Discover Q1 net income slides 6%

First Quarter Highlights

• Revenue net of interest expense was up $86 million, or 4%, from the prior year to $2.1 billion.
• Total loans grew $3.5 billion, or 6%, from the prior year to $63.9 billion.
• Credit card loans grew $2.2 billion, or 5%, to $50.9 billion and Discover card sales volume increased 3% from the prior year.
• Net charge-off rate for credit card loans decreased 4 basis points from the prior year to 2.32% and the delinquency rate for loans over 30 days past due decreased 5 basis points to 1.72%.
• Payment Services pretax income was down $19 million from the prior year to $28 million. Transaction dollar volume for the segment was $50.8 billion, up 4% from the prior year.

"Our results this quarter reflect a solid start for 2014 as we delivered strong card loan growth that was near the top of our targeted range while maintaining excellent credit performance and continuing to grow other lending products as well," said David Nelms, chairman and CEO of Discover. "Additionally, we are increasing our return of capital to shareholders through the recently announced dividend actions and the continuation of share buybacks following our inaugural CCAR stress test."

Segment Results:

Direct Banking

Direct Banking pretax income of $994 million in the quarter was down $39 million, or 4%, from the prior year.

Total loans ended the quarter at $63.8 billion, up 6% compared to the prior year. Credit card loans ended the quarter at $50.9 billion, up 5% from the prior year. Personal loans increased $915 million, or 27%, from the prior year and private student loans increased $385 million, or 5%, from the prior year. Excluding purchased student loans, private student loans grew $900 million, or 26%, from the prior year.

Revenue net of interest expense increased $94 million, up 5% from the prior year due to loan growth and net interest margin expansion.

Net interest income increased $153 million, or 11%, from the prior year, benefiting from loan growth, lower interest expense and higher loan yield. Net interest margin was 9.88%, up 49 basis points from the prior year. The increase in net interest margin reflects decreased funding costs and higher loan yield. Credit card yield was 12.14%, an increase of 20 basis points from the prior year. The increase in credit card yield reflects a modestly higher portion of customers revolving balances and lower interest charge-offs. Interest expense as a percent of total loans decreased 28 basis points from the prior year as the company continued to take advantage of available low rate funding.

Other income decreased $59 million, or 12%, from the prior year due to lower direct mortgage related income and higher rewards costs. The increase in rewards was primarily related to a decrease in the rewards forfeiture rate as well as higher standard and promotional rewards.

The delinquency rate for credit card loans over 30 days past due was 1.72%, an improvement of 5 basis points from the prior year and flat compared to the prior quarter. Credit card net charge-off rate for the first quarter was 2.32%, down 4 basis points from the prior year and up 23 basis points from the prior quarter. The student loan net charge-off rate excluding PCI loans was 1.31%, up 49 basis points from the prior year due to a larger portion of the portfolio entering repayment. The personal loans net charge-off rate of 2.07% decreased by 23 basis points from the prior year due primarily to strong growth.

Provision for loan losses of $270 million increased $111 million from the prior year primarily due to a smaller reserve release. The reserve release for the first quarter of 2014 was $59 million. The first quarter of 2013 included a reserve release of $154 million.

Expenses increased $22 million, or 3%, from the prior year primarily due to increased headcount, higher information processing expense and higher other expense, partially offset by lower professional fees.

Payment Services

Payment Services pretax income was $28 million in the quarter, down $19 million from the prior year. Revenue decreased $8 million from the prior year primarily due to lower transaction processing margins at PULSE. Expenses increased $9 million from the prior year primarily due to ongoing Diners Club costs in Europe.

Payment Services dollar volume was $50.8 billion for the first quarter of 2014, up 4% from the prior year. PULSE transaction dollar volume was up 5% year-over-year.

Share Repurchases

During the first quarter of 2014, the company repurchased approximately 5.5 million shares of common stock for $305 million. Shares of common stock outstanding declined by 1% from the prior quarter.

Full figures are available here.