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Discover Financial Services Reports Third Quarter Net Income of $771 Million or $2.45 Per Diluted Share

·15 min read

Discover Financial Services (NYSE: DFS):

Third Quarter Results

2020

2019

YOY Change

Total loans, end of period (in billions)

$88.7

$92.5

(4%)

Total revenue net of interest expense (in millions)

$2,714

$2,900

(6%)

Total net charge-off rate

3.00%

3.05%

-5 bps

Net income/(loss) (in millions)

$771

$770

—%

Diluted EPS

$2.45

$2.36

4%

Discover Financial Services (NYSE: DFS) today reported net income of $771 million or $2.45 per diluted share for the third quarter of 2020, as compared to net income of $770 million or $2.36 per diluted share for the third quarter of 2019.

"While the economic environment remains challenging, I am encouraged by the positive developments we saw, with a return to growth in sales in September and very solid credit performance across all of our loan products," said Roger Hochschild, CEO and President of Discover. "Our results this quarter demonstrate the benefit of actions we took in the first half of the year to mitigate credit risk and align expenses with the economic environment and we continue to invest in core capabilities to drive earnings growth and long-term value."

Segment Results:

Direct Banking

Direct Banking pretax income of $917 million for the quarter was $26 million lower than pretax income for the prior year period primarily driven by lower net interest income partially offset by lower operating expenses and a decrease in the provision for credit losses.

Total loans ended the quarter at $88.7 billion, down 4% year-over-year. Credit card loans ended the quarter at $69.7 billion, down 6% year-over-year. Personal loans decreased $385 million, or 5%, year-over-year. Private student loans increased $280 million, or 3%, year-over-year. The organic student loan portfolio, which excludes purchased loans, increased $594 million, or 7% year-over-year.

Net interest income for the quarter decreased $137 million, or 6%, from the prior year period, driven by an unfavorable net impact from lower market rates and lower average receivables. Net interest margin was 10.19%, down 24 basis points versus the prior year period. Card yield was 12.40%, a decrease of 95 basis points from the prior year period primarily driven by a lower prime rate modestly offset by favorable portfolio mix. Interest expense as a percent of total loans decreased 90 basis points from the prior year period, primarily as a result of lower market rates.

The overall net charge-off rate was 5 basis points lower reflecting stable credit across the portfolio. The credit card net charge-off rate was 3.45%, up 13 basis points from the prior year and down 45 basis points from the prior quarter. The 30+ day delinquency rate for credit card loans was 1.91%, down 59 basis points year-over year and down 26 basis points from the prior quarter. The student loan net charge-off rate was 0.58%, down 1 basis point from the prior year and down 4 basis point from the prior quarter. The personal loans net charge-off rate of 2.69% was down 130 basis points from the prior year and down 74 basis points from the prior quarter.

Provision for credit losses of $750 million decreased $49 million from the prior year period driven by the impact of lower net charge-offs and a lower reserve build. The reserve build for the third quarter of 2020 was $42 million, compared to a reserve build of $98 million in the third quarter of 2019.

Total operating expenses were down $100 million year-over year primarily driven by decreased marketing expense and professional fees, partially offset by higher employee compensation and information processing. Marketing decreased driven by reductions in brand and acquisition expense. Professional fees decreased primarily due to lower collection fees which were impacted by court closures. Employee compensation increased as a result of higher average salaries and headcount. Information processing increased reflecting ongoing investments in technology capabilities and infrastructure.

Payment Services

Payment Services pretax income was $42 million in the quarter, down $9 million year-over-year driven by lower PULSE and Network Partners revenue.

Payment Services volume was $69.7 billion, up 11% year-over-year. PULSE dollar volume was up 16% year-over-year driven by higher average spend per transaction related to the pandemic and the impact of stimulus funds available to consumers. Network Partners volume increased by 34% year-over-year driven by growth in AribaPay.

Share Repurchases

The company suspended its share repurchase program in March 2020 in response to the economic environment at that time. The share repurchase program remains suspended. Shares of common stock outstanding were flat to the prior quarter.

