Discover Financial Services : Reports First Quarter Net Income of $586 Million or $1.28 Per Diluted Share

Discover Financial Services (NYSE: DFS) today reported net income of $586 million or $1.28 per diluted share for the first quarter of 2015, as compared to $631 million or $1.31 per diluted share for the first quarter of 2014. The company's return on equity for the first quarter of 2015 was 21%.

First Quarter Highlights

• Total loans grew $3.8 billion, or 5.9%, from the prior year to $67.6 billion.
• Credit card loans grew $2.6 billion, or 5.1%, to $53.5 billion and Discover card sales volume increased 2.7% from the prior year.
• Net charge-off rate for credit card loans increased 8 basis points from the prior year to 2.40% and the delinquency rate for loans over 30 days past due decreased 8 basis points to 1.64%.
• Payment Services transaction dollar volume for the segment was $50.2 billion, down 1% from the prior year.

"We achieved solid loan growth and recently launched our new Discover it Miles card leveraging our strengths in rewards and service," said David Nelms, chairman and CEO of Discover. "We continue to generate a strong return on equity and announced plans to increase share repurchases and dividends."

Segment Results:

Direct Banking

Direct Banking pretax income of $881 million in the quarter was down $113 million, or 11%, driven primarily by higher provisioning for loan losses due to growth.

Total loans ended the quarter at $67.6 billion, up 6.0% compared to the prior year. Credit card loans ended the quarter at $53.5 billion, up 5.1% from the prior year. Personal loans increased $755 million, or 17.5%, from the prior year and private student loans increased $324 million, or 3.9%, from the prior year. Excluding purchased student loans, private student loans grew $851 million, or 19.7%, from the prior year.

Revenue net of interest expense increased $98 million, up 5% from the prior year.

Net interest income increased $66 million, or 4%, from the prior year, benefiting from loan growth partially offset by margin compression. Net interest margin was 9.70%, down 18 basis points from the prior year primarily due to a decline in card yield and an increase in funding costs. Credit card yield was 12.05%, a decrease of 9 basis points from the prior year due to portfolio mix. Interest expense as a percent of total loans increased 8 basis points from the prior year as the company continues to extend funding duration.

Other income increased $32 million, or 7%, from the prior year as higher direct mortgage related income and interchange revenue were partially offset by lower protection products revenue.

The delinquency rate for credit card loans over 30 days past due was 1.64%, down 8 basis points from the prior year and down 9 basis points from the prior quarter. Credit card net charge-off rate for the first quarter was 2.40%, up 8 basis points from the prior year and up 14 basis points from the prior quarter. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 1.03%, down 28 basis points from the prior year. The personal loans net charge-off rate of 2.22% increased by 15 basis points from the prior year.

Provision for loan losses of $388 million increased $118 million from the prior year. Net charge-offs increased $31 million due primarily to several years of consistent loan growth. The reserve build for the first quarter of 2015 was $28 million due mainly to seasoning of loan growth, versus a $59 million reserve release in the prior year.

Expenses increased $93 million, or 13%, from the prior year. Professional fees increased in part due to costs associated with anti-money laundering and related compliance program enhancements. Employee compensation and marketing also contributed to the increase in expenses, as well as higher legal reserves.

Payment Services

Payment Services pretax income was $27 million in the quarter, down $1 million from the prior year. Payment Services dollar volume was $50.2 billion, down 1% from the prior year. PULSE transaction dollar volume was down 3% year-over-year. Network Partners volume was up $568 million, or 24% from the prior year as AribaPay volume more than offset the previously communicated loss of volume from a third party payments partner.

Share Repurchases

During the first quarter of 2015, the company repurchased approximately 6 million shares of common stock for $360 million. Shares of common stock outstanding declined by 1% from the prior quarter.

Conference Call and Webcast Information

The company will host a conference call to discuss its first quarter results on Tuesday, April 21, 2015, at 4:00 p.m. Central time. Interested parties can listen to the conference call via a live audio webcast at http://investorrelations.discoverfinancial.com.

About Discover

Discover Financial Services (NYSE: DFS) is a direct banking and payment services company with one of the most recognized brands in U.S. financial services. Since its inception in 1986, the company has become one of the largest card issuers in the United States. The company issues the Discover card, America's cash rewards pioneer, and offers private student loans, personal loans, home loans, checking and savings accounts, certificates of deposit and money market accounts through its direct banking business. It operates the Discover Network, with millions of merchant and cash access locations; PULSE, one of the nation's leading ATM/debit networks; and Diners Club International, a global payments network with acceptance in more than 185 countries and territories. For more information, visit www.discover.com/company.

