Discover Financial Services on Thursday said its profit more than tripled in its fiscal second quarter as it added new customers, while existing customers used their cards more and got better about making payments on time.
For the three months ended May 31, the Riverwoods, Ill.-based credit card company said net income available to common shareholders rose to $593 million, or $1.09 per share, compared with $185 million, or 33 cents per share, in the year-ago quarter.
That far outpaced the average analyst expectation for earnings of 75 cents per share, according to data provided by FactSet.
Its shares rose 35 cents, or 1.5 percent, to $23.94 in afternoon trading. The stock has changed hands between $13.33 and $25.76 in the past 52 weeks, and is now up almost 30 percent since the start of the year.
Discover said sales volume on its namesake cards rose 9 percent during the quarter to $24.84 billion. That gain reflected new customers, more card use by existing customers and 8 percent growth in the number of merchants that accept its cards.
In an interview, CEO David Nelms said the newly signed retailers accounted for some of the gains, but acknowledged that they mostly represent smaller stores. Larger nationwide retailers that already accepted Discover accounted for a "fair amount of growth," he said.
"We saw a nice uptick this quarter in sales growth," he said, noting that it came as gas prices moderated a bit. "I attribute that gain to more new accounts and more marketing efforts."
The company's transaction processing networks saw an 18 percent volume jump, handling $71.62 billion in purchases during the quarter. The number of transactions on the Pulse network increased 25 percent. Nelms said that reflected "huge growth" in debit transactions, which topped 1 billion for the first time during the quarter.
Meanwhile, payments that were late by 30 days or more dropped to a 25-year low of 2.79 percent of balances on an annualized basis, compared to 4.85 percent a year earlier.
Unpaid balances written off as uncollectible, known as charge-offs, dropped to 5.01 percent of balances, or $577 million, from 8.56 percent, or $1 billion, last year.
Keefe, Bruyette & Woods analyst Sanjay Sakhrani said those metrics were better than expected, reflecting strong performance for student loans and personal loans. "How much better can charge-offs get?" he asked. "I'm sure there's still some room for improvement."
Nelms, during a conference call to discuss results, said he didn't expect charge-offs to drop as low as late payments. That's in part because charge-offs include accounts held by individuals who declare bankruptcy, and those accounts are not always past due. Bankruptcies are flattening out, Nelms said, and increasingly the filings Discover receives include accounts that are already written off, but the issue will tend to keep charge-offs higher. "We're certainly seeing improvements in those areas as well, just not as fast."
The improved payment results allowed the company to release $401 million from its reserves set aside to cover unpaid bills. Stifel Nicolaus analyst Chris Brendler noted that was the main reason for the improved results.
During the call, Discover executives said they are likely to release additional reserves in coming quarters as delinquencies and defaults continue to fall.
Discover reported a 5 percent increase in total loans to $52.5 billion. Most of that increase came from loans acquired with its recent purchase of The Student Loan Corp. Brendler said student loan growth was slightly slower than expectations. However he added that the quarter is typically not a strong one for student lending, and it's a newer business for Discover.
The company said its expenses rose 25 percent from last year, which reflected higher spending on marketing and advertising, higher labor costs, higher expenses related to recovering defaulted accounts, increased fraud costs and expenses related to The Student Loan Corp.
Discover also mentioned an increased reserve for various pending lawsuits, but didn't detail how much it set aside.
Overall, Brendler said the report showed good trends for Discover's business lines, but little stood out for the quarter. "It's hard to find anything that was actually negative," he said.