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Discover Financial Services Reports Third Quarter 2021 Net Income of $1.1 Billion or $3.54 Per Diluted Share

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RIVERWOODS, Ill., October 20, 2021--(BUSINESS WIRE)--Discover Financial Services (NYSE: DFS):

Third Quarter 2021 Results

2021

2020

YOY Change

Total loans, end of period (in billions)

$89.5

$88.7

1%

Total revenue net of interest expense (in millions)

$2,777

$2,714

2%

Total net charge-off rate

1.46%

3.00%

-154 bps

Net income/(loss) (in millions)

$1,091

$771

42%

Diluted EPS

$3.54

$2.45

44%

Discover Financial Services (NYSE: DFS) today reported net income of $1.1 billion or $3.54 per diluted share for the third quarter of 2021, as compared to a net income of $771 million or $2.45 per diluted share for the third quarter of 2020.

"Our results this quarter reflected the strengths of our integrated digital banking and payments model, which continues to be a source of significant competitive advantage" said Roger Hochschild, CEO and President of Discover. "Even in an environment of heightened competition, our attractive value proposition drove strong new account growth, which contributed to our return to year-over-year loan growth in the quarter. Further, our success in managing our operating costs and continued strong credit performance helped generate substantial capital, supporting the increase in share repurchases."

Segment Results:

Digital Banking

Digital Banking pretax income of $1.5 billion for the quarter was $599 million higher than the prior year period primarily reflecting a lower provision for credit losses and higher revenue net of interest expense, partially offset by increased operating expenses.

Total loans ended the quarter at $89.5 billion, up 1% year-over-year, and up 2% sequentially. Credit card loans ended the quarter at $70.3 billion, up 1% year-over-year. Personal loans decreased $321 million, or 4%, and private student loans increased $168 million, or 2%, year-over-year. The organic student loan portfolio, which excludes purchased loans, increased $402 million, or 4% from the prior year period.

Net interest income for the quarter increased $140 million, or 6%, from the prior year period, driven by favorable funding costs due to lower market rates and decreased interest charge-offs, partially offset by a lower credit card revolving loan balance as payment rates remained elevated. Net interest margin was 10.80%, up 61 basis points versus the prior year. Card yield was 12.53%, up 13 basis points from the prior year period primarily driven by decreased interest charge-offs, and a lower mix of receivables at a promotional rate, partially offset by the impact of a higher payment rate on revolving loan balances. Interest expense as a percent of total loans decreased 66 basis points from the prior year period, primarily as a result of lower market rates and proactive management of deposit costs, maturity of high coupon consumer CDs and a favorable shift in the funding mix.

Non-interest income increased $76 million, or 20%, from the prior year period, mainly driven by higher discount/interchange revenue and loan fee income partially offset by higher rewards cost.

The total net charge-off rate of 1.46% was 154 basis points lower versus the prior year period reflecting strong credit performance across the portfolio. The credit card net charge-off rate was 1.65%, down 180 basis points from the prior year period and down 80 basis points from the prior quarter. The 30+ day delinquency rate for credit card loans was 1.48%, down 43 basis points year-over year and up 5 basis points from the prior quarter. The student loan net charge-off rate was 0.68%, up 10 basis points from the prior year and up 15 basis points from the prior quarter. Personal loans net charge-off rate of 1.11% was down 158 basis points from the prior year and down 69 basis point from the prior quarter.

Provision for credit losses of $185 million decreased $565 million from the prior year period driven by lower net charge-offs and a reserve release in the quarter. The third quarter of 2021 included a $165 million reserve release, compared to a $42 million reserve build in the third quarter of 2020. Net charge-offs of $325 million were $343 million lower than the prior year period.

Total operating expenses were up $182 million, year-over year, or 19%, primarily reflecting higher marketing expense, increased other expenses, increased recovery fees, and higher employee compensation.

Payment Services

Payment Services had a pretax loss of $114 million, down $156 million year-over-year. Lower revenue was driven by a $167 million unrealized loss on equity investments. This was partially offset by higher PULSE and Network Partners revenue.

Payment Services volume was $76.8 billion, up 10% year-over-year. PULSE dollar volume was up 9% year-over-year with growth across all debit products driven by increased spend related to the economic recovery. Diners Club volume was up 12% year-over-year reflecting a rebound from the impacts of the pandemic. Network Partners volume increased 16% from the prior year primarily reflecting higher AribaPay volume.

Share Repurchase

During the third quarter of 2021, the company repurchased approximately 6.5 million shares of common stock for $815 million. Shares of common stock outstanding declined by 2.1% from the prior quarter.

