Discover Financial Services(DFS) - 2024 Q3 - Quarterly Report

Net Income and Earnings - Net income was $870 million, or$ 3.32 per diluted share, compared to $586 million, or$ 2.21 per diluted share in the prior year[307] - Net income increased by 48% from $586 million in September 2023 to$ 870 million in September 2024[371] - Net income allocated to common stockholders increased by 52% from $550 million in September 2023 to$ 834 million in September 2024[371] Loan Growth and Performance - Total loans grew $4.3 billion, or 4%, to$ 127.0 billion[307] - Credit card loans grew $3.1 billion, or 3%, to$ 100.5 billion[307] - Credit card loans grew to $100.290 billion with a yield of 16.23% for the three months ended September 30, 2024, compared to$ 95.796 billion and a yield of 15.43% in 2023[361] - Total loan receivables increased to $127.707 billion with a yield of 15.06% for the three months ended September 30, 2024, up from$ 120.380 billion and a yield of 14.44% in 2023[361] - Total loan portfolio decreased from $128.409 billion in December 2023 to$ 118.509 billion in September 2024, a decline of 7.7%[365] - Credit card loans decreased from $102.259 billion in December 2023 to$ 100.489 billion in September 2024, a decline of 1.7%[365] Credit Card Loans and Delinquencies - The net charge-off rate for credit card loans increased 125 basis points to 5.28%[307] - Credit card loans 30 or more days delinquent increased to $3,857 million (3.84%) in September 2024 from$ 3,955 million (3.87%) in December 2023[379] - Credit card loans 90 or more days delinquent decreased to $1,883 million (1.87%) in September 2024 from$ 1,917 million (1.87%) in December 2023[379] - Net charge-offs for credit card loans increased to $1,332 million (5.28%) in September 2024 from$ 973 million (4.03%) in September 2023[391] Deposit Growth - Direct-to-consumer deposits grew $9.1 billion, or 11%, to$ 90.3 billion[307] - At September 30, 2024, the company had $90.3 billion of direct-to-consumer deposits and$ 19.5 billion of brokered deposits, with $95.7 billion due in less than one year and$ 14.1 billion due in one year or thereafter[410] Payment Services - Payment Services transaction volume for the segment was $100.5 billion, up 9%[307] - Total Payment Services volume increased to$ 100.473 billion for the three months ended September 30, 2024, up from $91.768 billion in the same period in 2023[337] - Payment Services segment reported income before income taxes of$ 84 million in Q3 2024, compared to $85 million in Q3 2023[335] Revenue and Income - Total other income subject to ASC 606 was$ 1.866 billion for the nine months ended September 30, 2024, compared to $1.448 billion in the same period in 2023[301] - Discount and interchange revenue, net, increased to$ 1.121 billion for the nine months ended September 30, 2024, from $1.027 billion in the same period in 2023[301] - Transaction processing revenue increased to$ 262 million for the nine months ended September 30, 2024, from $221 million in the same period in 2023[301] - Loan fee income increased to$ 619 million for the nine months ended September 30, 2024, from $546 million in the same period in 2023[301] - Total interest income for Digital Banking increased to$ 5.112 billion in Q3 2024, up from $4.610 billion in Q3 2023[335] - Net interest income for Digital Banking rose to$ 3.655 billion in Q3 2024, compared to $3.322 billion in Q3 2023[335] - Credit card loans interest income grew to$ 4.092 billion in Q3 2024, up from $3.726 billion in Q3 2023[335] - Personal loans interest income increased to$ 360 million in Q3 2024, compared to $305 million in Q3 2023[335] - Total income before income taxes for Digital Banking reached$ 1.108 billion in Q3 2024, up from $676 million in Q3 2023[335] - Net interest income increased for the three and nine months ended September 30, 2024, driven by higher average loan receivables and yield expansion[339] - Total other income increased for the three months ended September 30, 2024, driven by a gain from the sale of the private student loan portfolio[340] - Total other income increased to$ 798 million in September 2024 from $705 million in September 2023, driven by a gain from the sale of the private student loan portfolio[396] Credit Losses and Allowances - Provision for credit losses decreased for the three months ended September 30, 2024, primarily due to portfolio seasoning[340] - Allowance for credit losses was$ 8.5 billion at September 30, 2024, reflecting a $31 million build from June 30, 2024[356] - Sensitivity analysis showed that the allowance for credit losses would increase by$ 444 million if 100% weight was applied to the most adverse macroeconomic scenario[358] - Allowance for credit losses decreased from $9.283 billion in December 2023 to$ 8.512 billion in September 2024, a decline of 8.3%[365] - Net charge-offs for credit card loans decreased from $2.499 billion in September 2023 to$ 973 million in September 2024, a decline of 61.1%[377] - Net charge-offs for personal loans increased to $106 million (4.01%) in September 2024 from$ 62 million (2.63%) in September 2023[391] Expenses - Total expenses are expected to increase, driven by investments in compliance, risk management, and wage growth, excluding card misclassification and merger-related costs[320] - Total other expense increased for the three months ended September 30, 2024, primarily due to higher employee compensation and benefits, and technology investments[352] - Total other expense increased by $224 million (14%) for the three months ended September 30, 2024, compared to the same period in 2023, driven by increases in employee compensation and benefits, information processing and communications, and professional fees[398] - Employee compensation and benefits increased by$ 128 million (22%) for the three months ended September 30, 2024, primarily due to higher average salaries and employee retention awards[398] - Information processing and communications expenses increased by $48 million (32%) for the three months ended September 30, 2024, driven