發現金融 (DFS) 2012 Q1 法說會逐字稿

Welcome to the 2012 first-quarter earnings release conference call.

My name is Hilda, and I will be your operator for today's call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

Please note that this conference is being recorded.

I will now turn the call over to Mr.

Craig Streem.

Mr.

Streem, you may begin.

Thank you, Hilda.

Welcome, everyone, to this afternoon's call.

We certainly appreciate your joining us for the discussion today.

Let me begin by reminding everyone that the discussion today contains certain forward-looking statements about the Company's future financial performance and business prospects which are subject to risks and uncertainties and speak only as of today.

Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was furnished to the SEC in an 8-K Report and in our Form 10-K for the year ended November 30, 2011, which is on file with the SEC.

In the first-quarter 2012 earnings release and supplement which are now posted on our website at Discoverfinancial.com and has been furnished to the SEC, we have provided information that compares and reconciles the Company's non-GAAP financial measures with the GAAP financial information and we explain why these presentations are useful to management and investors.

We urge you to review that information in conjunction with today's discussion.

30 AM at the New York Palace Hotel.

If you would like more information about that meeting please get in touch with me this evening by e-mail.

With that event ahead of us tomorrow it is our intention to keep this call and your questions focused on our first-quarter results and performance, and we'll certainly have much more for you tomorrow regarding our strategies for profitable growth.

Our call this afternoon will include formal remarks from David Nelms, our Chairman and Chief Executive Officer, and Mark Graf, our Chief Financial Officer and, of course, a question-and-answer session.

Now it's my pleasure to turn the call over to David.

Good afternoon, everyone, and thanks for joining us.

As Craig mentioned we are looking forward to our annual financial community briefing tomorrow morning where members of our executive team will take you through some of the exciting developments and opportunities ahead of us at Discover.

After the market closed today we reported record first-quarter net income of $631 million, or $1.18 per share, driven by continued improvements in credit performance, along with solid organic growth in receivables and strong volume growth across all of our networks.

In Direct Banking, we continued to deliver good growth in card, private student and personal loans and we achieve record profits in our Payment Services business and are continuing to expand our network.

I am very pleased with our 9% year-over-year loan growth, which reflects $1.6 billion in card loan growth and in private, student, and personal loans, we eclipse $10 billion in receivables.

In terms of credit card performance we achieved 25 year lows for net charge-off rates and 30+ delinquency rate, demonstrating the quality of our portfolio and the strength of our risk management capabilities.

Before I turn the call over to Mark for some more detail in the financial results, I want to mention some recent developments that augur well for future growth and for continued generation of solid shareholder returns.

The first of these was our receipt of the non-objection from the Fed related to our capital plan and proposed capital actions.

In connection with that, we announced a new two-year share repurchase authorization of $2 billion, along with our regular quarterly dividend.

I did want to remind you that last quarter we took up the dividend by 67% to its current quarterly level of $0.10 per share.

And we will review the dividend level at least on an annual basis.

A second recent development for us on the business side was our announcement of a new long-term agreement with the National Payments Corporation of India which runs the rupee network in India.

Since its founding in 2009 by a consortium of Indian banks, NPCI has grown its share of ATM process transactions in India to 95%.

Our new agreement will enable acceptance of Discover and Diners Club International cards at NPCI's ATMs, and eventually point-of-sale terminals throughout India.

The agreement will also allow rupee cardholders to utilize the Discover Diners Club International and PULSE networks for purchases and cash access outside of India.

We expect this arrangement will result in an increase transaction volume over time.

I'm very pleased that NPCI recognized Discover as the most flexible network and best partner for the future in one of the fastest growing, largest potential countries for payment cards.

At our meeting tomorrow, Diane Offereins will have more to say about our global network strategy.

The other very recent announcement that I want to highlight relates to the launch of the first Discover branded card in the international marketplace by our Diners Club franchise partner in Ecuador.

This is an important strategic development because we believe it will allow us to market test a model that could eventually become a framework for expanding Discover branded card issuance into additional countries with what to date has been a purely domestic model.

One final recent announcement was earlier today we announced a new deal with the large network in Puerto Rico, and we are excited to tell you more about that tomorrow as well.

