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Executives

Bill Franklin

David W. Nelms - Chairman and Chief Executive Officer

R. Mark Graf - Chief Financial Officer and Executive Vice President

Craig A. Streem - Vice President of Investor Relations

Analysts

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Brian Foran - Autonomous Research LLP

Betsy Graseck - Morgan Stanley, Research Division

Donald Fandetti - Citigroup Inc, Research Division

Bill Carcache - Nomura Securities Co. Ltd., Research Division

David S. Hochstim - The Buckingham Research Group Incorporated

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Moshe Orenbuch - Crédit Suisse AG, Research Division

Mark C. DeVries - Barclays Capital, Research Division

Jason Arnold - RBC Capital Markets, LLC, Research Division

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Richard B. Shane - JP Morgan Chase & Co, Research Division

Scott Valentin - FBR Capital Markets & Co., Research Division

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Daniel Furtado - Jefferies & Company, Inc., Research Division

Kenneth Bruce - BofA Merrill Lynch, Research Division

Discover Financial Services (DFS) Q1 2013 Earnings Call April 23, 2013 10:00 AM ET

Operator

Welcome to the Q1 2013 earnings call. My name is Vanessa, and I will be your operator for today's call. [Operator Instructions] Please note that this call is being recorded. And I will now turn the call over to Bill Franklin. You may begin.

Bill Franklin

Thank you, Vanessa. Good morning, everyone. We appreciate all of you for joining us on this morning's call. Please note that for the first time, we have provided an earnings presentation on our website, which we will be referencing during the call.

Let me start on Slide 2. The discussion today contains certain forward-looking statements about the company's future financial performance and business prospects, which are subject to risks and uncertainties and speak only as of today. Factors that could cause actual results to differ materially from these forward-looking statements are set forth within today's earnings press release, which was furnished to the SEC in an 8-K report and in our Form 10-K for the year ended November 30, 2012, which are on our website and on file with the SEC.

As previously reported, the company changed its fiscal year-end from November 30 to December 31. For more information, including historical calendar year financials, please see the 8-K dated March 5, 2013.

In the first quarter 2013 earnings materials, which are posted in our website at discoverfinancial.com and have been furnished to the SEC, we provided information that compares and reconciles the company's non-GAAP financial measures with the GAAP financial information and we explain why these presentations are useful to management and investors. We urge you to review that information in conjunction with today's discussion.

Our call this morning 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. [Operator Instructions]

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

David W. Nelms

Thanks, Bill. Good morning, everyone, and thanks for joining us. I'll start my remarks on Slide 3 of our new earnings presentation.

Before the market opened, we reported quarterly diluted earnings per share of $1.33, up 10% over the prior year, driven primarily by loan growth and share repurchases. During the quarter, we generated a return on equity of 27% and returned approximately $310 million of capital to common shareholders through repurchases and dividends. These positive results, our capital position and our outlook, led our board to approve a 43% increase in our dividend to common shareholders last week. Mark will provide you with more details about our financial performance for the first quarter, but I'd like to draw your attention to Discover's year-over-year revenue growth of 10%. This shows how the Discover business model is working, especially since the financial industry as a whole currently is an environment that poses challenges for achieving revenue growth. So we will continue with investments to drive topline growth.

Slide 4 of the earnings presentation illustrates some of the drivers behind our revenue growth. We achieved 7% organic receivables growth, driven by a 5% increase in card receivables and a combined 10% increase in private, student and personal loans. Car sales volume for the quarter was up 4%. We did continue to focus on prime revolver sales, and we believe these results underscore the effectiveness of that strategy.

On the Payment side, the year-over-year total volume growth slowed down to 2% as PULSE's growth rate decelerated from 11% for the fourth quarter to 4% year-over-year for the first quarter. This deceleration in growth was something we discussed in prior calls and was mainly due to the impact of merchant routing and competitor actions, as well as our focus on profitable business rather than just volume growth. While the environment remains dynamic, we are pursuing a number of strategies that we expect will enable us to compete for a larger share of debit transactions and continue to grow this business going forward.

Looking beyond debit, during the quarter, we signed our first net-to-net partnership in Africa, and we are making strong progress as we continue to prepare for Paypal's staged offline rollout this year. At Diners, volumes were impacted by the continued weakness in Europe and strengthening of the dollar versus other currencies like the yen.

