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Credit Quality
Credit card loans declined $367 million from the prior-year quarter. Total loans at the end of the quarter was $52.5 billion, up 5% compared with 2Q10, reflecting the acquisition of $3.7 billion in private student loans and $640 million in personal loans, partially offset by a decline of $367 million in credit card loans.
The delinquency rate for loans over 30 days past due declined to 2.79% in 2Q11, an improvement of 206 basis points from the prior year, and 80 basis points from the prior quarter.
The net charge-off rate decreased 355 basis points from the prior year and 99 basis points from the prior quarter.
Provision for loan losses of $176 million decreased $548 million from the 2Q10, driven by lower charge-offs and a reduction in the allowance for loan losses. The sustained improvement in the outlook for credit performance over the next twelve months led to a reduction in the loan loss reserve rate, which resulted in a reserve release of $401 million in 2Q11 versus a reserve build of $277 million in 2Q10.
Credit card yield declined 36 basis points year over year and 8 basis points quarter over quarter. The decline in yield reflects the impacts of the CARD Act and an increase in promotional rate balances, partially offset by lower interest charge-offs. Interest expense as a percent of loans declined 31 basis points year over year and 10 basis points quarter over quarter as the company continued to take advantage of available low rate funding.
Dividend and Share Repurchase
On June 15, 2011, the board of Discover approved and authorized a two-year share repurchase program worth $1 billion with an expected expiry on June 14, 2013. Although the approval is effective immediately, the buyback of its shares will be held from time to time through open market operations, depending on the market conditions.
On June 15, 2011, the board of Discover declared a quarterly dividend of $0.06 per share on its common stock, which was paid on July 21, 2011, to stockholders of record as on July 7, 2011. During the first quarter, the company had increased its dividend from $0.02 per share, paid until the fourth quarter, in order to restore its dividend payout to the pre-financial crisis level.
Mortgage Origination Business Acquisition
On May 12, 2011, Discover agreed to acquire substantially all of the operating and related assets of Home Loan Center, a subsidiary of Tree.com, Inc., for approximately $55.9 million. The acquisition will add residential mortgage component to Discover's direct-to-consumer banking business. The company intends to originate eligible consumer mortgages to sell in secondary markets on a servicing-released basis. The acquisition is subject to closing conditions, including the approvals of regulators and Tree.com, Inc. stockholders, and is expected to close by the end of 2011.
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