發現金融 (DFS) 2019 Q1 法說會逐字稿

Good afternoon.

My name is Deidra, and I will be your conference operator today.

At this time, I would like to welcome everyone to the First Quarter 2019 Discover Financial Services Earnings Conference Call.

(Operator Instructions) I will now turn the call over to Mr. Craig Streem, Head of Investor Relations.

Please go ahead.

Sure.

Thank you, Deidra, and welcome, everyone, to our call this evening.

We'll begin on Slide 2 of the earnings presentation, which you can find in the Financials section of our Investor Relations website, investorrelations.discover.com.

Our 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 provided to the SEC in an 8-K filing and in our 2018 10-K, both of which are on the website and again, on file with the SEC.

Our call today will include remarks from our CEO, Roger Hochschild, covering first quarter highlights; and then, Mark Graf, our CFO will take you through the rest of the earnings presentation.

And after Mark completes his comments, as always, we'll have ample time for Q&A.

(Operator Instructions)

And now it's my pleasure to turn the call over to Roger.

Thanks, Craig, and thanks to our listeners for joining today's call.

As you can see from our numbers, this was a very clean, solid quarter for Discover, reflecting continued execution on the key drivers of the business.

We earned $726 million after-tax in the quarter or $2.15 per share, and generated a very healthy ROE of 26%.

As always, our principal use of capital is to support profitable growth, but in the first quarter we also returned just over $600 million of capital to our shareholders in the form of dividends and buybacks, bringing the reduction in the level of outstanding shares to 7% from a year ago.

Our emphasis on profitable growth means that we always look to achieve a balance amongst receivables growth, net interest margin, credit and operating expenses.

And our performance this quarter demonstrates how that approach continues to generate very strong returns.

Total receivables grew 7%, with each major product performing as expected.

And NIM came in at a very robust level, keeping us on track to hit our full year target for that important measure.

Credit performance remains solid as the normalization impact on the back book continues to lessen and operating expenses were also consistent with our expectations, leading to a 50-basis point improvement in our efficiency ratio from last year's first quarter.

As I said a moment ago, it's all about executing on fundamentals and striving for excellence in everything we do.

Let's take a look at how that played out for each of our principal products.

In card, we saw a strong receivables growth as we leveraged the opportunity provided by last year's significant new account growth.

We also continue to drive a high level of engagement from our customers, which is reflected in our increased sales volume.

Year-over-year, we invested a bit more in brand advertising, while account acquisition spend was basically flat.

From an earnings point of view, slower growth in card marketing costs, somewhat offset the higher rewards costs from this quarter's grocery category.

Our private student loan business turned in another very strong quarter, with organic receivables growth of 9% and further improvement in credit performance.

In personal loans, our portfolio grew 2%, consistent with the outlook we'd shared with you.

We continue to focus on originating loans that we expect will generate the appropriate level of long-term returns as opposed to simply targeting a higher level of growth in what continues to be a very competitive environment.

As expected, charge-offs were often personal loans principally driven by earlier vintages.

Newer vintages are performing well, and we're seeing positive results from our revised underwriting strategy.

Our Payment Services segment generated 9% growth in volume, largely due to the performance of PULSE.

The PULSE team has been successful at winning new relationships and building business with existing issuers by developing creative debit solutions that deliver meaningful value for partners.

Wrapping up my part, our performance this quarter clearly demonstrates the strength of the Discover business model and our ability to deliver sound, profitable growth.

The economic environment remains quite good, and we believe we're well positioned to deliver continued strong results.

I'll now ask Mark Graf to discuss our financial results in more detail.

Thanks, Roger, and good afternoon, everyone.

I'll begin by addressing our summary financial results on Slide 4. Looking at the key elements of the income statement, revenue growth of 7% this quarter was driven by strong loan growth and a higher net interest margin.

With respect to the provision for loan losses, about 2/3 of the 8% increase reflects the seasoning of our strong loan growth with the remaining 1/3 due to continued supply-driven normalization in the consumer credit industry.

