Discover posts Q2 net income rise

Source: Discover Financial Services

Discover Financial Services (NYSE: DFS) today reported net income for the second quarter of 2008 of $234 million, or $.48 per share, as compared to $209 million, or $.44 per share, in the second quarter of 2007.

Reported results included income from continuing operations of $202 million, or $.42 per share, and $32 million from discontinued operations related to the company's International Card segment.

Second Quarter Highlights

  • Managed loans grew 2% to $47.8 billion; Discover Card sales grew 2% to $22.5 billion.
  • Including non-credit card loans, the second quarter managed net charge-off rate was 4.99% and the managed over 30 days delinquency rate was 3.81%.
  • The Third-Party Payments segment debit and credit volume grew 33% to $29.4 billion.
  • Non-interest expenses decreased 3% from last year.
  • The company completed the sale of the Goldfish business in the United Kingdom.
  • The company agreed to acquire Diners Club International, with an expected closing in July.

"Despite the challenging economy, Discover delivered solid results this quarter," said David Nelms, chief executive officer of Discover Financial Services. "We grew managed loans and revenues within our U.S. Card segment and maintained strong credit quality. We are also very pleased with the performance of our Third-Party Payments segment, which delivered record network volume of $29 billion, an increase of 33% from last year. With the pending acquisition and integration of Diners Club International, we expect to significantly improve our competitive position in this segment through global reach and by accelerating growth in our payments network revenues."

Segment Results (Managed Basis):

U.S. Card

Managed loans grew to $47.8 billion, up 2% from last year, as the company remained diligent in maintaining strong credit quality and improving net interest margin in the current environment. Balance transfer volume was reduced by 32% from last year, and sales volume grew at a slower pace, increasing 2%.

Beginning this quarter, the company is reporting its portfolio statistics, including managed loans, interest yield, charge-offs and delinquencies, on a segment basis to reflect the inclusion of non-card loan products in all measures. The segment managed over 30 days delinquency rate of 3.81% was down seasonally from the first quarter of 2008, and up 84 basis points from last year. The managed credit card over 30 days delinquency rate was 3.85%, down 8 basis points from last quarter and up 88 basis points from last year. The segment managed net charge-off rate increased to 4.99% for the second quarter of 2008, up 102 basis points from last year, while the managed credit card net charge-off rate increased to 5.05%, reflecting continued deterioration in the economic environment.

U.S. Card pretax income was $309 million in the second quarter of 2008, down 20% from the second quarter of 2007, as revenues net of interest expense increased 3% to $1.5 billion, provision for loan losses increased 31% to $582 million, and non-interest expenses declined 3% to $586 million.

• Managed net interest income increased $114 million, or 13%, reflecting widening net interest margins benefiting from lower cost of funds and a reduction in, and higher rates on, promotional balances.
• Other income decreased $71 million, or 14%, reflecting:

  • A $44 million unfavorable revaluation of the company's retained interests in securitizations as compared to a $36 million favorable revaluation in the second quarter of 2007;
  • The previously announced $31 million write-down of an investment in the asset-backed commercial paper notes of Golden Key U.S. LLC, which had invested in U.S. mortgage-backed securities; and
  • A $47 million increase in discount and interchange revenue related to increased sales volumes as well as lower rewards costs related to revised forfeiture assumptions.

• Provision for loan losses increased 31% due to higher net charge-offs reflecting recent credit trends. The loan loss reserve rate increased to 4.28% in the quarter; however, the allowance for loan losses declined by $14 million from last quarter due to a lower level of on-balance sheet loans as a result of securitization activity.
• Expenses declined $16 million, or 3%, principally due to lower professional fees related to lower legal and consulting costs.

Third-Party Payments

The Third-Party Payments segment produced record transaction volume of $29.4 billion, up 33% from last year, reflecting the impact of new issuer signings in 2007 as well as increased volumes from existing issuers. Pretax income of $17 million was up 110% from the second quarter of 2007 as revenues increased 26% to $38 million, while expenses fell 4% to $21 million.

  • Other income increased $8 million, or 27%, reflecting increased volumes and fee revenues.
  • Expenses decreased $1 million, or 4%, reflecting lower transaction processing and consulting costs.

Discontinued Operations

On March 31, 2008, the company completed the sale of its Goldfish business in the United Kingdom to Barclays Bank PLC. In the second quarter of 2008, the company recognized income from discontinued operations, net of tax, of $32 million.

Dividend Declaration/Stock Repurchase Program

The company declared a cash dividend of $.06 per share, payable on July 22, 2008, to stockholders of record at the close of business on July 1, 2008. No stock repurchases were conducted under the stock repurchase program during the second quarter.

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