We look forward to meeting with you tomorrow where we will share our model for long-term profitable growth and the initiatives that will help us to achieve our goals for 2012 and beyond.

With that, I'd like to hand it over to Mark Graf to review our first-quarter results.

Thanks, David.

Good afternoon, everyone.

I'll begin my comments by focusing on our Direct Banking segment's first-quarter results.

The segment earned $962 million pretax this quarter versus $677 million last year.

Reserve releases contributed $226 million to pretax earnings in the quarter as credit continued to improve to a greater degree than we had expected last quarter.

Turning to yield on the Card portfolio, we reported a 44 basis point decrease from the prior year to 12.21%.

This happened as our higher-priced balances declined and our promotional volumes increased.

These were partially offset by lower interest charge-offs.

We are now including total interest in fee charge-offs in the financial supplement so you don't have to wait for the 10-Q for that disclosure.

Total portfolio yield was 11.36%, lower by 74 basis points compared to the first quarter of last year, driven primarily by the acquisition of the private student loan portfolios in the first and fourth quarters of last year as well as the card yield compression I just mentioned.

The yield compression was slightly offset by the effect of the sale of federal student loans last month.

Net interest income increased $123 million or 11% versus the prior year driven by asset growth, lower charge-offs of accrued interest and the benefit of lower interest expense.

Net interest margin on receivables was 9.03%, down 19 basis points compared to the prior year due to the yield compression I mentioned a moment ago partially offset by funding cost improvement.

The modest sequential decrease in net interest margin of 7 basis points was primarily driven by having a full quarter of net interest income from the $2.4 billion in private student loans that we acquired during the fourth quarter along with the corresponding sequential card yield compression.

Again, funding cost improvement partially offset this NIM compression.

Absent any inorganic asset mix shifts we expect the net interest margin to stabilize around this level for the remainder of the year as funding cost improvement largely offsets both card yield compression and organic growth in private student loans.

However it's important to note that we also expect student loans to produce much lower average credit losses than we expect to see in the card product.

Other income for the Direct Banking segment decreased $22 million from last year's first quarter due in large part to a $16 million bargain purchase gain related to the SLC acquisition in the prior year period as well as slightly lower protection product revenues.

Higher discounted interchange revenue was partially offset by higher rewards as we increased our rewards rate on card sales to 92 basis points from 86 basis points in the first quarter of last year.

Total operating expenses for the segment were up $82 million over the prior year.

Expenses were up to support completed acquisitions, the higher level of loans and higher legal reserves.

The increase in expenses for this quarter reflects investments to further our diversification in Direct Banking and we expect to benefit from these investments as we move further into 2012.

Going forward, we will continue to be diligent on expense management and will provide more perspective on our thoughts around operating expenses during our investor day tomorrow.

Now I'll switch to lending product growth and credit performance for the segment.

We achieved card sales growth of 7% for the first quarter versus the prior year.

The growth in card sales was driven by our continued focus on increasing our merchant acceptance, enriching our rewards programs and leveraging our marketing investments.

Our total loan portfolio grew $4.6 billion with $2.4 billion of this growth attributable to the second accretive Private Student Loan acquisition.

Receivables in our personal loan product were up $764 million from the prior year while our credit card loans were up $1.6 billion.

The sale of our remaining federal student loan portfolio was completed this quarter and is already reflected in the numbers I just provided.

Turning to card credit quality, our positive momentum continued this quarter as the card net charge-off rate and 30+ delinquency rate each declined 17 basis points sequentially.

The card reserve rate decreased 44 basis points as well, reflecting a brighter forward 12-month outlook for credit performance which resulted in a $235 million card reserve release.

Going forward, we still expect to build reserves at some point in the next 12 months as our loan portfolio continues to grow.

However, the underlying economic environment clearly seems to be more constructive at this juncture.

For our Private Student Loan portfolio the net personal charge-off rate excluding our purchase portfolios was 49 basis points.

The charge-offs in delinquencies in our Private Student Loan portfolio are performing according to our expectations.

In terms of personal loan credit performance, loans greater than 30 days past due fell 6 basis points sequentially and the personal loan net principal charge-off rate was essentially flat at 2.59%.

