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Monday, March 22, 2010

Discover earnings report

Discover Financial Services released its earnings report for the first quarter of 2010, and the results are decidedly mixed. The company reported a net loss of $104 million for the first fiscal quarter of 2010 – despite a 5 percent increase in card sales volume, to $22 billion.

By comparison, Discover reported a net income of $120 million in the first quarter of 2009. Yet, that income was attended by a slightly steeper net loss to shareholders than what the company experienced in its first quarter this year. In 2010, the net loss experienced by shareholders was $122 million, or 22 cents a share, from the previous year; in 2009, the loss was $196 million, or 41 cents a share.

Good developments

The company's first quarter 2010 earnings statement touched on several favorable developments. One was the increase in sales volume, which the company said is its fourth straight month of year-over-year increases in that category. Second was a relatively low 30-day delinquency rate (for repayment of card expenditures) of 5.05 percent. Another was a $2.3 billion increase in deposit balances to $14.8 billion.

"Discover's performance this quarter reflects the emergence of a more favorable economic environment, as our Discover card sales volume has now shown four consecutive months of year-over-year growth and delinquency levels have declined," said David Nelms, Chairman and Chief Executive Officer of Discover.

Discover's revenue dip may have stemmed from its chargeoffs, which were reported at 8.51 percent. According to Paul Martaus, President of payment consulting firm Martaus & Associates, that number isn't especially high in the current economy but is nonetheless well above what a healthy rate would be.

"That's absolutely what's [causing the revenue decline]," he said. "A good chargeoff rate is 3 or 4 percent. Eight percent is still a big number. Think about it: if you took an 8.5 percent loss in your paycheck, you wouldn't be having a nice day. And that's what led to their disappointing earnings."

Martaus added that Discover is hardly alone among card issuers experiencing problems. "All the credit card cards have issues; they just do," he said. "People borrowed money they shouldn't have, and people lent money to people who shouldn’t have borrowed it."

Paying back TARP funds

Discover also indicated it had received regulatory approval to redeem the $1.2 billion of preferred stock that it issued to the U.S. Treasury under the Troubled Asset Relief Program – setting the stage for reimbursement on what was essentially a federal loan. That redemption could further solidify the company's financial footing by helping to clean its balance sheet and improve its image with shareholders.

Prior to that redemption, the company said it would issue $350 million of subordinated debt – meaning it will sell the ownership of owed monies to collection groups, according to Martaus.

"What Discover is trying to do, and I absolutely applaud them for it, is demonstrate to their shareholders that they have a handle on the problem, that it's a time-dependent issue having to do with the economy collapsing and that sooner or later that trend will turn," Martaus said. "If they can go to the marketplace and sell debt and raise capital that way, then they're golden." end of article

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