First Quarter Highlights

Total loans grew $3.8 billion, or 5.9%, from the prior year to $67.6 billion.
Credit card loans grew $2.6 billion, or 5.1%, to $53.5 billion and Discover card sales volume increased 2.7% from the prior year.
Net charge-off rate for credit card loans increased 8 basis points from the prior year to 2.40% and the delinquency rate for loans over 30 days past due decreased 8 basis points to 1.64%.
Payment Services transaction dollar volume for the segment was $50.2 billion, down 1% from the prior year.

"We achieved solid loan growth and recently launched our new Discover it Miles card leveraging our strengths in rewards and service," said David Nelms, chairman and CEO of Discover. "We continue to generate a strong return on equity and announced plans to increase share repurchases and dividends."

Segment Results:

Direct Banking

Direct Banking pretax income of $881 million in the quarter was down $113 million, or 11%, driven primarily by higher provisioning for loan losses due to growth.

Total loans ended the quarter at $67.6 billion, up 6.0% compared to the prior year. Credit card loans ended the quarter at $53.5 billion, up 5.1% from the prior year. Personal loans increased $755 million, or 17.5%, from the prior year and private student loans increased $324 million, or 3.9%, from the prior year. Excluding purchased student loans, private student loans grew $851 million, or 19.7%, from the prior year.

Revenue net of interest expense increased $98 million, up 5% from the prior year.

Net interest income increased $66 million, or 4%, from the prior year, benefiting from loan growth partially offset by margin compression. Net interest margin was 9.70%, down 18 basis points from the prior year primarily due to a decline in card yield and an increase in funding costs. Credit card yield was 12.05%, a decrease of 9 basis points from the prior year due to portfolio mix. Interest expense as a percent of total loans increased 8 basis points from the prior year as the company continues to extend funding duration.

Other income increased $32 million, or 7%, from the prior year as higher direct mortgage related income and interchange revenue were partially offset by lower protection products revenue.

The delinquency rate for credit card loans over 30 days past due was 1.64%, down 8 basis points from the prior year and down 9 basis points from the prior quarter. Credit card net charge-off rate for the first quarter was 2.40%, up 8 basis points from the prior year and up 14 basis points from the prior quarter. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 1.03%, down 28 basis points from the prior year. The personal loans net charge-off rate of 2.22% increased by 15 basis points from the prior year.

Provision for loan losses of $388 million increased $118 million from the prior year. Net charge-offs increased $31 million due primarily to several years of consistent loan growth. The reserve build for the first quarter of 2015 was $28 million due mainly to seasoning of loan growth, versus a $59 million reserve release in the prior year.

Expenses increased $93 million, or 13%, from the prior year. Professional fees increased in part due to costs associated with anti-money laundering and related compliance program enhancements. Employee compensation and marketing also contributed to the increase in expenses, as well as higher legal reserves.

Payment Services

Payment Services pretax income was $27 million in the quarter, down $1 million from the prior year. Payment Services dollar volume was $50.2 billion, down 1% from the prior year. PULSE transaction dollar volume was down 3% year-over-year. Network Partners volume was up $568 million, or 24% from the prior year as AribaPay volume more than offset the previously communicated loss of volume from a third party payments partner.

Share Repurchases

During the first quarter of 2015, the company repurchased approximately 6 million shares of common stock for $360 million. Shares of common stock outstanding declined by 1% from the prior quarter.