On the payment side we had another quarter of record pretax earnings and payment volumes.

Pretax income was up $9 million or 21% from the prior year to $52 million driven by higher-margin point-of-sale volume from our PULSE PIN debit network business.

Volumes were up 8% against the prior year driven by 9% growth in PULSE debit volumes and 15% growth in our third-party issuing volumes.

The increase in third-party issuing volume was driven mostly by spend on Walmart and Sam's Club cards and higher prepaid volume.

Let's move on to liquidity, funding, and capital.

Our liquidity levels were strong to end the quarter with total actual and contingent liquidity at $28 billion.

Our liquidity portfolio ended the quarter at $12.1 billion, up $1.9 billion from the prior year as we opportunistically prefunded upcoming maturities, including by issuing a $1 billion three-year ABS deal prior to the quarter's close at a fixed rate of 81 basis points.

Direct to consumer deposits were once again our largest source of funding at 46%.

Our funding cost is continuing to fall as we replace higher cost deposits that we originated in a much higher rate environment.

I'll take you through our expected quarterly maturities for 2012 and 2013 in my presentation tomorrow.

As we've said before, we continue to remain opportunistic across all our funding channels by tapping all but not exhausting any of them.

Turning to capital for some time now we have benchmarked our key capital ratio as tangible common equity tangible assets.

With a target of plus or minus 8%.

Going forward we will switch to focusing on our tier 1 common capital ratio as it better represents our regulators and industry look at capital levels and we have established a 9.5% long-term target.

We ended the most recent quarter at 14.3%.

We will address both this new target and our approach to excess capital in more detail tomorrow.

The strength of our capital position allowed us to announce the new $2 billion share repurchase authorization last week after completing the capital review process with our regulators.

We remain focused on returning capital to shareholders via mix of share repurchases and dividends as well as opportunistic acquisitions at the right price.

That concludes our formal remarks, so I'll turn the call back to the operator for the Q&A session.

(Operator Instructions).

Sanjay Sakhrani, KBW.

Thank you and congratulations on a good quarter.

I had a question on revenues and capital management.

Just first on revenues, I was hoping you could just talk, Mark, about your card yield expectations embedded in the net interest margin expectations for the remainder of the year.

And then secondly, on the third-party payments segment, it seems like the pretax margin has been expanding at a pretty rapid rate.

Could you talk about what's happening there?

And then, just on excess capital I don't want to front run your comments tomorrow, but maybe you could just talk about how you intend to utilize the share repurchase program especially in the context of what you guys did in the first quarter?

Thanks.

Absolutely, there is a lot in there.

I'll try to touch and all of them.

Please feel free to catch me if I don't touch all of them.

With respect to expectations for card yield I think we will be providing some greater detail on that thought during our investor day tomorrow so I don't want to jump the gun too much.

But what I would say is we continue to expect to see some continued compression coming primarily from the attrition of some of those higher rate balances that predate CARD Act that is continuing at this point in time.

But we expect the compression resulting from that as well as our other activities to essentially be offset by the funding cost scale that we've got right now.

Actually on a card yield alone basis it will more than offset it, I think.

So that's the right way to think about it and range it in.

Again a little bit more detail tomorrow.

And then with respect to the share repurchase spots we are going to give some guidance around our expectations and cadence in terms of how we will be looking at that going forward during the investor day tomorrow as well.

So I would encourage you to stay tuned, because we'll give you some pretty specific thoughts there.

And the third-party payment segment and pretax operating margin?

I'd say we are continuing to focus on higher-margin business and also get some benefits of scale, given the fixed cost as we grow that business.

Thank you.

Ryan Nash, Goldman Sachs.

I guess a question on the reserve, I guess you released more than most of us had been expecting, and, Mark, I think you've highlighted a brighter outlook, but you said you will be building as reserves grow.

I guess I'm trying to understand the takeaway message in that.

Are you saying that the build is solely going to be a function of the fact that loans grow, so can we assume that if -- assuming your outlook holds, that if loan balances stay flat the reserve would stay flat?