by technology investments and accelerated private student loan software depreciation[398] - Professional fees increased by$ 42 million (15%) for the three months ended September 30, 2024, primarily due to recovery fees and consulting supporting the pending merger[398] - Total other expense increased by $719 million (17%) for the nine months ended September 30, 2024, compared to the same period in 2023, driven by increases in employee compensation and benefits, other expense, and professional fees[399] Interest Rates and Margins - Net interest margin is expected to increase compared to 2023, driven by higher card yields and the exit of private student lending[320] - Net interest margin improved to 11.38% for the three months ended September 30, 2024, compared to 10.95% in the same period in 2023[361] - Total interest-earning assets increased to$ 152.371 billion with a yield of 13.35% for the three months ended September 30, 2024, compared to $141.828 billion and a yield of 12.90% for the same period in 2023[361] - Total interest-bearing deposits increased to$ 107.286 billion with a yield of 4.50% for the three months ended September 30, 2024, up from $99.606 billion and a yield of 4.23% in 2023[361] - Net interest income for the nine months ended September 30, 2024, was$ 10.666 billion, compared to $9.631 billion in the same period in 2023[363] - Total interest-earning assets for the nine months ended September 30, 2024, were$ 152.493 billion with a yield of 13.17%, compared to $136.911 billion and a yield of 12.67% in 2023[363] - Credit card loans for the nine months ended September 30, 2024, were$ 100.062 billion with a yield of 16.01%, compared to $92.383 billion and a yield of 15.21% in 2023[363] - Total loan receivables for the nine months ended September 30, 2024, were$ 127.273 billion with a yield of 14.87%, compared to $115.926 billion and a yield of 14.23% in 2023[363] - A +100 basis point change in interest rates would result in a$ 92 million (0.65%) impact on earnings as of September 30, 2024[472] - A -100 basis point change in interest rates would result in a $74 million (0.52%) negative impact on earnings as of September 30, 2024[472] - The majority of the company's credit card and private student loans charge variable rates as of September 30, 2024[470] - The company's net interest income and earnings may be reduced if interest rates on assets increase slower than rates on borrowings[469] Regulatory and Compliance - The company's Stress Capital Buffer (SCB) requirement increased to 3.1% effective from October 1, 2024, through September 30, 2025[327] - Discover is subject to new cybersecurity regulations, with final rules expected to be published in late 2025 and become effective in 2026[348] - The effective tax rate increased to 27.0% for the three months ended September 30, 2024, compared to 23.0% in 2023, due to the adoption of the proportional amortization method and potential non-deductible regulatory penalties[402] - The company's disclosure controls and procedures were not effective as of September 30, 2024, despite fair presentation of financial statements[474] - The company submitted an updated capital plan on May 3, 2024, due to the Merger Agreement with Capital One[462] Capital and Liquidity - The company's tangible common equity was$ 15.798 billion as of September 30, 2024, compared to $12.924 billion as of December 31, 2023[438] - The liquidity portfolio and undrawn credit facilities totaled$ 77.5 billion as of September 30, 2024, a $7.8 billion increase from December 31, 2023[457] - The company had$ 9.3 billion of outstanding public asset-backed securities and $2.5 billion of outstanding subordinated asset-backed securities as of September 30, 2024[418] - At September 30, 2024, the company had total committed borrowing capacity of$ 4.9 billion with the FHLB of Chicago, of which $1.0 billion of long-term advances were outstanding[422] - Discover Financial Services (Parent Company) and Discover Bank have outstanding fixed-rate debt totaling$ 7.789 billion, with $644 million of interest due in less than one year and$ 1.7 billion due thereafter[423] - Discover Bank has $46.1 billion of available borrowing capacity through the Federal Reserve Bank of Philadelphia's discount window, with no borrowings outstanding as of September 30, 2024[427] - The company has$ 750 million of short-term advances outstanding from private asset-backed securitizations as of September 30, 2024[424] - Discover Financial Services has a total committed capacity of $3.5 billion through private asset-backed securitizations, with$ 750 million drawn as of September 30, 2024[425] - The company's liquidity portfolio includes highly liquid assets such as cash, cash equivalents, short-term investments, and investment securities, primarily composed of U.S. Treasury and GSE debt obligations[430] - Discover Financial Services and Discover Bank met the "well-capitalized" status requirements under Federal Reserve Regulation Y and FDIC rules as of September 30, 2024[436] - The phase-in of the CECL accounting model decreased CET1 by $1.6 billion as of January 1, 2024[461] - Tangible common equity at September 30, 2024 is considered a non-GAAP financial measure, excluding goodwill and intangibles[464] Dividends and Shareholder Returns - The company's Series C preferred stock dividends totaled$ 55 million for both 2024 and 2023[439] - Total common stock dividends for 2024 amounted to $2.80 per share, compared to$ 2.70 per share in 2023[465] - Quarterly cash dividends on common stock may not exceed $0.70 per share without prior written consent from Capital One[467] Credit Ratings and Financial Health - Discover Financial Services' senior unsecured debt is rated Baa2 by Moody's, BBB- by Standard & Poor's, and BBB+ by Fitch Ratings[453] - The DiscoverSeries three-month rolling average excess spread was 14.00% for the three months ended September 30, 2024[405] Mergers and Acquisitions - The company submitted an updated capital plan on May 3, 2024, due to the Merger Agreement with Capital One[462]