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Text: Our call today will include remarks from our CEO, Roger Hochschild; and John Greene, our Chief Financial Officer.
After we conclude our formal comments, there will be time for question-and-answer session.
During the Q&A session, you will be permitted to ask one question, followed by one follow-up question, after your follow-up question, please return to the queue.
We had a very good quarter that highlighted the strength of our digital business model and solid execution on our strategic priorities against the backdrop of continued economic improvement.
This quarter was characterized by three important events.
First, our card receivables grew sequentially in May and June, causing our period-end receivables to be up quarter-over-quarter.
This outcome, combined with the strength in consumer spending and our account acquisition, increased our confidence for moderate receivables growth this year and stronger growth in 2022.
Second, we benefited from a gain in our Payment Services segment.
This gain is an outgrowth of a long [Technical Issues] commercial relationship and underscores our payments ability to forge innovative and lasting partnerships.
Lastly, we achieved a historic low in delinquencies, which resulted from consumers' strong liquidity position, our conservative stance on underwriting, and the proactive measures we took into the downturn to protect our credit quality.
This outcome also supported our reserve release this quarter.
Turning to the quarter's results.
We earned $1.7 billion after tax or $5.55 per share.
These results include a $729 million one-time gain.
But even excluding this gain, our results were very strong at $3.73 per share.
The drivers of the quarter's strong results reflect the combination of our solid execution and supportive macro conditions.
Total sales were, up 48% from a year ago, and 24% from the second quarter of 2019.
Retail sales remained very strong, and there was significant improvement in T&E categories, which were hardest hit by the pandemic.
Even travel returned to growth in June, compared to [Technical Issues] levels.
And sales volumes are accelerating.
The 24% growth I cited is an increase from 15% in the first quarter relative to the same period in 2019.
We also see an attractive environment for account acquisition even in the face of heightened competition.
We have removed nearly all of our pandemic credit tightening and have increased our marketing investment to align with these actions.
These decisions supported new account growth of 26% over 2019 levels with strong growth among prime consumers as our differentiated brand and integrated networks support our strong value proposition, which centers on transparent and useful rewards, outstanding customer service and no annual fees.
While the current operating environment is broadly constructive, there are also some challenges.
As we have highlighted before, the counterpoint of sustained strong credit performance is high payment rates, which in the second quarter were over 500 basis points above 2019 levels.
We may be seeing evidence that payment rates are plateauing, and while we expect some moderation later this year, we believe payment rates will remain above historical levels for some time.
Even so, we expect to strengthen our sales figures and the contribution from new accounts to drive loan growth through the back half of this year and accelerate in 2022.
As we have said in the past, we will invest when we see attractive opportunities and the actions we took this quarter with increased marketing expenses in investments and technology and analytics were an example of that approach.
These investments are consistent with our commitment to long-term positive operating leverage and an improving efficiency ratio as they drive loan growth and enable a more efficient operating platform.
In our Payments business, we benefited from a gain on our equity investment in Marqeta.
This gain was the result of a relationship that began a decade ago, and we continue to see opportunities [Technical Issues] and innovative partnerships.
I'm very excited about our investment in CECL that was [Technical Issues] week, as we look to expand our partnership with a leading buy now, pay later provider.
We also continue to grow our global acceptance presence and announced new partnerships in Bahrain and Portugal, adding to the two network alliances that we announced earlier this year.
Our debit business continued to build on its recent strength.
PULSE volume increased 19% year-over-year and was up 33% from 2019 levels.
In addition to the influence of economic recovery, this performance reflects the greater relevance of debit to many consumers through the pandemic period.
Volume at Diners has also recovered to some extent and was, up 41% from the prior year's lows.
However, volume is still below pre-pandemic levels and may remain so for a period of time.
The strong fundamental performance of our digital banking model drove significant capital generation, which this quarter was also aided by our equity gain.
We accelerated our share repurchases to $553 million of common stock, a level near the maximum permitted under the Federal Reserve's four quarter rolling net income test.
We remain committed to returning capital to our shareholders.
And going forward, our approach will be governed by the stress capital buffer framework.
