Discover Financial Services (NYSE:DFS) today reported net income for the third quarter of 2008 of $180 million, or $.37 per share, as compared to $202 million, or $.42 per share, in the third quarter of 2007.
Income from continuing operations was $179 million, or $.37 per share, as compared to $244 million, or $.51 per share, in the third quarter of 2007.
Third Quarter Highlights
- Managed loans grew 6% from last year to $50 billion; Discover Card sales grew 5% to $25 billion.
- Revenue net of interest expense increased 8% from last year, 14% on a managed basis, while expenses decreased 2%.
- The third-quarter managed net charge-off rate was 5.20% and the managed over 30 days delinquency rate was 3.85%.
- The company added reserves in excess of charge-offs of $113 million.
- The Third-Party Payments segment volume grew 48% to $35 billion, including $5 billion of Diners Club International volume. The company completed its acquisition of Diners Club International on June 30, 2008.
"While the consumer credit environment and funding costs continue to be challenging, Discover's results demonstrate the underlying quality of our customer base and reflect our disciplined loan underwriting process and multi-channel funding strategy," said David Nelms, chief executive officer of Discover Financial Services. "Card sales volume and receivables grew this quarter as our cardmembers took advantage of the value provided by our various Discover products and programs." Nelms added, "The acquisition of Diners Club International, completed this quarter, has quickly added to the already strong results of our Third-Party Payments segment."
Segment Results (Managed Basis):
Managed loans grew to $50 billion, up 6% from last year, reflecting growth in both credit card and installment loan receivables. Total Discover Card volume was up 5% year over year, driven by a 5% increase in sales volume, as well as an 11% increase in balance transfer volume.
The managed over 30 days delinquency rate of 3.85% was up 4 basis points from the second quarter of 2008, and 69 basis points from last year. The managed net charge-off rate increased to 5.20% for the third quarter of 2008, up 21 and 154 basis points, respectively, from last quarter and last year.
Pretax income was $245 million in the third quarter of 2008, down 36% from the third quarter of 2007.
- Managed net interest income increased $180 million, or 19%, an improvement of 116 basis points, reflecting widening net interest margins benefiting from lower cost of funds and amortization of balance transfer fees previously included in loan fee revenue.
- Provision for loan losses increased $336 million, or 80%, due to higher net charge-offs and a $113 million charge to increase loan loss reserves related to owned loan growth in the quarter, as well as a higher reserve rate.
- Expenses decreased $20 million, or 3%.
The Third-Party Payments segment produced strong transaction volume of $35 billion, up 48% from last year, reflecting the impact of new issuers, increased volumes from existing issuers and the addition of July and August Diners Club International volume of $5 billion. Diners Club International volume is derived from data provided by licensees and is subject to subsequent revision or amendment.
Pretax income of $29 million was up $19 million from the third quarter of 2007. Diners Club International contributed $7 million to the segment's pretax income.
- Revenue increased $25 million, or 84%, due to increased volumes and fee revenues, as well as a $12 million contribution from Diners Club International.
- Expenses increased $6 million, or 30%, including $5 million in Diners Club International expenses.
Discontinued operations represent the company's Goldfish business in the United Kingdom which was sold to Barclays Bank PLC on March 31, 2008. In the third quarter of 2008, the company recognized income from discontinued operations, net of tax, of $1 million versus a loss of $42 million in the third quarter of 2007.
Balance Sheet and Liquidity
The company increased cash liquidity by $1.2 billion since May 2008 to $9.6 billion. Funding growth during the quarter was achieved principally through our deposit channels as deposit balances grew $2 billion in the quarter, including $1 billion in growth from the direct to consumer channel.
Tangible equity was $5.5 billion at August 31, 2008, or 11.2% of net managed receivables.
Dividend Declaration/Stock Repurchase Program
On September 16, 2008, the company declared a cash dividend of $.06 per share, payable on Oct. 22, 2008, to stockholders of record at the close of business on Oct. 1, 2008. No stock repurchases were conducted under the stock repurchase program during the third quarter.
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