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Discover Financial Services NYSE: Moshe Ari Orenbuch - Credit Suisse Securities NYSE: My name is Chantelle and I will be your conference operator today. At this time, I would like to welcome everyone to the Discover Financial Services First Quarter Earnings Call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. Thank you, Chantelle, and a sincere thanks to everyone on the call for joining us today. I'll begin on slide 2 of our earnings presentation, which you can find in the Financials section of our Investor Relations website, investorrelations.

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 today in an 8-K Report and in our K and Qs which are on our website and on file with the SEC.

In the first quarter earnings materials, we have provided information that compares and reconciles the company's non-GAAP financial measures with GAAP financial information, and we explain why these measures are useful to management and investors.

We urge you to review that information in conjunction with today's discussion. Our call today will include formal remarks from David Nelms, our Chairman and Chief Executive Officer; and Mark Graf, our Chief Financial Officer.

After Mark completes his comments, there will be time for a question-and-answer session. Now, it's my pleasure to turn the call over to David, who will begin his comments on page 3 of the presentation. Before I ask Mark to review the financial results in more detail, I'll begin with some comments on our vision and key focus areas and strategic objectives. Inwe're celebrating Discover's first decade as a public company.

Throughout those 10 years, we've made great progress towards realizing our vision to be the leading direct bank and payments partner. This vision guides the choices we make and the strategies we employ to achieve our ultimate goal of creating long-term shareholder value. I mentioned some of our key focus areas and strategies for on our Q4 earnings call, and you can see them outlined on page 3 of our earnings presentation.

We've organized our strategies around two key focus areas, achieving a strong rate of profitable, disciplined asset growth in the near-term, while investing in capabilities that will create a firm foundation for future growth. Growth is an underlying theme in both of these focus areas because profitable, sustainable asset growth is essential to create long-term shareholder value in our lend-centric business model.

We have recently returned to faster growth because we deliberately slowed loan growth for much of and part ofwhen for instance we curtailed our use of aggregator sites as the cost to acquire new card accounts in that channel grow significantly. In response, we developed and implemented several initiatives to return to the higher and more profitable asset growth you see today. These initiatives have spurred new account originations that are responsible for most of our recent credit card receivables growth.

I would also note that we have established a long-term track record of managing our credit risk in a disciplined fashion. With our focus on consumer lending, asset quality has a large and direct impact on our bottom line. That's one reason why prudent risk management underlies all we do.

In managing credit risk, we stay keenly attuned to changes in the credit cycle. While credit fundamentals remain favorable and the lending market has been expanding, we have been making more loans. We continue to focus on attracting prime borrowers and achieving strong risk-adjusted returns. With that context, let's examine our recent progress in achieving the strategic objectives in these two key focus areas. As cited in the highlights on page 4, we made substantial progress in the first quarter.

In the focus area of profitable, disciplined growth, we produced strong loan growth momentum across all of our primary lending products. We achieved this asset growth without sacrificing revenue growth. We demonstrated growth in our payments business as well. Of note, PULSE volume returned to year-over-year growth in the first quarter and is well-positioned for further gains during the rest of We also delivered on our second focus area by investing wisely for the future. For instance, we continued to invest in our Cashback Match program, which is approaching its second anniversary.

This program has proven a worthy investment by generating sustained customer engagement beyond the promotion period. Customers acquired through this program recognize the benefits enjoyed by all Discover it cardholders including an award-winning, all domestic customer service, innovative security features, pre-FICO scores, no annual fee and a competitive rewards structure.

We also remained productively engaged with our deposit customers, many of whom have another Discover relationship as well. We achieved strong annual balance growth while holding deposit rates steady. Finally, to see future growth, we continue to enhance our operating capabilities and manage our risks prudently. Enhanced operating capabilities support features and benefits that serve our customers better, which in turn fosters growth through customer loyalty.

I'm particularly pleased that the Brand Keys Customer Loyalty Engagement Index ranks Discover card first in our industry for the 21st consecutive year, a feat unmatched by any of the brands measured in their respective categories.

With respect to risk management, we remain good stewards of our shareholder capital and submitted our most recent CCAR capital plan to our regulators on April 5. Given our strong earnings and capital position, we expect to remain among the industry leaders in total payout ratio and shareholder yield.

