Discover swings to Q1 net loss

Source: Discover Financial Services

Discover Financial Services (NYSE: DFS) today reported a net loss for the first quarter of 2010 of $104 million, as compared to net income of $120 million for the first quarter of 2009.

Results for the first quarter of 2010 included a pre-tax addition to loan loss reserves of $305 million ($185 million after tax), which brings the company's reserve coverage to approximately 12 months of losses. Net income for the first quarter of 2009 included approximately $297 million (after tax) related to the Visa/MasterCard antitrust litigation settlement.

The company has received regulatory approval to redeem the $1.2 billion of preferred stock that it issued to the U.S. Treasury under the TARP Capital Purchase Program. Prior to such redemption, Discover Bank will issue $350 million of tier 2 qualifying capital in the form of subordinated debt. The subordinated debt offering is expected to be completed during the second quarter, subject to market conditions.

First Quarter Highlights

* Discover card sales volume increased 5% from the prior year to $22 billion.
* Loans were approximately $50 billion. The student loan portfolio grew $2 billion from the prior year, while credit card loans decreased $3 billion.
* The first-quarter net charge-off rate was 8.51%, and the over 30 days delinquency rate was 5.05%.
* Expenses were down 15% from the prior year.
* Payment Services segment profit before tax was up 28% to $37 million, and transaction volume was $36 billion, a 2% increase from the prior year.
* Deposit balances originated through direct-to-consumer and affinity relationships were $14.8 billion, an increase of $2.3 billion from the prior quarter.

"Discover's performance this quarter reflects the emergence of a more favorable economic environment, as our Discover card sales volume has now shown four consecutive months of year-over-year growth and delinquency levels have declined," said David Nelms, chairman and chief executive officer of Discover. "We were also pleased with the continued strong growth of our direct-to-consumer deposit business."

"Our reserve addition this quarter is consistent with our conservative balance sheet management approach," Nelms added. "By continuing to strengthen our foundation and invest in the Discover franchise, we believe we are well-positioned to deliver on our strategy of becoming the leader in direct banking and payment services, particularly as the U.S. economy improves."

Read the full statement here.

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