Adoption of Accounting Standard for Measurement of Credit Losses

The company’s results for the third quarter of 2020 reflect the January 1, 2020 adoption of Accounting Standards Update No. 2016-13, Financial Instruments-Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments for the Company (the "ASU"). For purposes of calculating the company’s regulatory capital, the company has elected to defer recognition of the estimated impact of the ASU on regulatory capital for two years in accordance with the interim final rule adopted by federal bank regulatory agencies on March 27, 2020. Pursuant to the interim final rule, the estimated impact of the ASU on regulatory capital will be phased in over a three year period beginning in 2022.

Conference Call and Webcast Information

The company will host a conference call to discuss its third quarter results on Thursday, October 22, 2020, at 7:00 a.m. Central time. Interested parties can listen to the conference call via a live audio webcast at https://investorrelations.discover.com.

About Discover

Discover Financial Services (NYSE: DFS) is a digital 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 loans, checking and savings accounts and certificates of deposit through its banking business. It operates the Discover Global Network comprised 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 around the world. 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 (https://investorrelations.discover.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: the effect of the coronavirus disease 2019 ("COVID-19") pandemic and measures taken to mitigate the pandemic, including their impact on our credit quality and business operations as well as their impact on general economic and financial markets, 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 tax reform, 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, 2019, "Risk Factors" and "Management's Discussion & Analysis of Financial Condition and Results of Operations" in the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2020 and March 31, 2020, which is filed with the SEC and available at the SEC's internet site (http://www.sec.gov) and subsequent reports on Forms 8-K and 10-Q, including the company's Current Report on Form 8-K filed today with the SEC.

DISCOVER FINANCIAL SERVICES

(unaudited, in millions, except per share statistics)

Quarter Ended

September 30,
2020

June 30,
2020

September 30,
2019

EARNINGS SUMMARY

Interest Income

$2,681

$2,672

$3,040

Interest Expense

416

482

638

Net Interest Income

2,265

2,190

2,402

Discount/Interchange Revenue

752

622

775

Rewards Cost

514

385

520

Discount and Interchange Revenue, net

238

237

255

Protection Products Revenue

44

44

48

Loan Fee Income

100

85

120

Transaction Processing Revenue

50

49

52

Other Income

17

57

23

Total Non-Interest Income

449

472

498

Revenue Net of Interest Expense

2,714

2,662

2,900

Provision for Credit Losses

750

2,046

799

Employee Compensation and Benefits

471

452

439

Marketing and Business Development

140

129

230

Information Processing & Communications

111

117

96

Professional Fees

151

181

189

Premises and Equipment

26

27

26

Other Expense

106

171

127

Total Operating Expense

1,005

1,077

1,107

Income/(Loss) Before Income Taxes

959

(461

)

994

Tax Expense

188

(93

)

224

Net Income/(Loss)

$771

($368

)

$770

Net Income/(Loss) Allocated to Common Stockholders

$751

($369

)

$749

PER SHARE STATISTICS

Basic EPS

$2.45

($1.20

)

$2.36

Diluted EPS

$2.45

($1.20

)

$2.36

Common Stock Price (period end)

$57.78

$50.09

$81.09

Book Value per share

$33.45

$31.47

$37.20

BALANCE SHEET SUMMARY

Total Assets

$124,349

$113,792

$110,786

Total Liabilities

114,097

104,149

99,069

Total Equity

10,252

9,643

11,717

Total Liabilities and Stockholders' Equity

$124,349

$113,792

$110,786

TOTAL LOAN RECEIVABLES

Ending Loans 1

$88,660

$88,927

$92,493

Average Loans 1

$88,422

$89,771

$91,345

Interest Yield

11.78

%

11.70

%

12.76

%

Gross Principal Charge-off Rate 2

3.78

%

4.26

%

3.87

%

Net Principal Charge-off Rate 2

3.00

%

3.44

%

3.05

%

Delinquency Rate (30 or more days)

1.77

%

1.98

%

2.33

%

Delinquency Rate (30 or more days) excluding Purchased Loans 3

1.76

%

1.98

%

2.32

%

Delinquency Rate (90 or more days)

