Discover net income drops in Q4

Source: Discover Financial Services

Discover Financial Services (NYSE: DFS) today reported net income of $404 million or $0.87 per diluted share for the fourth quarter of 2014, as compared to $602 million or $1.23 per diluted share for the fourth quarter of 2013.

Excluding non-recurring items, fourth quarter 2014 adjusted net income was $553 million, or $1.19 of adjusted diluted earnings per share.1

“Management's Discussion and Analysis of Financial Condition and Results of Operations”

Fourth Quarter Highlights

  • Total loans grew $4.2 billion, or 6.4%, from the prior year to $70.0 billion.
  • Credit card loans grew $3.0 billion, or 5.6%, to $56.1 billion and Discover card sales volume increased 4.5% from the prior year.
  • Net charge-off rate for credit card loans increased 17 basis points from the prior year to 2.26% and the delinquency rate for loans over 30 days past due increased 1 basis point to 1.73%.
  • Payment Services transaction dollar volume for the segment was $51.0 billion, up 2% from the prior year.
  • Fourth quarter results included $226 million of non-recurring items.1

"We delivered solid performance this quarter," said David Nelms, chairman and CEO of Discover. "For the full year our business model and continued focus on the customer drove receivables growth of 6% and a return on equity of over 20%."

Segment Results:

Direct Banking

Direct Banking pretax income of $646 million in the quarter was down $265 million, or 29%, from the prior year. The decrease in pretax income was primarily driven by the previously announced $178 million one-time charge related to the elimination of the credit card rewards forfeiture reserve as well as a $27 million impairment of the goodwill that was realized with the acquisition of the Discover Home Loans platform.

Total loans ended the quarter at $69.9 billion, up 6.5% compared to the prior year. Credit card loans ended the quarter at $56.1 billion, up 5.6% from the prior year. Personal loans increased $816 million, or 19.5%, from the prior year surpassing $5 billion i up 6.5% compared to the prior year. Credit card loans ended the quarter at $56.1 billion, up 5.6% from the prior year. Personal loans increased $816 million, or 19.5%, from the prior year surpassing $5 billion in ending loans. Private student loans increased $362 million, or 4.4%, from the prior year. Excluding purchased student loans, private student loans grew $880 million, or 22.2%, from the prior year.

Revenue net of interest expense decreased $86 million, down 4% from the prior year as the charge related to the elimination of the credit card rewards forfeiture reserve more than offset higher net interest income.

Net interest income increased $103 million, or 7%, from the prior year, due to loan growth. Net interest margin was 9.77%, down 5 basis points from the prior year. The decrease in net interest margin primarily reflects increased funding costs as the company continues to extend funding duration. Interest expense as a percent of total loans increased 5 basis points from the prior year. Credit card yield was 12.08%, unchanged from the prior year.

The delinquency rate for credit card loans over 30 days past due was 1.73%, up 1 basis point from the prior year and up 2 basis points compared to the prior quarter. Credit card net charge-off rate for the fourth quarter was 2.26%, up 17 basis points from the prior year and up 10 basis points from the prior quarter. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 1.40%, down 1 basis point from the prior year. The personal loans net charge-off rate of 2.20% increased by 20 basis points from the prior year.

Provision for loan losses of $454 million increased $102 million from the prior year. Net charge-offs increased $50 million due to several years of consistent loan growth and declining recovery dollars on aged charge-offs. The reserve build for the fourth quarter of 2014 was $101 million, $52 million higher than the prior year due mainly to seasoning of loan growth.

Expenses increased $77 million, or 10%, from the prior year due to the impairment of goodwill related to the home loans platform, as well as increased marketing spend, professional fees related to technology investments and employee compensation including higher headcount.

Payment Services

Payment Services pretax income was $2 million in the quarter, down $24 million from the prior year primarily due to a $21 million fair value adjustment resulting from classifying Diners Club Italy as held-for-sale.

Payment Services dollar volume was $51.0 billion for the fourth quarter of 2014, up 2% from the prior year. PULSE transaction dollar volume was up 4% year-over-year. Network Partners volume was down $350 million, or 13% from the prior year due to the previously communicated loss of volume from a third party payments partner which was partially offset by AribaPay volume.

Share Repurchases

During the fourth quarter of 2014, the company repurchased approximately 6 million shares of common stock for $400 million. Shares of common stock outstanding declined by 1% from the prior quarter.

Full figures available here.

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