Our current outlook would lead us to conclude that we don't expect to see a turn in credit performance in the forward 12-month period time.

So yes, you're correctly reading what we are saying in that we expect any reserve build going forward to be directly related to growth in the loan book itself.

Okay.

And I guess just another question.

I think if you look at your loan balances, I guess quarter over quarter, they were down about 1.5%.

If you look at the industry I think they're down sizably more.

Can you give a sense of one, where you think you're taking market share from, and do you think it is the fact that your portfolio is outperforming is more a function of some people just have more seasonality in their books or do you actually think there is some market share benefit happening there?

I would say that we tend to look at it year over year to remove the seasonality a bit.

And we have been outperforming for quite some period of time.

Part -- I think I would start with lower charge-off rates, we are not losing off the top.

And we also -- believe we have higher customer retention of longtime balances.

So that really helps.

And then, obviously, we're very focused on acceptance as well as our cash rewards program enhance marketing, so there's no one piece.

But it all adds up to us growing and many of our competitors working to try to get back to zero.

Thanks, guys.

Chris Brendler, Stifel Consulting.

Hi, thanks, good afternoon.

Can you give us an up-to-date on any success you've had in your PULSE segment of adding additional issuers around the Dodd-Frank requirement around the exclusivity that starts on April 1?

Any meaningful progress there?

Thanks.

Well, I think that, recall that this is a twist of process.

We have first sign that issuers and then there's new routing rules that go in place in April.

PULSE recently announced that we signed 129 issuers last year, which we feel good about.

And we feel good about where we stand on that first step.

But I think there are a lot of -- there's a lot of changes going on in the industry right now, so we are going to have the monitor that carefully over the coming months.

Okay.

And second question would be can you give us an update, David, on credit card loan demand, what you are seeing on the front lines from your consumers.

And we've seen good spending volume and loan growth for Discover this quarter, it's a little bit ahead of our expectations.

But I think you've now been pretty cautious on the outlook for loan growth.

Any change to that over the last three months and any commentary on uptake of [future rates] offers would be helpful, thanks.

I wouldn't say that I've seen a dramatic change in trend over the last quarter.

We continue to see sales growing obviously faster than loans, but consumers are continuing to expand spending.

But they have kind of finished the deleveraging process and I don't see them certainly expanding dramatically their debt at a greater pace.

So I think it's a step slow steady increase.

I personally expect the industry to eventually return to growth at about GDP growth.

And I think that's going to be more driven by sales than by future rates or balance transfers, which was the other part of your question.

I haven't seen a big change on that.

Thank you very much.

David Hochstim, Buckingham Research.

Could you give us some color on in terms of what you saw in the way of any changes in spending during the quarter?

I guess I wasn't clear on how much of the spending growth was attributable to new cards, whether that meant new cards in the quarter or new cards in the last year, and did changes in gasoline prices have much of an effect on overall spending growth in the quarter?

You saw our spend growth year over year be pretty stable.

This last quarter as well as the quarter before.

I don't -- a lot of this increase in gas prices really happened towards the end of the quarter, so I wouldn't say there was anything that really -- I don't think that was a huge driver.

And frankly, during the quarter we saw a lot of continuation of the trends that I've seen -- that we've seen in previous two quarters with gradual improvement across multiple spending categories.

So the existing cardholder spending -- your growing spending about the same rate as the average for the portfolio?

Yes.

A good amount of -- the majority of our spend increased tends to be from existing customers.

We are putting on new customers at a somewhat higher rate, but I wouldn't say dramatically so.

So I think we are seeing a pretty balanced improvement across categories, across current and new customers, and obviously still focused more on the better credit quality, higher FICO score customers, if you will.

That's one thing that we see a little more robustness.

Could you just remind us how much you had in [sales] loans that you sold during the quarter and was there any gain on that sale?

No.

There is no gain on that in the remaining portion and held for sale was around $700 million.

So you'll sold the whole 720 -- whatever it was.

All right, thank you.

Mark DeVries, Barclays Capital.

Thanks.

Mark, I know you addressed some of these at a high-level, some of the expense items, but is there anything specifically you can point to on the other expense line and the employee comp that caused this to be up meaningfully?

