Third Quarter Highlights

• Revenue net of interest expense was up $128 million, or 6%, from the prior year to $2.2 billion.
• Total loans grew $4.6 billion, or 7.4%, from the prior year to $67.4 billion.
• Credit card loans grew $3.3 billion, or 6.6%, to $53.7 billion and Discover card sales volume increased 5.8% from the prior year.
• Net charge-off rate for credit card loans increased 11 basis points from the prior year to 2.16% and the delinquency rate for loans over 30 days past due increased 4 basis points to 1.71%.
• Payment Services pretax income was $28 million. Transaction dollar volume for the segment was $49.6 billion, up 2% from the prior year.

"I am very pleased with Discover's results this quarter, which were driven by robust card loan growth, strong revenue growth and near historically low credit performance resulting in continued better than industry returns," said David Nelms, chairman and CEO of Discover. "Our Direct Banking strategy continues to work as we grow consumer loans faster than our peers and return meaningful amounts of capital back to our shareholders."

Segment Results:

Direct Banking

Direct Banking pretax income of $981 million in the quarter was up $63 million, or 7%, from the prior year.

Total loans ended the quarter at $67.3 billion, up 7.4% compared to the prior year. Credit card loans ended the quarter at $53.7 billion, up 6.6% from the prior year. Personal loans increased $835 million, or 20.9%, from the prior year and private student loans increased $369 million, or 4.5%, from the prior year. Excluding purchased student loans, private student loans grew $884 million, or 23.1%, from the prior year.

Revenue net of interest expense increased $129 million, up 7% from the prior year due to loan growth and net interest margin expansion.

Net interest income increased $129 million, or 9%, from the prior year, benefiting from loan growth, lower interest expense and higher loan yield. Net interest margin was 9.79%, up 14 basis points from the prior year. The increase in net interest margin reflects decreased funding costs and higher credit card and student loan yields. Credit card yield was 12.04%, an increase of 4 basis points from the prior year. The increase in credit card yield reflects a higher portion of customers revolving balances and lower interest charge-offs. Interest expense as a percent of total loans decreased 6 basis points from the prior year as the company continued to take advantage of available low rate funding.

Other income was flat year-over-year as higher interchange revenue and loan fee income were offset by lower protection products revenue and lower direct mortgage related income.

The delinquency rate for credit card loans over 30 days past due was 1.71%, up 4 basis points from the prior year and up 8 basis points compared to the prior quarter. Credit card net charge-off rate for the third quarter was 2.16%, up 11 basis points from the prior year and down 17 basis points from the prior quarter. The student loan net charge-off rate excluding PCI loans was 1.14%, down 19 basis points from the prior year. The personal loans net charge-off rate of 1.92% decreased by 9 basis points from the prior year.

Provision for loan losses of $356 million increased $23 million from the prior year. Net charge-offs increased $34 million due to several years of consistent loan growth and declining recovery dollars. The reserve build for the third quarter of 2014 was $32 million, $10 million lower than the prior year.

Expenses increased $43 million, or 6%, from the prior year due to increased employee compensation including higher headcount, increased professional fees and more investment in marketing, partially offset by lower other expenses.

Payment Services

Payment Services pretax income was $28 million in the quarter, flat to the prior year. Payment Services dollar volume was $49.6 billion for the third quarter of 2014, up 2% from the prior year. PULSE transaction dollar volume was up 3% year-over-year.

Share Repurchases

During the third quarter of 2014, the company repurchased approximately 10 million shares of common stock for $622 million. Shares of common stock outstanding declined by 2% from the prior quarter.