Discover Financial Services Reports First Quarter 2023 Net Income of $1.0 Billion or $3.58 Per Diluted Share

Board of Directors Approves Repurchase of up to $2.7 Billion of Common Stock and Increases the Quarterly Common Stock Dividend 17% to $0.70 Per Share

Discover Financial Services (NYSE: DFS):

First Quarter 2023 Results

 

2023

2022

YOY Change

Total loans, end of period (in billions)

$112.7

$93.5

21%

Total revenue net of interest expense (in millions)

$3,753

$2,902

29%

Total net charge-off rate

2.72%

1.61%

111 bps

Net income/(loss) (in millions)

$976

$1,242

(21)%

Diluted EPS

$3.58

$4.22

(15%)

Discover Financial Services (NYSE: DFS) today reported net income of $1.0 billion or $3.58 per diluted share for the first quarter of 2023, as compared to a net income of $1.2 billion or $4.22 per diluted share for the first quarter of 2022.

“Our results for the first quarter of 2023 indicate a solid start to the year, with continued receivables growth and record deposit inflows, while credit is normalizing as expected. While there was stress across some segments of the banking system, our strong funding and capital generative business model enabled us to invest for growth while sustaining significant capital return to shareholders,” said Roger Hochschild, CEO and President of Discover. “We believe these factors create a compelling position for Discover in 2023 and beyond.”

Segment Results

Digital Banking

Digital Banking pretax income of $1.2 billion for the quarter was $498 million lower than the prior year period reflecting a higher provision for credit losses and higher operating expenses, partially offset by increased revenue net of interest expense.

Total loans ended the quarter at $112.7 billion, up 21% year-over-year, and flat sequentially. Credit card loans ended the quarter at $89.8 billion, up 22% year-over-year. Personal loans increased $1.5 billion, or 21%, and private student loans increased $166 million, or 2%, year-over-year. The organic student loan portfolio, which excludes purchased loans, increased $313 million, or 3% from the prior year period.

Net interest income for the quarter increased $653 million, or 26% driven by higher average receivables and net interest margin expansion. Net interest margin was 11.34%, up 49 basis points versus the prior year. Card yield was 15.06%, up 247 basis points from the prior year primarily driven by higher market rates partially offset by higher interest charge-offs and a slightly higher mix of receivables at a promotional rate. Interest expense as a percent of total loans increased 230 basis points from the prior year period, primarily driven by higher funding costs.

Non-interest income increased $47 million, or 10%, from the prior year period, mainly driven by higher discount/interchange revenue and loan fee income partially offset by higher rewards cost driven by higher sales volumes.

The total net charge-off rate of 2.72% was 111 basis points higher versus the prior year period reflecting credit normalization across the portfolio. The credit card net charge-off rate was 3.10%, up 126 basis points from the prior year period and up 73 basis points from the prior quarter. The 30+ day delinquency rate for credit card loans was 2.76%, up 99 basis points year-over year and up 23 basis points from the prior quarter. The student loan net charge-off rate was 1.04%, up 35 basis points from the prior year and down 29 basis points from the prior quarter. Personal loans net charge-off rate of 1.94% was up 82 basis points from the prior year and up 45 basis points from the prior quarter.

Provision for credit losses of $1.1 billion increased $948 million from the prior year driven by a $385 million reserve build in the current quarter compared to a $175 million reserve release in the prior year quarter and a $382 million increase in net-charge offs.

Total operating expenses were up $250 million year-over year, or 23%, driven primarily by higher expenses for employee compensation, professional fees, and marketing. The increase in employee compensation was driven by higher headcount. Professional fees increased due to investment in technology and consulting costs. Marketing increased primarily due to investments in consumer banking, card acquisition, and brand.

Payment Services

Payment Services pretax income of $47 million was up $148 million year-over-year. Higher revenue was driven by $162 million net losses on equity investments in the prior year quarter compared to $18 million net losses in the current year quarter.

Payment Services volume was $85.1 billion, up 10% year-over-year. PULSE dollar volume was up 9% primarily driven by increased debit transaction volume. Diners Club volume was up 28% year-over-year reflecting an improvement in global T&E and corporate spending. Network Partners volume decreased 1% from the prior year primarily reflecting lower transaction volume.

Share Repurchase

During the first quarter of 2023, the company repurchased approximately 11.3 million shares of common stock for $1.2 billion. Shares of common stock outstanding declined by 4.0% from the prior quarter.

