Form 8-K Discover Financial Servi For: Apr 19
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 8-K
Current Report
Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
Date of Report (Date of earliest event reported): April 19, 2016
DISCOVER FINANCIAL SERVICES
(Exact name of registrant as specified in its charter)
Commission File Number: 001-33378
Delaware | 36-2517428 | |
(State or other jurisdiction of incorporation) | (IRS Employer Identification No.) |
2500 Lake Cook Road, Riverwoods, Illinois 60015
(Address of principal executive offices, including zip code)
(224) 405-0900
(Registrant's telephone number, including area code)
N/A
(Former name or former address, if changed since last report)
Check the appropriate box below if the Form 8-K filing is intended to simultaneously satisfy the filing obligation of the registrant under any of the following provisions:
o | Written communications pursuant to Rule 425 under the Securities Act (17 CFR 230.425) |
o | Soliciting material pursuant to Rule 14a-12 under the Exchange Act (17 CFR 240.14a-12) |
o | Pre-commencement communications pursuant to Rule 14d-2(b) under the Exchange Act (17 CFR 240.14d-2(b)) |
o | Pre-commencement communications pursuant to Rule 13e-4(c) under the Exchange Act (17 CFR 240.13e-4(c)) |
Item 2.02. Results of Operations and Financial Condition.
On April 19, 2016, Discover Financial Services (the “Company”) released financial information with respect to the quarter ended March 31, 2016. Copies of the press release, financial data supplement and financial results presentation containing this information are attached hereto as exhibits and incorporated herein by reference.
The information contained in Exhibit 99.1, Exhibit 99.2 and Exhibit 99.3 is furnished pursuant to Item 2.02 of Form 8-K and shall not be deemed to be “filed” for purposes of Section 18 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act of 1933, as amended, or the Exchange Act.
Item 9.01. Financial Statements and Exhibits.
(d) Exhibits
Exhibit No. | Description | |
99.1 | Press Release of the Company dated April 19, 2016 containing financial information for the quarter ended March 31, 2016 | |
99.2 | Financial Data Supplement of the Company for the quarter and year ended March 31, 2016 | |
99.3 | Financial Results Presentation of the Company for the quarter ended March 31, 2016 |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
DISCOVER FINANCIAL SERVICES | ||||
Dated: April 19, 2016 | By: | /s/ D. Christopher Greene | ||
Name: D. Christopher Greene | ||||
Title: Vice President, Deputy General Counsel and Assistant Secretary |
EXHIBIT INDEX
Exhibit No. | Description | |
99.1 | Press Release of the Company dated April 19, 2016 containing financial information for the quarter ended March 31, 2016 | |
99.2 | Financial Data Supplement of the Company for the quarter and year ended March 31, 2016 | |
99.3 | Financial Results Presentation of the Company for the quarter ended March 31, 2016 |
Exhibit 99.1
DISCOVER FINANCIAL SERVICES REPORTS FIRST QUARTER NET INCOME OF $575 MILLION
OR $1.35 PER DILUTED SHARE
Riverwoods, IL, April 19, 2016 - Discover Financial Services (NYSE: DFS) today reported net income of $575 million or $1.35 per diluted share for the first quarter of 2016, as compared to $586 million or $1.28 per diluted share for the first quarter of 2015. The company's return on equity for the first quarter of 2016 was 21%.
First Quarter Highlights
• | Total loans grew $2.7 billion, or 4%, from the prior year to $70.3 billion. |
• | Credit card loans grew $2.1 billion, or 4%, to $55.6 billion and Discover card sales volume increased 4% from the prior year. |
• | Total net charge-off rate excluding PCI loans decreased 5 basis points from the prior year to 2.21% and the total delinquency rate excluding PCI loans over 30 days past due increased 7 basis points from the prior year to 1.64%. |
• | Direct to consumer and affinity deposits grew $3.5 billion, or 12%, from the prior year to $32.8 billion. |
• | Payment Services transaction dollar volume for the segment was $45.0 billion, down 10% from the prior year. |
“We made progress on our priorities this quarter, most notably accelerating loan growth into our target range,” said David Nelms, chairman and CEO of Discover. “We continue to focus on generating strong returns while prudently managing credit and effectively deploying capital.”
Segment Results:
Direct Banking
Direct Banking pretax income of $882 million in the quarter increased $1 million from the prior year as higher net interest income was offset by lower other income, higher provision for loan losses and higher expenses.
Total loans ended the quarter at $70.3 billion, up 4% compared to the prior year. Credit card loans ended the quarter at $55.6 billion, up 4% from the prior year. Personal loans increased $469 million, or 9%, from the prior year. Relative to the prior year, private student loans increased $218 million, or 3%, and grew $772 million, or 15%, excluding purchased student loans.
Net interest income increased $121 million, or 7%, from the prior year, driven by loan growth and higher net interest margin. Net interest margin was 9.94%, up 24 basis points from the prior year. Card yield was 12.42%, an increase of 37 basis points from the prior year due to portfolio mix and the prime rate increase. Interest expense as a percent of total loans increased 11 basis points from the prior year primarily due to funding mix.
Other income decreased $62 million, or 13%, from the prior year driven primarily by the lack of mortgage origination revenue, as the prior year included $42 million in income related to the now discontinued mortgage operation. In addition, protection products revenue was lower by $10 million.
The delinquency rate for credit card loans over 30 days past due was 1.68%, up 4 basis points from the prior year and down 4 basis points from the prior quarter. Credit card net charge-off rate for the first quarter was 2.34%, down 6 basis points from the prior year and up 16 basis points from the prior quarter. The personal loans net charge-off rate of 2.45% increased by 23 basis points from the prior year. The student loan net charge-off rate excluding purchased credit-impaired ("PCI") loans was 0.85%, down 18 basis points from the prior year.
Provision for loan losses of $423 million increased $35 million from the prior year primarily due to a larger reserve build. The reserve build for the first quarter of 2016 was $51 million, $23 million higher than the prior year reserve build primarily due to loan growth.
Expenses increased $23 million, or 3%, from the prior year mostly driven by higher regulatory and compliance costs. The prior year included $37 million in expenses related to the mortgage origination business that was subsequently closed. Professional fees increased primarily due to $30 million in look back related anti-money laundering remediation expenses. Employee compensation increased mostly due to higher staffing levels driven in part by regulatory and compliance activities.
Payment Services
Payment Services pretax income was $32 million in the quarter, up $5 million from the prior year as lower revenues were more than offset by expense reductions.
Payment Services transaction dollar volume was $45.0 billion, down 10% from the prior year. PULSE transaction dollar volume was down 15% year-over-year due to the loss of volume from a large debit issuer. Network Partners volume was up $0.6 billion, or 21%, from the prior year driven by AribaPay volume.
Share Repurchases
During the first quarter of 2016, the company repurchased approximately 9.0 million shares of common stock for $422 million. Net of employee issuance, shares of common stock outstanding declined by 1.8%, or 7.5 million shares, from the prior quarter.
Conference Call and Webcast Information
The company will host a conference call to discuss its fourth quarter results on Tuesday, April 19, 2016, at 4:00 p.m. Central time. Interested parties can listen to the conference call via a live audio webcast at
https://investorrelations.discover.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 equity loans, checking and savings accounts and certificates of deposit 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.
Contacts:
Investors:
Bill Franklin, 224-405-1902
Media:
Jon Drummond, 224-405-1888
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 (https://investorrelations.discover.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 non-card products; 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, 2015 which is filed with the SEC and available at the SEC's internet site (http://www.sec.gov).
