Discover Financial Services Reports Third Quarter Net Income of $639 Million or $1.56 Per Diluted Share

RIVERWOODS, Ill.--(BUSINESS WIRE)--

Discover Financial Services DFS today reported net income of $639 million or $1.56 per diluted share for the third quarter of 2016, as compared to $612 million or $1.38 per diluted share for the third quarter of 2015. The company's return on equity for the third quarter of 2016 was 23%.

Third Quarter Highlights

• Total loans grew $3.5 billion, or 5%, from the prior year to $73.6 billion.
• Credit card loans grew $2.4 billion, or 4%, to $58.0 billion and Discover card sales volume increased 1% from the prior year.
• Total net charge-off rate excluding PCI loans increased 16 basis points from the prior year to 2.10% and the total delinquency rate over 30 days past due excluding PCI loans increased 19 basis points from the prior year to 1.79%.
• Consumer deposits grew $5.5 billion, or 19%, from the prior year to $35.3 billion.
• Payment Services transaction dollar volume for the segment was $44.6 billion, down 3% from the prior year.
• Income tax expense includes one-time benefits of $28 million related to the resolution of certain tax matters.

"We achieved strong earnings per share growth, despite adding to loan loss reserves, through a combination of profitable loan growth, effective capital deployment and some tax favorability," said David Nelms, chairman and CEO of Discover. "Higher loan growth was assisted by record personal loan originations, and occurred despite challenging sales volume growth during the quarter."

Segment Results:

Direct Banking

Direct Banking pretax income of $931 million in the quarter decreased $19 million from the prior year as higher net interest income was offset by higher provision for loan losses, lower other income and higher operating expenses.

Total loans ended the quarter at $73.5 billion, up 5% compared to the prior year. Credit card loans ended the quarter at $58.0 billion, up 4% from the prior year. Personal loans increased $848 million, or 16%, from the prior year. Relative to the prior year, private student loans increased $226 million, or 3%, and grew $767 million, or 14%, excluding purchased student loans.

Net interest income increased $140 million, or 8%, from the prior year, driven by loan growth and higher net interest margin. Net interest margin was 10.00%, up 37 basis points from the prior year. Card yield was 12.53%, an increase of 50 basis points from the prior year due to portfolio mix and the prime rate increase. Interest expense as a percent of total loans increased 12 basis points from the prior year primarily due to higher market rates and higher FDIC expense.

Other income decreased $27 million, or 6%, from the prior year driven primarily by increased promotional rewards.

The delinquency rate for credit card loans over 30 days past due was 1.87%, up 22 basis points from the prior year and 24 basis points from the prior quarter. Credit card net charge-off rate for the third quarter was 2.17%, up 13 basis points from the prior year and down 22 basis points from the prior quarter. The personal loans net charge-off rate of 2.63% increased by 64 basis points from the prior year. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 1.02%, up 8 basis points from the prior year. Net charge-off rates were higher due to expected seasoning of recent growth.

Provision for loan losses of $445 million increased $113 million from the prior year due to a larger reserve build and higher net charge-offs. The reserve build for the third quarter of 2016 was $75 million, driven primarily by loan growth, $67 million higher than the reserve build in the third quarter of 2015.

Expenses increased $19 million, or 2%, from the prior year as increased marketing investments and higher regulatory and compliance staffing costs offset savings from the closure of the mortgage origination business. The prior year included $23 million in expenses related to the wind down of the mortgage origination business. Marketing expenses increased primarily due to card investments. Employee compensation increased mostly due to higher staffing levels driven in part by regulatory and compliance activities. Professional fees were lower than the prior year, primarily due to the completion of the look back related anti-money laundering remediation activities earlier this year. The third quarter of 2015 included $28 million in expenses related to these look back activities.

Payment Services

Payment Services pretax income was $30 million in the quarter, up $6 million from the prior year driven by expense reductions.

Payment Services transaction dollar volume was $44.6 billion, down 3% from the prior year. PULSE transaction dollar volume was down 6% year-over-year due to the loss of volume from a large debit issuer. Diners Club International volume increased 12% from the prior year driven by continued growth in Asia.

Share Repurchases

During the third quarter of 2016, the company repurchased approximately 10.1 million shares of common stock for $582 million. Shares of common stock outstanding declined by 2.5% from the prior quarter.