The Board of Directors has approved a new $2.7 billion share repurchase program. The new share repurchase program spans five quarters through June 30, 2024, replaces the prior program, and may be terminated at any time. The company expects to make share repurchases from time to time subject to the company's capital plan, market conditions and other factors, including legal and regulatory restrictions and required approvals.

Dividend Declaration

The Board of Directors increased the quarterly dividend from $0.60 to $0.70 per share, and declared a quarterly cash dividend of $0.70 per share of common stock payable on June 8, 2023, to holders of record at the close of business on May 25, 2023.

Conference Call and Webcast Information

The company will host a conference call to discuss its first quarter results on Thursday, April 20, 2023, at 7:00 a.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 digital 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 and certificates of deposit through its banking business. It operates the Discover Global Network® comprised of Discover Network, with millions of merchants and cash access locations; PULSE®, one of the nation's leading ATM/debit networks; and Diners Club International®, a global payments network with acceptance around the world. 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 (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 accounting guidance, tax reform, financial regulatory reform, consumer financial services practices, anti-corruption and funding, capital and liquidity; the actions and initiatives of current and potential competitors; our ability to manage our expenses; our ability to successfully achieve card acceptance across our networks and maintain relationships with network participants and merchants; our ability to sustain and grow our private student loan, personal loan and home loan 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; our ability to manage our credit risk, market risk, liquidity risk, operational risk, legal and compliance 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 our investment portfolio; limits on our ability to pay dividends and repurchase our common stock; limits on our ability to receive payments from our subsidiaries; fraudulent activities or material security breaches of our or others' key systems; our ability to remain organizationally effective; our ability to increase or sustain Discover card usage or attract new customers; our ability to maintain relationships with merchants; the effect of political, economic and market conditions, geopolitical events, climate change, pandemics and unforeseen or catastrophic events; our ability to introduce new products and services; our ability to manage our relationships with third-party vendors, as well as those with which we have no direct relationship such as our employees' internet service providers; our ability to maintain current technology and integrate new and acquired systems and technology; our ability to collect amounts for disputed transactions from merchants and merchant acquirers; our ability to attract and retain employees; our ability to protect our reputation and our intellectual property; our ability to comply with regulatory requirements; and new lawsuits, investigations or similar matters or unanticipated developments related to current matters. We routinely evaluate and may pursue acquisitions of or investments in businesses, products, technologies, loan portfolios or deposits, which may involve payment in cash or our 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, 2022, which is filed with the SEC and available at the SEC's internet site (http://www.sec.gov) and subsequent reports on Forms 8-K and 10-Q, including the company's Current Report on Form 8-K filed today with the SEC.

DISCOVER FINANCIAL SERVICES
(unaudited, in millions, except per share statistics)
Quarter Ended
March 31, 2023 December 31, 2022 March 31, 2022
EARNINGS SUMMARY
Interest Income

$4,077

 

$3,856

 

$2,736

 

Interest Expense

945

 

789

 

257

 

Net Interest Income

3,132

 

3,067

 

2,479

 

 
Discount/Interchange Revenue

1,057

 

1,165

 

955

 

Rewards Cost

716

 

797

 

635

 

Discount and Interchange Revenue, net

341

 

368

 

320

 

Protection Products Revenue

43

 

44

 

44

 

Loan Fee Income

166

 

182

 

140

 

Transaction Processing Revenue

67

 

66

 

57

 

Gains/Losses on Equity Investments

(18

)

(6

)

(162

)

Other Income

22

 

11

 

24

 

Total Non-Interest Income

621

 

665

 

423

 

 
Revenue Net of Interest Expense

3,753

 

3,732

 

2,902

 

 
Provision for Credit Losses

1,102

 

883

 

154

 

 
Employee Compensation and Benefits

625

 

573

 

500

 

Marketing and Business Development

241

 

313

 

192

 

Information Processing & Communications

139

 

143

 

125

 

Professional Fees

232

 

264

 

177

 

Premises and Equipment

22

 

48

 

24

 

Other Expense

124

 

154

 

112

 

Total Operating Expense

1,383

 

1,495

 

1,130

 

 
Income/(Loss) Before Income Taxes

1,268

 

1,354

 

1,618

 

Tax Expense

292

 

321

 

376

 

Net Income/(Loss)

$976

 

$1,033

 

$1,242

 