Operating expenses rose 6% year-over-year due to higher compensation expense and investments in support of growth and new capabilities.

The effective tax rate for the quarter was just under 22% due to the favorable resolution of certain tax matters.

We continue to expect that our effective tax rate for the full year will be about 24%.

Turning to Slide 5. Total loans increased 7% over the prior year led by 8% growth in credit card receivables, with the majority of this increase coming in the form of standard merchandise balances.

The contribution from promotional balances decelerated from the prior year and was a relatively modest contributor to growth this quarter.

Looking at our other primary lending products, our organic student loan portfolio increased 9% year-over-year, while total private student loan balances were up 2%.

Personal loans also increased 2%, which was in line with expectations given the slowdown in originations we've discussed over the past few quarters.

Moving to the results from our Payment segment.

On the right-hand side of Slide 5, you can see that proprietary volume rose 5% year-over-year.

In Payment Services, PULSE volume continued to grow with a 9% increase over the prior year driven by both new issuers as well as incremental volume from existing issuers.

Network Partners volume increased 24%, primarily driven by AribaPay, while Diners Club volume was down slightly from the prior year due to unfavorable foreign exchange impacts.

Moving to revenue on Slide 6. Net interest income increased $205 million or 10% from a year ago, driven by higher loan balances and increased market rates.

Total noninterest income decreased $17 million, primarily driven by a 9% decline in net discount and interchange revenue.

Gross discount in interchange revenue increased, driven by higher sales volume, which was up 7% year-over-year.

However, this was more than offset by increased rewards costs due to higher customer engagement in the 5% rotating category.

This higher engagement was the result of our featuring groceries this quarter as opposed to gasoline in the first quarter last year.

As shown on Slide 7, our net interest margin was up 23 basis points year-over-year and 11 basis points sequentially, coming in at 10.46% for the quarter.

Relative to the first quarter of last year, the net benefit of a higher prime rate was partially offset by higher costs in both brokered and direct consumer deposits as well as higher interest charge-offs.

Compared to the fourth quarter, the net benefit of a higher prime rate was partially offset by higher costs in brokered and direct consumer deposits with interest charge-offs being much less of a factor.

Total loan yield increased 58 basis points from a year ago to 12.8%, primarily driven by a 57-basis point increase in card yield and a 74-basis point increase in private student loans.

Prime rate increases and a slight increase in revolve rate led card yields higher, partially offset by an increase in promotional balances and higher interest charge-offs.

The increase in student loan yield was primarily driven by increased short-term interest rates.

On the liabilities side of the balance sheet, average consumer deposits grew 15%, reflecting our success in attracting more stable and cost-effective funding.

Consumer deposit rates rose during the quarter, increasing 15 basis points sequentially and 56 basis points year-over-year.

While deposit betas have increased, cumulative betas continue to be better than historic norms.

Turning to Slide 8. Total operating expenses were $56 million higher than the prior year with the efficiency ratio at 37.1%, a nice improvement quarter-over-quarter and year-over-year.

The increase in employee compensation and benefits was driven by average salaries, which included the impact of the higher minimum hourly wage we implemented in May of last year.

A higher level of advertising spend drove marketing expense up 5% from the first quarter of last year, representing a lower growth rate than the 8% year-over-year increase in the fourth quarter.

Increased information processing costs reflect our ongoing investments in infrastructure and analytic capabilities.

Professional fees were up year-over-year, primarily driven by increased collection costs related to higher recoveries in the quarter.

I'll now discuss credit results on Slide 9. Total net charge-offs rose 16 basis points from the prior year.

The seasoning of loan growth from the past few years and supply-driven credit normalization continue to be the primary drivers of the year-over-year increase in charge-offs.

Credit card net charge-offs rose 18 basis points year-over-year.

From a sequential perspective, this was the sixth consecutive quarter of slowing year-over-year increases in card charge-offs.