DISCOVER FINANCIAL SERVICES | Exhibit 99.2 | ||||||||||||||||||||||||||
EARNINGS SUMMARY | |||||||||||||||||||||||||||
(unaudited, in millions, except per share statistics) | |||||||||||||||||||||||||||
Quarter Ended | |||||||||||||||||||||||||||
Mar 31, 2016 | Dec 31, 2015 | Sep 30, 2015 | Jun 30, 2015 | Mar 31, 2015 | Mar 31, 2016 vs. Mar 31, 2015 | ||||||||||||||||||||||
EARNINGS SUMMARY | |||||||||||||||||||||||||||
Interest Income | $2,084 | $2,061 | $2,008 | $1,947 | $1,929 | $155 | 8 | % | |||||||||||||||||||
Interest Expense | 334 | 329 | 323 | 311 | 300 | 34 | 11 | % | |||||||||||||||||||
Net Interest Income | 1,750 | 1,732 | 1,685 | 1,636 | 1,629 | 121 | 7 | % | |||||||||||||||||||
Discount/Interchange Revenue | 565 | 635 | 614 | 612 | 536 | 29 | 5 | % | |||||||||||||||||||
Rewards Cost | 292 | 372 | 326 | 314 | 268 | 24 | 9 | % | |||||||||||||||||||
Discount and Interchange Revenue, net | 273 | 263 | 288 | 298 | 268 | 5 | 2 | % | |||||||||||||||||||
Protection Products Revenue | 61 | 60 | 62 | 68 | 71 | (10 | ) | (14 | %) | ||||||||||||||||||
Loan Fee Income | 80 | 87 | 87 | 80 | 81 | (1 | ) | (1 | %) | ||||||||||||||||||
Transaction Processing Revenue | 36 | 38 | 39 | 40 | 42 | (6 | ) | (14 | %) | ||||||||||||||||||
Other Income | 24 | 25 | 27 | 53 | 80 | (56 | ) | (70 | %) | ||||||||||||||||||
Total Other Income | 474 | 473 | 503 | 539 | 542 | (68 | ) | (13 | %) | ||||||||||||||||||
Revenue Net of Interest Expense | 2,224 | 2,205 | 2,188 | 2,175 | 2,171 | 53 | 2 | % | |||||||||||||||||||
Provision for Loan Losses | 424 | 484 | 332 | 306 | 390 | 34 | 9 | % | |||||||||||||||||||
Employee Compensation and Benefits | 345 | 333 | 337 | 326 | 331 | 14 | 4 | % | |||||||||||||||||||
Marketing and Business Development | 162 | 196 | 168 | 199 | 182 | (20 | ) | (11 | %) | ||||||||||||||||||
Information Processing & Communications | 88 | 87 | 84 | 90 | 88 | — | — | % | |||||||||||||||||||
Professional Fees | 160 | 170 | 160 | 153 | 127 | 33 | 26 | % | |||||||||||||||||||
Premises and Equipment | 24 | 24 | 24 | 23 | 24 | — | — | % | |||||||||||||||||||
Other Expense | 107 | 123 | 109 | 136 | 121 | (14 | ) | (12 | %) | ||||||||||||||||||
Total Other Expense | 886 | 933 | 882 | 927 | 873 | 13 | 1 | % | |||||||||||||||||||
Income Before Income Taxes | 914 | 788 | 974 | 942 | 908 | 6 | 1 | % | |||||||||||||||||||
Tax Expense | 339 | 288 | 362 | 343 | 322 | 17 | 5 | % | |||||||||||||||||||
Net Income | $575 | $500 | $612 | $599 | $586 | ($11 | ) | (2 | %) | ||||||||||||||||||
Net Income Allocated to Common Stockholders | $562 | $488 | $599 | $586 | $573 | ($11 | ) | (2 | %) | ||||||||||||||||||
Effective Tax Rate | 37.1 | % | 36.5 | % | 37.2 | % | 36.4 | % | 35.5 | % | |||||||||||||||||
Net Interest Margin | 9.94 | % | 9.75 | % | 9.62 | % | 9.63 | % | 9.69 | % | 25 | bps | |||||||||||||||
Operating Efficiency | 39.8 | % | 42.3 | % | 40.3 | % | 42.6 | % | 40.2 | % | (40 | ) | bps | ||||||||||||||
ROE | 21 | % | 18 | % | 22 | % | 21 | % | 21 | % | |||||||||||||||||
Ending Common Shares Outstanding | 414 | 422 | 430 | 437 | 445 | (31 | ) | (7 | %) | ||||||||||||||||||
Weighted Average Common Shares Outstanding | 417 | 426 | 433 | 441 | 448 | (31 | ) | (7 | %) | ||||||||||||||||||
Weighted Average Common Shares Outstanding (fully diluted) | 417 | 426 | 434 | 442 | 448 | (31 | ) | (7 | %) | ||||||||||||||||||
PER SHARE STATISTICS | |||||||||||||||||||||||||||
Basic EPS | $1.35 | $1.15 | $1.38 | $1.33 | $1.28 | $0.07 | 5 | % | |||||||||||||||||||
Diluted EPS | $1.35 | $1.14 | $1.38 | $1.33 | $1.28 | $0.07 | 5 | % | |||||||||||||||||||
Common Stock Price (period end) | $50.92 | $53.62 | $51.99 | $57.62 | $56.35 | ($5.43 | ) | (10 | %) | ||||||||||||||||||
Book Value per share | $27.32 | $26.74 | $26.32 | $25.75 | $25.22 | $2.10 | 8 | % | |||||||||||||||||||
Note: See Glossary of Financial Terms for definitions of financial terms |
DISCOVER FINANCIAL SERVICES | ||||||||||||||||||||||||||
EARNINGS SUMMARY | ||||||||||||||||||||||||||
(unaudited, in millions) | ||||||||||||||||||||||||||
Quarter Ended | ||||||||||||||||||||||||||
Mar 31, 2016 | Dec 31, 2015 | Sep 30, 2015 | Jun 30, 2015 | Mar 31, 2015 | Mar 31, 2016 vs. Mar 31, 2015 | |||||||||||||||||||||
SEGMENT- INCOME BEFORE INCOME TAXES | ||||||||||||||||||||||||||
Direct Banking | $882 | $767 | $950 | $914 | $881 | $1 | — | % | ||||||||||||||||||
Payment Services | 32 | 21 | 24 | 28 | 27 | 5 | 19 | % | ||||||||||||||||||
Total | $914 | $788 | $974 | $942 | $908 | $6 | 1 | % | ||||||||||||||||||
TRANSACTIONS PROCESSED ON NETWORKS | ||||||||||||||||||||||||||
Discover Network | 486 | 546 | 519 | 512 | 456 | 30 | 7 | % | ||||||||||||||||||
PULSE Network | 841 | 905 | 972 | 989 | 1,024 | (183 | ) | (18 | %) | |||||||||||||||||
Total | 1,327 | 1,451 | 1,491 | 1,501 | 1,480 | (153 | ) | (10 | %) | |||||||||||||||||
NETWORK VOLUME | ||||||||||||||||||||||||||
PULSE Network | $34,680 | $35,902 | $36,267 | $37,162 | $40,814 | ($6,134 | ) | (15 | %) | |||||||||||||||||
Network Partners | 3,572 | 3,274 | 3,206 | 3,536 | 2,949 | 623 | 21 | % | ||||||||||||||||||
Diners Club International 1 | 6,738 | 6,760 | 6,560 | 6,773 | 6,474 | 264 | 4 | % | ||||||||||||||||||
Total Payment Services | 44,990 | 45,936 | 46,033 | 47,471 | 50,237 | (5,247 | ) | (10 | %) | |||||||||||||||||
Discover Network - Proprietary | 28,576 | 32,910 | 31,408 | 31,084 | 27,324 | 1,252 | 5 | % | ||||||||||||||||||
Total | $73,566 | $78,846 | $77,441 | $78,555 | $77,561 | ($3,995 | ) | (5 | %) | |||||||||||||||||
1 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 of Financial Terms for definitions of financial terms |
DISCOVER FINANCIAL SERVICES | |||||||||||||||||||||||||||
BALANCE SHEET SUMMARY | |||||||||||||||||||||||||||
(unaudited, in millions) | |||||||||||||||||||||||||||
Quarter Ended | |||||||||||||||||||||||||||
Mar 31, 2016 | Dec 31, 2015 | Sep 30, 2015 | Jun 30, 2015 | Mar 31, 2015 | Mar 31, 2016 vs. Mar 31, 2015 | ||||||||||||||||||||||
BALANCE SHEET SUMMARY | |||||||||||||||||||||||||||
Assets | |||||||||||||||||||||||||||
Cash and Investment Securities | $16,101 | $12,755 | $13,650 | $14,050 | $14,701 | $1,400 | 10 | % | |||||||||||||||||||
Total Loan Receivables | 70,320 | 72,385 | 70,078 | 69,028 | 67,648 | 2,672 | 4 | % | |||||||||||||||||||
Allowance for Loan Losses | (1,921 | ) | (1,869 | ) | (1,743 | ) | (1,735 | ) | (1,776 | ) | (145 | ) | (8 | %) | |||||||||||||
Net Loan Receivables | 68,399 | 70,516 | 68,335 | 67,293 | 65,872 | 2,527 | 4 | % | |||||||||||||||||||
Premises and Equipment, net | 706 | 693 | 684 | 688 | 678 | 28 | 4 | % | |||||||||||||||||||
Goodwill and Intangible Assets, net | 422 | 423 | 424 | 425 | 432 | (10 | ) | (2 | %) | ||||||||||||||||||
Other Assets | 2,465 | 2,412 | 2,378 | 2,317 | 2,364 | 101 | 4 | % | |||||||||||||||||||
Total Assets | $88,093 | $86,799 | $85,471 | $84,773 | $84,047 | $4,046 | 5 | % | |||||||||||||||||||
Liabilities & Stockholders' Equity | |||||||||||||||||||||||||||