Last month, our management team presented Discover's strategic priorities and key initiatives at our annual Financial Community Briefing in New York. We discussed our profitable growth, the credit environment, our successful expansion beyond credit cards and our commitment to effective capital management. We also shared exciting new opportunities, including the nationwide rollout of Discover it, which so far is driving strong response rates and an enhanced engagement from new accounts. Discover it was not the only new product we launched this quarter. We also launched Cashback Checking. While these new initiatives are in early days, I'm very excited about how they will shape the future of Discover.

Now I'll turn the call over to Mark, and he will walk through the details of our first quarter results.

R. Mark Graf

Thanks, David, and good morning, everyone. I'd like to start our discussion this morning by going through the revenue detail on Slide 5 of the earnings presentation.

Net interest income increased $118 million or 9% over the prior year, driven by asset growth and a higher net interest margin. Net discount and interchange revenue increased by $23 million year-over-year or 10% due to Discover card sales volume growth and a lower rewards rate. The timing of promotional Cashback programs drove most of the sequential decline in our rewards rate from 111 to 92 basis points. For the full year, our target rewards rate remained at approximately 100 basis points. However, you will likely see continued quarterly fluctuations due to the timing of promotions as we look to further engage our customers and to drive profitable sales.

Protection product revenue declined by $15 million over the prior year and $10 million sequentially, mainly due to the discontinuation of new product sales, as well as customer refunds. We don't currently believe this sequential decline is representative of an accelerating runoff rate, but do think there may be some quarterly fluctuations going forward.

Other income increased by $59 million, primarily due to the inclusion of Discover Home Loans, which was launched in June of 2012. In terms of production, we originated approximately $1 billion in direct mortgages for the quarter. Payment Services revenue increased 6% year-over-year due to higher-transaction processing revenue for PULSE and higher revenue from network partnerships.

Turning to Slide 6. Total loan yield of 11.22% declined 17 basis points over the prior year, mainly due to card yield compression. This compression resulted from an expected increase in promotional rate balances, as well as an expected decline in higher-priced balances. Lower funding cost and lower-than-expected interest charge-offs more than offset this yield compression, resulting in a 30 basis point increase in net interest margin over the prior year to 9.39%. We continue to expect some NIM compression next quarter and then margin should expand sequentially in the second half due to maturities of higher rate funding.

Operating expenses, as shown on Slide 7, were up $81 million or 12% over the prior year. Over half of the expense increase is due to higher employee and marketing costs associated with the Home Loan acquisition and the launch of our Direct Mortgage product last June. Marketing expense was also higher than the prior year due to investments that continue to drive new account growth, card utilization and loan growth.

Other expenses were lower than the prior year mainly due to fluctuations in reserves related to legal and regulatory matters. Payment Services' operating expenses were up $6 million or 18% over the prior year, mainly due to higher professional fees and marketing expenses related to new partnership and growth initiatives. As David and I mentioned last quarter, this will be an investment year for payments. We're working on a number of different opportunities that will depress profits in the segment near term, but which we believe will position us for volume and revenue growth over the longer term. As mentioned during our financial community briefing, we still expect total company operating expenses of roughly $3.1 billion for the full year.

Turning to provision for loan losses and credit on Slide 8. Provision for loan losses increased $75 million in the prior year, driven by a lower reserve release for the first quarter, which was partially offset by lower charge-offs. Our forward loss forecast, particularly for seasoned credit card vintages, improved since fourth quarter earnings. Accordingly, the first quarter of this year had a reserve release of $154 million, which I would emphasize should not be used as a run rate. Net principal charge-offs were down $45 million or 13% year-over-year due to continued improvement in credit. Sequentially, the credit card net charge-off rate increased 5 basis points to 2.36%, and the 30-plus day delinquency rate decreased 2 basis points to a new historic low of 1.77%.

The Student Loan net charge-off rate, excluding purchased loans, decreased 18 basis points from the fourth quarter due to seasonal and growth in the portfolio. We would remind you that as the portfolio seasons, we expect this charge-off rate will rise above 1% and come back down over time to our normalized target of approximately 1%. The over 30-day delinquency rate increased 26 basis points sequentially. The credit performance of both our organic and purchased credit-impaired student loan portfolios continues to be in line with our expectations. The personal loan net charge-off rate was down 17 basis points sequentially, and the over 30-day delinquency rate was down 1 basis point.