This positive trend reflects the fact that normalization continues to moderate.

The credit card 30-plus delinquency rate was up 12 basis points year-over-year and 2 basis points sequentially.

Looking forward, we expect to see continued solid credit performance in the card business.

The credit performance of private student loans remained strong with net charge-offs down 26 basis points year-over-year and 20 basis points sequentially as a result of efficiency gains in collections.

Personal loan net charge-offs were up 50 basis points from the prior year and 4 basis points sequentially.

The 30-plus delinquency rate was up 14 basis points year-over-year and decreased 9 basis points sequentially.

Looking at capital on Slide 10, our common equity Tier 1 ratio increased 40 basis points sequentially, as card loan balances exhibited their normal seasonal decline.

Our payout ratio for the last 12 months was 88%.

To sum up the quarter on Slide 11, we generated 7% total loan growth and a 26% return on equity.

Our consumer deposit business posted robust growth of 15%, while deposit betas remained below expected levels.

With respect to credit, while our charge-off rates have increased as loan growth seasons and credit conditions normalize, performance remains consistent with both our expectations and our return targets.

Finally, we're continuing to execute on our capital plan, strong loan growth and capital returns helping to bring our Tier 1 ratio closer to target levels.

In conclusion, we're pleased with our performance this quarter, and we remain comfortable with guidance we provided for 2019.

That concludes our formal remarks.

So now I'll turn the call back to our operator, Deidra, to open the line for Q&A.

(Operator Instructions) We'll take our first question from Betsy Graseck with Morgan Stanley.

I just wanted to have 2 quick questions.

One on the rewards you highlighted that look this is the 5% rotating in groceries.

So as we go into next quarter, given the fact that you're going to have a different rotating, the question is, we would expect that you would have a decline in that rewards rate similar to prior years we've gone from grocery to gas, Uber, Lyft in the following quarter.

Is that a fair expectation?

So what I would say, Betsy, I don't want to get in the business doing quarterly guidance on rewards rates, but what I would say is you're absolutely correct that the grocery category is the most lucrative.

It's really easy for people to engage and max out the benefits.

If you think about it, to spend $1,500 in groceries in the quarter, you only need to spend something less than $125 a week.

So not a lot of people spend that on gas, but a lot of people spend that on groceries.

So it tends to be very lucrative when we run that one.

We did not very specifically revise our guidance on rewards rate.

Matter of fact, I think in my prepared remarks I reiterated all of our guidance we provided.

So that probably -- that combination should probably give you a pretty good answer to that question.

Okay.

And then on the expense side, marketing cost looks like it decelerated a little bit.

And I'm just wondering, is that because you don't need to spend as much to incent people to take the card out because you've got the rotating and groceries, and so is that a little bit of an offset to changing the category next quarter?

Or is there something else that we should be thinking about maybe the efficiency that you've got going on the marketing spend, maybe that's what's going on there and it's more persistent, that's essentially the question.

Yes.

I mean, we're certainly seeing efficiency in our marketing spend.

But I think a lot of that we're just leveraging to drive more growth and to put on, for example, increasing numbers in new accounts.

There is a bit of an offset in terms of stimulating the portfolio, when we have a program that has as broad participation as grocery.

But it also impacts new account marketing and there can be elements of seasonality to our spend as well.

So I wouldn't necessarily read too much into it.

And our next question comes from Sanjay Sakhrani with KBW.

Obviously, the NIM came in quite strong relative to our expectations, and obviously, higher than the guidance, bottom end of the range.

I guess, Mark, when we look ahead, is there anything that should cause any downward pressure?

Or should we assume that we sort of buildup of this level for the rest of the year?

No.

I would say, again, we reiterated that NIM guidance along with all the rest of our guidance at that 10.3 plus or minus, Sanjay.

We would expect just to give you a little bit of a thought there, we would expect a little bit of compression probably as we head into the second quarter.

