Discover Financial Services today reported net income of $513 million for the fourth quarter of 2011, as compared to $350 million for the fourth quarter of 2010.
Fourth Quarter Highlights
- Total loans grew 17% from the prior year to a record $57.3 billion. The company purchased an additional $2.4 billion in private student loans in the fourth quarter.
- Credit card loans grew 3% from the prior year and Discover card sales volume was up 8%.
- The delinquency rate for credit card loans over 30 days past due continued to improve, declining to 2.39%. The credit card net charge-off rate declined to 3.24%.
- Payment Services pretax income was up 35% from the prior year to $42 million. Transaction volume for the segment was $43.3 billion in the quarter, an increase of 7% from the prior year.
"We are pleased to report another quarter of very strong performance as we generated organic growth in all loan products, had continued improvement in credit and demonstrated solid expense control," said David Nelms, chairman and chief executive officer of Discover. "Our fourth quarter results, together with our already strong capital levels, allowed us to increase our dividend and execute on our share repurchase program."
Nelms added, "Our results this quarter cap a year of outstanding performance, with all-time record net income of $2.2 billion and a 30% return on equity for the full year. We achieved record volume of over $280 billion across all of our networks. We further enhanced our competitive position in private student loans by completing two successful and earnings accretive acquisitions."
Direct Banking pretax income of $776 million in the quarter was up $222 million, or 40%, from the prior year.
Discover card sales volume grew 8% from the prior year to $25.0 billion. The increase was driven by growth in spending from both new and existing customers. Credit card loans increased, ending the quarter at $46.6 billion, up $1.5 billion or 3% from the prior year.
Total loans ended the quarter at $57.3 billion, up $8.5 billion, or 17%, compared to the prior year. Private student loans increased $6.3 billion, including the acquisition of $3.1 billion in loans in the first quarter of 2011, and an additional $2.4 billion in the fourth quarter of 2011. Personal loans increased $770 million from the prior year.
Net interest margin was 9.10%, down 18 basis points from the prior year and 16 basis points from the prior quarter. The decrease in net interest margin in both periods reflects the acquisitions of student loans which have lower yields as well as a decline in credit card yield, partially offset by lower funding costs. Credit card yield was 12.36%, a decrease of 32 basis points from the prior year and 10 basis points from the prior quarter. The decline in credit card yield reflects the impacts of the CARD Act, an increase in promotional rate balances and an increase in customers who pay their balance in full, partially offset by lower interest charge-offs. Interest expense as a percent of total loans decreased 50 basis points from the prior year and 11 basis points from the prior quarter as the company continued to take advantage of available low rate funding.
Net interest income increased $136 million, or 12%, from the prior year, primarily driven by an increase in loan balances related to the student loan acquisitions, an increase in personal loans and lower interest expense. Interest income on credit card loans was relatively flat compared to the prior year as a decline in yield was offset by an increase in loan balances.
The delinquency rate for credit card loans over 30 days past due was 2.39%, an improvement of 167 basis points from the prior year, and 4 basis points from the prior quarter. The credit card net charge-off rate decreased to 3.24% for the fourth quarter of 2011, down 371 basis points from the prior year and 61 basis points from the prior quarter.
Provision for loan losses of $319 million decreased $64 million, or 17%, from the prior year, driven by lower charge-offs, partially offset by a lower reserve release. Principal charge-offs decreased $410 million from the prior year as a result of the continued decline in delinquencies in 2011. The reserve release for the fourth quarter of 2011 was $68 million, versus a release of $414 million in the fourth quarter of 2010.
Other income increased $66 million, or 16%, from the prior year. The fourth quarter of 2010 included a $28 million charge related to federal student loans classified as held for sale. Discount and interchange revenue increased from the prior year reflecting higher sales volume. Late fees increased, reflecting a decline in late fee charge-offs.
Expenses were up $44 million, or 7%, from the prior year, reflecting increased compensation costs, expenses related to The Student Loan Corporation and investments in growth initiatives.
Payment Services pretax income of $42 million in the quarter was up $11 million, or 35%, from the prior year. Revenue increased $8 million, primarily driven by an increase in transactions on the PULSE network and higher margins. Expenses decreased $3 million, reflecting lower marketing costs related to timing of programs.
Payment Services dollar volume was $43.3 billion for the fourth quarter, up 7% from the prior year, driven by higher PULSE, Diners Club International and third-party issuer volume.
The company's board declared a cash dividend of $0.10 per share of common stock, payable on Jan. 19, 2012, to stockholders of record at the close of business on Dec. 29, 2011.
The company repurchased 9.6 million shares in the fourth quarter for $227 million, bringing the total shares repurchased for the program to 18.0 million or $425 million.