Next, I'll touch on our capital position on Slide 9. Our Tier 1 common ratio increased sequentially by 110 basis points to 14.7% due to the combination of strong earnings, sequentially lower share repurchases and the seasonal decline in receivables in the fourth quarter. As was previously announced on March 14, Discover received a non-objection from the Federal Reserve for proposed capital object -- actions for the four quarters, which we began on April 1. Additionally, our board authorized a 2-year, $2.4 billion share repurchase program, and last week, increased our quarterly common stock dividend from $0.14 to $0.20 per share.

With respect to longer-term capital planning, we anticipate being part of the Fed's CCAR review process next year. Having compared peer reported stress results to those calculated by the Fed in this year's process, we believe that our target capital ratio may increase as we become a part of the CCAR process. Despite the prospects of a potentially higher Tier 1 common target, we still have more than adequate levels of capital to drive organic growth and planned capital actions in the current environment.

In summary, this was a great way to start the year. We drove better-than-industry revenue and receivables growth, credit performance remained strong and we received non-objection from the Fed on our January 2013 capital plan.

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

Question-and-Answer Session

Operator

[Operator Instructions] We have our first question from Craig Maurer.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

I had a question about network volume. For many quarters, you've been talking about share gains in the network business, not just PULSE, but Discover Network as well. And it seems, at minimum, you've fallen back to the growth rates of the 4-party systems and are now lagging the other major 3-party network. Do you expect that to recover with the launch of 'it'? Are there other initiatives you can take? Or should we expect more of a lagging position from Discover Network now versus some of the other networks?

David W. Nelms

Well, certainly, we've had a great track record over the last 5 years or so of gaining share. It hasn't all been even. We've gone through some periods of gaining significant share and some much less. And if you look at the -- what's going on, there's not a big change in the Discover side. It's primarily debit, where PULSE has been gaining very significant share. And as we had suggested in prior quarters, some of the trends that we're seeing were concerning, some of the new rules and approaches coming out of some of our competitors, as well as some routing changes post-Durbin. And I still do expect in the long term to be in a share gain position. And I'm particularly excited by some of the new net-to-net partnerships, Paypal and others, as well as the actions that we're taking within PULSE to confront some of the competitive challenges. As Mark suggested, we are in an investment mode pursuing some of these great new opportunities, which I think will pay huge dividends over the long term, but I'm not expecting to have big share gains. We obviously didn't have it this quarter, and I wouldn't expect it probably in the next 1 or 2 quarters. But we'd look forward to returning to gaining share again as soon as we can.

Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division

And if I could follow up on Paypal, are you planning to aid Paypal in their marketing efforts? Or will this be strictly a Paypal effort in terms of actual consumer-focused marketing?

David W. Nelms

Consumer marketing will be Paypal's responsibility. We are focused on the acceptance side.

Operator

And our next question comes from Ryan Nash.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Mark, just on credit and the reserve, losses continue to come down nicely. I believe you mentioned due to the seasonal loans, and the reserve also came down. Can you just help us understand the path from here? Any changes to your expectations over the next year? And given all the initiatives you have on the lending side, can we continue to see the reserve come down at this point? Or is all the provision [ph] that you're going to be doing from here strictly related to growth that you're generating?

R. Mark Graf

Yes, there's a lot in there, Ryan. I'll try and touch on it all and if I miss anything, feel free to hit me with your follow-up. But I guess what I would say is, that credit continues to surprise to the positive. And I guess that's a great thing, at the end of the day. It validates the underwriting we've done and the strength of the book. I would say, I would not take this quarter's run rate on a release or anything even approximating it and say that's what the -- kind of the future is going to look like, and you should extrapolate that out. I guess, what I'd say specifically is, at this point in time, it's really too early to call if next quarter is going to represent a release or a build. I think it's a continually evolving situation where in 50 years of the existence of a credit card as a product, the models are all built off that history and we've never seen an environment like this. So I think everybody in the industry is, to some degree, figuring this out as we go. We feel good about the positioning, and we feel good about where we are. In terms of the trajectory right now, I'd say next quarter could go either way.