I think it's a couple of different things.

Number 1, revolve rate seasonality drives a piece of it.

All right.

You're going to have paydowns from some revolvers with the normal seasonality, if you will.

And then, of course, deposit cost continue to increase modestly as well.

So you'll probably see a little bit of that.

So I'd expect something in the order of mid-single-digit compression in NIM from the first quarter into the second.

We feel good about the NIM guidance for the full year.

Okay.

And my follow-up question is on CECL.

Obviously, we got a little bit more clarity there from FASB.

And one of your competitors sort of came out and gave a pretty high number in terms of what they expect the impact on card balances to be.

I was wondering if you had anymore guidance as it relates to CECL?

Sure.

So lot of caveats in here, Sanjay.

I guess I would say our models are not yet fully validated.

There's a number of alternatives that remain under evaluation, and we're still analyzing a number of factors for potential inclusion or exclusion based on their predictive capabilities over time.

In addition, I just point out and remind you that the ultimate impact won't really be determinable until the date of adoption because it's really heavily dependent on both the composition and trends in our portfolio as well as our forward-looking view of the economy at the time of adoption.

So -- but basically, if you want a preliminary estimate, I would say, based on the view that we have right now, you would have seen our total reserves, not just card, total reserves, somewhere between 55% and 65% higher than where they were this quarter, assuming we had adopted the standard this quarter.

Okay.

And then when we think about how you're thinking about capital return, obviously, there is a phase-in element to it.

How should we think about how you're planning for that?

Yes.

I think we've known about the phase-in all along.

So we've been planning for that.

And I think all of our forward capital planning contemplated, nothing disconnected from the numbers I just shared with you.

And your next question comes from Ryan Nash with Goldman Sachs.

Mark, maybe just a followup on the net interest margin question.

I understand you're not in the business of quarterly guidance.

When I think back years ago when -- in points in time when rates were stable, the NIM would have positive seasonality in the back half of the year.

So I just want to maybe understand the puts and takes once we get beyond the next quarter.

And then just related to that, if we are in a flat Fed environment here, how do you think about the impacts on your deposit pricing going forward?

So maybe as opposed to giving specific guidance thoughts quarterly or seasonally, if you will, maybe I'll just talk about the key things that impact the margin and maybe we can cover it that way, Ryan, a little bit.

So market rates, obviously, you've talked about, our current thoughts are that the Fed is done, right?

That there is no forward moves factored in any of our guidance.

Portfolio mix will play a part.

That is seasonal, right?

There are times when you see a higher level of revolve rate, a lower level of revolve rate.

There is also an element of that that's somewhat unpredictable, right?

We do see transactors from time-to-time come in and engage and other times we see them disengage, and you can't always ascertain as to exactly why.

So there is a seasonal element there.

And there's just a, what I'll call, a wildcard element there as well.

Levels of promotional activity can affect that.

We said we don't expect this year to be as heavily promotional as last.

Interest charge-offs, we've talked about normalization continues to moderate, but it's not over.

And we do have the seasoning of growth.

So they'll be a factor but less of a factor probably.

Deposit betas are there.

I'll punt that to the second part of your question and obviously, funding mix and funding rates.

And obviously, as we have fundings rolling off, we're replacing those fundings in a higher rate environment, so that's probably a bad guy.

As far as deposit betas go, they remain very well managed, Ryan.

I mean, if you look through history, usually deposit rates keep going up for a little while after market rates stop, but it's not a particularly concerning factor for us.

Got it.

Appreciate the color.

And then, Roger, we've heard a competitor or 2 talking about being careful online.

I think late last year you talked about tightening a bit.

But yes, you're still seeing a high single-digit growth.

Can you just talk about what you're doing online?

And are you still tightening credit?

And -- or do you expect that we could continue to sustain this type of growth?

Yes.

I want to make clear that we are tightening credit as we grow.

And that I do expect unless we see significant changes in economy to the good side, that this late in the cycle we will continue to be probably err a little being on the cautious side.