In summary, I'm pleased with the achievements to date in our focus areas and our profitable and disciplined approach to generate long-term value for our shareholders. Thanks, David, and good afternoon, everyone. I'll begin by addressing our summary financial results on slide 5. The increase in card receivables was primarily driven by growth in standard merchandise revolving balances.

Loan growth remained favorable across our other primary lending products as well. We continue to make investments in early-stage product awareness and marketing to promote student loan growth.

Increased card usage and higher gas prices both contributed to this growth. On a sequential basis, our net interest margin was flat.

I'll explain this more thoroughly in a subsequent slide. Our rewards rate rose 19 basis points from the prior year, but declined 1 basis point sequentially. Late fees accounted for most of the gain.

Moving now to slide 8, our net interest margin rose 13 basis points from the prior year, but held stable from the prior quarter at Relative to the first quarter ofa higher prime rate and higher shares of standard merchandise balance and revolving loans contributed favorably to margin, although the pace of growth in the revolve rate slowed from the prior year.

These gains were offset in part by higher charge-offs and a more costly funding mix. Shifting gears and looking at a comparison to the fourth quarter ofa higher prime rate added to margin, but was offset primarily by a combination of receivables mix, higher charge-offs of accrued interest, and modestly higher liquidity balances.

Total loan yield increased 25 basis points from a year ago to The increase in card yield was primarily the result of prime rate increases and a shift in portfolio mix. On the liability side of the balance sheet, growth in our direct-to-consumer or DTC deposits remains one of our primary objectives.

We intend to continue to increase this share over time as DTC deposits provide relatively low cost and stable funding, and are also viewed favorably by debt investors and rating agencies. With deposit betas below historic norms, DTC deposit growth will also help mitigate the impact of rising interest rates on our funding costs, which increased 12 basis points from the prior year, driven by higher market rates and funding mix.

Turning to slide 9, operating expenses were flat relative to the prior year. Increased acquisition and brand spending in card was largely offset by lower expenses in other areas. Marketing investments to support our card business as well as ongoing investments in rewards have been drivers of our strong loan growth. In summary, our expenses remain well managed. I'll now discuss credit results on slide Excluding acquired loans, total net charge-offs rose 48 basis points from the prior year and 30 basis points sequentially, in line with commentary we provided on our fourth quarter earnings call and in public forums during the quarter.

Credit cards drove most of the increase as net charge-offs rose 50 basis points year-over-year and 37 basis points from the prior quarter. Student loan net charge-offs, excluding acquired loans, declined 2 basis points year-over-year and 59 basis points quarter-over-quarter, reflecting seasonal trends. Personal loan net charge-offs increased 71 basis points from the prior year and 46 basis points sequentially as credit performance continues to normalize from historically low levels. Relative to the prior quarter, day delinquency rates were relatively stable or declined across all of our primary lending products.

While we continue to see some normalization in the credit environment, the increase in our provision is primarily the result of the seasoning of loan growth, which has been driven both by new accounts and to a lesser extent, growth initiatives directed at legacy accounts. On balance, the macroeconomic fundamentals underlying consumer credit performance remain favorable relative to historic norms.

The labor market remains strong, home prices continue to rise, bankruptcy filings remain relatively low, and while rising, consumer financial obligations remain low relative to disposable income. While charge-off rates have risen, they remain quite low by historical standards and within the context of our guidance. Loan growth, both in recent vintages and to some degree in the well-seasoned portion of the portfolio, continues to be the primary driver of reserve additions with the remainder being driven by ongoing normalization.

Once again, these trends are in line with our expectations. As David noted, we will remain disciplined and vigilant in managing our credit risk as we take advantage of current loan growth opportunities. On slide 11, you'll note that we continue to deploy excess capital. Our common equity Tier 1 ratio increased 20 basis points sequentially, driven by the seasonal decline in risk-weighted assets. David previously mentioned that we submitted our CCAR capital plan on April 5, and I would note that we will continue to deploy shareholders' capital in a prudent manner that is consistent with our priorities: We continue to fund these loans with an increasing share of consumer deposits while realizing the benefits of relatively low betas.

Credit fundamentals remain favorable relative to historic standards with provisions primarily driven by the seasoning of loan growth. And finally, we continue to benefit from a strong capital position that enables us to simultaneously invest in profitable asset growth while delivering a high payout ratio and total yield to our shareholders. That concludes today's formal remarks. Your first question comes from the line of Sanjay Sakhrani with KBW.