Ryan M. Nash - Goldman Sachs Group Inc., Research Division

Great. And then just on the buyback, Mark, I know that at Investor Day you talked about getting the payout close to 100% or at least that's cap, the way the Fed is thinking about it. If I look at expectations over the next few quarters, it implies a buyback of something around $500 million a quarter or so. When you think about the 2-year program, given that you used 70% of last year's allotment, is it feasible that we could see greater utilization on this year's $2.4 billion plan, just given the significant amount of earnings that you're generating at this point?

R. Mark Graf

Yes, I mean, I don't think at this point in time I'm going to give guidance on exactly where we expect to end up. I guess what I'd say, Ryan, is we -- we're generating great returns on that excess capital. And we don't -- so we don't feel like we're being irresponsible in that regard. And we bought back 6% of our outstanding shares last year and popped our dividend 43% last week. So I think we're trying to navigate a healthy balance between deploying that capital into the business to drive compounding of value and profitable growth over the long haul, as well as making sure we don't just start building some giant capital hoard. I guess, what I would say is that it is a 2-year authorization and I wouldn't expect we would, over the rolling 4 quarters from where we sit right now, I wouldn't expect we'd approach utilizing that $2.4 million (sic) [$2.4 billion].

Operator

And we have our next question from Sanjay Sakhrani with KBW.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

So when I look at marketing, it seemed like it was a little bit lighter than what I had anticipated and kind of what you guys were guiding to. I was wondering if you could just talk about if there was any change to the competitive landscape that caused a little bit of variance there? I think one of your competitors mentioned where the growth has really been is in the high-balance revolvers. And I was just wondering if you could just maybe even talk about that and specifically kind of where your growth is coming from versus what you've typically originated in the past?

David W. Nelms

Sure. First, our marketing was certainly higher in the cards this -- first quarter this year than it was 1 year ago. And I think if you look around, you've seen probably plenty of billboards, TV spots and so on; I think we've really gotten the word out, and we've done it in a cost-effective way. I think during the first quarter with the launch of Discover it, we probably went a bit heavier on some of those broad market approaches because in the test markets, they worked very well. But I'd say we're also now following up with a bit heavier mail. And I would expect to see our direct mail volumes be a bit higher for Discover it in the second quarter versus the first as we continue to make consumers broadly aware of this great product and grow our business. In terms of where our growth is coming from, I'd say it's quite balanced. There's still a good amount of our growth that comes from current customers and gaining market share, retaining them, not writing them off, and so that's a big part of it. I'd say Discover it is attracting a slightly different usage pattern, a little bit less balance transfer, a little bit more retail sales, higher activation, and if anything, skewing a bit better in terms of the credit expectations. So that will take quite some time given the size of our book to work its way in. But I guess, overall, our growth has been quite balanced, and we're going to continue to ramp up our marketing on Discover it.

Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division

Sorry, just one follow-up for Mark. Mark, you just talked about your targeted level of capital going up under CCAR. Can you just talk -- or could you help quantify how much of a change you might be anticipating? And kind of could you just also talk about why that would go up under CCAR versus CapPR?

R. Mark Graf

Yes, I would say that we don't, Sanjay, definitively know that it will go up, is the key point. I think what we've seen is, we've compared the same thing you all have, and that is, we've looked at in the CCAR where there's total transparency, we've looked at what the BHCs themselves submitted as their expected losses and hits to pre-provision net revenue. And we've seen the stress cases that the Fed came back with. And I think some of our customers have talked about -- or some of our competitors rather, have talked about that disconnect. I think we clearly see a pretty significant disconnect there. We're just being -- trying to be responsible and say, "Hey, look, as we're looking at this, we feel compelled to tell the market, this may impact us, too." So I think we're just trying to level set that. In terms of what the impact may be, I know this isn't the answer you want to hear, but it's the God's honest truth, and that is, we won't know until we go through the CCAR process ourselves, because they don't disclose how this is being done and it changes every year. But I think the key point to take away is, in my prepared remarks, one of the things I was very cautious to say is, we don't envision any of this impacting our current planned capital actions. So I'd say, it's a bit of an academic point at some level because getting back -- getting down to that target capital ratio, as we discussed with you before, was going to be a multi-year process anyway. And it isn't going to impact us near term; we just felt compelled to put it out there.

Operator

And our next question comes from Brian Foran with Autonomous.

Brian Foran - Autonomous Research LLP

Just as we think about credit, you referenced the bankruptcy benefit in the press release. Can you just talk through kind of where bankruptcy filings are coming out? Is it just the number of bankruptcy filings are coming out lower than you had forecast or dollars per bankruptcy, or what exactly is happening there?