So as I look at the changes that come through credit policy, they continue to be more on the contractionary side than expansionary.

That doesn't mean we're not still looking to leverage our advances in analytics.

So I identify we'd take kind of swap-in, swap-out that would let us grow faster and improve credit performance.

And then continued focus on differentiation, the better your product is and the better you can compete in the marketplace, that would drive your growth even as you are disciplined on the credit side.

And I think that's always been one of our hallmarks here.

And your next question comes from Bill Carcache with Nomura Instinet.

One of your competitors has indicated that the digital investments they've been making over the years have positioned them to exit legacy data centers and fully migrate to the cloud by roughly the 2020 time frame.

And this positions them for meaningful improvement in operating efficiency by 2021.

Can you discuss whether Discover sees a similar potential for a step function improvement in efficiency from a similar dynamic in the future?

And any other thoughts around that dynamic would be helpful.

Yes.

I mean, certainly, there are benefits from a cost standpoint in migrating from legacy data centers to more a cloud-based infrastructure.

But, I guess, I would view that as not necessarily the most exciting piece of the advanced analytics journey.

It's really been how do you leverage the data and that much cheaper storage in the cloud for speed and driving business benefit.

And so as we think about the benefits from advanced analytics, that's a piece, but not even necessarily where I'd the say the most exciting piece.

Yes.

And that -- in addition to that, Bill, I would also note, we have for a couple of quarters now talked about the fact that we do see an opportunity to bring our efficiency ratio down over time.

We've noted that the general purpose issuers were already the lowest, but we see over time an opportunity to lower it.

And that migration into a cloud-based environment is a key piece of that thought process.

That's really helpful.

And separately, can you give us an update on how your prepaid debit product is going?

What's the engagement from existing Discover customers?

Are you attracting new customers?

Has there been any pushback for merchants on the higher pricing that you enjoy due to your Durbin exemption?

Yes.

So you're talking about the checking product?

Yes.

Yes, so not a prepaid, it's just a checking product.

Sorry, yes.

Right.

That's correct.

Yes.

No.

The -- we're excited with how that's doing.

We continue to grow it at a steady pace.

We've ramped up marketing of that product.

One of the great things about checking accounts is how sticky the deposits are, but I think that also is part of the challenge in growing it.

We have not received any pushback from merchants.

The volume there is still a very low portion, but in terms of the quality of the accounts we're booking, we're very excited.

Average age is about 35, so targeting that younger demographic we're seeing about 25% of the customers set up direct deposit, but we're also seeing 25% open a savings account.

So the impact on deposits is beyond just the checking balances we get.

And you tend to see a lower beta on those savings accounts when they also have a checking relationship with you.

So I'd say, continued focus and growth of that product.

And your next question comes from Chris Brendler with Buckingham Research.

Just wanted to ask on the acceleration you saw in the sales volume.

Were there any extra or lacking processing days, some other issuers and networks have called out fewer processing days as well as the Easter holidays.

So your 6.6% growth actually could be little better than what you reported.

Just want to make sure that's the case.

Yes.

No, we would not call out any adjustments like that.

It's a clean number.

Great.

And is that mostly driven by the successful rewards promotion, anything else that's driving the increased pickup in spending in the face of most people showing some deceleration this quarter?

I would say, we saw a broad-based pickup in spend.

But there's no question that the grocery promotion did play a part in that as well.

And your next question comes from Don Fandetti with Wells Fargo.

Roger, I think the consensus view in the card industry is the competition sort of peaked, loan growth seems to have moderated.

But if you look at credit performance and the returns from Discover and a lot of the other issuers, returns are very good.

Looking at some of the banks like JPMorgan, their loan growth picked up a bit.

What do you think the chances are of your bank competitors reaccelerating?

Or do you think that they're going to look at the cycle and just sort of lay low until we get a downturn?

It's hard to talk for an entire industry.