Your line is open. Appreciate the comments on the NIM, but I was just trying to get a little more clarity. Mark, you've talked about historically at least seeing some benefit from rate rises.

As we look towards future rate rises and one that happened later in the quarter, should we assume that that will benefit the aggregate NIM? Mark Graf - Discover Financial Services. So, I think there were a couple of things that saw the aggregate NIM not get a benefit this most recent quarter, Sanjay, and maybe that's a good starting place that'll let me talk to the quarter ahead as well a little bit.

So, if you talk about just the benefit of the moving rate, we saw about 15 basis points of goodness to NIM. The takeaways from that really were about a 5-basis point negative based on asset mix, promotional balances, transactors reengaging in the portfolio, and we also had a higher percentage of student loans that drive great risk-adjusted returns, but they don't have the highest yields associated with them.

So, in combination, that took about 5 basis points away. Another 5 basis points came off due to the increased charge-offs of accrued interest. Then you saw about 3 basis points come off based purely on funding volume. We did overfund a little bit for the quarter.

We were pre-funding for a potential portfolio acquisition we were looking at, that didn't come to fruition. So, we're lugging around a little bit of extra year money that we'll grow into here. That was a piece of it. And then there was about 2 basis points as well that was really just netting of a whole bunch of positives and negatives. So on balance, that's kind of how you ended up flat on a fourth quarter to first quarter basis. We'll still have some of the impact of that overfunding as we head into the second quarter a little bit, but on balance I feel really good about our margin guidance of slightly higher on a full year basis.

And we do indeed remain positioned to be asset sensitive.

Donald Fandetti - Citigroup Global Markets, Inc. Mark, can you clarify what your card charge-off guidance is for ? I think you've been thinking 30 basis points to 35 basis points, and I could be wrong, but it looked like Q1 might have trended a little higher than what you were thinking and just can you talk a little bit about that? I think what we've said is — we didn't clarify card.

We gave total charge-off guidance, said it was on the order of 35 basis points year-over-year, something like that. And I think it's really being driven by two different things, Don. It's being driven both by a growth component and I'll call it a normalization component. The growth piece of the puzzle I would say every year since the crisis, we've had advantage of new accounts that's been larger than the one that preceded it and as you know well, new accounts season at loss rates they're above portfolio loss rates and that's part of the phenomena.

We also have engaged in some growth stimulating activities over the last couple of years in the legacy back book. We have some seasoning of some new line availability there as well. And then the normalization piece of the puzzle that I would say is really more just eight years or nine years post the crisis. Folks have had the ability to encounter life events or get over leverage or whatever the case might be. I think we're just seeing some degree of that normal normalization creep into the book, but it doesn't feel like a cyclical turn.

All the macro factors continue to feel really strong and that normalization relatively modest. In terms of the first quarter move there, I would say — I think it was pretty well in line with the guidance that we gave on our fourth quarter call. We said that it was going to look more and the first quarter would be lumpy and that we expected the increase in charge-offs to look a little bit more like the increase from third quarter into fourth quarter than what we were guiding for, for the full year.

So as I sit here right now, I don't see any reason to revise the thoughts we provided around the charge-offs on a full year basis. That 35 or so basis points directionally is correct. It could be a smidge higher or a whisker lower, but in that general ballpark is the way to think about it.

And just to clarify, the potential portfolio acquisition, can you talk about which product that was in? Was it personal loans, cards and is that a source of potential loan growth going forward? I'd prefer to stay silent on that one, Don. I guess the one thing I would say is given we funded it with year money, it probably wasn't cards, but I'll leave it at that.

Your next question comes from the line of Christopher Donat with Sandler O'Neill. Your line is now open. Thanks for taking my question. Just wanted to ask one thing related to the net charge-offs.

As we look at the data and look at your roll rates in card from day delinquencies into net charge-offs, seems like that roll rate is increasing. And then when we look at the data from your securitization which I know is a well-seasoned piece of business, but it looks like recoveries are coming down a bit. We've talked in the past before about this, Mark, but we finally worked through some of the recoveries related to the financial crisis, but are we not yet picking up recoveries from some of your recent loan growth?

So I would say on the latter point, most of the charge-offs that were generated during the crisis have now passed the statute of limitations. So while we don't stop trying to collect at that point in time, the collection percentage does indeed decline.