Conference Call and Webcast Information

The company will host a conference call to discuss its third quarter results on Thursday, October 21, 2021, 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 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 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: the effect of the coronavirus disease 2019 ("COVID-19") pandemic and measures taken to mitigate the pandemic, including their impact on our credit quality and business operations as well as their impact on general economic and financial markets, 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 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; 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, 2020, "Risk Factors" and "Management's Discussion & Analysis of Financial Condition and Results of Operations" in the company's Quarterly Report on Form 10-Q for the quarter ended June 30, 2021 and March 31, 2021 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

September 30,
2021

June 30,
2021

September 30,
2020

EARNINGS SUMMARY

Interest Income

$2,674

$2,589

$2,681

Interest Expense

269

290

416

Net Interest Income

2,405

2,299

2,265

Discount/Interchange Revenue

988

937

752

Rewards Cost

689

598

514

Discount and Interchange Revenue, net

299

339

238

Protection Products Revenue

43

43

44

Loan Fee Income

121

105

100

Transaction Processing Revenue

58

58

50

Unrealized Gains/ (Losses) on Equity Investments

(167

)

729

0

Realized Gains/ (Losses) on Equity Investments

0

0

0

Other Income

18

6

17

Total Non-Interest Income

372

1,280

449

Revenue Net of Interest Expense

2,777

3,579

2,714

Provision for Credit Losses

185

135

750

Employee Compensation and Benefits

483

498

471

Marketing and Business Development

210

175

140

Information Processing & Communications

121

145

111

Professional Fees

198

187

151

Premises and Equipment

23

22

26

Other Expense

155

195

106

Total Operating Expense

1,190

1,222

1,005

Income/ (Loss) Before Income Taxes

1,402

2,222

959

Tax Expense

311

524

188

Net Income/ (Loss)

$1,091

$1,698

$771

Net Income/ (Loss) Allocated to Common Stockholders

$1,055

$1,688

$751

PER SHARE STATISTICS

Basic EPS

$3.54

$5.56

$2.45

Diluted EPS

$3.54

$5.55

$2.45

Common Stock Price (period end)

$122.85

$118.29

$57.78

Book Value per share

$45.00

$43.72

$33.45

BALANCE SHEET SUMMARY

Total Assets

$108,544

$110,985

$124,349

Total Liabilities

95,281

97,814

114,097

Total Equity

13,263

13,171

10,252

Total Liabilities and Stockholders' Equity

$108,544

$110,985

$124,349

TOTAL LOAN RECEIVABLES

Ending Loans 1

$89,542

$87,674

$88,660

Average Loans 1

$88,356

$86,296

$88,422

Interest Yield

11.79

%

11.79

%

11.78

%

Gross Principal Charge-off Rate

2.50

%

3.20

%

3.78

%

Net Principal Charge-off Rate

1.46

%

2.12

%

3.00

%

Delinquency Rate (30 or more days)

1.40

%

1.34

%

1.77

%

Delinquency Rate (90 or more days)

0.58

%

0.63

%

0.80

%

Gross Principal Charge-off Dollars

$556

$688

$842

Net Principal Charge-off Dollars

$325

$456

$668

Net Interest and Fee Charge-off Dollars

$72

$101

$141

Loans Delinquent 30 or more days

$1,258

$1,172

$1,567

Loans Delinquent 90 or more days

$522

$550

$708

Allowance for Credit Losses (period end)

$6,861

$7,026

$8,226

Reserve Change Build/(Release) 2, 3

($165

)

($321

)

$42

Reserve Rate

7.66

%

8.01

%

9.28

%

CREDIT CARD LOANS

Ending Loans

$70,320

$68,886

$69,656

Average Loans

$69,416

$67,420

$69,643

Interest Yield

12.53

%

12.52

%

12.40

%

Gross Principal Charge-off Rate

2.83

%

3.69

%

4.33

%

Net Principal Charge-off Rate

1.65

%

2.45

%

3.45

%

Delinquency Rate (30 or more days)

1.48

%

1.43

%

1.91

%

Delinquency Rate (90 or more days)

0.66

%

0.73

%

0.93

%

Gross Principal Charge-off Dollars

$495

$620

$759

Net Principal Charge-off Dollars

$289

$412

$604

Loans Delinquent 30 or more days

$1,040

$983

$1,328

Loans Delinquent 90 or more days

$467

$504

$650

Allowance for Credit Losses (period end)

$5,298

$5,409

$6,491

Reserve Change Build/(Release) 2

($111

)

($231

)

$0

Reserve Rate

7.54

%

7.85

%

9.32

%

Total Discover Card Volume

$50,389

$48,049

$39,783

Discover Card Sales Volume

$47,613

$45,460

$37,134

Rewards Rate

1.44

%

1.31

%

1.38

%

SEGMENT- INCOME/(LOSS) BEFORE INCOME TAXES

Digital Banking

$1,516

$1,530

$917

Payment Services

(114

)

692

42

Total

$1,402

$2,222

$959

NETWORK VOLUME

PULSE Network

$59,872

$62,855

$54,993

Network Partners

10,377

9,468

8,917

Diners Club International 4

6,547

6,126

5,839

Total Payment Services

76,796

78,449

69,749

Discover Network - Proprietary

49,360

47,201

38,699

Total

$126,156

$125,650

$108,448

1 Total Loans includes Home Equity and other loans.

2 Excludes January 1, 2020 CECL day one impact

3 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

4 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).

View source version on businesswire.com: https://www.businesswire.com/news/home/20211020006070/en/

Contacts

Investors:
Eric Wasserstrom, 224-405-5923
ericwasserstrom@discover.com

Media:
Jon Drummond, 224-405-1888
jondrummond@discover.com

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