But I think in general, it's dominated by large sophisticated players with good risk management who have been through multiple cycles.

So I guess, I'd probably be surprised that someone who started growing aggressively at this point barring some fundamental changes in the economy and people views as to where we are.

You see quite a lot of discipline out there from the major issuers.

We see a lot of continued competitive focus around transactors and at the high end transactor segment, and we tend to focus more on a lend-driven versus spend-driven model.

But, again, I would expect continued discipline.

And Mark, just to clarify on credit.

Delinquency trends year-over-year have been very steady.

It sounds like you expect that to sort of stay in that zone, is that correct?

Yes.

I would say, we don't give quarterly delinquency guidance, but I would say, what I would really underscore is, normalization is continuing to moderate, if not over.

But for 6 consecutive quarters now, we're seeing the rate of formation and charge-offs moderate.

Delinquency trends are obviously a leading indicator of that for a little bit as well.

So I would say we feel pretty good.

I would say, going forward, provisioning will continue to become more and more a function of loan growth as opposed to that normalization piece.

And your next question comes from Moshe Orenbuch with Crédit Suisse.

I guess, I was just wondering, you talked a little bit about marketing spend.

Can you relate that to the cost per account.

You had a very impressive lower cost per account in 2018, is that continuing?

Yes.

We continue to see strong performance on the cost per new account.

And again, achieving that when you tighten credit, it tends to be the cheapest more responsive accounts that you cut.

So in a tightening environment, I'm even more excited by the progress that the team has.

And again, it's leveraging the advances in analytics and, let's say, also continued shift towards more and more of the mix being on the digital side.

But we expect continued strong performance this year as well.

And switching over to the personal loan business.

I mean, the business -- the growth has kind of -- it's slowed, but the other metrics are kind of not deteriorating as much as, I guess, as I thought you seem to indicate in the past, and noticing that you've got probably a 20%, 25% decline in overall mail volume in the industry.

Can you talk about your plans there?

Is that something you would start up again?

I mean, how do you think about your performance there and what the outlook is?

Yes.

I think we've tried to be very explicit around the channels that we cut back on.

Some of them were more of the aggregator and the unsolicited channels.

And one of the things we highlight was the new vintages we're booking.

We're pleased with the credit quality.

So we have made adjustments both to our channel mix and our underwriting strategy.

And we are achieving the returns we want from what we can see in the newer vintages.

In terms of overall industry mail volume rates, you had a couple players whose mail volumes were just off the charts.

And I think it appeared unsustainable.

So I wouldn't be surprised.

The other thing is a lot of them underwrite a much broader spectrum than we do.

So we're probably competing head-to-head against the subsegment of their overall volume.

But I would just view that as some of the excesses getting flushed out of the system.

It's probably still going to remain competitive.

And Moshe, to the point of looking a little bit better than what we'd thought or guided, I would say, we definitely saw Q1 come in a little bit better.

I would say collection strategies and some of the technology we've layered in to detect synthetic fraud has had a pretty meaningful impact.

Not going to call a trend based on one quarter at this point in time, but with charge-offs up only 4 bps quarter-over-quarter and delinquencies coming down, it does feel like possibly there's an opportunity there.

And your next question comes from John Hecht with Jefferies.

Mark, you talked about -- you mentioned the term supply-driven normalization.

And I assume that means that kind of incremental or marginal dollar getting into the consumers' pockets got a little bit more risk tied to it.

And then, Roger, you're talking about marginal tightening.

So are you guys seeing some participants in the market taking incremental underwriting risk.

Is that dictating how you're managing your credit trends at this point in time?

It's very hard to see, especially real-time what competitors are underwriting.

So we tend to focus on our product and again, different competitors have different strategies targeting other segments.

So it remains competitive.

But, again, we continue to see, as I look at competitors earnings and what they're putting up, people seem to be staying disciplined.

And the supply-driven normalization piece, really reflects that fact that coming out of the crisis, consumer credit was pretty restrained.