So I think, Chris, yes, you definitely blu ray option on computers seeing and candidly that was the gift that kept on giving for an awful lot longer than it normally does, and to normally post a peak in charge-offs, you really have strong recoveries for 24 months to 36 months. This time we got them for bloody well close seven years.

So, it was definitely the gift that kept on giving. As far as the rolls are concerned, what I'd really buy or sell medtronic stock you to is if you look at the trends and delinquencies in the earlier stage buckets, all continue to be really favorable.

And that's really more I think the indicator of what's coming at you to be looking at and thinking about in terms of how we came up with our thoughts on our guidance on a full year basis. But in terms of just general loss development, it feels again, as I said earlier, like our earlier guidance from the last quarter's call.

For the full year, it still feels like it's in the relevant range. And then just kind of curious — just a question on marketing, when I look back a year ago, you had a pretty low number and there was some talk about the timing of metatrader platform stocks. It's not that you're not taking the foot off the accelerator on marketing, are you?

Nelms - Discover Financial Services. I would say that we were growing a bit faster as you can see. We're very pleased with the results of the marketing dollars and I would guide you to look at the rewards line and we do kind of think about, especially when we're thinking about promotional amounts, about where we get the best investments in marketing dollars directly, or in Cashback Bonus which attracts more customers more cost-effectively. And you can see there, we have increased our investment, and we do expect to spend more in marketing this year than we did last year.

Your next question comes from the line of Ryan Nash with Goldman Sachs. Mark, maybe I can start off with expenses, so obviously they came in a lot lower than I think the Street had been looking for. David just referred to marketing expenses will obviously be up from this quarter and year-over-year. We definitely have leverage over that number, and if we see other things working against us that we feel a need to pull at, we can pull at those.

And we've said all along, you've heard my three-engine aircraft analogy or the market's heard my three-engine aircraft analogy many times, and we can pull back on those throttles accordingly. There is a lag between spend and results, right? So, a lot of the growth you're seeing this quarter, yes, a lot of it's rewards, but a lot of it is also marketing dollars that were invested last year, that really kind of produced the loan growth you see on, on to this quarter.

So I think there will be some seasonally adjusted marketing spend as we go through the year, but we will be very mindful on that expense line. And maybe if I could ask one for David, many of us just got off another call where the outlook for loan growth is lower amid increasing consumer indebtedness, higher competition. So maybe just in both card and personal, can you just talk about the decision to accelerate growth where you're actually seeing good opportunities for effects stock market crash 1929 canada, and do you think that you wealth forex trading actually sustain these type of growth rates in both card and personal?

Yes, well, if I start with card, we were growing two years ago, three years ago, ready for binary options strategy years ago, when the market was actually shrinking. And to some degree, it's a whole lot easier currency exchange rate desktop gadget grow when the market's growing than when it's purely share gain because the market is shrinking.

So in some ways, the environment is better. Now it is clearly more competitive and you're seeing us, particularly in the rewards space, invest more in rewards in order to remain competitive, and that's paying off in these results. I did mention to you that in my prepared remarks, that a year ago we were pulling back from some areas where we weren't as comfortable with the returns, specifically some of the aggregator sites that had become very popular with some of our competitors, and that cost us a bit of growth last year, it gives us a little bit better comp for this year's growth, so that's also a piece of it.

But, generally, we see great opportunities in the prime credit card market, and I'm not sure, the fact that we're not a subprime player, in my observation, is that market has gone through a lot more gyrations, and so people that are exposed to that may have bigger swings than we have. But in the prime space, we're pleased with the opportunities. More broadly, in the other products, you can see personal loans continues to grow very nicely, and when there's more loans outstanding, there's more loans to consolidate, and that is heavily a consolidation product, and so we're seeing strong opportunities there.

I would expect that as variable interest, seasonality in the stock market what is betas priced interest forex muslim brokers credit cards reprice upwards, that opportunity may continue as we consolidate in.

And of course, tuition continues to increase in schools, and so we continue to find good opportunities to grow in our private student loan program. So I would say, all in all, while it's more competitive than it was, there's more opportunities than there were.

And I would just pile on to that quickly with just one little comment, and David noted that we did pull back on growth last year or the year before, when we saw that we weren't meeting our return thresholds. We wouldn't hesitate to do that again, just to be clear. I mean, right now we are getting good trading hours on anzac day in nz growth.