David W. Nelms

Well, I think that total bankruptcy filings in the country has been trending down a bit, which is different than what a number of forecasters externally had been predicting just a few months ago. And within that, our share of Discover customers who have -- who are part of those bankruptcy filings has also remained quite modest. And so it's part of the credit favorability that we've talked about earlier on the call.

Brian Foran - Autonomous Research LLP

And then on the net interest margin, you had a nice slide at the Analyst Day on the high-cost CD and fixed-rate ABS rollovers. I was wondering if you could just give us a sense of what the go-to rates are on average for CDs, and I guess on ABS; kind of whether you're replacing the fixed-rate or floating rate ABS, so we can try to think about what the funding cost benefits might be over the next couple of quarters?

R. Mark Graf

Yes, I guess what I can say is, from the standpoint of the deposits, I'd encourage you to just go out and hit our website. Our posted rates are out there. And you can get a good sense and a good approximation on the deposit side of the equation where we're replacing those roles today. With respect to the ABS market, I'd point you to our most recent print in terms of how we're looking at life, where we're doing a multi-tranched approach. We're managing the balance sheet holistically, not incrementally. So the asset liability position is -- takes into account a number of different factors obviously. And we're tranching out some of this with longer-dated, fixed-rate ABS. We're also keeping it somewhat relatively shorter-dated. So I know that's not a direct, specific answer to the question. But if you need some further follow-up, we'll be happy to help you on that as well.

Operator

And our next question comes from Betsy Graseck with Morgan Stanley.

Betsy Graseck - Morgan Stanley, Research Division

One of the questions that I keep getting is on teasers. And you did indicate and you've talked before about the fact that you're doing teasers, ramping them up. I guess, I'm just wondering if you could give us a sense of how you're managing the credit around the teasers? And also could you give us an update on how much of the teasers that you're bringing in you're able to transfer into multiproduct or extended product-type of customers that helps you get a sense of what their payment history is like?

David W. Nelms

Sure. Well, I mean, we're up modestly from last year. We were around 16% last year. We're around 18% now, and I expect it to be pretty stable from this point forward. And I'd say from a -- we obviously do it because our net present value say that it's the right thing to do. That we look at all the different factors, how many stay with us, the credit aspects and so on. From a credit perspective, generally speaking, if you offer customers a lower rate, you get better credit. So a higher percent, and the fact that we're in the prime business, means that we use it more than someone who's not fully in the prime business. So I'd say, generally speaking, what you're seeing with us is consistent with our previous guidance, is probably elevated today versus what it might be in a different cost of funds environment, because that obviously goes into the -- all the models and is being done to maximize returns and is indicative of a prime, faster-growing issuer, which we are. I guess, the final set [ph] point I would make is that if you look at our total yield, it's strong. And so I think that -- that is maybe the best indication that we're balancing it all and achieving both growth and profitability.

R. Mark Graf

And Betsy, the thing that I would...

David W. Nelms

Do you have another question?

Betsy Graseck - Morgan Stanley, Research Division

No, I'm just going to say when it comes off teasers, how has the performance on the credit side been?

R. Mark Graf

It's been very strong. What I was going to say, Betsy, is that I think David covered the first half of the equation, which is really the NPVs and the come ons and everything else. But the second piece of the puzzle is to start watching these vintages very early and things you bring on promotionally, and you look to see if you're getting the behaviors out of those accounts that you like to see. For example, if you see an account that comes on and balance transfer, in the first 6 weeks, they never pull out their new card, we probably know that wasn't successful, and we need to start really trying to engage that customer pretty meaningfully. The flip side of the equation, if that card gets pulled out of the wallet 16x in the first 6 weeks, we're feeling a lot better about it, right? So you have to watch not only the cost of acquisition and what the ultimate profitability of those current balances are, but you also have to watch that customer, the behavior of that customer going forward. And I would tell you, we're very happy with the results from our promos and their activity as well.

Betsy Graseck - Morgan Stanley, Research Division

Okay. Because you've been pretty active in trying to engage those customers quickly, can you give us a sense as to, has that customer utilization, so to speak, that pulling out of the wallet, been pretty steady state over the past year or so? Or has that ramped up? And roughly what percentage of your teaser customers are you able to translate into active card users?

