at the low
end of our target range, slower than we'd like," said David Nelms,
chairman and CEO of Discover. "We are taking steps to accelerate
card loan growth in 2016 while staying disciplined on credit and
continuing to execute on our Payments strategy."
Segment Results:
Direct Banking
Direct Banking pretax income of $767 million in the quarter
increased $121 million, or 19%, from the prior year. The prior year
results included two one-time items: a $178 million one-time charge
related to the elimination of the credit card rewards forfeiture
reserve and a $27 million charge related to a goodwill impairment
associated with the Discover Home Loans unit that was subsequently
closed.
Total loans ended the quarter at $72.4 billion, up 3.5% compared
to the prior year. Credit card loans ended the quarter at $57.9
billion, up 3.1% from the prior year. Personal loans increased $483
million, or 9.6%, from the prior year and private student loans
increased $253 million, or 3.0%, from the prior year. Excluding
purchased student loans, private student loans grew $797 million,
or 16.4%, from the prior year.
Net interest income increased $60 million, or 4%, from the prior
year, driven by loan growth. Net interest margin was 9.75%, down 2
basis points from the prior year. Total yield was 11.60%, an
increase of 7 basis points from the prior year primarily due to
card portfolio mix. Interest expense as a percent of total loans
increased 8 basis points from the prior year due to funding mix and
higher rates.
Other income increased $122 million, or 43%, from the prior year
despite the run-off in mortgage origination income and lower
protection products revenue as the prior year other income included
the one-time charge related to the elimination of the credit card
rewards forfeiture reserve.
The delinquency rate for credit card loans over 30 days past due
was 1.72%, down 1 basis point from the prior year and up 7 basis
points from the prior quarter. Credit card net charge-off rate for
the fourth quarter was 2.18%, down 8 basis points from the prior
year and up 14 basis points from the prior quarter. The student
loan net charge-off rate excluding purchased credit-impaired
("PCI") loans was 1.30%, down 10 basis points from the prior year.
The personal loans net charge-off rate of 2.28% increased by 8
basis points from the prior year.
Provision for loan losses of $486 million increased $32 million
from the prior year primarily due to a larger reserve build. The
reserve build for the fourth quarter of 2015 was $128 million,
versus a $101 million reserve build in the prior year.
Expenses increased $29 million, or 3%, from the prior year
mostly driven by higher regulatory and compliance costs.
Professional fees increased primarily due to $37 million in look
back related anti-money laundering remediation expenses.
Employee compensation increased in part due to increased
staffing driven in part by regulatory and compliance activities.
The prior year expenses included the goodwill impairment charge
related to the Discover Home Loans unit that was subsequently
closed.
Payment Services
Payment Services pretax income was $21 million in the quarter,
up $19 million from the prior year as the prior year included a $21
million charge from a fair value adjustment related to Diners Club
Italy being classified as held-for-sale.
Payment Services transaction dollar volume was $45.9 billion,
down 10% from the prior year. PULSE transaction dollar volume was
down 14% year-over-year due to the loss of volume from a large
debit issuer. Network Partners volume was up $1.0 billion, or 45%,
from the prior year driven by AribaPay volume.
Share Repurchases
During the fourth quarter of 2015, the company repurchased
approximately 8 million shares of common stock for $435 million.
Shares of common stock outstanding declined by 1.8% from the prior
quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its fourth
quarter results on Wednesday, January 27, 2016, 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 issues the Discover card, America's cash rewards
pioneer, and offers private student loans, personal loans, home
equity loans, checking and savings accounts and certificates of
deposit through its direct banking business. It operates the
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.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
(http://investorrelations.discoverfinancial.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,” and similar
expressions. Such statements are based upon the current beliefs and
expectations of the company's 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 financial
regulatory reform, consumer financial services practices,
anti-corruption, and funding, capital and liquidity; the actions
and initiatives of current and potential competitors; the company's
ability to manage its expenses; the company's ability to
successfully achieve card acceptance across its networks and
maintain relationships with network participants; the company's
ability to sustain and grow its non-card 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; the
company's ability to manage its credit risk, market risk, liquidity
risk, operational risk, compliance and legal 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 the company's investment portfolio; limits on the
company's ability to pay dividends and repurchase its common stock;
limits on the company's ability to receive payments from its
subsidiaries; fraudulent activities or material security breaches
of key systems; the company's ability to remain organizationally
effective; the company's ability to increase or sustain Discover
card usage or attract new customers; the company's ability to
maintain relationships with merchants; the effect of political,
economic and market conditions, geopolitical events and unforeseen
or catastrophic events; the company's ability to introduce new
products or services; the company's ability to manage its
relationships with third-party vendors; the company's ability to
maintain current technology and integrate new and acquired systems;
the company's ability to collect amounts for disputed transactions
from merchants and merchant acquirers; the company's ability to
attract and retain employees; the company's ability to protect its
reputation and its intellectual property; and new lawsuits,
investigations or similar matters or unanticipated developments
related to current matters. The company routinely evaluates and may
pursue acquisitions of or investments in businesses, products,
technologies, loan portfolios or deposits, which may involve
payment in cash or the company's 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, 2014 and "Management's Discussion
and Analysis of Financial Condition and Results of Operations" in
the company's Quarterly Reports on Form 10-Q for the quarters ended
March 31, 2015, June 30, 2015 and September 30, 2015, which are
filed with the SEC and available at the SEC's internet site
(http://www.sec.gov).