If anything, we've tightened credit recently, and we're still getting this really good solid growth. I think that's a key point, and I would also point out that as long as that's the case and we can make rational assumptions and drive good credit, loan growth is the key to compounding shareholder value in that lend-centric business model.

So we really feel good about the growth we're putting up right now. Your next question comes from the line of Eric Wasserstrom with Guggenheim.

Eric Wasserstrom - Guggenheim Securities LLC. Yes, thanks very much. Mark, just on the rewards cost, typically there's a decent amount of seasonality in that, regulated binary best online stock traders for international trading yet this first quarter comes in more or less in line with the full year guidance.

So is this a change in the marketplace? Or is there something else occurring relative to the historical pattern? I think a big piece of it, Eric, really is the cadence on the rewards stuff, unlike a lot of the seasonality in the industry, is really under our control, right? It's really the management set rate for lack of a better term as opposed to cyclical or seasonal factors that affect it.

So really it was a conscious decision more than anything else. So does that suggest that at this moment your outlook is for more or less a sustained level of rewards expense? I would speak specifically because there will be peaks and valleys. So I'd speak specifically to the full year guidance of 1. Still feel good about that guidance as we sit here right seasonality in the stock market what is betas. Your next question comes from the line of John Hecht with Jefferies. Mark, you talked about how the rewards expense payout was consistent with guidance, but looking at historical patterns, it looks like your rewards in Q1 is seasonally a little lower than the other quarters, so I'm wondering is the seasonality changing?

Or are we just keeping our eyes open to what might come of the rewards expense ratio? Again, I would say it's really a management set rate.

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It's not really a seasonal rate, historically. Like last year, sometimes gas is in there, sometimes gas isn't. So I feel good about the full year guidance of 1. And then all else equal on credit, with an even economic backdrop, unemployment and wage expansion and borrowing the rates where we are, would you think that represents kind of the normalization year?

Or would you expect loss rates to accumulate into before they corretoras forex bonus out? I think that we're likely to see them continue to rise a bit, at least into I don't see anything dramatic as long as — as you point out, the economic environment is actually quite good.

But I would also say that we think the long-term new normal is way below what it historically was before all the structural changes that happened with CARD Act and the consolidation and so on in the industry.

So maybe a little bit of a long answer, but we're not providing guidance yet. But I would expect to be somewhat higher than as I sit here today. Your next question comes from the line of Betsy Graseck with Morgan Stanley. Just one on the, what keeps you up at night kind of question. It sounds like things are going really well and you are still investing in growth and just want to understand, is there anything out there that keeps you up at night and slows down the growth at all?

I sleep very well. But I would say over my career, I mean credit is probably the single most important thing that I think we have to be diligent on. And that has served us well and will continue to be the thing that we probably focus on the most. And I'd say secondly, being diligent can you make money on pkr pricing, rewards, sustainable rewards structures. One thing about credit cards is that — I mean our average credit card customer's been with us for 12 years, and so you really lock in a long-term relationship when you approve someone.

And so it's important to take the long-term and not to get carried away by short-term fluctuations in the market. So I would say focusing on the basics. I mean some people might point to technology changing or the competitive set changing. But I think people, when I observe what's gotten people into trouble over time, it's when they lose track of the basics of credit extension and pricing.

And then just a follow-up on balance transfers, did I hear you correctly in saying that, that impacted NIM in part this quarter? Promotional activity broadly did impact NIM a little bit this quarter, Betsy. So it was about 5 basis points was due to mix, was a detractor from NIM, and that was really three main components. It was partially — we saw transactors reemerge in the book to a larger degree than we expected.

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We did see some higher promotional activity with our double Cashback Match as well as some BTs. And then student loans picked up a little bit as a percentage of the overall book, and they're simply lower yielding.

You make up for it on a loss rate, but it does have a modest negative effect on them. And the improvement that you saw in spend year-on-year, that's a function — I mean that's also an output. The spend is really a function, I mean it was standard merch balances that drove how to make money out of cartoonist increase in spend. So it was regular way utilization of the card that we feel really good about.

Your next question comes from the line of Bob Napoli with William Blair. The efficiency ratio continues to be very good. As we look out over the next few years, is there still operating leverage left in this business? Can you drive that efficiency ratio lower over time? And if so, what's forexpros us cotton no 2 reasonable way to think about that over the next few years?