Direct to Consumer and Affinity Deposits | $32,818 | $30,866 | $29,801 | $29,498 | $29,303 | $3,515 | 12 | % | |||||||||||||||||||
Brokered Deposits and Other Deposits | 15,647 | 16,665 | 16,738 | 16,755 | 17,061 | (1,414 | ) | (8 | %) | ||||||||||||||||||
Deposits | 48,465 | 47,531 | 46,539 | 46,253 | 46,364 | 2,101 | 5 | % | |||||||||||||||||||
Borrowings | 24,752 | 24,650 | 23,726 | 24,168 | 23,022 | 1,730 | 8 | % | |||||||||||||||||||
Accrued Expenses and Other Liabilities | 3,560 | 3,343 | 3,903 | 3,089 | 3,450 | 110 | 3 | % | |||||||||||||||||||
Total Liabilities | 76,777 | 75,524 | 74,168 | 73,510 | 72,836 | 3,941 | 5 | % | |||||||||||||||||||
Total Equity | 11,316 | 11,275 | 11,303 | 11,263 | 11,211 | 105 | 1 | % | |||||||||||||||||||
Total Liabilities and Stockholders' Equity | $88,093 | $86,799 | $85,471 | $84,773 | $84,047 | $4,046 | 5 | % | |||||||||||||||||||
LIQUIDITY | |||||||||||||||||||||||||||
Liquidity Portfolio | $14,556 | $12,077 | $12,354 | $12,781 | $14,162 | $394 | 3 | % | |||||||||||||||||||
Undrawn Credit Facilities 1 | 30,077 | 30,682 | 31,008 | 25,029 | 24,340 | 5,737 | 24 | % | |||||||||||||||||||
Total Liquidity | $44,633 | $42,759 | $43,362 | $37,810 | $38,502 | $6,131 | 16 | % | |||||||||||||||||||
1 Excludes investments pledged to the Federal Reserve, which is included within the liquidity portfolio | |||||||||||||||||||||||||||
Note: See Glossary of Financial Terms for definitions of financial terms |
DISCOVER FINANCIAL SERVICES | |||||||||||||||||||||||||||
BALANCE SHEET STATISTICS | |||||||||||||||||||||||||||
(unaudited, in millions) | |||||||||||||||||||||||||||
Quarter Ended | |||||||||||||||||||||||||||
Mar 31, 2016 | Dec 31, 2015 | Sep 30, 2015 | Jun 30, 2015 | Mar 31, 2015 | Mar 31, 2016 vs. Mar 31, 2015 | ||||||||||||||||||||||
BALANCE SHEET STATISTICS | |||||||||||||||||||||||||||
Total Common Equity | $10,756 | $10,715 | $10,743 | $10,703 | $10,651 | $105 | 1 | % | |||||||||||||||||||
Total Common Equity/Total Assets | 12.2 | % | 12.3 | % | 12.6 | % | 12.6 | % | 12.7 | % | |||||||||||||||||
Total Common Equity/Net Loans | 15.7 | % | 15.2 | % | 15.7 | % | 15.9 | % | 16.2 | % | |||||||||||||||||
Tangible Assets | $87,671 | $86,376 | $85,047 | $84,348 | $83,615 | $4,056 | 5 | % | |||||||||||||||||||
Tangible Common Equity 1 | $10,334 | $10,292 | $10,319 | $10,278 | $10,219 | $115 | 1 | % | |||||||||||||||||||
Tangible Common Equity/Tangible Assets 1 | 11.8 | % | 11.9 | % | 12.1 | % | 12.2 | % | 12.2 | % | |||||||||||||||||
Tangible Common Equity/Net Loans 1 | 15.1 | % | 14.6 | % | 15.1 | % | 15.3 | % | 15.5 | % | |||||||||||||||||
Tangible Common Equity per share 1 | $24.95 | $24.41 | $24.02 | $23.50 | $22.99 | $1.96 | 9 | % | |||||||||||||||||||
REGULATORY CAPITAL RATIOS | Basel III Transition | ||||||||||||||||||||||||||
Total Risk Based Capital Ratio | 16.8 | % | 16.5 | % | 17.1 | % | 17.2 | % | 17.6 | % | |||||||||||||||||
Tier 1 Risk Based Capital Ratio | 15.0 | % | 14.7 | % | 15.2 | % | 15.3 | % | 15.6 | % | |||||||||||||||||
Tier 1 Leverage Ratio | 12.8 | % | 12.9 | % | 13.1 | % | 13.2 | % | 13.3 | % | |||||||||||||||||
Common Equity Tier 1 Capital Ratio | 14.3 | % | 13.9 | % | 14.4 | % | 14.5 | % | 14.8 | % | |||||||||||||||||
Basel III Fully Phased-in | |||||||||||||||||||||||||||
Common Equity Tier 1 Capital Ratio 2 | 14.2 | % | 13.9 | % | 14.3 | % | 14.4 | % | 14.7 | % | |||||||||||||||||
RATIO OF EARNINGS TO FIXED CHARGES | |||||||||||||||||||||||||||
Ratio of Earnings to Fixed Charges 3 | 3.8 | 3.9 | 4.0 | 4.0 | 4.1 | ||||||||||||||||||||||
1 Tangible Common Equity ("TCE") is a non-GAAP measure. The Company believes TCE is a more meaningful measure to investors of the net asset value of the Company. For corresponding reconciliation of TCE to a GAAP financial measure see Reconciliation of GAAP to non-GAAP Data schedule | |||||||||||||||||||||||||||
2 Common Equity Tier 1 Capital Ratio (Basel III fully phased-in) is calculated using Basel III fully phased-in Common Equity Tier 1 Capital, a non-GAAP measure. The Company believes that the Common Equity Tier 1 Capital Ratio based on fully phased-in Basel III rules is an important complement to the existing capital ratios and for comparability to other financial institutions. For the corresponding reconciliation of Common Equity Tier 1 Capital and risk weighted assets calculated under fully phased-in Basel III rules to common equity tier 1 capital and risk weighted assets calculated under Basel III transition rules see the Reconciliation of GAAP to non-GAAP data schedule | |||||||||||||||||||||||||||
3 Fixed charges are the sum of interest expense, amortized premiums, discounts and capitalized expenses related to indebtedness and an estimate of interest within rental expense | |||||||||||||||||||||||||||
Note: See Glossary of Financial Terms for definitions of financial terms |
DISCOVER FINANCIAL SERVICES | ||||||||||||||||||||||||||
AVERAGE BALANCE SHEET | ||||||||||||||||||||||||||
(unaudited, in millions) | ||||||||||||||||||||||||||
Quarter Ended | ||||||||||||||||||||||||||
Mar 31, 2016 | Dec 31, 2015 | Sep 30, 2015 | Jun 30, 2015 | Mar 31, 2015 | Mar 31, 2016 vs. Mar 31, 2015 | |||||||||||||||||||||
AVERAGE BALANCES | ||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Cash and Investment Securities | $13,452 | $12,881 | $12,609 | $13,219 | $12,148 | $1,304 | 11 | % | ||||||||||||||||||
Restricted Cash | 801 | 529 | 703 | 686 | 605 | 196 | 32 | % | ||||||||||||||||||
Credit Card Loans | 56,124 | 56,050 | 55,281 | 53,987 | 54,038 | 2,086 | 4 | % | ||||||||||||||||||
Private Student Loans | 8,967 | 8,732 | 8,580 | 8,597 | 8,721 | 246 | 3 | % | ||||||||||||||||||
Personal Loans | 5,503 | 5,488 | 5,307 | 5,131 | 5,047 | 456 | 9 | % | ||||||||||||||||||
Other Loans | 243 | 233 | 294 | 385 | 342 | (99 | ) | (29 | %) | |||||||||||||||||
Total Loans | 70,837 | 70,503 | 69,462 | 68,100 | 68,148 | 2,689 | 4 | % | ||||||||||||||||||
Total Interest Earning Assets | 85,090 | 83,913 | 82,774 | 82,005 | 80,901 | 4,189 | 5 | % | ||||||||||||||||||
Allowance for Loan Losses | (1,866 | ) | (1,794 | ) | (1,776 | ) | (1,807 | ) | (1,753 | ) | (113 | ) | (6 | %) | ||||||||||||
Other Assets | 4,453 | 4,357 | 4,333 | 4,331 | 4,309 | 144 | 3 | % | ||||||||||||||||||
Total Assets | $87,677 | $86,476 | $85,331 | $84,529 | $83,457 | $4,220 | 5 | % | ||||||||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||||||||
Direct to Consumer and Affinity Deposits | $31,529 | $30,126 | $29,477 | $29,194 | $28,891 | $2,638 | 9 | % | ||||||||||||||||||
Brokered Deposits and Other Deposits | 15,982 | 16,504 | 16,857 | 16,840 | 17,034 | (1,052 | ) | (6 | %) | |||||||||||||||||
Total Interest-bearing Deposits | 47,511 | 46,630 | 46,334 | 46,034 | 45,925 | 1,586 | 3 | % | ||||||||||||||||||
Short-term Borrowings | 2 | — | 60 | 153 | 126 | (124 | ) | (98 | %) | |||||||||||||||||