David W. Nelms

Well, I can't give you numbers, but I can tell you directionally, Discover it, we're seeing higher retail engagement, a bit lower balance transfer activity than we had before. So we're -- than history had, so I think that the trends have been favorable.

Operator

And our next question comes from Donald Fandetti with Citigroup.

Donald Fandetti - Citigroup Inc, Research Division

David, I think you had mentioned that the Paypal ramp-up was sort of a staged process. And you may have commented on this already, but can you talk a little bit about how many merchants have agreed to accept that, and how that staged process could work? And then secondly, I know some of the banks have complained that these merchant record models just sort of add risk to the payments system. I was wondering if you could sort of provide your perspective on that as well?

David W. Nelms

Well, I would say that I'm not prepared to give specific numbers. We're adding acquirers and therefore, the merchants that those acquirers go to continuously here. We're in a very active stage. I'm very pleased with the number. We've press released a good number, and we're going to -- we're expecting to continue to add additional acquirers to the equation. I think that what we have committed to do is to work as hard as we can to turn on our merchant acquirers and our entire merchant base to Paypal. But that doesn't happen with a flip of the switch. We've done this a couple of times before. I mean, Paypal has got some unique characteristics, but we've turned on the JCV and China UnionPay and BCcard and -- we've been working. There's no one in the industry that's turned on more new networks and merchant base and acquire base than Discover has, and I think that's one reason Paypal chose us. So we're going to be ramping up quickly. But I purposely used the word "staged" because it doesn't all happen in 1 day. And I think for us, the volume will build gradually and I wouldn't really think about a big volume benefit this year. In terms of your other part of the question, I'm simply not aware of any real issues. I mean, if you look at Paypal itself having 100 million customers and merchants in the U.S. and around the world, I'm not aware of issues that you talk about in terms of merchant of record.

Donald Fandetti - Citigroup Inc, Research Division

Okay, great. And then just lastly, your sense on April credit card spend trends. I mean, are they holding fairly steady?

David W. Nelms

Yes, I'd say April is holding steady with the second half of the quarter. January was the strongest month on a year-over-year growth rate of the quarter, and then it just seemed like things slowed down a bit. I mean, continuing to see growth, year-over-year growth, but just not as robust as January, and it seems like that has continued so far into April.

Operator

And our next question comes from Bill Carcache with Nomura.

Bill Carcache - Nomura Securities Co. Ltd., Research Division

I was hoping you guys could give some commentary around the trajectory of capital actions for the rest of the year, particularly for the second quarter. Last year, you had a big spike in buybacks in Q2 from almost nothing in the first. And I'm wondering if it's reasonable to expect a spike in Q2 this year relative to the other quarters at least?

R. Mark Graf

Bill, I guess, I'd lean into my earlier comment and say we're not really prepared to provide a lot of guidance on that front today. But the one thing I would say in response to your question -- your specific question, is that last year's 2nd quarter included a catch-up from our having been out on the market in the first quarter last year. So I would say spiking was more related to that. In terms of the year ahead, I just point you again to my earlier comment that it's a 2-year, $2.4 billion repurchase authorization and I wouldn't expect us to approach that $2.4 billion in the next 12 months.

Bill Carcache - Nomura Securities Co. Ltd., Research Division

Okay. And as far as the commentary that you guys have made on expenses, I was wondering if you could maybe elaborate on that a little bit. So you've made it clear that there's some opportunistic investments that you're making this year and that expenses will be elevated, and I think everyone was expecting that. They still came a bit lower than expectations. I'm wondering if over the course of the rest of the year, is there any reason to expect there would be some lumpiness in kind of that expense ratio from where it is this quarter? Or how should we be thinking about the progression of that expense relative to this quarter over the next -- over the rest of this year? And that's it.

R. Mark Graf

Yes, I think -- absolutely. Yes, I think you raised a very good point. It will be a little bit lumpy, Bill, is the most likely outcome. I think $3.1 billion on the full year is the right way to think about it. When David spoke earlier about our marketing expenses, he alluded to the fact that we pulled back on some planned direct mail for the quarter and few other things because the response rates we were seeing on the other channels for 'it' were so strong. So basically what we did is we've taken some dollars that we still fully intend to spend, and we pulled them out of the first quarter shock and awe campaign and we're spreading it out a little bit more to be maybe not a first quarter shock and awe, but an early part of the year mini-shock and awe, would be the right way to think about some of that. With respect to other initiatives, I would say there aren't any that are going to be particularly lumpy through the year, other than that marketing line item.