A financial summary follows. Financial, statistical, and business related information, as well as information regarding business and segment trends, is included in the financial supplement filed as Exhibit 99.2 to the company's Current Report on Form 8-K filed today with the Securities and Exchange Commission (“SEC”). Both the earnings release and the financial supplement are available online at the SEC's website (http://www.sec.gov) and the company's website (http://investorrelations.discoverfinancial.com).

This press release contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Such statements, which speak to our expected business and financial performance, among other matters, contain words such as “believe,” “expect,” “anticipate,” “intend,” “plan,” “aim,” “will,” “may,” “should,” “could,” “would,” “likely,” and similar expressions. Such statements are based upon the current beliefs and expectations of the company's management and are subject to significant risks and uncertainties. Actual results may differ materially from those set forth in the forward-looking statements. These forward-looking statements speak only as of the date of this press release, and there is no undertaking to update or revise them as more information becomes available.

The following factors, among others, could cause actual results to differ materially from those set forth in the forward-looking statements: changes in economic variables, such as the availability of consumer credit, the housing market, energy costs, the number and size of personal bankruptcy filings, the rate of unemployment, the levels of consumer confidence and consumer debt, and investor sentiment; the impact of current, pending and future legislation, regulation, supervisory guidance, and regulatory and legal actions, including, but not limited to, those related to financial regulatory reform, consumer financial services practices, anti-corruption, and funding, capital and liquidity; the actions and initiatives of current and potential competitors; the company's ability to manage its expenses; the company's ability to successfully achieve card acceptance across its networks and maintain relationships with network participants; the company's ability to sustain and grow its private student loan portfolio and mortgage loan products; losses as a result of mortgage loan repurchase and indemnification obligations to secondary market purchasers; difficulty obtaining regulatory approval for, financing, closing, transitioning, integrating or managing the expenses of acquisitions of or investments in new businesses, products or technologies; the company's ability to manage its credit risk, market risk, liquidity risk, operational risk, compliance and legal risk, and strategic risk; the availability and cost of funding and capital; access to deposit, securitization, equity, debt and credit markets; the impact of rating agency actions; the level and volatility of equity prices, commodity prices and interest rates, currency values, investments, other market fluctuations and other market indices; losses in the company's investment portfolio; limits on the company's ability to pay dividends and repurchase its common stock; limits on the company's ability to receive payments from its subsidiaries; fraudulent activities or material security breaches of key systems; the company's ability to remain organizationally effective; the company's ability to increase or sustain Discover card usage or attract new customers; the company's ability to maintain relationships with merchants; the effect of political, economic and market conditions, geopolitical events and unforeseen or catastrophic events; the company's ability to introduce new products or services; the company's ability to manage its relationships with third-party vendors; the company's ability to maintain current technology and integrate new and acquired systems; the company's ability to collect amounts for disputed transactions from merchants and merchant acquirers; the company's ability to attract and retain employees; the company's ability to protect its reputation and its intellectual property; and new lawsuits, investigations or similar matters or unanticipated developments related to current matters. The company routinely evaluates and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or the company's debt or equity securities.

Additional factors that could cause the company's results to differ materially from those described in the forward-looking statements can be found under “Risk Factors,” “Business - Competition,” “Business - Supervision and Regulation” and “Management's Discussion and Analysis of Financial Condition and Results of Operations” in the company's Annual Report on Form 10-K for the year ended December 31, 2014 which is filed with the SEC and available at the SEC's internet site (http://www.sec.gov).

¹ Total Loans includes mortgages and other loans.

² Purchased Credit Impaired ("PCI") loans are loans that were acquired in which a deterioration in credit quality occurred between the origination date and the acquisition date. These loans were initially recorded at fair value and accrete interest income over the estimated lives of the loans as long as cash flows are reasonably estimable, even if the loans are contractually past due. PCI loans are private student loans and are included in total loan receivables.

³ Excludes PCI loans (described above) which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because the company is recognizing interest income on a pool of loans, it is all considered to be performing.

⁴ During the first quarter of 2015, a payment processing change was implemented which had the effect of contributing favorably to the delinquencies of certain accounts. These changes partially contributed to the decline in the delinquency rate.

⁵ Volume is derived from data provided by licensees for Diners Club branded cards issued outside of North America and is subject to subsequent revision or amendment.

Note: See Glossary for definitions of financial terms in the financial supplement which is available online at the SEC's website (http://www.sec.gov) and the company's website (http://investorrelations.discoverfinancial.com).