Discover Financial Services

Good afternoon. My name is Deidre, 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. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your touchtone phone. If you should need operator assistance, please press star zero. Thank you. I will now turn the call over to Mr. Craig Stream, Head of Investor Relations. Please go ahead.

Sure. Thank you, Deidre. And welcome, everyone, to our call this evening. We'll begin on slide two of the earnings presentation, which you can find in the financial 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 8K filing, and in our 2018 10K, 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 Raff, 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. I would ask, though, that you limit yourself to one question and one follow-up during that period so we can make sure that everyone has an opportunity. 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 remained 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 strong receivables growth as we leveraged the opportunity provided by last year's significant new account growth. We also continued 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 had 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 advantages are performing well, and we are 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 demonstrated 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 are well-positioned to deliver continued strong results. I'll now ask Mark Rapp 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 four. 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 two-thirds of the 8% increase reflects the seasoning of our strong loan growth, with the remaining third 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 five, 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 five, 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 six, net interest income increased $205 million, or 10% from a year ago, driven by higher loan balances and increased market rates. Total non-interest income decreased $17 million, primarily driven by a 9% decline in net discount and interchange revenue. Gross discount and 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-to-consumer deposits and 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 and 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 liability 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 eight, 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 two 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 boasted 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, with 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, Deidre, to open the line for Q&A.

At this time, if you would like to ask a question, please press star 1 on your touchtone phone. If you wish to remove yourself from the queue, you may do so by pressing the pound key. We remind you to please pick up your handset for optimal sound quality. We'll take our first question from Betsy Grasick with Morgan Stanley. Hi, good afternoon.

Hi, Betsy.

I just wanted to have two quick questions, one on the rewards you highlighted that, look, this is the 5% rotating in groceries. So as we go into next quarter, you know, given the fact that, you know, 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 where you've gone from grocery to, you know, 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 category. It's really easy for people to engage and max out the benefits. If you think about it, you know, 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.

Right. Okay. And then on the expense side, marketing cost looks like it decelerated a little bit, and I'm just wondering – Is that because, hey, you don't need to spend as much and send people to take the cart out because you've got the rotating in groceries? And so is that a little bit of an offset to, you know, changing the category next quarter? Or is there something else that we should be thinking about? You know, 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.

Yeah. 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, you know, 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, you know, 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.

Okay. Thank you.

Peter? And your next question comes from Sanjay Sekrani with KBW.

Thanks. Obviously, 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 build off 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, you know, 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. You know, I think it's a couple different things. Number one, revolve rate seasonality drives a piece of it, right? You're going to have – paydowns from some revolvers with the normal seasonality, if you will. And then, of course, you know, deposit costs 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 FESOL. Obviously, we've 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 car balances to be. I was wondering if you had any more guidance as it relates to diesel.

Sure. So a 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 we're still analyzing a number of factors for potential inclusion or exclusion based on their predictive capabilities over time. In addition, I'd 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. 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's a phase-in element to it. How should we think about how you're planning for that?

Yeah, 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. Okay.

Thank you.

You bet.

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

Hey, good evening, guys. Hey, Ryan. Good evening. Mark, maybe just a follow-up on the net interest margin question. I understand you're not in the business of quarterly guidance. When I think back years ago and 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 from here, how do you think about the impact 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 we would cover it that way, Ryan, a little bit. Yep. Market rates, obviously, you've talked about. Our current thoughts are, you know, that the Fed is done, right, that there's 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's 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's a seasonal element there, and there's just what I'll call a wild card element there as well. Levels of promotional activity can affect that. You know, we said we don't expect this year to be as heavily promotional as last. Interest charge-offs, you know, 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. You know, we've heard a competitor or two talk about being careful on lines. I think late last year you talked about tightening a bit. But, yeah, you are still seeing high single-digit growth. Can you just talk about what you're doing on lines, and are you still tightening credit, or do you expect that we could continue to sustain this type of growth?

Thanks. Yeah, I want to make clear that we are tightening credit as we grow, and that, you know, I do expect, unless we see, you know, significant changes in the economy to the good side, that this late in the cycle, we will continue to be, you know, probably err a little being on the cautious side. So, if 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'd identify, I would say, 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 will drive your growth even as you are, you know, disciplined on the credit side. And I think that's always been one of our hallmarks here.

Got it. Thanks for taking my questions, guys.

And your next question comes from Bill Karkachi with Nomura Instant.

Thank you. Good evening, Roger and Mark. 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 timeframe. And this positions them for meaningful improvement and 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.

Yeah. I mean, certainly there are benefits from a cost standpoint in migrating from, you know, legacy data centers to more cloud-based infrastructure. But I guess I would view that as, you know, not necessarily the most exciting piece of the advanced analytics journey. It's really then how do you leverage the data and that, you know, much cheaper storage in the cloud and for speed and driving business benefit. And so as we think about the benefits from advanced analytics, you know, that's a piece, but not even necessarily what I'd say the most exciting piece.

Yeah, and that, in addition to that, Bill, I would also note, you know, we have for a couple 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 very helpful. Thank you. 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 from merchants on the higher pricing that you enjoy due to your Durban exemption?

Yeah, so you're talking about the checking product. Yes. Yeah. So not a prepaid, just a checking class. I'm sorry. I'm sorry. Yeah. Yeah. Yeah. No, no. You know, we're excited with how that's doing. We continue to grow it at a steady pace. We've ramped up the marketing of that product. You know, 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. You know, 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. You know, 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 itself. 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 would say, you know, continued focus and growth of that product.

