Discover Financial Services Reports Third Quarter 2021 Net Income of $1.1 Billion or $3.54 Per Diluted Share

Rhea-AI Summary

Discover Financial Services (NYSE: DFS) reported a strong performance for Q3 2021, with net income rising 42% to $1.1 billion, or $3.54 per diluted share, compared to the previous year. Total loans reached $89.5 billion, up 1% year-over-year, while total revenue increased by 2% to $2.777 billion. The net charge-off rate improved significantly to 1.46%, reflecting robust credit performance. Operating expenses rose 19% due to increased marketing and employee costs. The company repurchased 6.5 million shares for $815 million during the quarter.

Positive

• Net income up 42% to $1.1 billion.
• Diluted EPS increased 44% to $3.54.
• Total revenue increased by 2%, reaching $2.777 billion.
• Total loans grew 1% year-over-year to $89.5 billion.
• Net charge-off rate improved to 1.46%, down 154 bps.

Negative

• Operating expenses rose 19%, primarily due to higher marketing and employee compensation costs.
• Payment Services segment reported a pretax loss of $114 million.

RIVERWOODS, Ill.--(BUSINESS WIRE)-- Discover Financial Services (NYSE: DFS):

Third Quarter 2021 Results
		2021		2020		YOY Change
Total loans, end of period (in billions)		$89.5		$88.7		1%
Total revenue net of interest expense (in millions)		$2,777		$2,714		2%
Total net charge-off rate		1.46%		3.00%		-154 bps
Net income/(loss) (in millions)		$1,091		$771		42%
Diluted EPS		$3.54		$2.45		44%

Discover Financial Services (NYSE: DFS) today reported net income of $1.1 billion or $3.54 per diluted share for the third quarter of 2021, as compared to a net income of $771 million or $2.45 per diluted share for the third quarter of 2020.

“Our results this quarter reflected the strengths of our integrated digital banking and payments model, which continues to be a source of significant competitive advantage” said Roger Hochschild, CEO and President of Discover. “Even in an environment of heightened competition, our attractive value proposition drove strong new account growth, which contributed to our return to year-over-year loan growth in the quarter. Further, our success in managing our operating costs and continued strong credit performance helped generate substantial capital, supporting the increase in share repurchases.”

Segment Results:

Digital Banking

Digital Banking pretax income of $1.5 billion for the quarter was $599 million higher than the prior year period primarily reflecting a lower provision for credit losses and higher revenue net of interest expense, partially offset by increased operating expenses.

Total loans ended the quarter at $89.5 billion, up 1% year-over-year, and up 2% sequentially. Credit card loans ended the quarter at $70.3 billion, up 1% year-over-year. Personal loans decreased $321 million, or 4%, and private student loans increased $168 million, or 2%, year-over-year. The organic student loan portfolio, which excludes purchased loans, increased $402 million, or 4% from the prior year period.

Net interest income for the quarter increased $140 million, or 6%, from the prior year period, driven by favorable funding costs due to lower market rates and decreased interest charge-offs, partially offset by a lower credit card revolving loan balance as payment rates remained elevated. Net interest margin was 10.80%, up 61 basis points versus the prior year. Card yield was 12.53%, up 13 basis points from the prior year period primarily driven by decreased interest charge-offs, and a lower mix of receivables at a promotional rate, partially offset by the impact of a higher payment rate on revolving loan balances. Interest expense as a percent of total loans decreased 66 basis points from the prior year period, primarily as a result of lower market rates and proactive management of deposit costs, maturity of high coupon consumer CDs and a favorable shift in the funding mix.

Non-interest income increased $76 million, or 20%, from the prior year period, mainly driven by higher discount/interchange revenue and loan fee income partially offset by higher rewards cost.

The total net charge-off rate of 1.46% was 154 basis points lower versus the prior year period reflecting strong credit performance across the portfolio. The credit card net charge-off rate was 1.65%, down 180 basis points from the prior year period and down 80 basis points from the prior quarter. The 30+ day delinquency rate for credit card loans was 1.48%, down 43 basis points year-over year and up 5 basis points from the prior quarter. The student loan net charge-off rate was 0.68%, up 10 basis points from the prior year and up 15 basis points from the prior quarter. Personal loans net charge-off rate of 1.11% was down 158 basis points from the prior year and down 69 basis point from the prior quarter.

Provision for credit losses of $185 million decreased $565 million from the prior year period driven by lower net charge-offs and a reserve release in the quarter. The third quarter of 2021 included a $165 million reserve release, compared to a $42 million reserve build in the third quarter of 2020. Net charge-offs of $325 million were $343 million lower than the prior year period.

Total operating expenses were up $182 million, year-over year, or 19%, primarily reflecting higher marketing expense, increased other expenses, increased recovery fees, and higher employee compensation.

Payment Services

Payment Services had a pretax loss of $114 million, down $156 million year-over-year. Lower revenue was driven by a $167 million unrealized loss on equity investments. This was partially offset by higher PULSE and Network Partners revenue.

Payment Services volume was $76.8 billion, up 10% year-over-year. PULSE dollar volume was up 9% year-over-year with growth across all debit products driven by increased spend related to the economic recovery. Diners Club volume was up 12% year-over-year reflecting a rebound from the impacts of the pandemic. Network Partners volume increased 16% from the prior year primarily reflecting higher AribaPay volume.

Share Repurchase

During the third quarter of 2021, the company repurchased approximately 6.5 million shares of common stock for $815 million. Shares of common stock outstanding declined by 2.1% from the prior quarter.

