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.”
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 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.
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.