Operator

[Operator Instructions] Our next question comes from David Hochstim with Buckingham Research.

David S. Hochstim - The Buckingham Research Group Incorporated

I wonder, could you tell us in the Payment Services P&L, is there much in the way of Paypal integration expense? Is that pretty much done this quarter? Or...

R. Mark Graf

Yes, I would say with respect to Paypal, we definitely, as David mentioned earlier, are responsible for the acquisition side of that equation. And so we are actively engaged in that and there are dollars being spent in that effort. So what I would say is, yes, in the Payments line item, there are dollars being spent on Paypal at this point in time. But I would say it's not just Paypal. There are a number of different initiatives that we have talked about. I think -- and a number that we have not spoken about, if you will, that are underway in the payments space right now that are driving some of that. So I would say it's a more broad-based approach to building out that business that's driving that expense line than it is Paypal driving that expense line.

David S. Hochstim - The Buckingham Research Group Incorporated

And then could you just talk about the lumpiness in rewards cost? How much lumpiness?

R. Mark Graf

Yes, I would -- I'd say for the full year, we still expect the rewards rate to be about 1%. There is definitely going to be some lumpiness in that trajectory based on the timing of our 5% Cashback programs and the way we are going to run these programs over the year ahead. So what I would say is, quarter-on-quarter, there's going to be some variability. I think, for the full year, though, what you should be looking for is the 1% rate is the target we're after.

David S. Hochstim - The Buckingham Research Group Incorporated

Then should we -- which quarter should we expect it to be substantially above 1%, do you think, at this point?

David W. Nelms

Well, I would think about higher amounts in the second half of the year. So just as you saw us being -- I wouldn't necessarily expect it to be quite the magnitude of this past fourth quarter, but we tend to be heavier during the season -- the seasonal part of the year, and so I think higher in the second half than the first half.

David S. Hochstim - The Buckingham Research Group Incorporated

If -- sorry, I have one more follow-up, above the limit, but could you just tell us the -- how much of a distortion there was in the year-over-year growth from leap year, David? Is it about 1 percentage point? Was it 2 percentage points, do you think, in terms of your reported?

R. Mark Graf

Yes, I think -- we'll let you get away with it this time. I would think about it as 1 day out of 90 days as roughly the impact.

Operator

Our next question comes from Chris Brendler with Stifel, Nicolaus.

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Just a little more on the spending volumes. Can you talk at all about your merchant acceptance initiatives? Is that still -- I know you're spending a lot of time and effort in improving the sort of virtual or the real merchant acceptance and making sure all merchants are aware that they do accept Discover. Is that still additive to your spending growth at this point? And also if you could address PULSE, I know you have some initiatives just to re-energize the volumes there. Should those start to kick in and help out the PULSE business in 2013?

David W. Nelms

I think I missed the second question, but on the first question, I would think about, I think it's still -- well, increased acceptance is still clearly additive and a tailwind to us. And that's true both in the U.S. as we get the remaining merchants on board as well less the online -- the international acceptance, that has ramped up significantly in the past few years. That being said, the remaining merchants in the U.S. are mostly quite small. And so I think that I would expect it to, at this point, start to be really a diminishing tailwind because we, frankly, have gotten the -- we prioritize the larger merchants, and there's just not too many of them left. Could you repeat your second question, please?

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

Just on PULSE. I remember from Diane's presentation at the Investor Day, she alluded to some new initiatives, some routing on signature potentially that would help the PULSE volume, help Discover regain some of the market share after Visa's changes that have seemed to have hurt that business starting this quarter.

David W. Nelms

Sure, well, I'm not prepared to talk in detail; it would be a longer conversation. But certainly, one of the things Diane pointed out is that we traditionally were a PIN debit network, and PIN was about 1/3 of the market order of magnitude. And you saw us announce, in the previous quarter, Cadence Bank, which was a signature issuer, so we're clearly starting to add some signature issuers. We're also -- have taken close notice to what some of our competitors are doing and we're putting in appropriate responses to really try to provide options across our network for the full range of debit types, including as you mentioned, signature, not just PIN. And we're actively working with acquirers, banks, making technological changes to pursue everything that we possibly can to get back into the share gain that we have had for many years.