Conference Call and Webcast Information

The company will host a conference call to discuss its third quarter results on Thursday, October 21, 2021, 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, 2020, "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, 2021 and March 31, 2021 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, 2021			June 30, 2021			September 30, 2020
EARNINGS SUMMARY
Interest Income		$2,674			$2,589			$2,681
Interest Expense		269			290			416
Net Interest Income		2,405			2,299			2,265
Discount/Interchange Revenue		988			937			752
Rewards Cost		689			598			514
Discount and Interchange Revenue, net		299			339			238
Protection Products Revenue		43			43			44
Loan Fee Income		121			105			100
Transaction Processing Revenue		58			58			50
Unrealized Gains/ (Losses) on Equity Investments		(167	)		729			0
Realized Gains/ (Losses) on Equity Investments		0			0			0
Other Income		18			6			17
Total Non-Interest Income		372			1,280			449
Revenue Net of Interest Expense		2,777			3,579			2,714
Provision for Credit Losses		185			135			750
Employee Compensation and Benefits		483			498			471
Marketing and Business Development		210			175			140
Information Processing & Communications		121			145			111
Professional Fees		198			187			151
Premises and Equipment		23			22			26
Other Expense		155			195			106
Total Operating Expense		1,190			1,222			1,005
Income/ (Loss) Before Income Taxes		1,402			2,222			959
Tax Expense		311			524			188
Net Income/ (Loss)		$1,091			$1,698			$771
Net Income/ (Loss) Allocated to Common Stockholders		$1,055			$1,688			$751
PER SHARE STATISTICS
Basic EPS		$3.54			$5.56			$2.45
Diluted EPS		$3.54			$5.55			$2.45
Common Stock Price (period end)		$122.85			$118.29			$57.78
Book Value per share		$45.00			$43.72			$33.45
BALANCE SHEET SUMMARY
Total Assets		$108,544			$110,985			$124,349
Total Liabilities		95,281			97,814			114,097
Total Equity		13,263			13,171			10,252
Total Liabilities and Stockholders' Equity		$108,544			$110,985			$124,349
TOTAL LOAN RECEIVABLES
Ending Loans 1		$89,542			$87,674			$88,660
Average Loans 1		$88,356			$86,296			$88,422
Interest Yield		11.79	%		11.79	%		11.78	%
Gross Principal Charge-off Rate		2.50	%		3.20	%		3.78	%
Net Principal Charge-off Rate		1.46	%		2.12	%		3.00	%
Delinquency Rate (30 or more days)		1.40	%		1.34	%		1.77	%
Delinquency Rate (90 or more days)		0.58	%		0.63	%		0.80	%
Gross Principal Charge-off Dollars		$556			$688			$842
Net Principal Charge-off Dollars		$325			$456			$668
Net Interest and Fee Charge-off Dollars		$72			$101			$141
Loans Delinquent 30 or more days		$1,258			$1,172			$1,567
Loans Delinquent 90 or more days		$522			$550			$708
Allowance for Credit Losses (period end)		$6,861			$7,026			$8,226
Reserve Change Build/(Release) 2, 3		($165	)		($321	)		$42
Reserve Rate		7.66	%		8.01	%		9.28	%
CREDIT CARD LOANS
Ending Loans		$70,320			$68,886			$69,656
Average Loans		$69,416			$67,420			$69,643
Interest Yield		12.53	%		12.52	%		12.40	%
Gross Principal Charge-off Rate		2.83	%		3.69	%		4.33	%
Net Principal Charge-off Rate		1.65	%		2.45	%		3.45	%
Delinquency Rate (30 or more days)		1.48	%		1.43	%		1.91	%
Delinquency Rate (90 or more days)		0.66	%		0.73	%		0.93	%
Gross Principal Charge-off Dollars		$495			$620			$759
Net Principal Charge-off Dollars		$289			$412			$604
Loans Delinquent 30 or more days		$1,040			$983			$1,328
Loans Delinquent 90 or more days		$467			$504			$650
Allowance for Credit Losses (period end)		$5,298			$5,409			$6,491
Reserve Change Build/(Release) 2		($111	)		($231	)		$0
Reserve Rate		7.54	%		7.85	%		9.32	%
Total Discover Card Volume		$50,389			$48,049			$39,783
Discover Card Sales Volume		$47,613			$45,460			$37,134
Rewards Rate		1.44	%		1.31	%		1.38	%
SEGMENT- INCOME/(LOSS) BEFORE INCOME TAXES
Digital Banking		$1,516			$1,530			$917
Payment Services		(114	)		692			42
Total		$1,402			$2,222			$959
NETWORK VOLUME
PULSE Network		$59,872			$62,855			$54,993
Network Partners		10,377			9,468			8,917
Diners Club International 4		6,547			6,126			5,839
Total Payment Services		76,796			78,449			69,749
Discover Network - Proprietary		49,360			47,201			38,699
Total		$126,156			$125,650			$108,448
1 Total Loans includes Home Equity and other loans.
2 Excludes January 1, 2020 CECL day one impact
3 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
4 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/20211020006070/en/

Investors:

Eric Wasserstrom, 224-405-5923

ericwasserstrom@discover.com

Media:

Jon Drummond, 224-405-1888

jondrummond@discover.com

Source: Discover Financial Services

FAQ

What were Discover Financial Services' net income results for Q3 2021?

Discover Financial Services reported a net income of $1.1 billion for Q3 2021.

How much did Discover Financial Services spend on share repurchases in Q3 2021?

The company repurchased approximately 6.5 million shares for $815 million in Q3 2021.

What was the net charge-off rate for Discover Financial Services in Q3 2021?

The net charge-off rate was 1.46% in Q3 2021.

How did total revenue change for Discover Financial Services in Q3 2021 compared to Q3 2020?

Total revenue increased by 2% to $2.777 billion in Q3 2021 compared to Q3 2020.

What was the EPS for Discover Financial Services in Q3 2021?

The diluted EPS for Q3 2021 was $3.54, up 44% from the previous year's $2.45.