RIVERWOODS, Ill.--(BUSINESS WIRE)--Discover Financial Services (NYSE: DFS) today reported net income for the second quarter of 2010 of $258 million, as compared to net income of $226 million for the second quarter of 2009. Net income for the second quarter of 2009 included approximately $295 million (after tax) related to the Visa/MasterCard antitrust litigation settlement.“Management’s Discussion and Analysis of Financial Condition and Results of Operations”
On April 21, 2010, the company redeemed $1.2 billion of preferred stock issued to the U.S. Treasury under the TARP Capital Purchase Program and, as a result, accelerated the accretion of the discount on the preferred stock. The accretion of the discount and preferred stock dividend reduced earnings per share by $0.13.
Second Quarter Highlights
- Discover card sales volume was $23 billion, a record for a second quarter and an increase of 6% from the prior year.
- Credit performance continued to improve, with net charge-offs down $81 million and over 30 days delinquencies down $266 million from the prior quarter, driving a release of loan loss reserves in the quarter.
- The net charge-off rate for the second quarter was 7.97% versus the previously disclosed expectation of 8-8.5%. The net charge-off rate for the third quarter of 2010 is expected to be between 7.5% and 8%.
- Payment Services showed continued strong results with profit before tax up 36% from the prior year to $36 million, and transaction volume of $37 billion.
- Deposit balances originated through direct-to-consumer and affinity relationships were $17.5 billion, an increase of $9.5 billion from the prior year and $2.7 billion from the prior quarter. This quarter included an acquisition of $1 billion in deposit accounts.
"Our very strong results this quarter were driven by a significant improvement in the credit performance of our loyal customer base along with continued solid growth in cardmember spending,” said David Nelms, chairman and chief executive officer of Discover. “We were also pleased with the performance of our payments business, driven by solid growth in key volume measures. In addition, our direct-to-consumer deposit business turned in another quarter of strong growth, and is now our single largest funding source. Looking ahead, we anticipate that sustained improvements in credit performance will continue to contribute meaningfully to earnings and, importantly, allow us to invest for long-term growth."
Segment Results:
Direct Banking
The discussion that follows compares amounts reported for the second quarter of 2010 to 2009 on an “as-adjusted” basis1. The table below reconciles the 2009 as-adjusted amounts with the relevant measure on an as reported basis where appropriate.
| Quarter Ended | Quarter Ended | |||||
| May 31, 2009 | May 31, 2009 | |||||
| Managed - As Reported | Adjustments | As Adjusted | ||||
| Net Yield on Loan Receivables | 9.26% | (0.01%) | 9.25% | |||
| Other Income | $835 | ($380) | $455 | |||
| Provision for Loan Losses | $1,111 | $191 | $1,302 | |||
| Direct Banking Income Before Taxes | $388 | ($573) | ($185) | |||
Direct Banking pretax income of $386 million in the second quarter of 2010 was a $571 million improvement from the second quarter of 2009, as adjusted.
Discover card sales volume grew 6% from the prior year, the second consecutive quarter of year-over-year growth, reflecting a general increase in consumer spending and higher gas prices. Credit card loans declined $3.6 billion to $45.3 billion. The impact of higher sales volume on credit card loans was more than offset by a reduction in promotional rate balances, as the company continued to reduce balance transfer activity. The year-over-year decline in balance transfer volume was 60% in the second quarter. Total loans ended the quarter at $50 billion, down 2% compared to the prior year, as the decline in credit card loans was partially offset by an increase in student loans.
Net yield on loan receivables was 9.14%, a decrease of 11 basis points from the prior year as adjusted and an increase of 13 basis points from the prior quarter. The net yield decreased from the prior year primarily due to the increase in lower rate student loan balances and higher funding costs, partially offset by a reduction in promotional rate credit card balances, higher interest rates on standard balances, and lower interest charge-offs. The interest yield on credit card loans increased 23 basis points from the prior quarter including 20 basis points attributable to the impact of improving credit trends on interest charge-offs. The net yield on loan receivables increased from the prior quarter reflecting the higher interest yield on credit cards partially offset by an increase in lower rate student loan balances.
The over 30 days delinquent loans and rate have continued to decline from the fourth quarter of 2009 peak as credit trends continue to improve. The over 30 days delinquency rate was 4.52%, an improvement of 56 basis points from the prior year, and 53 basis points from the prior quarter.
The net charge-off rate decreased to 7.97% for the second quarter of 2010, up 18 basis points from the prior year and down 54 basis points from the prior quarter. The increase from the prior year 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 decrease from the prior quarter reflects the ongoing improvement in credit performance of the portfolio.
Provision for loan losses of $724 million decreased $578 million, or 44%, from the prior year as adjusted. The sustained improvement in credit performance over the past two quarters led to a reduction in the loan loss reserve rate, which resulted in a reserve release of $277 million in the second quarter of 2010. In contrast, the second quarter of 2009, as adjusted, included a $299 million reserve addition, reflecting worsening credit trends at the time.
Other income decreased $7 million from the prior year as adjusted, primarily due to the discontinuance of overlimit fees beginning in February 2010, partially offset by higher discount and interchange revenue from higher sales volume.
Expenses were down $44 million, or 8% from the prior year, reflecting the impact of cost containment initiatives. The second quarter of 2009 included a $20 million charge related to a reduction in force.
Payment Services
Payment Services pretax income of $36 million in the quarter was up $10 million, or 36%, from the prior year. Revenues were up $6 million, reflecting an increase in the number of transactions and higher margin volume on the PULSE network and lower incentive payments as well as higher Diners Club revenues. Expenses were down $3 million, due primarily to transaction processing cost reduction initiatives.
Payment Services dollar volume of $37 billion for the second quarter was up 1% from the prior year. Third-Party Issuer volume was up 25% and Diners Club volume was up 7%, partially offset by a 2% decrease in volume on the PULSE network. The number of transactions on the PULSE network increased 6% to 805 million due to increased transaction volume from new and existing clients.
Conference Call and Webcast Information
The company will host a conference call to discuss its second quarter results on Thursday June 24, 2010, at 10:00 a.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).
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