So consumer leverage ratios were very low by historic standards.

And what we saw as time went on, is consumer credit availability kept back in, a lot more providers willing to provide credit.

So you saw consumers relever back toward normalized levels of leverage, and that's what's really driven that.

That -- the supply of credit has driven that releveraging and it's driving that normalization of loss rate.

Okay.

And I know it's early on, Mark but, you've talked about seasoning of the credit book normalization so forth.

How do you think the '18 vintage will look against the '17 vintage at this point in time?

It's too early to call, and we don't typically tend to talk about vintages in isolation.

What I would say is, I think both Roger and I have over the course of the last couple of quarters talked about advancements in advanced analytics and our ability to do a better job, targeting and detecting synthetic fraud as well.

So I would say we feel good about the current accounts we are booking and those we booked in '18.

Your next question comes from Chris Donat with Sandler O'Neill.

Mark, wanted to follow up on your comments on deposit betas and I'm just wondering if there is anything you're seeing in the competitive market?

You said that the overall deposit betas were pretty well managed.

I'm just wondering if you're seeing any competitors be more aggressive than you'd like?

Or do you feel like your -- because of what you have in deposits now and even the savings accounts tied to checking that you don't need to worry about what competitors do?

I would say, there is always somebody who you scratch your head about a little bit in most businesses, I guess.

But in terms of where we are, I mean, cycle to date, I think our beta on our deposits has been 51.

So continues to be lower than you would expect at this point in time.

I would say, we are now up to, I think traditionally we've said over 60% of our depositors have a relationship with us on the card side as well.

I think that is now approaching 70%.

I think it's up to like 68% at this point in time.

So that cross-sell provides some virtuous benefit there.

They don't tend to be just retail capital markets customers rate shopping.

So we tend to target being in that 6th to 10th place in the bank rate tables as opposed to the first to the fifth place, and it's a strategy that has served both us and our customers well we think.

Okay.

And then on a completely different topic, just wondering, as you think about the student loan market, there was one of the Democratic presidential candidates put out a proposal that included canceling private student loans, again, it's a proposal.

But anyway, just as you think about student loans, some competitors had exited the market over the years and I think partly because of concerns that the regulatory environment could change.

Just how do you think about the potential for big changes in regulation of student loans, including your private student loans, not just the federal side?

Yes.

I wouldn't read too much yet into the proposals of individual Democratic candidates.

I think we have a long way to go before anyone's elected or anything gets put into law.

It is a very, very complex product to originate.

And I think when the federal loan program expanded, a lot of players decided the volume wasn't worth it.

We're very excited about that business and it continues to perform well.

You're probably seeing more new entrants coming into that than exit, as I look at this year's season versus the last.

But it's a business that we feel good about.

And your next question comes from Rick Shane with JPMorgan.

Look, we did see a delay in tax refunds.

But I think by the end of tax season, it seems to have really caught off on a year-over-year basis.

I'm curious if you saw any state level distortions that we should think about as we consider normal seasonality as we move through the rest of the year?

No, Rick.

We really didn't see much out of the ordinary in terms of any pockets of particular strength or pockets of particular weakness.

And your next question comes from Mark DeVries with Barclays.

I have a 2-part question around capital planning.

Can you just talk about what the capital planning and approval process looks for you here, both timing and process over the next year?

And the second question is, I think in the past, you've historically talked about eventually targeting an economic capital level of maybe a 10% to 11% CET1, but have had to obviously be above that given some of the regulatory constraints.

But given maybe a less constrained process going forward, should we expect you to kind of migrate down towards that level?

And if so, how might CECL kind of play a part in that transition?

So I would say the capital planning process for us at this point in time continues to evolve.

There is the guidance out there about the $100 million to $250 million banks that still requires a little bit more specificity, so we understand exactly what it's ultimately going to look like.