I wouldn't say if you look at the other other expense line there is a number of different pieces moving around in there.

One is clearly year over year you have the full integration of the student loan or the continuing integration of the student loan business, and some significant increased expenses related to that.

As well as some increases related to some of the new business initiatives that we will be talking about pretty extensively here at investor data tomorrow.

The other thing obviously that shows up in other, other is the litigation reserve.

And I would say that a meaningful portion of the year-over-year increase in that other, other piece is due to the reserves related to litigation and regulatory matters.

I'd point you back to our 10-K disclosures on that one.

There's a number of litigation matters we are involved in currently, and by policy we don't talk about them specifically.

So I can't really provide any further color, but that's kind of where I take it.

Okay.

And rewards picked up a little bit as a percentage of interchange revenue.

Discount revenue.

Does this represent a kind of a new run rate or are you still seeing a little bit of upward inflation in rewards expense?

I think as we look at the rewards expense line item we guided last quarter we thought it would be somewhat higher this quarter, and indeed it was.

I think as we look at where we are right now for the remainder of the year we think we will be somewhere in this general range.

It's got the ability to be slightly higher, possibly, but somewhere around the range we are right now feels about right to us.

Great.

And can you give us an update on kind of where you stand as far as the mix of the promotional balances versus standard and your default pricing bucket?

Harit is going to be speaking about that directly in his section during the investor day tomorrow morning, so I don't want to steal his thunder.

Got it, thanks.

John Stilmar, SunTrust.

Good evening.

Two quick questions, the first of which -- and maybe this is also for tomorrow.

I was wondering if you might be able to touch a little bit more about your really impressive move with regards to recoveries, and that you still continue to show growth in recovery dollars despite your continued cautiousness here.

Wondering if you could kind of give us some color as to what pockets you are seeing, because it certainly defined the lag conditions relative to previous charge-offs that we certainly talked about.

My second question is, where is pricing today in private student loans?

Wondering if you could give us the average private student loans that were originated this quarter.

Just trying to get a sense for where we are in terms of pricing environment.

I'll handle the first one.

I don't -- I'm sorry.

Why don't you do the second one.

Repeat the question -- the first question was -- .

Recoveries.

Recoveries, I'm sorry.

Thinking about your second one.

You know, a big part of it is just our recovery -- our total inventory at charge-off dollars is still very significant from the last few years.

And I think that as some people go back to work or have a desire to repay some of the loans, I think we've been pleasantly surprised by some of that debt over the last few years that is actually least partially repaid.

I wouldn't point you to any specific pocket or strategy, and maybe Jim will be able to shed a little bit more light on that tomorrow.

But I would say the big factor is large inventories on which we are working.

Mark, on the second one?

In terms of the yield on the student loan portfolio I would say it came down about 105 basis points year over year.

That was principally due to the addition of the $2.5 billion in private student loans that we closed on on September 30.

It came on at a much lower yield, but also a much lower loss expectation than we had in the first acquisition.

So that had some impact there, and I would say sequentially the yield decreased about 46 basis points, because you only have the impact of that $2.5 billion acquisition in parts of last quarter.

And so it fully kicked in, you had the full impact of it this quarter.

I was just curious in terms of new loans that you've originated in the quarter that may not have shown up.

Just the absolute coupon that you put on the books this past quarter.

I was wondering if you had that available.

I don't have it at my fingertips, but we'll be happy to address it tomorrow for you.

Perfect, thank you very much.

Craig Maurer, CLSA.

Mark, in light of the multi-decade loans that are seeing credit quality metrics, can you comment on where new card loans might fit in at the current metrics as they season, what your expectations are?

David, you want to take the first stab at that and I'll follow on?

You ask Mark, he is handing it to me.

(laughter).

I would say that the larger improvements on credit quality have probably come from more of the base.

And we've seen maybe less dramatic of an improvement on the newest vintages originated in the last few years.

But we are still seeing some improvement even on those new vintages.

And it's probably partly related on us refining our models and maybe partly environmentally, things starting to improve a bit more.

I mean as we look at it, as I indicated earlier, as we look at our 12-month forward loss forecast, we continue to be surprised as the quarter rolls off and a new quarter rolls on at the fact just the performance continues to look very, very solid going forward.