And when you combine that with that other thought process that I shared earlier about the key to compounding shareholder value in a lend-centric business model is continuing to drive the right kind of quality loan growth over time. I'd be concerned about peeling back on muscle. And it's one thing to cut fat, start thinking about cutting muscle, you have other effects on the business. So we will always look for animal crossing wild world money cheats youtube to be more efficient.

We will always look for opportunities to find ways to protect the customer experience while doing more with less. That being said, that's kind of a separate question in one respect from the expense leverage because obviously, if credit does turn meaningfully against you, you have some giant geopolitical event, whatever the case might be.

You clearly do have expense leverage in the model that you could act and react accordingly and appropriately. And then on the payments businesses, you did have some acceleration this quarter, and I think you lapped, got easier comps as well. Any thoughts on the ability to try to accelerate that business further?

I still think it's well below where you'd like to see it on a longer-term basis. I mean the Diners Club had some pretty impressive acceleration.

Well, we do think there's opportunity to accelerate it past this. I'm really pleased that we returned to growth after a couple of difficult years mainly from the loss of one business from one very large customer.

We don't have that kind of concentration anymore.

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And PULSE had a long-term — for many years after we bought PULSE, it outgrew the industry and the last couple of years have been very difficult as we lost some share and so we're taking all the steps we can to try to regain share.

It's very tough when we got to deal with some of the things that a few competitors are doing, which are really hard to compete against without that level playing field, but I'm pleased that we're at least — that we're growing and looking to accelerate from here. We had a couple of settlements, some open tax matters in a few states in the quarter, Bob.

Your next question comes from the line of David Scharf with JMP Securities. Scharf - JMP Securities LLC. Good afternoon, and thanks for taking my question. Mark, I want to revisit — it's been asked a few different ways, but as you recounted the litany of puts and takes in NIM this quarter, you among other things mentioned transactors were reemerging in the book and a bigger part of the asset mix. And I'm trying to get a sense for whether or not — in your mind, as you plan your rewards rates, I mean, is that a leading indicator or any kind of red flag that perhaps the rewards spend may be getting a little too high?

I mean is the transactor mix, was it very modest on the margin or is it a sign that tells us from an ROE basis there's actually room to potentially trim back rewards at the end of the year?

I'll take that one. And so I think if you have that concern, you'd see sales growing a whole lot faster than loans because you're getting transactors that aren't turning into loans which some of our competitors have been chasing. So, I feel very pleased that our sales have gotten up very close to loans and that's been our target for a couple of years and we're hoping to maintain it and it doesn't — it more gives me a signal that our programs are working and we're moving to a nice balance as opposed to needing to change something from here.

And switching to the credit side, notwithstanding the commentary on normalization, I'm wondering within the personal loan category, was that sequential rise in losses from Q4 to Q1? Was that in line with your expectations? I mean, it was steeper obviously than all the other categories and it's steeper than anything that took place seasonally a year ago. Is there anything behind that?

It actually was in line with our expectations. I think there's two pieces of the puzzle there. Piece number one is just simply the level of overall loan growth we generated over the period of time proceeding and leading up to that that really kind of goes through the peak seasoning and drives that, that's a piece of it, number one. The second piece of it is we did run a small test of some potential to set up a marketplace business for lack of a better way of putting it. So, we did originate some stuff that was a little bit lower than we normally would've played.

It was a very small portfolio test and control. And that had an impact of adding a few basis points to what that reported rate was as well. It wasn't directionally the driver by any stretch of the imagination, but it was a small piece of it also. So, all consistent with our expectations and in line with our guidance for the full year as well. And just real quickly as a cleanup, on the reserve rate, is the level we saw at the end of the Q1 a good way to think about for most of the — balance of the year?

We always set reserves on a forward-looking basis, so I'm going to have to — I bluntly couldn't even tell you what my reserve rate was. But I can tell you roughly where it was, but I couldn't tell you exactly because we can't manage to it. So we're setting on a forward-looking basis. What I would say is, I — there's going to be that element of normalization that's taking place out there. It remains modest, but really it's going to be growth that are going to be the primary drivers of the growth in reserve and the provision expense as I look forward.

