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March 21, 2012 04:15 PM Eastern Daylight Time
RIVERWOODS, Ill.--()--Discover Financial Services (NYSE: DFS) today reported net income of $631 million for the first quarter of 2012, as compared to $465 million for the first quarter of 2011.
“Our results this quarter represent record first quarter earnings for Discover and are a great start for 2012”
First Quarter Highlights
- Total loans grew $4.6 billion, or 9%, from the prior year to $56.3 billion.
- Credit card loans grew $1.6 billion to $45.9 billion and Discover card sales volume was up 7%.
- The delinquency rate for credit card loans over 30 days past due declined to 2.22% and the credit card net charge-off rate declined to 3.07%, each of which were record lows.
- Payment Services pretax income was up 21% from the prior year to $52 million. Transaction volume for the segment was $46.7 billion in the quarter, an increase of 8% from the prior year.
"Our results this quarter represent record first quarter earnings for Discover and are a great start for 2012," said David Nelms, chairman and chief executive officer of Discover. "Continued improvements in credit performance, solid organic growth in each of our lending products and strong volume growth across our networks were key drivers of this quarter's earnings. We also recently announced that our board of directors approved a new $2 billion share repurchase authorization. This action, along with the two dividend increases we announced last year, reflect the strength of our capital base and our confidence in the future earnings power of the company."
Segment Results:
Direct Banking
Direct Banking pretax income of $962 million in the quarter was up $285 million, or 42%, from the prior year.
Discover card sales volume grew 7% from the prior year to $25.6 billion, primarily driven by an increase in the number of customers using their Discover card. Credit card loans increased, ending the quarter at $45.9 billion, up $1.6 billion from the prior year.
Total loans ended the quarter at $56.3 billion, up $4.6 billion, or 9%, compared to the prior year. Private student loans increased $3.0 billion, including the acquisition of a $2.4 billion student loan portfolio in the fourth quarter of 2011. Personal loans increased $764 million from the prior year. The company sold its remaining $698 million of federal student loans in the first quarter of 2012.
Net interest margin was 9.03%, down 19 basis points from the prior year and 7 basis points from the prior quarter. The decrease in net interest margin from the prior year reflects an increase in lower yielding student loans as well as a decline in credit card yield, partially offset by lower funding costs. Credit card yield was 12.21%, a decrease of 44 basis points from the prior year and 15 basis points from the prior quarter. The decline in credit card 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 total loans decreased 55 basis points from the prior year and 13 basis points from the prior quarter as the company continued to take advantage of available low rate funding.
Net interest income increased $123 million, or 11%, from the prior year, primarily driven by an increase in income from student and personal loans and lower interest expense. Interest income on credit card loans increased modestly from the prior year as an increase in loan balances was partially offset by the decline in yield.
The delinquency rate for credit card loans over 30 days past due was 2.22%, an improvement of 137 basis points from the prior year, and 17 basis points from the prior quarter. The credit card net charge-off rate decreased to 3.07% for the first quarter of 2012, down 289 basis points from the prior year and 17 basis points from the prior quarter.
Provision for loan losses of $152 million decreased $266 million, or 64%, from the prior year, primarily driven by lower charge-offs as a result of the continued decline in delinquencies. The reserve release for the first quarter of 2012 was $226 million, versus a release of $271 million in the first quarter of 2011.
Other income decreased $22 million, or 5%, from the prior year. The first quarter of 2011 included a $16 million bargain purchase gain estimate related to the acquisition of The Student Loan Corporation.
Expenses were up $82 million, or 15%, from the prior year, due to increased compensation and benefits costs reflecting increased staffing, an increase in reserves related to litigation and regulatory matters, investments in growth initiatives and infrastructure, and higher fraud costs.
Payment Services
Payment Services pretax income was a record $52 million in the quarter, up $9 million, or 21%, from the prior year. Revenue increased $9 million, primarily driven by an increase in higher margin point-of-sale transactions on the PULSE network. Expenses were relatively flat, as higher compensation costs were offset by lower marketing costs related to the timing of programs.
Payment Services dollar volume was $46.7 billion for the first quarter, up 8% from the prior year, driven by higher PULSE, third-party issuer and Diners Club International volume.
Share Repurchases
As previously announced, the company’s board of directors approved a new share repurchase program authorizing the company to purchase up to $2 billion of its common stock and also terminated the prior share repurchase program. The company had repurchased a total of 18 million shares for $425 million under the prior program, all of which occurred in fiscal year 2011.
Conference Call and Webcast Information
The company will host a conference call to discuss its first quarter results on Wednesday, March 21, 2012, at 4:00 pm. Central time. Interested parties can listen to the conference call via a live audio webcast at http://investorrelations.discoverfinancial.com.