With respect to specifically where we think credit trends look over the course of the cycle, if you will, as opposed to spot at this point in time, Jim Panzarino is going to provide some pretty significant detail around that at our investor day tomorrow.

I think it's fair to say that we view it as likely good news.

Not bad news, let's put it that way.

Thank you.

Bob Napoli, William Blair.

Thank you.

I guess maybe just trying to follow up on that question on normalized credit losses, if you will, and we'll hear more tomorrow, I don't want to go too far.

Your return on equity is obviously way above your goals even after you adjust for reserves.

The industry is generating substantial excess capital above normalized levels I think now.

Don't you expect that credit losses would kind of normalize back at historical -- would 5% be kind of around where you would expect normalized credit losses to be through a cycle?

I think it's a good question and a difficult one to answer because I think we are in new territory at this point.

We used to say 5% to 6% losses and credit cards over the cycle, and I think there's been enough structural changes in the industry between deleveraging, consolidated industry -- you just don't have all the subprime players out there that used to have an impact on everyone.

Even the CARD Act had a certain impact on it.

And so, and I think even consumer behavior has actually taken a shift after coming through the cycle.

Consumers are more cautious and that will show up in lower losses over time.

So if I had to guess, I would say eventually we're going to see more like 4% to 5% being kind of a range of normalization.

And I think it's going to maybe take longer than we might have expected to get there.

Mark originally earlier today said as we look over the next 12 months we are not really seeing any signs -- we are seeing signs that may be approaching a bottom, but you saw both our delinquencies and charge-off rates this quarter still improve.

So it indicates we are not quite at the bottom yet but we should be getting close.

But I wouldn't see anything that would dramatically take it up and I would say it's probably going to be a while before -- if it's going to go back to 4% or 5%, it's going to be a while, we think.

That makes sense.

The share repurchase approval, the extension.

How -- you have a lot of capital.

How aggressive are you going to be on buying back shares, or are you looking at acquisitions that would make you a little more cautious on the rate of share repurchase?

What I would say is we are going to go into that in some detail tomorrow.

So I am unfortunately going to hold my comments on that one and make you wait 12 hours or so for that one.

But I think it's fair to say we intend to be very disciplined overall.

Last question.

The federal loans you sold, who did you sell them to and was there a gain on sale in the quarter?

I'm not sure we have disclosed who they were sold to, I don't know legally if the contract allows us to.

So I won't go there but, no, there was no gain nor loss of any significance on the sale of those loans.

Thank you very much.

Rick Shane, JPMorgan.

Thanks guys, my questions have been asked and will be answered tomorrow.

Have a good one.

Thank you.

Moshe Orenbuch, Credit Suisse.

Thanks.

Kind of along the lines of a prior question about normalized credit losses, any thoughts about going either a little deeper or changing credit criteria to push balance growth faster?

Is anything, is that something that's thought about or how do you discuss that?

What I would say is that, if we can find expansion areas where we can still get prime credit performance, we would certainly seek to expand our criteria in those areas.

I think we don't have the appetite to go sub-prime, if you will, but certainly some of the changes we are seeing suggest that there may indeed be some sales where we could approve someone that will in fact have that prime credit performance that we are looking for.

But as you know, from our reputation and results, we are going to be cautious on this.

Great, thanks so much.

Brad Ball, Evercore.

Thanks.

Can you talk about your experience in terms of organic private student loan growth and what your outlook is for private student loan growth, and also personal loan growth?

I think last year we said that we were targeting $1 billion plus organic growth, and I would say we are on track to achieve that.

On track for $1 billion annually?

Well, we said for this year.

But certainly what I would expect is that this business, we may be able to ramp up even a little more over time.

But we do think it's $1 billion plus kind of a year business for us, growth.

Okay.

I wonder if you can comment.

Sen.

Durbin has been holding hearings to discuss removing the non-discharge ability of private student loans.

If that were to go through what kind of impact would that have on your business?

Just one thing quickly.

I don't -- you may have asked student and personal loans before, and the $1 billion plus is just personal -- just student loans.

