Discover Q1 net income down on 2007

Source: Discover Financial Services

Discover Financial Services (NYSE:DFS) today reported net income from continuing operations for the first quarter of 2008 of $239 million, or $.50 per share, as compared to $260 million, or $.54 per share in the first quarter of 2007.

Reported net income of $81 million included a $158 million loss from discontinued operations related to the company's Goldfish business previously reported as the International Card segment.

First Quarter Highlights
  • U.S. Card managed loans grew to $47.5 billion, up 2% from last year driven primarily by a 5% increase in sales volume.
  • Revenue net of interest expense grew 13%, while total other expense increased by 2% over last year.
  • The first quarter U.S. Card managed credit card net charge-off rate was 4.37% and the managed over 30 days delinquency rate was 3.93%, up 51 basis points and 62 basis points, respectively, from last year.
  • Third-Party Payment debit and credit volume was $26.3 billion for the first quarter, 24% above last year.

"Our U.S. Card results this quarter demonstrated strong profitability despite rising credit costs," said David Nelms, chief executive officer of Discover Financial Services. "The net yield on our loan portfolio expanded as lower funding costs largely offset a higher level of provisioning for credit losses, which we attribute primarily to U.S. housing and mortgage issues and a deteriorating economic environment. We had continued solid growth in credit card sales, with appropriate growth in receivables. We also achieved strong performance this quarter in our Third-Party Payments segment, with network volume exceeding $26 billion, an increase of 24% from last year and pretax income up 30%."

Segment Results (Managed Basis):

U.S. Card

The U.S. Card segment produced solid results in the first quarter of 2008 with pretax income of $375 million, down 6% from the first quarter of 2007, as higher provision for loan losses was largely offset by increased net interest income and other income.
  • Provision for loan losses increased 54% due to higher net charge-offs and an increase in the reserve rate, reflecting recent delinquency trends.
  • Managed net interest income increased 11% due to higher interest income partially offset by higher interest expense.
  • Interest income increased due to higher average receivables and an increase in interest yield, as a reduction in low rate balance transfer volume more than offset lower pricing on variable-rate APR accounts.
  • Interest expense increased due to increased borrowings offset by lower funding costs.
  • Other income increased, reflecting a $75 million favorable revaluation of the interest-only strip receivable and higher discount and interchange revenue due to growth in sales.

Sales volume remained strong, increasing 5% from the first quarter of last year. Managed loans grew to $47.5 billion, up 2% from last year, as the company moderated loan growth in response to the current economic environment. Balance transfer volumes were 43% below last year as the company implemented tighter marketing and credit criteria. The weakening economic environment impacted cardmember delinquencies and charge-offs, with a managed credit card over 30 days delinquency rate of 3.93%, up 34 basis points from the fourth quarter of 2007 and 62 basis points from last year. The managed credit card net charge-off rate of 4.37% was up 52 basis points from the fourth quarter of 2007 and 51 basis points from last year, consistent with the company's current expectation for a full year managed net charge-off rate between 4.75% and 5.00%.

Third-Party Payments

The Third-Party Payments segment continued to produce strong growth in transaction volume, up 24% from last year reflecting the impact of financial institution signings in 2007 as well as increased volumes from existing financial institutions. Increased revenues from transaction growth along with controlled expenses led to first quarter pretax income of $16 million, up 30% from the first quarter of 2007. First quarter 2008 results also include higher marketing and pricing incentives as the company invested to grow share, as well as $3 million in revenue related to a one-time contractual payment.

Discontinued Operations

On February 7, 2008, the company announced that it reached an agreement to sell its Goldfish business in the United Kingdom, which previously had been reported as the International Card segment and, as a result, has reclassified the net assets of the business to discontinued operations in the first quarter of 2008, restating prior periods for comparability. The company recorded a loss from discontinued operations of $158 million in the first quarter of 2008. This included a loss from the write-down of net assets to fair value of $172 million and net income from operations of $14 million which included gains from the sale of other assets.

Dividend Declaration

The company declared a cash dividend of $.06 per share, payable on April 22, 2008, to stockholders of record at the close of business on April 3, 2008.

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