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

Rhea-AI Summary

Discover Financial Services (NYSE: DFS) reported a net income of $771 million for Q3 2020, slightly up from $770 million in Q3 2019. Total loans decreased 4% year-over-year, ending at $88.7 billion. Revenue dropped 6% to $2.714 billion. The net charge-off rate slightly improved to 3.00%. Credit card loans fell 6%, while private student loans rose 3%. Total operating expenses decreased by $100 million, primarily from reduced marketing and professional fees.

Positive

• Net income increased by 1%, reaching $771 million.
• Total operating expenses decreased by $100 million, indicating cost management.

Negative

• Total loans decreased by 4% year-over-year.
• Total revenue fell by 6%, indicating a decline in financial performance.
• Credit card loans declined by 6%, signaling reduced borrowing activity.

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