And the personal loans would be something greater than that.

In terms of the dischargeability in bankruptcy, it -- there's not -- I don't expect anything to happen real quickly if at all in this area.

But if it did, it would depend on exactly how, is it immediately dischargeable, so when someone graduates and they haven't even had time to start making money they could walk away, or would it be after five years they could be dischargeable?

So I think the precise way it happened would matter.

But I would also say we have relatively low losses in this.

So -- I don't think -- I think it would certainly change how we think about pricing going forward, but I don't think it would totally undermine the business model.

Certainly the fact that most of our loans are cosigned, I think, gives us some protection from anything too dramatic.

Thanks.

Just one separate question, what proportion of your balances, your card balances, are currently on promotional rates?

That will be disclosed by Eric tomorrow.

It's a big part of his presentation, we don't want to steal his thunder.

I see.

Okay, thank you.

Daniel Furtado, Jefferies & Company.

This is Martin Kemnec in for Daniel Furtado.

I also have a question on recovery levels, so building off of John's earlier question.

You have obviously continued to recapture these previous losses at a pretty impressive rate.

I guess what I'm trying to focus on, is there some type of limitation on how far the look back is there on that?

Generally speaking, after an account is charged off, what type of timeframe are we looking at for recovery?

Obviously there's legal statutes around that, but if you have any guidance, that would be helpful.

Recovery is a very broad focus.

And so, one of the reasons that we tend to have high -- our recoveries have held up is that, unlike many of our competitors, we haven't sold things.

So within recoveries, for instance, our people who went through Chapter 13 bankruptcy and signed up for a repayment plan, and then, that's somewhat of an annuity that lasts for many years after that.

Many of our competitor sold that off in past years, especially as losses peaked.

We didn't sell any.

So you get a whole variety of these, and some of these could be loans from quite some time ago that have done on a regular repayment plan but are counted out as recoveries because we wrote them off -- could be five years plus ago.

We've actually also been investing very heavily in that area.

We've got some what we think are some unique techniques we are utilizing on the collection side, some of the expense growth you've seen (technical difficulty) part of the business, and we think it's vindication and validation that that's paying off.

Excellent, thank you.

And building off of Mark's question on rewards expense, thanks for the guidance on where you guys see that.

Stepping back more broadly, are you still seeing competition act rationally with respect to rewards offerings, or how do you frame that up?

I think it's a tough one to answer.

There is --.

We do think some of our competitors are probably, in our view, spending reward dollars at unsustainably high levels.

And if you look back over time, the history is that people have tended to put up reward programs, find out that they are expensive and then back off and devalue.

And a number of competitors have done that.

Our approach has been to have a sustainable program that gives great value to consumers, and but is still -- is also affordable by us.

That's all I had, thanks.

Matthew Howlett, Macquarie.

Thanks for taking my question.

Just on the creation of the CFPB, I know it's in development, but any more clarity on what you expect out of that department if anything?

It's been operational since last summer.

I wouldn't say it's totally in development.

But it also is can continuing to gain experience and we are continuing to gain experience with the CFPB.

And all I could say is that we look to have a very constructive dialogue, and our understanding is that they want to be factually based, and if that's how things proceed, we think we've got good facts, so we will just have a constructive dialogue with them.

As it stands now, do you see any major impact on reasonable marketing or even pricing, do you foresee potentially them coming in and asking to adjust things on those two topics or anything else that could really affect the business model?

I just wouldn't want to speculate.

Got you.

Just on the student loans, great performance so far.

Anything that you're seeing on the repayment when the loans hit the repayment side, anything out of the ordinary in terms of default or is that sort of coming in line?

I would say that the repayments and the legacies and charge-offs are pretty in-line with our expectations.

Great.

Thanks, guys.

That was our last question.

I'd like to turn it back over to you for any closing remarks.

Thanks Hilda.

I just want to thank all of you for your questions and your attention this evening and we are really excited about tomorrow morning's meeting, and look forward to either seeing all of you in persons or if not, then certainly on the webcast.

So thanks and have a good evening.

Thank you, ladies and gentlemen.

This concludes today's conference.

We thank you for participating.

You may now disconnect.