On our call last quarter, we indicated that we hope to revisit our capital return for the second half of this year.
And I'm very pleased that our Board of Directors authorized the new $2.4 billion share repurchase program that expires next March.
We also increased our quarterly dividend from $0.44 to $0.50 per share.
With the current strength of the US economy, I'm increasingly optimistic about our growth opportunities this year and beyond.
Our value proposition continues to resonate with consumers.
Our Payment segment is expanding its partnerships and acceptance and our capital generative model positions us for strong returns over the long-term.
I'll now ask John to discuss key aspects of our financial results in more detail.
I'll begin with our summary financial results on Slide four.
As Roger noted, our results this quarter highlighted the strength of our digital model, solid execution on our priorities and continued improvement in the macroeconomic environment.
Revenue, net of interest expense, increased 34% from the prior year.
Excluding one-time items, revenue was up 9%.
Net interest income was up 5% as we continue to benefit from lower funding costs and reduced interest charge-offs, reflecting strong credit performance.
This was partially offset by a 4% decline in average receivables from the prior year levels.
Excluding one-time items, non-interest income increased 29%, driven by the higher -- by higher net debt count and interchange revenue, due to strong sales volume.
The provision for credit losses decreased $2 billion from the prior year, mainly due to a $321 million reserve release in the current quarter, compared to a $1.3 billion reserve build in the prior year, an improvement in the economic [Technical Issues] and ongoing credit strength were the primary drivers of the release.
Net charge-offs decreased 41% or $311 million from the prior year.
Operating expenses were, up 13%, primarily reflecting additional investments in marketing, which was up 36% and employee compensation, which was up 10%, a software write-off and a non-recurring impairment at Diners Club also contributed to the increase.
Moving to loan growth on Slide five.
Ending loans increased 2% sequentially and were down just 1% from the prior year.
This was driven by card loans, which increased 2% from the prior quarter and were down 2% year-over-year.
Lower year-over-year card receivables reflect two primary factors.
First, the payment rate remains high as households continue to have a strong cash flow position, due to several rounds of government stimulus.
Second, promotional balances were approximately 250 basis points lower than the prior year quarter.
While card receivables declined year-over-year, we considered a sequential increase to be an important data point reflecting continued momentum in account acquisition and very strong sales volume.
The high payment rate remains a headwind to receivable growth, although we expect to see modest decreases in late 2021.
Looking at our other lending products.
Organic student loans increased 4% from the prior year.
We are well positioned as we enter the peak origination season.
Personal loans were down 6%, driven by credit tightening last year and high payment rates.
We are encouraged by continued strong credit performance in the portfolio and have expanded credit for new originations.
Moving to Slide six.
Net interest margin was 10.68%, up 87 basis points from the prior year and down 7 basis points sequentially.
Compared to the prior quarter, the net interest margin decrease was mainly driven by a nearly 200 basis points reduction in the card revolve rate.
Loan yields decreased 17 basis points from the prior quarter, mainly due to the lower revolve rate.
This decline reflects the impact of increased payments, as well as seasonal trends.
Yield on personal loans declined 7 basis points sequentially, due to lower pricing.
Student loan yield was up 4 basis points.
Margin benefited from lower funding costs, primarily driven by maturities at higher rate CDs.
We cut our online savings rate to 40 basis points in the first quarter and did not make any pricing adjustments during the second quarter.
Average consumer deposits were, up 6% year-over-year and declined 1% from the prior quarter.
The entire sequential decline was from consumer CDs, which were down 9%, while savings and money market deposits increased 2% from the prior quarter.
Consumer deposits are now 66% of total funding, up from 65% in the prior period.
Looking at Slide 7.
Excluding the equity investment gains, total non-interest income was up $123 million or 29% year-over-year.
Net discount and interchange revenue increased $102 million or 43% as revenue from strong sales volume was partially offset by higher rewards costs.
Loan fee income increased $20 million or 24%, mainly driven by higher cash advance fees with demand increasing as the economy reopens.
Looking at Slide eight.
Total operating expenses were, up $145 million or 13% from the prior year.
Employee compensation increased $46 million, primarily due to a higher bonus accrual in the current [Technical Issues] versus 2020 when we reduced the accrual.