Securitized Borrowings | 16,950 | 16,628 | 16,449 | 17,319 | 17,188 | (238 | ) | (1 | %) | |||||||||||||||||
Other Long-term Borrowings | 7,934 | 7,900 | 7,401 | 5,989 | 5,272 | 2,662 | 50 | % | ||||||||||||||||||
Total Interest-bearing Liabilities | 72,397 | 71,158 | 70,244 | 69,495 | 68,511 | 3,886 | 6 | % | ||||||||||||||||||
Other Liabilities & Stockholders' Equity | 15,280 | 15,318 | 15,087 | 15,034 | 14,946 | 334 | 2 | % | ||||||||||||||||||
Total Liabilities and Stockholders' Equity | $87,677 | $86,476 | $85,331 | $84,529 | $83,457 | $4,220 | 5 | % | ||||||||||||||||||
AVERAGE RATES | ||||||||||||||||||||||||||
Assets | ||||||||||||||||||||||||||
Cash and Investment Securities | 0.72 | % | 0.61 | % | 0.55 | % | 0.59 | % | 0.62 | % | 10 | bps | ||||||||||||||
Restricted Cash | 0.40 | % | 0.16 | % | 0.15 | % | 0.13 | % | 0.11 | % | 29 | bps | ||||||||||||||
Credit Card Loans | 12.42 | % | 12.20 | % | 12.03 | % | 12.04 | % | 12.05 | % | 37 | bps | ||||||||||||||
Private Student Loans | 7.02 | % | 6.88 | % | 6.88 | % | 6.91 | % | 6.95 | % | 7 | bps | ||||||||||||||
Personal Loans | 12.20 | % | 11.79 | % | 12.08 | % | 12.12 | % | 12.19 | % | 1 | bps | ||||||||||||||
Other Loans | 5.18 | % | 4.88 | % | 4.44 | % | 4.62 | % | 4.23 | % | 95 | bps | ||||||||||||||
Total Loans | 11.69 | % | 11.49 | % | 11.37 | % | 11.35 | % | 11.37 | % | 32 | bps | ||||||||||||||
Total Interest Earning Assets | 9.85 | % | 9.75 | % | 9.62 | % | 9.52 | % | 9.67 | % | 18 | bps | ||||||||||||||
Liabilities and Stockholders' Equity | ||||||||||||||||||||||||||
Direct to Consumer and Affinity Deposits | 1.22 | % | 1.21 | % | 1.23 | % | 1.23 | % | 1.25 | % | (3 | ) | bps | |||||||||||||
Brokered Deposits and Other Deposits | 1.68 | % | 1.60 | % | 1.55 | % | 1.55 | % | 1.51 | % | 17 | bps | ||||||||||||||
Total Interest-bearing Deposits | 1.37 | % | 1.35 | % | 1.35 | % | 1.35 | % | 1.35 | % | 2 | bps | ||||||||||||||
Short-term Borrowings | 0.64 | % | — | % | 1.49 | % | 1.37 | % | 1.43 | % | (79 | ) | bps | |||||||||||||
Securitized Borrowings | 2.04 | % | 1.99 | % | 1.98 | % | 1.92 | % | 1.90 | % | 14 | bps | ||||||||||||||
Other Long-term Borrowings | 4.38 | % | 4.33 | % | 4.44 | % | 4.93 | % | 5.14 | % | (76 | ) | bps | |||||||||||||
Total Interest-bearing Liabilities | 1.86 | % | 1.83 | % | 1.82 | % | 1.80 | % | 1.78 | % | 8 | bps | ||||||||||||||
Net Interest Margin | 9.94 | % | 9.75 | % | 9.62 | % | 9.63 | % | 9.69 | % | 25 | bps | ||||||||||||||
Net Yield on Interest-earning Assets | 8.27 | % | 8.19 | % | 8.08 | % | 8.00 | % | 8.17 | % | 10 | bps | ||||||||||||||
Note: See Glossary of Financial Terms for definitions of financial terms |
DISCOVER FINANCIAL SERVICES | ||||||||||||||||||||||||||
LOAN STATISTICS | ||||||||||||||||||||||||||
(unaudited, in millions) | ||||||||||||||||||||||||||
Quarter Ended | ||||||||||||||||||||||||||
Mar 31, 2016 | Dec 31, 2015 | Sep 30, 2015 | Jun 30, 2015 | Mar 31, 2015 | Mar 31, 2016 vs. Mar 31, 2015 | |||||||||||||||||||||
TOTAL LOAN RECEIVABLES | ||||||||||||||||||||||||||
Ending Loans 1, 2 | $70,320 | $72,385 | $70,078 | $69,028 | $67,648 | $2,672 | 4 | % | ||||||||||||||||||
Average Loans 1, 2 | $70,837 | $70,503 | $69,462 | $68,100 | $68,148 | $2,689 | 4 | % | ||||||||||||||||||
Interest Yield | 11.69 | % | 11.49 | % | 11.37 | % | 11.35 | % | 11.37 | % | 32 | bps | ||||||||||||||
Gross Principal Charge-off Rate | 2.80 | % | 2.65 | % | 2.51 | % | 2.76 | % | 2.82 | % | (2 | ) | bps | |||||||||||||
Gross Principal Charge-off Rate excluding PCI Loans 3 | 2.92 | % | 2.78 | % | 2.64 | % | 2.91 | % | 2.98 | % | (6 | ) | bps | |||||||||||||
Net Principal Charge-off Rate | 2.11 | % | 2.02 | % | 1.85 | % | 2.05 | % | 2.14 | % | (3 | ) | bps | |||||||||||||
Net Principal Charge-off Rate excluding PCI Loans 3 | 2.21 | % | 2.11 | % | 1.94 | % | 2.16 | % | 2.26 | % | (5 | ) | bps | |||||||||||||
Delinquency Rate (over 30 days) excluding PCI Loans 3 | 1.64 | % | 1.67 | % | 1.60 | % | 1.49 | % | 1.57 | % | 7 | bps | ||||||||||||||
Delinquency Rate (over 90 days) excluding PCI Loans 3 | 0.79 | % | 0.76 | % | 0.72 | % | 0.69 | % | 0.78 | % | 1 | bps | ||||||||||||||
Gross Principal Charge-off Dollars | $493 | $472 | $440 | $469 | $474 | $19 | 4 | % | ||||||||||||||||||
Net Principal Charge-off Dollars | $372 | $358 | $324 | $347 | $360 | $12 | 3 | % | ||||||||||||||||||
Net Interest and Fee Charge-off Dollars | $86 | $86 | $81 | $87 | $95 | ($9 | ) | (9 | %) | |||||||||||||||||
Loans Delinquent Over 30 Days 3 | $1,105 | $1,153 | $1,070 | $980 | $1,006 | $99 | 10 | % | ||||||||||||||||||
Loans Delinquent Over 90 Days 3 | $531 | $530 | $481 | $450 | $500 | $31 | 6 | % | ||||||||||||||||||
Allowance for Loan Loss (period end) | $1,921 | $1,869 | $1,743 | $1,735 | $1,776 | $145 | 8 | % | ||||||||||||||||||
Change in Loan Loss Reserves | $52 | $126 | $8 | ($41 | ) | $30 | $22 | 73 | % | |||||||||||||||||
Reserve Rate | 2.73 | % | 2.58 | % | 2.49 | % | 2.51 | % | 2.63 | % | 10 | bps | ||||||||||||||
Reserve Rate Excluding PCI Loans 3 | 2.80 | % | 2.65 | % | 2.57 | % | 2.60 | % | 2.72 | % | 8 | bps | ||||||||||||||
CREDIT CARD LOANS | ||||||||||||||||||||||||||
Ending Loans | $55,620 | $57,896 | $55,655 | $54,949 | $53,499 | $2,121 | 4 | % | ||||||||||||||||||
Average Loans | $56,124 | $56,050 | $55,281 | $53,987 | $54,038 | $2,086 | 4 | % | ||||||||||||||||||
Interest Yield | 12.42 | % | 12.20 | % | 12.03 | % | 12.04 | % | 12.05 | % | 37 | bps | ||||||||||||||
Gross Principal Charge-off Rate | 3.15 | % | 2.94 | % | 2.83 | % | 3.14 | % | 3.21 | % | (6 | ) | bps | |||||||||||||
Net Principal Charge-off Rate | 2.34 | % | 2.18 | % | 2.04 | % | 2.28 | % | 2.40 | % | (6 | ) | bps | |||||||||||||
Delinquency Rate (over 30 days) | 1.68 | % | 1.72 | % | 1.65 | % | 1.55 | % | 1.64 | % | 4 | bps | ||||||||||||||
Delinquency Rate (over 90 days) | 0.86 | % | 0.85 | % | 0.78 | % | 0.75 | % | 0.86 | % | — | bps | ||||||||||||||
Gross Principal Charge-off Dollars | $439 | $415 | $394 | $423 | $428 | $11 | 3 | % | ||||||||||||||||||
Net Principal Charge-off Dollars | $326 | $309 | $285 | $307 | $319 | $7 | 2 | % | ||||||||||||||||||
Loans Delinquent Over 30 Days | $934 | $995 | $919 | $850 | $879 | $55 | 6 | % | ||||||||||||||||||
Loans Delinquent Over 90 Days | $480 | $490 | $437 | $414 | $458 | $22 | 5 | % | ||||||||||||||||||
Allowance for Loan Loss (period end) | $1,590 | $1,554 | $1,459 | $1,441 | $1,492 | $98 | 7 | % | ||||||||||||||||||
Change in Loan Loss Reserves | $36 | $95 | $18 | ($51 | ) | $18 | $18 | 100 | % | |||||||||||||||||
Reserve Rate | 2.86 | % | 2.68 | % | 2.62 | % | 2.62 | % | 2.79 | % | 7 | bps | ||||||||||||||
Total Discover Card Volume | $30,004 | $33,830 | $32,971 | $32,299 | $28,725 | $1,279 | 4 | % | ||||||||||||||||||
Discover Card Sales Volume | $27,552 | $31,672 | $30,374 | $30,017 | $26,379 | $1,173 | 4 | % | ||||||||||||||||||
Rewards Rate | 1.06 | % | 1.18 | % | 1.07 | % | 1.05 | % | 1.02 | % | 4 | bps | ||||||||||||||