DISCOVER FINANCIAL SERVICES (unaudited, in
millions, except per share statistics) Quarter
Ended Dec 31, Sep 30,
Dec 31,
2015 2015
2014
EARNINGS
SUMMARY
Interest Income $2,061 $2,008 $1,974 Interest Expense 329 323 302
Net Interest Income 1,732 1,685 1,672 Discount/Interchange
Revenue 635 614 620 Rewards Cost 372 326 517 Discount and
Interchange Revenue, net 263 288 103 Protection Products Revenue 60
62 75 Loan Fee Income 87 87 86 Transaction Processing Revenue 38 39
46 Other Income 25 27 55 Total Other Income 473 503 365
Revenue Net of Interest Expense 2,205 2,188 2,037 Provision
for Loan Losses 484 332 457 Employee Compensation and
Benefits 333 337 314 Marketing and Business Development 196 168 216
Information Processing & Communications 87 84 88 Professional
Fees 170 160 128 Premises and Equipment 24 24 24 Other Expense 123
109 162 Total Other Expense 933 882 932 Income
Before Income Taxes 788 974 648 Tax Expense 288 362 244 Net Income
$500 $612 $404 Net Income Allocated to Common Stockholders
$488 $599 $392
PER SHARE
STATISTICS
Basic EPS $1.15 $1.38 $0.87 Diluted EPS $1.14 $1.38 $0.87 Common
Stock Price (period end) $53.62 $51.99 $65.49 Book Value per share
$26.74 $26.32 $24.79
SEGMENT- INCOME
BEFORE INCOME TAXES
Direct Banking $767 $950 $646 Payment Services 21 24 2 Total $788
$974 $648
BALANCE SHEET
SUMMARY
Total Assets $86,936 $85,611 $83,126 Total Liabilities 75,661
74,308 71,992 Total Equity 11,275 11,303 11,134 Total Liabilities
and Stockholders' Equity $86,936 $85,611 $83,126
TOTAL LOAN
RECEIVABLES
Ending Loans 1, 2 $72,385 $70,078 $69,969 Average Loans 1, 2
$70,503 $69,462 $67,930 Interest Yield 11.49% 11.37% 11.40%
Gross Principal Charge-off Rate 2.65% 2.51% 2.70% Gross Principal
Charge-off Rate excluding PCI Loans 3 2.78% 2.64% 2.86% Net
Principal Charge-off Rate 2.02% 1.85% 2.06% Net Principal
Charge-off Rate excluding PCI Loans 3 2.11% 1.94% 2.18%
Delinquency Rate (over 30 days) excluding
PCI Loans 3
1.67% 1.60% 1.66%
Delinquency Rate (over 90 days) excluding
PCI Loans 3
0.76% 0.72% 0.78% Gross Principal Charge-off Dollars $472 $440 $463
Net Principal Charge-off Dollars $358 $324 $355 Net Interest and
Fee Charge-off Dollars $86 $81 $91
Loans Delinquent Over 30 Days 3
$1,153 $1,070 $1,100
Loans Delinquent Over 90 Days 3
$530 $481 $517 Allowance for Loan Loss (period end) $1,869
$1,743 $1,746 Change in Loan Loss Reserves $126 $8 $102 Reserve
Rate 2.58% 2.49% 2.50% Reserve Rate Excluding PCI Loans 3 2.65%
2.57% 2.59%
CREDIT CARD
LOANS
Ending Loans $57,896 $55,655 $56,128 Average Loans $56,050 $55,281
$54,169
Interest Yield 12.20% 12.03% 12.08% Gross Principal
Charge-off Rate 2.94% 2.83% 3.03% Net Principal Charge-off Rate
2.18% 2.04% 2.26%
Delinquency Rate (over 30 days)
1.72% 1.65% 1.73%
Delinquency Rate (over 90 days)
0.85% 0.78% 0.85% Gross Principal Charge-off Dollars $415 $394 $413
Net Principal Charge-off Dollars $309 $285 $309
Loans Delinquent Over 30 Days
$995 $919 $971
Loans Delinquent Over 90 Days
$490 $437 $480 Allowance for Loan Loss (period end) $1,554
$1,459 $1,474 Change in Loan Loss Reserves $95 $18 $86 Reserve Rate
2.68% 2.62% 2.63% Total Discover Card Volume $33,830 $32,971
$33,211 Discover Card Sales Volume $31,672 $30,374 $30,871 Rewards
Rate 1.18% 1.07% 1.67%
NETWORK
VOLUME
PULSE Network $35,902 $36,267 $41,788 Network Partners 3,274 3,206
2,263
Diners Club International 4
6,760 6,560 6,933 Total Payment Services 45,936 46,033 50,984
Discover Network - Proprietary 32,910 31,408 32,005 Total $78,846
$77,441 $82,989 1 Total Loans includes mortgages and other loans.
2 Purchased Credit Impaired ("PCI") loans
are loans that were acquired in which a deterioration in credit
quality occurred between the origination date and the acquisition
date. These loans were initially recorded at fair value and accrete
interest income over the estimated lives of the loans as long as
cash flows are reasonably estimable, even if the loans are
contractually past due. PCI loans are private student loans and are
included in total loan receivables.
3 Excludes PCI loans (described above)
which are accounted for on a pooled basis. Since a pool is
accounted for as a single asset with a single composite interest
rate and aggregate expectation of cash flows, the past-due status
of a pool, or that of the individual loans within a pool, is not
meaningful. Because the company is recognizing interest income on a
pool of loans, it is all considered to be performing.
4 Volume is derived from data provided by
licensees 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).
View source
version on businesswire.com: http://www.businesswire.com/news/home/20160127006343/en/
Discover Financial ServicesInvestors:Bill Franklin,
224-405-1902williamfranklin@discover.comorMedia:Jon
Drummond, 224-405-1888jondrummond@discover.com
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