 
Net Income/(Loss) Allocated to Common Stockholders

$939

 

$1,027

 

$1,205

 

 
 
PER SHARE STATISTICS
Basic EPS

$3.58

 

$3.77

 

$4.23

 

Diluted EPS

$3.58

 

$3.77

 

$4.22

 

Common Stock Price (period end)

$98.84

 

$97.83

 

$110.19

 

Book Value per share

$55.79

 

$54.57

 

$47.81

 

 
BALANCE SHEET SUMMARY
Total Assets

$133,061

 

$131,628

 

$107,412

 

Total Liabilities

118,746

 

117,038

 

93,979

 

Total Equity

14,315

 

14,590

 

13,433

 

Total Liabilities and Stockholders' Equity

$133,061

 

$131,628

 

$107,412

 

 
TOTAL LOAN RECEIVABLES
Ending Loans 1

$112,674

 

$112,120

 

$93,471

 

Average Loans 1

$112,049

 

$108,036

 

$92,691

 

 
Interest Yield

14.06

%

13.53

%

11.80

%

Gross Principal Charge-off Rate

3.50

%

2.87

%

2.64

%

Net Principal Charge-off Rate

2.72

%

2.13

%

1.61

%

Delinquency Rate (30 or more days)

2.48

%

2.30

%

1.64

%

Delinquency Rate (90 or more days)

1.14

%

0.98

%

0.72

%

Gross Principal Charge-off Dollars

$966

 

$781

 

$603

 

Net Principal Charge-off Dollars

$750

 

$581

 

$368

 

Net Interest and Fee Charge-off Dollars

$169

 

$126

 

$87

 

Loans Delinquent 30 or more days

$2,791

 

$2,578

 

$1,537

 

Loans Delinquent 90 or more days

$1,290

 

$1,101

 

$678

 

 
Allowance for Credit Losses (period end)

$7,691

 

$7,374

 

$6,647

 

Reserve Change Build/(Release) 2

$385

 

$313

 

($175

)

Reserve Rate

6.83

%

6.58

%

7.11

%

 
CREDIT CARD LOANS
Ending Loans

$89,755

 

$90,113

 

$73,783

 

Average Loans

$89,460

 

$86,396

 

$73,042

 

 
Interest Yield

15.06

%

14.50

%

12.59

%

Gross Principal Charge-off Rate

3.99

%

3.20

%

3.00

%

Net Principal Charge-off Rate

3.10

%

2.37

%

1.84

%

Delinquency Rate (30 or more days)

2.76

%

2.53

%

1.77

%

Delinquency Rate (90 or more days)

1.34

%

1.14

%

0.83

%

Gross Principal Charge-off Dollars

$879

 

$697

 

$541

 

Net Principal Charge-off Dollars

$684

 

$516

 

$331

 

Loans Delinquent 30 or more days

$2,477

 

$2,278

 

$1,305

 

Loans Delinquent 90 or more days

$1,204

 

$1,028

 

$613

 

 
Allowance for Credit Losses (period end)

$6,135

 

$5,883

 

$5,120

 

Reserve Change Build/(Release) 2

$318

 

$322

 

($153

)

Reserve Rate

6.84

%

6.53

%

6.94

%

 
Total Discover Card Volume

$54,129

 

$59,153

 

$49,379

 

Discover Card Sales Volume

$50,588

 

$55,663

 

$46,329

 

Rewards Rate

1.41

%

1.42

%

1.36

%

 
SEGMENT- INCOME/(LOSS) BEFORE INCOME TAXES
Digital Banking

$1,221

 

$1,317

 

$1,719

 

Payment Services

47

 

37

 

(101

)

Total

$1,268

 

$1,354

 

$1,618

 

 
NETWORK VOLUME
PULSE Network

$65,268

 

$66,807

 

$59,836

 

Network Partners

10,628

 

10,433

 

10,683

 

Diners Club International 3

9,211

 

9,155

 

7,176

 

Total Payment Services

85,107

 

86,395

 

77,695

 

Discover Network - Proprietary

51,826

 

58,138

 

48,129

 

Total

$136,933

 

$144,533

 

$125,824

 

 
 
1 Total Loans includes Home Equity and other loans.
 
2 Excludes any build/release of the liability for expected credit losses on unfunded commitments as the offset is recorded in accrued expenses and other liabilities in the Company's condensed consolidated statements of financial condition
 
3 Volume is derived from data provided by licencees 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).

 

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