And we're not losing any sleep that we can't manage the credit situation we're confronted with right now. Your next question comes from the line of Mark DeVries with Barclays. DeVries - Barclays Capital, Inc. Mark, I know you've been pretty clear on the big drivers for the upswing in charge-offs around both growth and normalization. Is there an element to which it's also being driven by a bit of a loosening in the credit box and maybe moving down FICO a little bit in your new growth, relative to what you've done, or have you really held the line on FICO scores and loss content?

I think we've pretty well held the line. I mean, if anything, of the last quarter or two quarters, we've tightened credit, in terms of directionally where we've gone, as opposed to liberalizing it. So, feel pretty good about that.

If you go back a few years, we've talked to market in the past about, we will look to expand the credit box a little bit from time to time.

And if you go back a few years, we did a little bit of it. I think that's all performing in line with our expectations and we're getting paid for it in the NIM as well. So feel very good about that and if you think about it as the sundae, it wasn't the ice cream or the hot fudge, maybe it was the whipped cream or the cherry, is the way to think about it on the growth levels.

So it was just marginal. And then — sorry. One of your competitors in the student lending space reported slower growth, loan growth, for the quarter than they expect for the year, and they attributed that to kind of the disproportionate share of for-profit schools and the disbursement season for the spring. Are you seeing any kind of uptick in your share of for-profit schools and if so, any kind of thoughts on implications for losses going forward?

For-profit schools, I'm sorry. And the first quarter is not a big quarter for disbursement, so it's hard to get a read, but we're seeing that we had expected somewhat higher growth this year in that business, more originations this year than last year, and so far we're seeing that.

Your next question comes from the line of Moshe Orenbuch with Credit Suisse. Moshe Ari Orenbuch - Credit Suisse Securities USA LLC. It's been asked and answered, but I wanted to come back quickly just to the rewards side of things. And maybe if you could just, David or Mark, talk a little bit about how you might use that, whether it's the rotating category or some other aspect, to kind of drive, and, David, you said you're generally happy with the characteristics.

But are there any other ways that you can think about, kind of optimizing your performance in the coming year? Well, because we have quarterly categories, we're able to be somewhat strategic and see what else is going on in the industry, what performance we've had in the past. I think then, the second thing is, the Double is continuing to work very well. We had originally put that in as a test, it worked, we've continued, and right now we have no plans to back off on that, and it's allowing us to get strong costs per account, strong engagement, and not be as wedded to some of the aggregator sites as some of our competitors are.

And then the third piece is we continue to work very hard on the redemption side and growing the number of partners who help fund and provide additional value to cardholders, leveraging our network in a way that's hard for our competitors to follow. Now, it's not quite Cashback Bonus, but I'll just mention that we're really pleased that we're doing a program right now with Walmart that you've seen launch last week, I think.

And we think programs like that is still rewards essentially, and it's cause marketing. And we don't have results yet, but we're optimistic that, that kind of engagement with our customers, with our retailer partners will pay dividends. Just a quick follow-up. You mentioned, David, the year kind of average tenure, but part of the Discover, it was to attract a somewhat younger demographic. And can you talk a little bit about how that's going and what your success there has been because that's been kind of a hot I'd say it's working well, and all of our marketing results and brand tests show that we do particularly well with Millennials compared to almost any other card brand.

And so I would say we have a double-edged strategy. One is to grow, especially with the Millennials, but grow through new accounts. But the second is to retain our existing customers through better service, through lower charge-offs and through a strong rewards program.

Seasonality in the stock market what is beta

And it's that combination of not having a leaky bucket and then filling the bucket with new customers with a differentiated product with Discover it, specifically, that is working for us.

Your next question comes from the line of Henry Coffey with Wedbush. Coffey - Wedbush Securities, Inc. Good afternoon, and thanks for taking my call. This is probably overly simplistic, but when we look at the quarterly trends and quarterly charge-offs, do you think that there was a sort of "a jump" in the second half of last year which will make the quarter-over-quarter comparisons easier as we go into the second half of the year?

And I know you talked about it in the past, but is it fair to think of the March quarter as a bigger reserve build relative to the rest of the year?

I'll let Mark answer the reserve question. But on the seasonality, I guess the way I would look at it is first quarter of last year was a pretty low quarter of charge-offs. And so that essentially is what you're describing and is what you would expect in order to reach the roughly 35 basis points increase for the full year.