Conference Call and Webcast Information

The company will host a conference call to discuss its third quarter results on Tuesday, October 25, 2016, at 4:00 p.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 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 (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: 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, 2015, and "Management's Discussion and Analysis of Financial Condition and Results of Operations" in the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2016, 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
		Sep 30, 2016		Jun 30, 2016		Sep 30, 2015
EARNINGS SUMMARY
Interest Income		$2,184		$2,090		$2,008
Interest Expense		359		339		323
Net Interest Income		1,825		1,751		1,685
Discount/Interchange Revenue		631		636		614
Rewards Cost		368		371		326
Discount and Interchange Revenue, net		263		265		288
Protection Products Revenue		60		59		62
Loan Fee Income		91		79		87
Transaction Processing Revenue		40		39		39
Other Income		22		23		27
Total Other Income		476		465		503
Revenue Net of Interest Expense		2,301		2,216		2,188
Provision for Loan Losses		445		412		332
Employee Compensation and Benefits		342		340		337
Marketing and Business Development		195		198		168
Information Processing & Communications		81		89		84
Professional Fees		143		150		160
Premises and Equipment		25		23		24
Other Expense		109		106		109
Total Other Expense		895		906		882
Income Before Income Taxes		961		898		974
Tax Expense		322		282		362
Net Income		$639		$616		$612
Net Income Allocated to Common Stockholders		$625		$602		$599
PER SHARE STATISTICS
Basic EPS		$1.56		$1.47		$1.38
Diluted EPS		$1.56		$1.47		$1.38
Common Stock Price (period end)		$56.55		$53.59		$51.99
Book Value per share		$28.62		$28.03		$26.32
SEGMENT- INCOME BEFORE INCOME TAXES
Direct Banking		$931		$868		$950
Payment Services		30		30		24
Total		$961		$898		$974
BALANCE SHEET SUMMARY
Total Assets		$90,541		$87,511		$85,471
Total Liabilities		79,194		76,114		74,168
Total Equity		11,347		11,397		11,303
Total Liabilities and Stockholders' Equity		$90,541		$87,511		$85,471
TOTAL LOAN RECEIVABLES
Ending Loans 1, 2		$73,551		$71,924		$70,078
Average Loans 1, 2		$72,668		$70,810		$69,462
Interest Yield		11.82%		11.72%		11.37%
Gross Principal Charge-off Rate		2.66%		2.87%		2.51%
Gross Principal Charge-off Rate excluding PCI Loans 3		2.77%		2.99%		2.64%
Net Principal Charge-off Rate		2.02%		2.18%		1.85%
Net Principal Charge-off Rate excluding PCI Loans 3		2.10%		2.27%		1.94%
Delinquency Rate (over 30 days) excluding PCI Loans 3		1.79%		1.60%		1.60%
Delinquency Rate (over 90 days) excluding PCI Loans 3		0.77%		0.71%		0.72%
Gross Principal Charge-off Dollars		$488		$505		$440
Net Principal Charge-off Dollars		$370		$384		$324
Net Interest and Fee Charge-off Dollars		$80		$84		$81
Loans Delinquent Over 30 Days 3		$1,269		$1,104		$1,070
Loans Delinquent Over 90 Days 3		$545		$491		$481
Allowance for Loan Loss (period end)		$2,024		$1,949		$1,743
Change in Loan Loss Reserves		$75		$28		$8
Reserve Rate		2.75%		2.71%		2.49%
Reserve Rate excluding PCI Loans 3		2.81%		2.77%		2.57%
CREDIT CARD LOANS
Ending Loans		$58,006		$57,219		$55,655
Average Loans		$57,561		$56,124		$55,281
Interest Yield		12.53%		12.42%		12.03%
Gross Principal Charge-off Rate		2.93%		3.21%		2.83%
Net Principal Charge-off Rate		2.17%		2.39%		2.04%
Delinquency Rate (over 30 days)		1.87%		1.63%		1.65%
Delinquency Rate (over 90 days)		0.86%		0.78%		0.78%
Gross Principal Charge-off Dollars		$425		$448		$394
Net Principal Charge-off Dollars		$314		$334		$285
Loans Delinquent Over 30 Days		$1,086		$933		$919
Loans Delinquent Over 90 Days		$500		$444		$437
Allowance for Loan Loss (period end)		$1,661		$1,603		$1,459
Change in Loan Loss Reserves		$58		$13		$18
Reserve Rate		2.86%		2.80%		2.62%
Total Discover Card Volume		$33,471		$33,409		$32,971
Discover Card Sales Volume		$30,683		$30,702		$30,374
Rewards Rate		1.20%		1.21%		1.07%
NETWORK VOLUME
PULSE Network		$33,913		$33,856		$36,267
Network Partners		3,313		3,713		3,206
Diners Club International 4		7,331		7,198		6,560
Total Payment Services		44,557		44,767		46,033
Discover Network - Proprietary		31,759		31,780		31,408
Total		$76,316		$76,547		$77,441

1 Total Loans includes Home Equity 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/20161025006742/en/