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Discover’s Net Income Declines due to Higher Expenses in 1Q15

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Aug. 18 2020, Updated 10:32 a.m. ET

Increased expenses

Discover Financial’s (DFS) operating expenses increased 11% in 1Q15 over the prior year—driven primarily by higher employee compensation, marketing expenses, and legal reserves. Employee compensation increased due to a higher headcount, annual salary increases, and higher commissions associated with the increase in mortgage originations.

The increased marketing expenses was due to increased advertising costs. Professional fees increased due in part to costs associated with anti-money laundering and the related compliance program.

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Provision for loan losses was higher compared to the prior year, due to higher reserves and charge offs—driven primarily by loan growth. The above chart compares the company’s operating expenses for the quarter with the same quarter last year. Discover forms ~0.9% of the Financial Select Sector SPDR ETF (XLF) and ~1.2% of the iShares U.S. Financial Services ETF (IYG).

Wells Fargo (WFC) also reported an increase in employee compensation in the quarter. To learn more, read Wells Fargo Posts Strong 1Q 2015 Results. In contrast, Bank of America (BAC) and JPMorgan Chase (JPM) are cutting down on headcounts to manage costs.

Spending for growth?

In the previous quarter, Discover stated that the additional operating expenses will help in business growth over time. It didn’t plan to cut them—at least over 2015. You can read more about it in Higher operating expenses brought Discover’s income down in 4Q14.

Discover’s efficiency ratio was 40% for the quarter. The operating efficiency represents total other expense divided by revenue net of interest expense. The operating efficiency, adjusted for unusual items, was 38.6%. In the quarter, unusual items included $15 million anti-money laundering and related compliance program expenses and a $20 million legal reserve addition.

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