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 | ||||||||||||||||||||||||||
Note: See Glossary of Financial Terms for definitions of financial terms |
DISCOVER FINANCIAL SERVICES | ||||||||||||||||||||||||||
LOAN STATISTICS | ||||||||||||||||||||||||||
(unaudited, in millions) | ||||||||||||||||||||||||||
Quarter Ended | ||||||||||||||||||||||||||
Mar 31, 2016 | Dec 31, 2015 | Sep 30, 2015 | Jun 30, 2015 | Mar 31, 2015 | Mar 31, 2016 vs. Mar 31, 2015 | |||||||||||||||||||||
PRIVATE STUDENT LOANS | ||||||||||||||||||||||||||
Ending Loans | $8,914 | $8,763 | $8,769 | $8,520 | $8,696 | $218 | 3 | % | ||||||||||||||||||
Ending PCI Loans 1 | $2,965 | $3,116 | $3,249 | $3,381 | $3,519 | ($554 | ) | (16 | %) | |||||||||||||||||
Interest Yield | 7.02 | % | 6.88 | % | 6.88 | % | 6.91 | % | 6.95 | % | 7 | bps | ||||||||||||||
Net Principal Charge-off Rate | 0.56 | % | 0.82 | % | 0.57 | % | 0.61 | % | 0.61 | % | (5 | ) | bps | |||||||||||||
Net Principal Charge-off Rate excluding PCI Loans 2 | 0.85 | % | 1.30 | % | 0.94 | % | 1.02 | % | 1.03 | % | (18 | ) | bps | |||||||||||||
Delinquency Rate (over 30 days) excluding PCI Loans 2 | 1.92 | % | 1.91 | % | 1.88 | % | 1.78 | % | 1.66 | % | 26 | bps | ||||||||||||||
Reserve Rate | 1.65 | % | 1.63 | % | 1.48 | % | 1.68 | % | 1.63 | % | 2 | bps | ||||||||||||||
Reserve Rate excluding PCI Loans 2 | 1.86 | % | 1.88 | % | 1.84 | % | 2.23 | % | 2.18 | % | (32 | ) | bps | |||||||||||||
PERSONAL LOANS | ||||||||||||||||||||||||||
Ending Loans | $5,534 | $5,490 | $5,425 | $5,183 | $5,065 | $469 | 9 | % | ||||||||||||||||||
Interest Yield | 12.20 | % | 11.79 | % | 12.08 | % | 12.12 | % | 12.19 | % | 1 | bps | ||||||||||||||
Net Principal Charge-off Rate | 2.45 | % | 2.28 | % | 1.99 | % | 2.10 | % | 2.22 | % | 23 | bps | ||||||||||||||
Delinquency Rate (over 30 days) | 0.97 | % | 0.89 | % | 0.80 | % | 0.71 | % | 0.76 | % | 21 | bps | ||||||||||||||
Reserve Rate | 2.99 | % | 2.82 | % | 2.49 | % | 2.54 | % | 2.43 | % | 56 | bps | ||||||||||||||
1 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 | ||||||||||||||||||||||||||
2 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 | ||||||||||||||||||||||||||
Note: See Glossary of Financial Terms for definitions of financial terms |
DISCOVER FINANCIAL SERVICES | ||||||||||||||||||||||||||
SEGMENT RESULTS | ||||||||||||||||||||||||||
(unaudited, in millions) | ||||||||||||||||||||||||||
Quarter Ended | ||||||||||||||||||||||||||
Mar 31, 2016 | Dec 31, 2015 | Sep 30, 2015 | Jun 30, 2015 | Mar 31, 2015 | Mar 31, 2016 vs. Mar 31, 2015 | |||||||||||||||||||||
DIRECT BANKING | ||||||||||||||||||||||||||
Interest Income | $2,084 | $2,061 | $2,008 | $1,947 | $1,929 | $155 | 8 | % | ||||||||||||||||||
Interest Expense | 334 | 329 | 323 | 311 | 300 | 34 | 11 | % | ||||||||||||||||||
Net Interest Income | 1,750 | 1,732 | 1,685 | 1,636 | 1,629 | 121 | 7 | % | ||||||||||||||||||
Other Income | 406 | 408 | 435 | 468 | 468 | (62 | ) | (13 | %) | |||||||||||||||||
Revenue Net of Interest Expense | 2,156 | 2,140 | 2,120 | 2,104 | 2,097 | 59 | 3 | % | ||||||||||||||||||
Provision for Loan Losses | 423 | 486 | 332 | 306 | 388 | 35 | 9 | % | ||||||||||||||||||
Total Other Expense | 851 | 887 | 838 | 884 | 828 | 23 | 3 | % | ||||||||||||||||||
Income Before Income Taxes | $882 | $767 | $950 | $914 | $881 | $1 | — | % | ||||||||||||||||||
Net Interest Margin | 9.94 | % | 9.75 | % | 9.63 | % | 9.63 | % | 9.70 | % | 24 | bps | ||||||||||||||
Pretax Return on Loan Receivables | 5.01 | % | 4.32 | % | 5.43 | % | 5.38 | % | 5.24 | % | (23 | ) | bps | |||||||||||||
PAYMENT SERVICES | ||||||||||||||||||||||||||
Interest Income | $— | $— | $— | $— | $— | $— | NM | |||||||||||||||||||
Interest Expense | — | — | — | — | — | — | NM | |||||||||||||||||||
Net Interest Income | — | — | — | — | — | — | NM | |||||||||||||||||||
Other Income | 68 | 65 | 68 | 71 | 74 | (6 | ) | (8 | %) | |||||||||||||||||
Revenue Net of Interest Expense | 68 | 65 | 68 | 71 | 74 | (6 | ) | (8 | %) | |||||||||||||||||
Provision for Loan Losses | 1 | (2 | ) | — | — | 2 | (1 | ) | (50%) | |||||||||||||||||
Total Other Expense | 35 | 46 | 44 | 43 | 45 | (10 | ) | (22 | %) | |||||||||||||||||
Income Before Income Taxes | $32 | $21 | $24 | $28 | $27 | $5 | 19 | % | ||||||||||||||||||
Note: See Glossary of Financial Terms for definitions of financial terms |
DISCOVER FINANCIAL SERVICES |
GLOSSARY OF FINANCIAL TERMS |
Book Value per share represents total equity divided by ending common shares outstanding |
Common Equity Tier 1 Capital Ratio (Basel III transition) represents common equity tier 1 capital divided by risk weighted assets calculated under Basel III rules subject to transition provisions |
Common Equity Tier 1 Capital Ratio (Basel III fully phased-in) represents fully phased-in common equity tier 1 capital divided by risk weighted assets under fully phased-in Basel III rules. The Common Equity Tier 1 Capital Ratio (Basel III fully phased-in) is calculated using Basel III fully phased-in common equity tier 1 capital, a non-GAAP measure. The Company believes that the common equity tier 1 capital ratio based on fully phased-in Basel III rules is an important complement to the existing capital ratios and for comparability to other financial institutions. For the corresponding reconciliation of common equity tier 1 capital and risk weighted assets calculated under fully phased-in Basel III rules to common equity tier 1 capital and risk weighted assets calculated under Basel III transition rules see the Reconciliation of GAAP to non-GAAP data schedule |
Delinquency Rate (Over 30 Days) represents loans delinquent over thirty days divided by ending loans (total or respective loans, as appropriate) |
Delinquency Rate (Over 90 Days) represents loans delinquent over ninety days divided |
Discover card sales volume represents Discover card activity related to net sales |
Discover card volume represents Discover card activity related to net sales, balance transfers, cash advances and other activity |
Discover Network proprietary volume represents gross proprietary sales volume on the Discover Network |
Delinquency Rate (Over 90 Days) represents loans delinquent over ninety days divided by ending loans (total or respective loans, as appropriate) |
Earnings Per Share represents net income allocated to common stockholders divided by the weighted average common shares outstanding |
Effective Tax Rate represents tax expense divided by income before income taxes |
Gross Principal Charge-off Rate represents gross principal charge-off dollars (annualized) divided by average loans for the reporting period |
Interest Yield represents interest income on loan receivables (annualized) divided by average loans for the reporting period |
Liquidity Portfolio represents cash and cash equivalents (excluding cash-in-process) and other investments |
Net Income Allocated to Common Stockholders represents net income less (i) dividends and accretion of discount on shares of preferred stock and (ii) income allocated to participating securities |