0.80

%

1.03

%

1.06

%

Delinquency Rate (90 or more days) excluding Purchased Loans 3

0.80

%

1.04

%

1.06

%

Gross Principal Charge-off Dollars 2

$842

$950

$891

Net Principal Charge-off Dollars 2

$668

$767

$702

Net Interest and Fee Charge-off Dollars

$141

$169

$156

Loans Delinquent 30 or more days

$1,567

$1,763

$2,153

Loans Delinquent 30 or more days excluding Purchased Loans 3

$1,544

$1,739

$2,114

Loans Delinquent 90 or more days

$708

$916

$978

Loans Delinquent 90 or more days excluding Purchased Loans 3

$702

$911

$968

Allowance for Credit Losses (period end) 4

$8,226

$8,184

$3,299

Reserve Change Build/(Release) 5, 6, 7

$42

$1,271

$97

Reserve Rate

9.28

%

9.20

%

3.57

%

CREDIT CARD LOANS

Ending Loans

$69,656

$70,201

$73,968

Average Loans

$69,643

$70,848

$73,248

Interest Yield

12.40

%

12.34

%

13.35

%

Gross Principal Charge-off Rate

4.33

%

4.84

%

4.25

%

Net Principal Charge-off Rate

3.45

%

3.90

%

3.32

%

Delinquency Rate (30 or more days)

1.91

%

2.17

%

2.50

%

Delinquency Rate (90 or more days)

0.93

%

1.21

%

1.21

%

Gross Principal Charge-off Dollars

$759

$852

$784

Net Principal Charge-off Dollars

$604

$688

$611

Loans Delinquent 30 or more days

$1,328

$1,523

$1,847

Loans Delinquent 90 or more days

$650

$846

$897

Allowance for Credit Losses (period end) 4

$6,491

$6,491

$2,799

Reserve Change Build/(Release) 5, 6

$-

$1,185

$106

Reserve Rate

9.32

%

9.25

%

3.78

%

Total Discover Card Volume

$39,783

$33,105

$41,168

Discover Card Sales Volume

$37,134

$30,721

$37,432

Rewards Rate

1.38

%

1.24

%

1.38

%

SEGMENT- INCOME/(LOSS) BEFORE INCOME TAXES

Direct Banking

$917

($484

)

$943

Payment Services

42

23

51

Total

$959

($461

)

$994

NETWORK VOLUME

PULSE Network

$54,993

$52,859

$47,535

Network Partners

8,917

7,280

6,656

Diners Club International 8

5,839

4,339

8,386

Total Payment Services

69,749

64,478

62,577

Discover Network - Proprietary

38,699

32,349

38,722

Total

$108,448

$96,827

$101,299

1 Total Loans includes Home Equity and other loans.

2 Prior to adoption of ASU No. 2016-13 on January 1, 2020, net charge-offs on Purchased Credit Impaired ("PCI") loans generally did not result in a charge to earnings

3 Prior to adoption of ASU No. 2016-13 on January 1, 2020, Purchased loans (formerly referred to as PCI) were accounted for on a pooled basis. Since a pool was 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, was not meaningful. Because the Company was recognizing interest income on a pool of loans, it was all considered to be performing

4 Prior to adoption of ASU No. 2016-13 on January 1, 2020, credit losses were estimated using the incurred loss approach. Under the new current expected credit loss ("CECL") approach, reserves are now recorded for expected losses, not simply those deemed to be already incurred, and the loss estimate period is extended to include the entire life of the loan

5 Prior to adoption of ASU No. 2016-13 on January 1, 2020, the allowance for credit loss included the net change in reserves on PCI pools having no remaining non-accretable difference which did not impact the reserve change build/(release) in provision for credit losses

6 Excludes January 1, 2020 CECL day one impact

7 Excludes any build/release of the liability for expected credit losses on unfunded commitments as the offset is recorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition

8 Volume is derived from data provided by licencees 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: https://www.businesswire.com/news/home/20201021005995/en/

Contacts

Investors:
Craig Streem, 224-405-5923
craigstreem@discover.com

Media:
Jon Drummond, 224-405-1888
jondrummond@discover.com