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Discover Financial Services (DFS - Analyst Report) reported second-quarter 2013 earnings per share (EPS) of $1.20, surpassing the Zacks Consensus Estimate of $1.16. EPS also surpassed the year-ago quarter’s earnings of 99 cents.

Discover Financial’s net income improved 14.7% year over year to $602 million from $525 million. Net income allocated to common shareholders was increased to $588 million from $520 million in the year-ago quarter.

The improvement in net income was due to revenue growth and improved interest income. Strong operating results in the Direct Banking segment overshadowed the pre-tax loss of the Payment Services segment.

Discover Financial’s total revenue, net of interest expense, increased 9.4% year over year to $2.04 billion, beating the Zacks Consensus Estimate of $1.71 billion. Net interest income also improved 8.8% year over year to $1.43 billion.

Moreover, total other income for Discover Financial increased 10.7% over the prior-year quarter to $611 million. However, total other expenses also jumped 8.2% year over year to $820 million.

Direct Banking Segment

Discover Financial’s Direct Banking segment reported pre-tax income of $1 billion, reflecting a 26% increase from the year-ago quarter. Revenues, net of interest expense, for the segment increased $182 million or 10% from the year-ago quarter. The increase was due to increased loans, additional revenues from Discover Home Loans, launched in Jun 2012, and a decline in funding costs.

Discover card sales volume grew 4% year over year to $27.6 billion. Total loans improved 6% year over year to $61.7 billion, boosted by a 5% increase in credit card loans, a 5% increase in private student loans and a 22% surge in personal loans.

Other income increased 14% year over year, primarily due to higher interchange revenues from improved sales and additional revenues from Discover Home Loans.

Expenses in the segment increased 2% year over year on increased employee compensation and marketing expenditure related to the Home Loan Center acquisition, increased card marketing initiatives and elevated headcount.

Discover Financial’s credit card net charge-off rate declined 2 basis points (bps) sequentially to 2.34%. However, the over-30-days delinquency rate declined 19 bps over the prior quarter to a record low of 1.58%.

In addition, the provisions for losses declined $37 million year over year to $225 million, reflecting higher reserve release and lower charge-offs. Reserve release during the quarter was $93 million, against $73 million in the year-ago quarter.

Payment Services Segment

Pre-tax loss in Discover Financial’s Payment Services segment amounted to $21 million, compared to income of $50 million in the year-ago quarter. Meanwhile, expenses increased $49 million from the year-ago level.

Payment Services dollar volume declined 2% from the year-ago quarter to $49.4 billion. Meanwhile, the transaction volume from PULSE reduced 3% year over year due to increased competition and merchant routing.

Financial Position

Discover Financial had total assets worth $74.9 billion as of Jun 30, 2013, increasing from $73.2 billion as of Jun 30, 2012. Total equity stood at $10.4 billion at the end of Jun 2013, up from $8.9 billion at the end of Jun 2012. Book value per share was $21.52 at the end of Jun 2013, compared with $17.36 as of Jun 30, 2012.

Share Repurchase Update

During the reported quarter, Discover Financial repurchased 7 million shares for $340 million.

Zacks Rank

Currently, Discover Financial caries a Zacks Rank #2 (Buy). Other companies worth considering in the financial sector are SLM Corporation (SLM - Analyst Report) – Zacks Rank #1 (Strong Buy), Capital One Financial Corp. (COF - Analyst Report) – Zacks Rank #2 (Buy) and Regional Management Corp. (RM - Snapshot Report) – Zacks Rank #2 (Buy).

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