Net Interest Margin represents net interest income (annualized) divided by average total loans for the period. |
Net Principal Charge-off Rate represents net principal charge-off dollars (annualized) divided by average loans for the reporting period |
Operating Efficiency represents total other expense divided by revenue net of interest expense |
Pretax Return on Loan Receivables represents income before income taxes (annualized) divided by total average loans for the period |
Proprietary Network Volume represents gross proprietary sales volume on the Discover Network |
Ratio of Earnings to Fixed Charges represents income before income tax expense and fixed charges divided by fixed charges for the reporting period. Fixed charges are the sum of interest expense, amortized premiums, discounts and capitalized expenses related to indebtedness and an estimate of interest within rental expense for the reporting period |
Regulatory Capital Ratios are regulatory measures used to evaluate capital adequacy. Under Basel III, to be considered "well-capitalized," total risk-based, tier 1 risk-based, tier 1 leverage, and common equity tier 1 ratios of 10%, 8%, 5%, and 6.5% respectively must be maintained. As of January 1, 2015 regulatory capital ratios are calculated under Basel III rules subject to transition provisions. Total Risk Based Capital Ratio represents total capital divided by risk-weighted assets. Tier 1 Capital Ratio represents tier 1 capital divided by risk-weighted assets. Tier 1 Leverage Ratio represents tier 1 capital divided by average total assets. The Tier 1 Common Capital Ratio has been replaced by the Common Equity Tier 1 Ratio under Basel III |
Reserve Rate represents the allowance for loan losses divided by total loans |
Return on Equity represents net income (annualized) divided by average total equity for the reporting period |
Rewards Rate represents rewards cost divided by Discover Card sales volume |
Tangible Assets represents total assets less goodwill and intangibles |
Tangible Common Equity ("TCE"), a non-GAAP financial measure, represents total common equity less goodwill and intangibles. The Company believes TCE is a more meaningful measure to investors of the net asset value of the Company. For corresponding reconciliation of TCE to a GAAP financial measure, see Reconciliation of GAAP to Non-GAAP Data schedule |
Tangible Common Equity/Net Loans, a non-GAAP measure, represents total common equity less goodwill and intangibles divided by total loans less the allowance for loan loss (period end) |
Tangible Common Equity per Share, a non-GAAP measure, represents total common equity less goodwill and intangibles divided by ending common shares outstanding |
Tangible Common Equity/Tangible Assets, a non-GAAP measure, represents total common equity less goodwill and intangibles divided by total assets less goodwill and intangibles |
Total Volume represents the transaction dollar volume from the PULSE network, Network Partners, Diners Club and proprietary Discover Network |
Undrawn Credit Facilities represents asset-backed conduit funding facilities and Federal Reserve discount window (excluding investments pledged to the Federal Reserve, which are included within the liquidity investment portfolio) |
DISCOVER FINANCIAL SERVICES | |||||||||||||||||||
RECONCILIATION OF GAAP TO NON-GAAP DATA | |||||||||||||||||||
(unaudited, in millions) | |||||||||||||||||||
Quarter Ended | |||||||||||||||||||
Mar 31, 2016 | Dec 31, 2015 | Sep 30, 2015 | Jun 30, 2015 | Mar 31, 2015 | |||||||||||||||
GAAP Total Common Equity | $10,756 | $10,715 | $10,743 | $10,703 | $10,651 | ||||||||||||||
Less: Goodwill | (255 | ) | (255 | ) | (255 | ) | (255 | ) | (257 | ) | |||||||||
Less: Intangibles | (167 | ) | (168 | ) | (169 | ) | (170 | ) | (175 | ) | |||||||||
Tangible Common Equity 1 | $10,334 | $10,292 | $10,319 | $10,278 | $10,219 | ||||||||||||||
Common Equity Tier 1 Capital (Basel III Transition) | $10,593 | $10,566 | $10,612 | $10,552 | $10,497 | ||||||||||||||
Adjustments Related To Capital Components During Transition 2 | (54 | ) | (82 | ) | (82 | ) | (83 | ) | (87 | ) | |||||||||
Common Equity Tier 1 Capital (Basel III Fully Phased-in) | $10,539 | $10,484 | $10,530 | $10,469 | $10,410 | ||||||||||||||
Risk Weighted Assets (Basel III Transition) | $74,205 | $75,787 | $73,526 | $72,658 | $70,868 | ||||||||||||||
Risk Weighted Assets (Basel III Fully Phased-in) 3 | $74,137 | $75,685 | $73,423 | $72,555 | $70,762 | ||||||||||||||
Common Equity Tier 1 Capital Ratio (Basel III Transition) | 14.3 | % | 13.9 | % | 14.4 | % | 14.5 | % | 14.8 | % | |||||||||
Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) 4 | 14.2 | % | 13.9 | % | 14.3 | % | 14.4 | % | 14.7 | % | |||||||||
GAAP Book Value Per Share | $27.32 | $26.74 | $26.32 | $25.75 | $25.22 | ||||||||||||||
Less: Goodwill | (0.62 | ) | (0.60 | ) | (0.60 | ) | (0.58 | ) | (0.58 | ) | |||||||||
Less: Intangibles | (0.40 | ) | (0.40 | ) | (0.40 | ) | (0.39 | ) | (0.39 | ) | |||||||||
Less: Preferred Stock | (1.35 | ) | (1.33 | ) | (1.30 | ) | (1.28 | ) | (1.26 | ) | |||||||||
Tangible Common Equity Per Share | $24.95 | $24.41 | $24.02 | $23.50 | $22.99 | ||||||||||||||
1 Tangible Common Equity ("TCE"), a non-GAAP financial measure, represents common equity less goodwill and intangibles. A reconciliation of TCE to common equity, a GAAP financial measure, is shown above. Other financial services companies may also use TCE and definitions may vary, so users of this information are advised to exercise caution in comparing TCE of different companies. TCE is included because management believes that common equity excluding goodwill and intangibles is a more meaningful measure to investors of the true net asset value of the Company | |||||||||||||||||||
2 Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion | |||||||||||||||||||
3 Key differences under fully phased-in Basel III rules in the calculation of risk weighted assets include higher risk weighting for past due loans and unfunded commitments | |||||||||||||||||||
4 Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) is calculated using Common Equity Tier 1 Capital (Basel III Fully Phased-in), a non-GAAP measure, divided by Risk Weighted Assets (Basel III Fully Phased-in) | |||||||||||||||||||
Note: See Glossary of Financial Terms for definitions of financial terms |
April 19, 2016 ©2016 DISCOVER FINANCIAL SERVICES 4Q15 Financial Results Exhibit 99.3