We obviously would not reach that if we have kept up the same year-over-year, so we would expect the year-over-year to moderate from here. Mark, on the reserve. On the reserve, we don't give provision guidance, so I'll steer clear of that one, Henry. But what I would say is we did give the charge-off guidance, and I think I can use that to answer your question. And really we did see a bigger bump in first quarter charge-off growth than we're guiding for in basis point terms for the full year.

So clearly, that low point of delinquencies in the first quarter of last year is entering into our thought process. And then just kind of an unrelated question, but right now you have three core products that are driving the equation plus the direct bank.

Have you thought about adding a fifth or sixth product to the quiver? Or is it really, you're going to focus right where you are? Well, first I would certainly include the deposit products.

And even within deposit products, there's CDs, very different than money markets, checking, et cetera. But I would say home equity is the product that we are in. It's a very big market relative to many other markets. I think we're coming into a particularly good part of the cycle in which home equity will be in higher demand as people look to use home equity as opposed to refinancing their very low-rate first mortgage.

We're in the early days of that. We're still fine-tuning our infrastructure, our modeling and so on. So, it's not particularly significant today, but it is an area that we would like to grow further to create a, what I would call, a fifth product. Insight into where the student loan market is likely to go relative to the federal programs, or We're not counting on any change today.

I would hope that any changes that come in future years might be positive. And so, if the government backs off any piece of that market, such as graduate loans as an example, it's a market that we would hope could accelerate, and we would take the position to take advantage of it. And we are in the final stages of converting our system.

We've talked about that in previous calls, and I think having a state-of-the-art proprietary system that's very scalable, I think could position us well for possible acceleration in future years. I don't know if that would be orbut it's a great market, it's by far the lowest charge-off market for any kind of installment loan that I'm familiar with, and you saw that was the one product that actually improved this quarter and was the lowest charge-offs of any quarter that we've had in the last two years.

Your next question comes from the line of Jason Harbes with Wells Fargo. Harbes - Wells Fargo Securities LLC. Thanks for taking my question, guys. Maybe just a quick one on the longer-term credit outlook. I think at the last Investor Day, you provided a longer-term charge-off ratios target of 3.

Is that still a reasonable range to think about as we look ahead over the next couple of years? I'd pick up on David's earlier comment, there's a bit of Kentucky windage in that estimate. None of us have been here in a post-CARD Act world before, with our books kind of having gone through the crisis.

And all the cleansing that took place from that, coupled with the discipline that's kind of brought in by CARD Act. So we think that's a pretty good guesstimate of what new normal looks like through the cycle, but as David noted earlier, we're kind of going to need to ride through a cycle to validate that definitively. Thanks for that, Mark. And then just a quick follow-up on the direct bank, looks like you guys have had some good success with your deposit-gathering efforts, while the deposit betas remain surprisingly low, at least thus far into the tightening cycle.

Can you maybe share your expectations for what you're expecting for the remainder of the year? Yes, I think we'll probably start to step into normalized betas over the next several rate increases, I think it's kind of really a stair-step function. The money supply that's in the market has just got a tremendous amount of deposits in the system more broadly, and I think as the Fed begins to shrink its balance sheet, that'll have a bearing and an impact on that.

I think to the extent loan growth continues across the industry, I think there will be demand for those deposits. So I think you'll start to see some betas kick in, but I do think it plays out over time.

So as opposed to going from a beta of essentially zero to normalized assumed betas, I think over the next two, three, four, I'm not smart enough to tell you exactly how many moves you kind of stair-step your way there. Our last question comes from the line of Bill Carcache with Nomura Instinet. I believe that concludes the question-and-answer session on the call.

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DFS Q1 Earnings Call April 25, 6: Nelms - Discover Financial Services R. Scharf - JMP Securities LLC Mark C. USA LLC Henry J. Harbes - Wells Fargo Securities LLC Bill Carcache - Nomura Instinet Operator Good afternoon. Tim Schmidt, VP of Investor Relations, you may begin your conference. Tim Schmidt - Discover Financial Services Thank you, Chantelle, and a sincere thanks to everyone on the call for joining us today.

Nelms - Discover Financial Services Thanks, Tim, and thanks to our listeners for participating on today's call. FinancialCredit ServicesTranscripts. Error in this transcript? Contact us to add your company to our coverage or use transcripts in your business. Learn more about Seeking Alpha transcripts here.

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