But I would say this year, specifically, we were granted an exemption from CECL and had a worksheet-based, formula-based approach to approve our capital ask, if you will.

Still a strong governance process through our Board and everything else around that.

And our planned capital actions were not outside the range that was allowed in that process.

Yes, we definitely see an opportunity to continue to migrate our capital levels lower.

I think we've said that with CCAR, having been modified or gone away for us, that the rating agencies, Mark, are probably the binding constraint for us at this point in time.

I think 10.5% is definitely in the cards in our eyes at this point in time.

And the CECL overlay, there is the 3-year phase-in associated with that.

And harkening back to my earlier comments, the 55% to 65% range I gave earlier with an awful lot of caveats, I would say is not inconsistent with our thoughts or the thinking around that target capital ratio.

And your final question comes from Bob Napoli with William Blair.

Yes, this is actually Brian Hogan filling in for Bob Napoli.

First question is actually on the home equity loan product, which is in the other loans.

Obviously, you had some pretty strong growth there, 89% in that category.

I guess, what is the long-term potential of that product?

I mean, how long can it grow at a very rapid pace?

And what is your plan for that?

Yes.

I would highlight it is coming off a very small base.

So over time, we think it can grow into a nice business, but it's going to be a while before it's a meaningful portion of our overall loan book.

All right.

And then the next -- final question is actually more related to your payments and network outlook.

Just what are you doing to drive more growth along that -- along your network in the payments business.

Obviously, you have the SAP Ariba thing, but you have -- SAP is doing more stuff with other competitors as well, like American Express and (inaudible).

What are you seeing out there from like a partnership perspective?

Or what are you doing to grow that network business?

Yes.

So you mentioned the SAP Ariba arrangement, they announced in American Express, I don't think -- expect that to have a material impact on the profitability of our arrangement with SAP.

There is -- it's hard to go over everything we're doing on the payment side, but a couple of highlights here.

Certainly, PULSE represents a significant portion of our profitability.

They continue to execute well as you can see from the growth there, and we see room for continued growth.

We also are probably most excited by some of our international network partnerships.

We call them our net-to-net where we provide technical support, including our BIN ranges, chip spec, et cetera.

They -- we provide acceptance for them everywhere outside their home market.

They provide acceptance for us.

I just got back from a regional conference in Vietnam and very excited about the opportunities we're seeing in Asia.

So again, we see a lot of room to continue growing our Payment segment, but also continuing to leverage our proprietary network to drive value for our core card issuing business.

And you have a question from Eric Wasserstrom with UBS Securities.

Mark, just a couple of quick questions.

In the past, you've talked to the proportion of your growth in receivables are coming from existing customers.

Has that trend changed at all recently?

No, it's been pretty healthy.

It tends to bounce somewhere between 60-40 and 40-60.

So on average we talk about it sort of as a 50-50 kind of range.

This quarter, I think it tended a little bit more towards the 60% new and 40% back book, but again, relatively consistent.

And in your K, you had a disclosure about some change in TDR policy.

Can you just explain what was occurring there?

So last year there were a number of workout programs that we decided we should classify as TDRs.

So you saw a big migration in early last year as we went through the process of reclassifying those programs as TDRs.

That was a big piece of the puzzle.

And then as we continue to originate significantly larger vintages over time, you see migration into TDRs as well.

I would say, there's been a little bit of noise out there we've heard on the TDR book.

I would say, I really don't think it's warranted.

If you look at the 90-day past dues in TDRs, they have continued to be below around -- right slightly below 5% on a very consistent basis over the course of the last 2 years.

And those programs can be a very effective way to work with customers.

So we think it's customer-friendly and the credit impacts of that are negligible.

And I will now turn the floor back over to Craig Streem for any additional or closing remarks.

Sure.

Thanks, Deidra, and thank you all for your attention, your questions.

You know how to find us for any follow-up.

We're there for you.

Thank you.

This does conclude today's conference call.

Thank you for your participation.

You may now disconnect.