Notice The following slides are part of a presentation by Discover Financial Services (the "Company") in connection with reporting quarterly financial results and are intended to be viewed as part of that presentation. No representation is made that the information in these slides is complete. For additional financial, statistical, and business related information, as well as information regarding business and segment trends, see the earnings release and financial supplement included as exhibits to the Company’s Current Report on Form 8-K filed today and available on the Company’s website (www.discover.com) and the SEC’s website (www.sec.gov). The information provided herein includes certain non-GAAP financial measures. The reconciliations of such measures to the comparable GAAP figures are included at the end of this presentation, which is available on the Company’s website and the SEC’s website. The presentation contains forward-looking statements. You are cautioned not to place undue reliance on forward-looking statements, which speak only as of the date on which they are made, which reflect management’s estimates, projections, expectations or beliefs at that time, and which are subject to risks and uncertainties that may cause actual results to differ materially. For a discussion of certain risks and uncertainties that may affect the future results of the Company, please see "Special Note Regarding Forward-Looking Statements," "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, 2015 which is filed with the SEC and available at the SEC's website (www.sec.gov). The Company does not undertake to update or revise forward-looking statements as more information becomes available. 2
B / (W) ($MM, except per share data) 1Q16 1Q15 $ Δ % Δ Revenue Net of Interest Expense $2,224 $2,171 $53 2% Provision for Loan Losses 424 390 (34) (9%) Operating Expense 886 873 (13) (1%) Direct Banking 882 881 1 —% Payment Services 32 27 5 19% Total Pre-Tax Income 914 908 6 1% Pre-tax, Pre-Provision Income (1) 1,338 1,298 40 3% Income Tax Expense 339 322 (17) (5%) Net Income $575 $586 ($11) (2%) Diluted EPS $1.35 $1.28 $0.07 5% ROE 21% 21% 1Q16 Summary Financial Results • Diluted EPS of $1.35, up 5% YOY • Revenue net of interest expense of $2.2Bn, up 2% YOY as the lack of mortgage income was offset primarily by loan growth • Provision for loan losses increased $34MM, or 9% due primarily to a $22MM higher reserve build • Expenses increased $13MM, or 1% as the elimination of mortgage expenses was offset by higher anti- money laundering and compliance program expenses 3 Note(s) 1. Pre-tax, pre-provision income, which is derived by adding provision for loan losses to pre-tax income, is a non-GAAP financial measure which should be viewed in addition to, and not as a substitute for, the Company’s reported results. Management believes this information helps investors understand the effect of provision for loan losses on reported results and provides an alternate presentation of the Company’s performance; see appendix for a reconciliation
1Q15 1Q16 80 70 60 50 40 30 20 10 0 $67.6 $53.5 $8.7 $5.1 $70.3 $55.6 $8.9 $5.5 1Q15 1Q16 50 40 30 20 10 0 $27.3 $40.8 $6.5 $2.9 $28.6 $34.7 $6.7 $3.6 1Q16 Loan and Volume Growth 4 Volume ($Bn)Ending Loans ($Bn) Note(s) 1. 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 Total +4% Card +4% Student +3% Personal 9% PULSE -15% Diners(1) +4% Network Partners +21% Proprietary +5% Total Network Volume down 5% YOY
1Q16 Revenue Detail • Net interest income of $1.8Bn, up 7% YOY due primarily to loan growth and higher net interest margin • Discount and interchange revenue of $565MM, up 5% YOY driven primarily by an increase in card sales • Rewards rate increased 4bps YOY driven by higher promotional and standard rewards Protection products revenue of $61MM, down 14% YOY due to the prior suspension of new product sales • Other income decreased by $56MM primarily due to the lack of $42MM in mortgage origination revenue as we exited the business last year Note(s) 1. Rewards cost divided by Discover card sales volume 5 B / (W) ($MM) 1Q16 1Q15 $ Δ % Δ Interest Income $2,084 $1,929 $155 8% Interest Expense 334 300 (34) (11%) Net Interest Income 1,750 1,629 121 7% Discount/Interchange Revenue 565 536 29 5% Rewards Cost 292 268 (24) (9%) Net Discount/Interchange Revenue 273 268 5 2% Protection Products Revenue 61 71 (10) (14%) Loan Fee Income 80 81 (1) (1%) Transaction Processing Revenue 36 42 (6) (14%) Other Income 24 80 (56) (70%) Total Non-Interest Income 474 542 (68) (13%) Revenue Net of Interest Expense $2,224 $2,171 $53 2% Direct Banking $2,156 $2,097 $59 3% Payment Services 68 74 (6) (8%) Revenue Net of Interest Expense $2,224 $2,171 $53 2% Change ($MM) 1Q16 1Q15 QOQ YOY Discover Card Sales Volume $27,552 $26,379 (13%) 4% Rewards Rate(1) 1.06% 1.02% -12 bps 4 bps
1Q16 Net Interest Margin 6 • Total interest yield of 11.69% increased 32bps YOY driven primarily by higher card yield • Credit card yield increased 37bps YOY due to portfolio mix and the prime rate increase • Average direct to consumer and affinity deposits grew 9% YOY and made up 44% of total funding • Funding costs on interest-bearing liabilities increased 8bps YOY to 1.86% primarily due to funding mix • Net interest margin on receivables increased 25bps YOY due to higher total yield partially offset by higher funding costs Change (%) 1Q16 QOQ YOY Total Interest Yield 11.69% 20 bps 32 bps NIM on Receivables 9.94% 19 bps 25 bp NIM on Interest-Earning Assets 8.27% 8 bps 10 bps 1Q16 1Q15 ($MM) Average Balance Rate Average Balance Rate Credit Card $56,124 12.42% $54,038 12.05% Private Student 8,967 7.02% 8,721 6.95% Personal 5,503 12.20% 5,047 12.19% Other 243 5.18% 342 4.23% Total Loans 70,837 11.69% 68,148 11.37% Other Interest-Earning Assets 14,253 0.70% 12,753 0.59% Total Interest-Earning Assets $85,090 9.85% $80,901 9.67% Direct to Consumer and Affinity $31,529 1.22% $28,891 1.25% Brokered Deposits and Other 15,982 1.68% 17,034 1.51% Interest Bearing Deposits 47,511 1.37% 45,925 1.35% Borrowings 24,886 2.79% 22,586 2.65% Total Interest-Bearing Liabilities $72,397 1.86% $68,511 1.78%
B / (W) ($MM) 1Q16 1Q15 $ Δ % Δ Employee Compensation and Benefits $345 $331 ($14) (4%) Marketing and Business Development 162 182 20 11% Information Processing & Communications 88 88 — —% Professional Fees 160 127 (33) (26%) Premises and Equipment 24 24 0 0% Other Expense 107 121 14 12% Total Operating Expense $886 $873 ($13) (1%) Direct Banking $851 $828 ($23) (3%) Payment Services 35 45 10 22% Total Operating Expense $886 $873 ($13) (1%) Operating Efficiency (1) 39.8% 40.2% 40 bps Adjusted Operating Efficiency (2) 38.5% 38.6% 10 bps 1Q16 Operating Expense Detail 7 • Employee compensation and benefits of $345MM, up 4% YOY primarily due to higher regulatory and compliance staffing as well as higher compensation • Marketing and business development expense of $162MM, down 11% YOY primarily due to timing of advertising campaigns • Professional fees of $160MM, up 26% YOY. Look back related anti- money laundering remediation expenses were $30MM in 1Q16 vs. $15MM in 1Q15 • Other expense of $107MM, down 12% YOY largely due to a $20MM legal reserve in the prior year • Prior year mortgage origination expense was $37MM Note(s) 1. Defined as reported total operating expense divided by revenue net of interest expense 2. 1Q16 operating efficiency adjusted for $30 million in look back related anti-money laundering remediation expenses. 1Q15 operating efficiency adjusted for $15 million anti- money laundering and related compliance program expenses and $20 million legal reserve addition; see appendix for a reconciliation. Management believes adjusted operating efficiency, which is a non-GAAP measure, provides investors with a useful metric to evaluate the ongoing operating performance of the Company