Excluding this item, employee compensation was down from the prior year as we've managed headcount across the organization.
Marketing expense increased $46 million from the prior year as we accelerated our growth investments.
We still see significant opportunities for growth and we plan to accelerate our marketing spend through [Technical Issues] to drive account acquisition and brand awareness.
Information processing was up due to a $32 million software write-off, the increase in other expense reflects a $92 million charge and the remainder of the Diners intangible asset.
Partially offsetting this was lower fraud expense, reflecting some of the benefits from our investments in data analytics.
Moving to Slide nine.
We had another quarter of improved credit performance.
Total net charge-offs were 2.1%, down 132 basis points year-over-year and 36 basis points sequentially.
The [Technical Issues] net charge-off rate was 2.45%, 145 basis points lower than the prior year quarter and down 35 basis points sequentially.
The net charge-off dollars were down $276 million versus last year's second quarter and $62 million sequentially.
The card 30-plus delinquency rate was 1.43%, down 74 basis points from the prior year and 42 basis points lower sequentially.
Credit in our private student loans and personal loans also remained very strong through the quarter.
Moving to the allowance for credit losses on Slide 10.
This quarter, we released $321 million from the reserves, due to three key factors: continued improvement in the macroeconomic environment; sustained strong credit performance with improving delinquency trends and lower losses; these were partially offset by a 2% sequential increase in loans.
Our current economic assumptions include an unemployment rate of approximately 5.5% by year-end and GDP growth of 7%.
Embedded within these assumptions are the expanded child care tax credits and the benefit from the infrastructure physical package beginning in late 2021.
Looking at Slide 11.
Our common equity Tier 1 ratio increased 80 basis points sequentially to 15.7%, a level well above our internal target of 10.5%.
As Roger noted, we are committed to returning capital.
The recent Board approval increasing our buyback and dividend payouts reflect that.
On funding, we continue to make progress toward our goal of having deposits [Technical Issues] 70% to 80% of our mix.
Moving to Slide 12.
Our perspective on 2021 continue to evolve as we see additional opportunities to drive profitable growth.
We have increasing confidence in our outlook for modest loan growth in 2021 as strong sales and our new account growth should offset the higher payment rates.
We expect NIM will remain in a relatively narrow range, compared to the first quarter levels of 75%, with some quarterly variability similar to what we experienced this quarter.
We anticipate a slight benefit from higher coupon deposit maturities and an optimized funding mix with yields affected by variability in the revolve rate.
Our commitment to disciplined expense management has not changed, and we remain focused on generating positive operating leverage and an improving efficiency ratio.
For this year, we now expect non-marketing expenses to be up slightly over the prior year, reflecting the higher compensation accruals and recovery fees.
The increase in the use expense categories is closely tied to the economic recovery.
For example, the high level of consumer liquidity is supporting elevated recoveries.
These recoveries have some costs associated with them, but are more than offset by lower credit losses.
Regarding marketing expenses, we expect this will step up more significantly in the second half of 2021 as we further deploy resources into account acquisition and brand marketing.
With the continued improvement in credit performance, our current expectation is that credit losses will be down this year, compared to 2020.
Naturally, a material change in the economic environment could shift the timing and magnitude of losses.
Lastly, as evidenced by our dividend increase and new share repurchase authorization, we remain committed to returning capital to shareholders.
In summary, we had another very strong quarter.
We are well positioned for a positive top line trajectory given our sales trends and new account growth.
Credit remains extraordinarily strong, and the economic outlook continues to improve.
We maintained our discipline on operating expenses, while investing [Technical Issues] returning organic growth opportunities.
And finally, we continue to deliver high returns, allowing for enhanced buybacks and dividends.

user
discover financial services q2 earnings per share $5.55.
q2 earnings per share $5.55.
board approves repurchase of up to $2.4 billion of common stock.
increases the quarterly common stock dividend 14% from $0.44 to $0.50 per share.
compname says total loans ended quarter at $87.7 billion, down 1% year-over-year.
compname says credit card loans ended the quarter at $68.9 billion, down 2% year-over-year.

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