Discover Financial Services (DFS)

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Discover Financial Services (DFS)

Q1 2011 Earnings Call

March 22, 2011 5:00 pm ET


Craig Streem - Vice President of Investor Relations

Roy Guthrie - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Treasurer

David Nelms - Chairman and Chief Executive Officer


Richard Shane - JP Morgan Chase & Co

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc.

Michael Taiano - Sandler O’Neill & Partners

Brian Foran - Nomura Securities Co. Ltd.

Betsy Graseck - Morgan Stanley

Jason Arnold - RBC Capital Markets, LLC

Donald Fandetti - Citigroup Inc

Moshe Orenbuch - Crédit Suisse AG

Bradley Ball - Evercore Partners Inc.

John Stilmar - SunTrust Robinson Humphrey, Inc.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

David Hochstim - Buckingham Research Group, Inc.



Welcome to the Discover Financial Services First Quarter 2011 Earnings Conference Call. My name is Christine and I will be your operator for today's conference. [Operator Instructions] I will now turn the call over to Craig Streem, Vice President, Investor Relations. Mr. Streem, you may begin.

Craig Streem

Thanks, Christine. Welcome, everybody. Glad you're with us for this afternoon's call. Let me begin, as always, by reminding you that today's discussion contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today.

Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was furnished to the SEC in an 8-K report, and in our Form 10-K for the year ended November 30, 2010, which is on file with the SEC.

In this first quarter 2011 earnings release and supplement, which are now up on our website at, and have been furnished to the SEC, we have provided information that compares and reconciles the company's non-GAAP financial measures with the GAAP financial information, and we explained why these presentations are useful to management and to investors. And of course, we urge you to review that information in conjunction with today's discussion.

Finally, let me remind all of you that we will be holding our annual financial community update tomorrow morning at 8:30 here at the New York Palace Hotel. If you want more information about that meeting, please get in touch with me later this evening via e-mail.

With that event in front of us, we are going to keep this call and your questions, hopefully, focused on our first quarter results and performance. We will have much more for you tomorrow regarding our strategies for growth, and we'll have ample opportunity to take your questions in regard to those strategies and issues tomorrow morning.

Our call this afternoon will include formal remarks from David Nelms, our Chairman and Chief Executive Officer; and Roy Guthrie, our Chief Financial Officer. And as I said, a Q&A period following. Now it's my pleasure to turn the call over to David.

David Nelms

Thanks, Craig. Good afternoon, and thanks, everyone, for joining us. As Craig mentioned, we will be holding our annual financial community update tomorrow morning, so we will keep this conference call focused specifically on first quarter results.

During tomorrow's meeting we will give you a full update of the driver of our current performance and on our strategic priorities for delivering profitable growth into the future. After the market closed today, we reported record first quarter net income of $465 million or $0.84 per share. And we are very pleased to announce the restoration of our quarterly dividend to $0.06 per share, making Discover an early mover to fully restore its dividends to pre-financial crisis levels.

Our first-quarter performance can be attributed to strong results in both of our business segments. In Direct Banking, we earned pretax income of $677 million driven by the ongoing improvement in credit. Our Payment Services segment contributed $43 million of pretax income, reflecting growth of 16% from last year's first quarter.

For the company as a whole, I was very pleased that we achieved net worth volume of $68 billion, an increase of 15% from a year-ago.

Turning now to some of our first quarter highlights for each segment. In Direct Banking, Discover Card achieved sales of $24 billion, which represents a 7% year-over-year growth rate. We continue to focus on increasing our merchant acceptance, emphasizing our reward programs and leveraging our marketing investments to increase sales. Our total loan portfolio increased 3% from last year due to the acquisition of The Student Loan Corporation. We continue to be very excited about the growth potential and earning contribution of our Private Student Loan business.

Based on our first two months of results since closing on SLC, we reaffirmed that we are on track for $0.09 EPS accretion in 2011 related to the SLC acquisition, excluding a onetime related gain.

Looking only at our credit card loans, they were down 3% year-over-year this quarter, an improvement over the 5% decrease last year, and trending towards our expected modest card portfolio growth year-over-year by the second half of 2011. Our direct-to-consumer deposit business continued to grow this quarter as we added a net $1.2 billion in deposits.

In February, we announced our intent to acquire $1 billion in deposits from Allstate Bank, which also includes a multi-year banking product marketing relationship. Subject to regulatory approval, we expect the transaction to close midyear.

Our Payment Services segment turned in another strong quarter with 21% volume growth leading to a 16% increase in pretax income compared to last year. I was really pleased with the growth in PULSE dollar volume, which increased 24% over the same quarter a year ago.

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