1Q16 Provision for Loan Losses and Credit Quality 8 • Net charge-offs of $372MM, up 3% YOY and reserve build of $52MM both primarily due to loan growth • Card net charge-off rate decreased 6bps YOY to 2.34% • Card 30+ day delinquency rate of 1.68% increased 4bps YOY • Student loan net charge-off rate excluding PCI loans of 0.85%, down 18bps YOY • Personal loan net charge-off rate of 2.45%, up 23bps YOY Note(s) 1. Excludes PCI loans which are accounted for on a pooled basis. Since a pool is accounted for as a single asset with a single composite interest rate and aggregate expectation of cash flows, the past-due status of a pool, or that of the individual loans within a pool, is not meaningful. Because the Company is recognizing interest income on a pool of loans, it is all considered to be performing B / (W) ($MM) 1Q16 1Q15 $ Δ % Δ Net Principal Charge-Off $372 $360 ($12) (3%) Reserve Changes build/(release) 52 30 (22) (73%) Total Provision for Loan Loss $424 $390 ($34) (9%) Change (%) 1Q16 QOQ YOY Credit Card Loans Gross Principal Charge-Off Rate 3.15% 21 bps -6 bps Net Principal Charge-Off Rate 2.34% 16 bps -6 bps 30-Day Delinquency Rate 1.68% -4 bps 4 bps Reserve Rate 2.86% 18 bps 7 bps Private Student Loans Net Principal Charge-Off Rate (excl. PCI Loans)(1) 0.85% -45 bps -18 bps 30-Day Delinquency Rate (excl. PCI Loans)(1) 1.92% 1 bps 26 bps Reserve Rate (excl. PCI Loans)(1) 1.86% -2 bps -32 bps Personal Loans Net Principal Charge-Off Rate 2.45% 17 bps 23 bps 30-Day Delinquency Rate 0.97% 8 bps 21 bps Reserve Rate 2.99% 17 bps 56 bps Total Loans Gross Principal Charge-Off Rate (excl. PCI Loans)(1) 2.92% 14 bps -6 bps Net Principal Charge-Off Rate (excl. PCI Loans)(1) 2.21% 10 bps -5 bps 30-Day Delinquency Rate (excl. PCI Loans)(1) 1.64% -3 bps 7 bps Reserve Rate (excl. PCI Loans)(1) 2.80% 15 bps 8 bps
Capital Position 9 Note(s) 1. Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) is calculated using Basel III Fully Phased-in Common Equity Tier 1 Capital, a non-GAAP measure. The Company believes that the Common Equity Tier 1 Capital Ratio based on Fully Phased-in Basel III rules is an important complement to the existing capital ratios and for comparability to other financial institutions. For the corresponding reconciliation of Common Equity Tier 1 Capital and risk weighted assets calculated under Fully Phased-in Basel III rules to Common Equity Tier 1 Capital and risk weighted assets calculated under Basel III transition rules see appendix Capital Ratios • Common Equity Tier 1 Capital Ratio (Basel III fully phased-in) of 14.2%, up 30 bps sequentially due to the seasonal decline in loan balances Basel III Transition 1Q16 4Q15 1Q15 Total Risk Based Capital Ratio 16.8% 16.5% 17.6% Tier 1 Risk Based Capital Ratio 15.0% 14.7% 15.6% Tier 1 Leverage Ratio 12.8% 12.9% 13.3% Common Equity Tier 1 Capital Ratio 14.3% 13.9% 14.8% Basel III Fully Phased-in Common Equity Tier 1 Capital Ratio (1) 14.2% 13.9% 14.7%
Appendix
Reconciliation of GAAP to Non-GAAP Data Note(s) 1. Pre-tax, pre-provision income, which is derived by adding provision for loan losses to pre-tax income, is a non-GAAP financial measure which should be viewed in addition to, and Pre-tax, pre-provision income, which is derived by adding provision for loan losses to pre-tax income, is a non-GAAP financial measure which should be viewed in addition to, and not as a substitute for, the Company's reported results. Management believes this information helps investors understand the effect of provision for loan losses on reported results and provides an alternate presentation of the Company's performance 2. Adjusted operating efficiency is calculated using adjusted operating expense, a non-GAAP measure, divided by adjusted revenue net of interest expense, a non-GAAP measure. Management believes this information provides investors with a useful metric to evaluate the ongoing operating performance of the Company 11 Quarter Ended (unaudited, in millions) Mar 31, 2016 Mar 31, 2015 Provision for loan losses $424 $390 Income before income taxes 914 908 Pre-tax, pre-provision income (1) $1,338 $1,298 Revenue net of interest expense $2,224 $2,171 Total operating expense 886 873 Excluding legal reserve addition — 20 Excluding anti-money laundering and related compliance program expenses 30 15 Adjusted operating expense $856 $838 Adjusted operating efficiency (2) 38.5% 38.6%
Reconciliation of GAAP to Non-GAAP Data (cont'd) Quarter Ended (unaudited, in millions) Mar 31, 2016 Dec 31, 2015 Mar 31, 2015 Note(s) 1. Tangible Common Equity ("TCE"), a non-GAAP financial measure, represents common equity less goodwill and intangibles. A reconciliation of TCE to common equity, a GAAP financial measure, is shown above. Other financial services companies may also use TCE and definitions may vary, so users of this information are advised to exercise caution in comparing TCE of different companies. TCE is included because management believes that common equity excluding goodwill and intangibles is a more meaningful measure to investors of the true net asset value of the Company 2. Adjustments related to capital components for fully phased-in Basel III include the phase-in of the intangible asset exclusion 3. Key differences under fully phased-in Basel III rules in the calculation of risk weighted assets include higher risk weighting for past due loans and unfunded commitments 4. Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in) is calculated using Common Equity Tier 1 Capital (Basel III Fully Phased-in), a non-GAAP measure, divided by Risk Weighted Assets (Basel III Fully Phased-in) 12 GAAP Total Common Equity $10,756 $10,715 $10,651 Less: Goodwill (255) (255) (257) Less: Intangibles (167) (168) (175) Tangible Common Equity(1) $10,334 $10,292 $10,219 Common Equity Tier 1 Capital (Basel III Transition) $10,593 $10,566 $10,497 Adjustments Related to Capital Components During Transition(2) ($54) (82) (87) Common Equity Tier 1 Capital (Basel III Fully Phased-in) $10,539 $10,484 $10,410 Risk Weighted Assets (Basel III Transition) $74,205 $75,787 $70,868 Risk Weighted Assets (Basel III Fully Phased-in) (3) $74,137 $75,685 $70,762 Common Equity Tier 1 Capital Ratio (Basel III Transition) 14.3% 13.9% 14.8% Common Equity Tier 1 Capital Ratio (Basel III Fully Phased-in)(4) 14.2% 13.9% 14.7%
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