Very helpful.

Thanks for taking my questions.

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

Hi. Thanks. Good afternoon. 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 holiday. So your 6.6% growth actually could be a little better than what you reported. So we want to make sure that's the case.

Yeah, 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 score?

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.

Great. Thanks so much.

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

Roger, you know, I think the consensus view in the card industry is that 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 J.P. Morgan, their loan growth picked up a bit. What do you think the chances are of your bank competitors re-accelerating? Or do you think that they're going to look at the cycle and just sort of lay low until we get a downturn?

You know, it's hard to talk for an entire industry, but I think in general it's dominated by, you know, 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 something fundamental changes in the economy and people's views as to where we are. You know, you see quite a lot of discipline out there from the major issuers. You know, we see a lot of continued competitive focus around transactors and that the high-end transactors segment, and we tend to focus more on a, you know, a lend-driven versus spend-driven model. But again, I would expect continued discipline.

Okay. 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?

Yeah, 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. It's not over. But, you know, for six 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. Thank you.

And your next question comes from Mousha Orenbuck with Credit Suisse.

Hey, Mousha. Thank you. So I guess I was just wondering, you know, you talked a little bit about marketing spend. Can you relate that to the cost per account? You had a very impressive, you know, lower cost per account in 2018. Is that continuing?

Yeah, we continue to see, you know, strong performance on the cost per new account. And, again, achieving that, you know, when you tighten credit, it tends to, you know, be the cheapest, most 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, you know, I'd say also continued shift towards more and more of the mix being on the digital side. But, you know, we expect continued strong performance this year as well.

Thanks. And switching over to the personal loan business, I mean, the business growth has kind of slowed, but, you know, the other metrics are kind of not deteriorating as much as, I guess, as I thought you seemed 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 that you would start up again? I mean, how do you think about your performance there and what the outlook is?

Yeah, I think we have tried to be very explicit around the channels that we cut back on. Some of them were more the aggregator and the unsolicited channels. channels, you know, and one of the things we highlight was the new vintages we are booking, we are pleased with the credit quality. So, we have made adjustments both to our channel mix and our underwriting strategies, 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 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 a subsegment of their overall volume. But I would just view that as some of the excess is 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 had thought or guided, I would say that 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 have 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 four dips quarter over quarter and delinquencies coming down, it does feel like possibly there's an opportunity there.

Thanks, guys.

And your next question comes from John Hecht with Jefferies.

Hi, guys. Thanks very much. Mark, you mentioned the term supply-driven normalization, and I assume that means that kind of incremental or marginal dollar getting into the consumer's 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?

You know, 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, you know, it remains competitive. But, again, we continue to see, you know, 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 – really reflects the fact that, you know, 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, you know, time went on, as consumer credit availability kept back in, a lot more providers willing to provide credit. So you saw consumers re-lever back toward normalized levels of leverage. And that's what's really driven that The supply of credit has driven that re-leveraging, and it's driving that normalization of loss rate.

Okay. I know it's early on, Mark, but you've talked about seizing of the credit book, normalization, and so forth. How do you think the 18 vintage look gives the 17 vintage at this point in time?

Okay. 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 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 2018.

Great. Thanks very much, guys.

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

Good afternoon. Thanks for taking my question. Mark, I wanted to follow up on your comments on deposit betas, and I'm just wondering if there's 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 – Or do you feel like 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's 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 – We tend to target being in that sixth to tenth 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. Granted, 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?

Yeah, I wouldn't read too much yet into the proposals of individual, you know, Democratic candidates. I think we have a long way to go before anyone's elected or anything gets put into law. You know, 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 know, 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.

Got it. Thanks very much.

And your next question comes from Rick Shane with J.P. Morgan.

Thanks, guys, for taking my question. Look, you know, we did see a delay in tax refunds, but I think by the end of tax season – it seems to have really caught up on a year-over-year basis. I am 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.

Great. Thanks, Mark.

You bet.

And your next question comes from Mark DeVries with Barclays.

Thanks. I have a two-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, you know, in the past you've historically talked about, you know, eventually targeting an economic capital plan. level of maybe 10% to 11% CET1, but have had to obviously be above that given some of the regulatory constraints. But given, you know, 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's the guidance out there about the $100 to $250 billion 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 a 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, you know, 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 three-year phase-in associated with that. And hearkening back to my earlier comments, the 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.

Got it. Thank you.

You bet.

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

This is actually Brian Hogan filling in for Bob Napoli. Hey, Brian. The first question is actually on the home equity loan product, which is in the other loans. Obviously, you have 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?

Yeah, you know, I would highlight it as 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 your network in the payments business Obviously, you have the SAP Ariba thing, but, you know, SAP is doing more stuff with other competitors as well, like American Express and what have you. I'm just saying, what are you seeing out there from, like, a partnership perspective, or what are you doing to grow that network business?

Yeah, so, you know, you mentioned the SAP Ariba development. arrangement they announced with America Express. I don't expect that to have a material impact on the profitability of our arrangement with SAP. You know, 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 – I'm probably most excited by some of our international network partnerships. We call them our net-to-net, where, you know, we provide technical support, including our bin ranges, chip spec, et cetera. 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. I'm 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. All right. Thank you.

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

Thank you for sneaking me in. Mark, just a couple of quick questions. In the past, you've talked to the proportion of your growth in receivables 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 toward 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, you know, below right around slightly below 5% on a very consistent basis over the course of the last two years. And those programs, you know, 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. Thanks very much. You bet.

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

Sure. Thanks, Deidre. 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.