John T. Greene
Executive Vice President & Chief Financial Officer at Discover Financial Services
Thank you, Michael. I'll start with our summary financial results on Slide 5. In the 4th-quarter, we reported net income of $1.3 billion versus $366 million in the same-period last year. These results were driven by three main factors. First, provision expense declined by $707 million. This was largely from a reduction in our credit reserve balance compared to a reserve build one year-ago. Second, as Michael mentioned, we successfully completed the sale of our student loan portfolio, which resulted in a gain of $381 million. The transaction in total provided an earnings benefit of $1.3 billion, including the reserve reduction of $869 million recognized in the second-quarter. And third, net interest income grew $162 million from continued net interest margin expansion. In connection with finalizing the merger proxy, we restated financial results for the periods dated back to 2021, reflecting a reclassification of amounts related to the card tiering accrual. Furthermore, an independent review identified approximately $60 million of incremental charges related to the card product misclassification and we increased our accrual for potential regulatory penalties by $90 million in the 3rd-quarter. Both are incorporated in our revised results. Accounting for these updates, the cumulative impact on equity was a decrease of $151 million. Earnings for 2024 increased by $441 million. Back to the detailed results beginning with revenue on Slide 6. Our net interest margin ended the quarter at 11.96%, up 98 basis-points from the prior year and up 58 basis-points sequentially. Margin expansion was driven by-product mix, investment of sales proceeds and a lower card promotional balance mix. Card receivables increased 1% year-over-year due to a slightly lower payment rate, partially offset by a decrease in sales volume. The payment rate declined around 10 basis-points from last year, was down 20 basis-points sequentially and is approximately 90 basis-points above pre-pandemic levels. Over the past several quarters, payment rates have stabilized. Discover card sales were down 3% compared to the prior year. The decline in card sales is primarily due to credit tightening actions, which began in 2022. Holiday sales were strong and we currently see an opportunity to increase new account acquisition in the coming year. This is expected to provide a modest boost to 2025 sales with more substantial benefits expected in 2026. Personal loans were up 5% from the prior year. Demand remained strong and we continue to take a conservative approach to underwriting. Total loans after adjusting for the student loan sale increased 3%. Average consumer deposits were up 10% year-over-year and 2% sequentially. Deposit growth driven by industry-leading products, customer experience and our value proposition has enabled us to improve our funding mix. Direct-to-consumer deposits now account for 72% of total funding, bringing us within our targeted range of 70% to 80%. We continue to manage deposit balances to meet our liquidity needs and anticipate a through-the-cycle beta of around 70%. Looking at other revenue on Slide 7, non-interest income increased $417 million or 59%. Other income increased as a result of the successful student loan exit. Net discount and interchange revenue was up $45 million due to increased cashback debit volume and lower rewards. The rewards rate was 135 basis-points in the period, a decrease of 2 basis-points driven by lower cashback match, which was largely offset by an increase in 5% rewards. Sequentially, the reward rate is down 9 basis-points from changes in the promotional category. Moving to expenses on Slide 8. Total operating expenses were up $67 million or 4% year-over-year. Looking at our major expense categories, compensation costs increased $146 million or 23%, primarily due to higher wages and benefits and proactive employee retention actions. Marketing costs declined $73 million in the quarter due to timing of broad market advertising. Information processing increased as a result of technology investments and a $22 million write-off pertaining to our student loan infrastructure. Professional fees were up $51 million or 16%. This increase was driven by approximately $44 million of merger and integration costs and loan sale expenses. We recognized $588 million of risk management and compliance expense in addition to card misclassification costs and $118 million of merger and integration expense in 2024. Moving to credit performance on Slide nine. Total net charge-offs were 4.64%, 53 basis-points higher than the prior year and down 22 basis-points from the prior quarter. On a full-year basis, net charge-offs ended at 4.8%, slightly better than our guided range. In card, net charge-offs declined 25 basis-points from the prior quarter and the 30-plus day delinquency rate was flat. This marks the third consecutive quarter the card net charge-off rate has declined. The 2023 card vintage is maturing and is now expected to modestly outperform the 2022 vintage. We are seeing improvements across the portfolio. Personal loan net charge-offs and delinquencies continue to be within historical norms. Increases reflect the seasoning of recent growth. Our view on the consumer has not changed. We continue to observe a stable consumer supported by wage growth and a resilient labor market providing a foundation for sales and credit headed into 2025. Turning to the allowance for credit losses on Slide 10. Our credit reserve balance decreased $189 million from the prior quarter. The reserve rate was 6.87%, down 31 basis-points driven by our credit performance, improvement in household net-worth and an increase in seasonal transactor balances. Absent seasonal balances, the reserve rate would have declined by about 20 basis-points. In terms of the macroeconomic outlook, our expectations for unemployment and GDP are relatively unchanged from last quarter. We now assume peak unemployment of 4.7%, up 10 basis-points. Our GDP forecast remains in the 1% to 3% range. Looking at Slide 11, our common equity Tier-1 ratio for the period was 14.1%, up 160 basis-points compared to the prior quarter, supported by the student loan sale and core earnings generation. We declared a quarterly cash dividend of $0.70 per share of common stock. Including on Slide 12, given the pending merger, we will not provide numerical guidance. However, I'd like to provide some insights on trends for 2025. We anticipate loan growth to align more closely with pre-pandemic norms. Tailwinds from declining payment rates appear to have largely subsided. Sales and new account generation should play a larger role in driving growth than in the recent past. We expect net interest margin to remain relatively consistent with the 4th-quarter level, although an increase in new account generation may create some margin pressure in the back-half of the year. Mitigating factors include declining deposit rates and our improved funding mix. We have not contemplated any significant changes to our expense base prior to merger approval. Previously, we had shared the expectation for net charge-offs to peak in plateau. We are beginning to see a downward trend. To summarize, our strong 4th-quarter results brought an excellent close to 2024. In 2025, we will continue to invest in actions that drive sustainable long-term value and prepare for the consummation of our pending merger with Capital One. This concludes our remarks. I'll turn the call-back over to the operator.
