Discover Financial Services (DFS) today reported net income of $673 million or $1.33 per diluted share for the first quarter of 2013, as compared to $650 million or $1.21 per diluted share for the first quarter of 2012. The company's return on equity was 27%.
The results for the quarter ending March 31, 2013 are compared with the results for the quarter ending March 31, 2012, which are presented on a calendar basis due to a change in the company's fiscal year end from November 30 to December 31.
First Quarter Highlights
- Revenue net of interest expense was up $189 million, or 10%, from the prior year to $2.0 billion.
- Total loans grew $3.7 billion, or 7%, from the prior year to $60.4 billion.
- Credit card loans grew $2.4 billion, or 5%, to $48.7 billion and Discover card sales volume increased 4% from the prior year.
- Credit card loan delinquencies over 30 days past due reached a record low of 1.77%. Credit card net charge-off rate increased 5 basis points sequentially to 2.36%.
- Payment Services pretax income was down $1 million, or 2%, from the prior year to $47 million. Transaction dollar volume for the segment was $48.8 billion in the quarter, an increase of 2% from the prior year.
"Discover delivered strong profitability and growth in the first quarter, which combined with our outlook allowed us to increase our dividend by 43%," said David Nelms, chairman and CEO of Discover. "During the quarter, we had a nationwide rollout of Discover IT, our new flagship credit card, and we made progress in growing our suite of direct banking products by introducing Cashback Checking to some of our customers."
Direct Banking pretax income of $1.0 billion in the quarter was up $34 million, or 3%, from the prior year.
Discover card sales volume grew 4% from the prior year to $24.9 billion. Credit card loans ended the quarter at $48.7 billion, up 5% from the prior year.
Total loans ended the quarter at $60.4 billion, up 7% compared to the prior year. Private student loans increased $431 million, or 6%, from the prior year and personal loans increased $578 million, or 21%, from the prior year.
Revenue net of interest expense increased $184 million, up 11% from the prior year due to loan growth, revenue from Discover Home Loans, which was launched in June 2012 after acquiring Home Loan Center assets from Tree.com, and lower funding costs.
Net interest margin was 9.39%, up 30 basis points from the prior year. The increase in net interest margin from the prior year reflects decreased funding costs partially offset by lower loan yield. Credit card yield was 11.94%, a decrease of 27 basis points from the prior year. The decline in credit card yield from the prior year reflects an increase in promotional rate balances and a decline in higher rate balances, partially offset by lower interest charge-offs. Interest expense as a percent of total loans decreased 47 basis points from the prior year as the company continued to take advantage of available low rate funding.
Net interest income increased $118 million, or 9%, from the prior year, benefiting from loan growth and lower interest expense, which was partially offset by a decline in loan yield.
Other income increased $66 million, or 15%, from the prior year primarily due to revenue from Discover Home Loans and higher interchange revenue as a result of increased sales.
The delinquency rate for credit card loans over 30 days past due was 1.77%, an improvement of 33 basis points from the prior year, and a decrease of 2 basis points from the prior quarter. Credit card net charge-off rate for the first quarter was 2.36%, down 56 basis points from the prior year, and up 5 basis points from the prior quarter.
Provision for loan losses of $159 million increased $75 million from the prior year, driven by a lower reserve release partially offset by a decline in charge-offs. The reserve release for the first quarter of 2013 was $154 million reflecting the impact of a 15 basis point decline in the reserve rate from the prior quarter partially offset by additional reserves due to loan growth. The first quarter of 2012 included a reserve release of $274 million. Net principal charge-offs were $45 million lower than the prior year as a result of the continued decline in delinquencies and bankruptcies.
Expenses were up $75 million, or 12%, from the prior year. The increase was primarily due to higher employee compensation and marketing expenses associated with the Home Loan Center acquisition, increased card marketing initiatives and higher headcount.
Payment Services pretax income was $47 million in the quarter, down $1 million, or 2%, from the prior year. Revenue increased $5 million and expenses were up $6 million from the prior year mainly due to higher professional fees and marketing expenses related to new partnership and growth initiatives.
Payment Services dollar volume was $48.8 billion for the first quarter of 2013, up 2% from the prior year. PULSE transaction dollar volume growth slowed to 4% year-over-year due to merchant routing and competitor actions.
In the first quarter of 2013, the company repurchased approximately 6 million shares of common stock for $238 million. Shares of common stock outstanding declined by 1% from the prior quarter.