Discover Financial Services (DFS) today reported net income of $616 million or $1.47 per diluted share for the second quarter of 2016, as compared to $599 million or $1.33 per diluted share for the second quarter of 2015.
Net income included a non-recurring tax benefit of $44 million which contributed $0.11 to diluted earnings per share.
Second Quarter Highlights
- Total loans grew $2.9 billion, or 4%, from the prior year to $71.9 billion.
- Credit card loans grew $2.3 billion, or 4%, to $57.2 billion and Discover card sales volume increased 2% from the prior year.
- Total net charge-off rate excluding PCI loans increased 11 basis points from the prior year to 2.27% and the total delinquency rate over 30 days past due excluding PCI loans increased 11 basis points from the prior year to 1.60%.
- Direct to consumer and affinity deposits grew $4.6 billion, or 16%, from the prior year to $34.1 billion.
- Payment Services transaction dollar volume for the segment was $44.8 billion, down 6% from the prior year.
- Income tax expense includes a one-time benefit of $44 million related to the resolution of certain tax matters.
“During the second quarter, we achieved loan growth within our target range and delivered strong profitability,” said David Nelms, chairman and CEO of Discover. “We also announced plans to increase our dividend and share repurchases, which we expect will result in one of the highest total yields among CCAR banks over the next four quarters.”
Direct Banking pretax income of $868 million in the quarter decreased $46 million from the prior year as higher net interest income and lower operating expenses were offset by higher provision for loan losses and lower other income.
Total loans ended the quarter at $71.9 billion, up 4% compared to the prior year. Credit card loans ended the quarter at $57.2 billion, up 4% from the prior year. Personal loans increased $525 million, or 10%, from the prior year. Relative to the prior year, private student loans increased $205 million, or 2%, and grew $752 million, or 15%, excluding purchased student loans.
Net interest income increased $115 million, or 7%, from the prior year, driven by loan growth and higher net interest margin. Net interest margin was 9.95%, up 32 basis points from the prior year. Card yield was 12.42%, an increase of 38 basis points from the prior year due to portfolio mix and the prime rate increase. Interest expense as a percent of total loans increased 9 basis points from the prior year primarily due to higher market rates and funding mix.
Other income decreased $72 million, or 15%, from the prior year driven primarily by increased promotional rewards and the lack of mortgage origination revenue, as the prior year included $28 million in income related to the now discontinued mortgage operation. In addition, protection products revenue was lower by $9 million.
The delinquency rate for credit card loans over 30 days past due was 1.63%, up 8 basis points from the prior year and down 5 basis points from the prior quarter. Credit card net charge-off rate for the second quarter was 2.39%, up 11 basis points from the prior year and 5 basis points from the prior quarter. The personal loans net charge-off rate of 2.38% increased by 28 basis points from the prior year. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 1.10%, up 8 basis points from the prior year.
Provision for loan losses of $411 million increased $105 million from the prior year primarily due to a reserve build. The reserve build for the second quarter of 2016 was $27 million, driven primarily by loan growth, while the second quarter of 2015 included a $41 million reserve release.
Expenses decreased $16 million, or 2%, from the prior year mostly driven by the closure of the mortgage origination business, partially offset by higher regulatory and compliance costs. The prior year included $62 million in expenses related to the mortgage origination business that was subsequently closed. Employee compensation increased mostly due to higher staffing levels driven in part by regulatory and compliance activities as well as higher salaries. Professional fees were slightly lower than the prior year, primarily due to a $7 million decrease in look back related anti-money laundering remediation expenses to $12 million.
Payment Services pretax income was $30 million in the quarter, up $2 million from the prior year as lower revenues were more than offset by expense reductions.
Payment Services transaction dollar volume was $44.8 billion, down 6% from the prior year. PULSE transaction dollar volume was down 9% year-over-year due to the loss of volume from a large debit issuer. Diners Club International volume was up $0.4 billion, or 6%, from the prior year driven by growth in Asia.
During the second quarter of 2016, the company repurchased approximately 7.8 million shares of common stock for $425 million. Shares of common stock outstanding declined by 1.9% from the prior quarter.