Christopher C. Brendler - Stifel, Nicolaus & Co., Inc., Research Division

I'd like to squeeze in one more, if I could. Just on the Home Loans business, it seems to have accelerated pretty meaningfully this quarter. Is that business already profitable, and do you expect the high volumes and the profitability to continue even under the potential of the refis to start to slowdown? I imagine it's mostly refi at this point.

David W. Nelms

No, problem. We've said before that it is profitable, but it's not -- it's a pretty small part of our profitability. And like other loan origination businesses, we're certainly benefiting from the current significant refinance volumes. And we do expect those to slow over time. So we saw a slight slowing in this quarter, maybe not as much as some others have so far, but we're taking a lot of steps to get stronger in the initial purchase part of the market to enhance our cost structure and ability to remain profitable through other parts of the lending cycle.

Operator

Our next question comes from James Friedman with Susquehanna.

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

Mark, I wanted to ask also about some of these Payment Services investments; Slide 7 in your presentation. A housekeeping question: As we see return on those investments, should we be watching -- will it show up in Payment Services revenue? Or is it in that Network Partner line item that you have in that separate disclosure?

R. Mark Graf

Jamie, you're going to see it in both of those line items, is the way to think about it. We're investing pretty heavily in initiatives that run through both of those items. So what I would say is, without really talking about what they are, and given that a number of them are in the works and not yet public, I can't really do that; I can't kind of give you the break downs for how to look forward. But I tell you what, as this starts to roll forward and as we talk about new initiatives that we make known, how about if we just go ahead and let you know where those are going to be reflected going forward?

James E. Friedman - Susquehanna Financial Group, LLLP, Research Division

That would be helpful. We'd appreciate the disclosure. And then, David, maybe if you could just talk in more human terms about the partnership with Paypal. What do they like to work with as human beings, as technologists, as payment professionals? Observations in that direction would be helpful.

David W. Nelms

Sure. Well, just one follow-on to your earlier question. One thing that helps us is that in the network business, a lot of it is fixed cost and fixed infrastructure that we are leveraging. And so that's one of the reasons that getting additional volume on it over time is helpful and why you're not seeing much more massive investments despite some of these big opportunities that we have. Paypal has been great to work with. One of the things about them is that they are -- they're a payments company, and we deal with a lot of partners. But they are -- they're a strong technology company and they've been in payments for quite some period of time. And I think our teams have really enjoyed working with them. I think one of the things that has been great is the fact that they have really recognized that we are experts at point-of-sale and we're experts at offline network, having built it over the last 27 years. And we recognize that they are very nimble, and they have some attributes that together, I think, is helping us to really do some great things for consumers and merchants. And so I think they're one of our most important and great partners to work with.

Operator

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

Moshe Orenbuch - Crédit Suisse AG, Research Division

I was just wondering if you could talk a little bit about -- you mentioned a few things about marketing, saying you pulled back a little on mail because the other stuff was still good. Could you talk about the efficiency of your marketing and this program and what you see going forward kind of compared to what it's been in the past? Because I think what stands out to me is that everyone else is kind of sort of making excuses as to why they're not seeing the growth. And maybe could you just talk about what it is about marketing programs that you find successful and how they've compared to others?

David W. Nelms

Well, I would say that we are seeing better efficiencies both on the direct-mail side and the non-direct mail side, all the others on this. And I think it starts with having just a great product. And we believe that Discover it is second to none in terms of consumer value, proposition, the rewards, the service, the fees, the services that it provides. And you see that in some of our marketing, where we're doing much more than we have in the past, direct comparative charts, they kind of point out the fact that we think it's the best in the market. And we're seeing customers respond to that and prospects respond to that. So I am very happy that I'm not in a position of having to make excuses. I'm in the position of working really hard to deliver results.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Great. And just if you could follow-up -- any kind of metrics that you can share with us as to what the typical customer kind of looks like when they come on in the terms of either credit line or balance or spending volume, just if you could kind of frame that for us?

David W. Nelms

Well, kind of as I told Betsy, I'm not prepared to give any specifics. But I would just repeat that directionally, whether it's credit or usage or spend, we're seeing better performance with Discover it than we did with the previous More card. And I'm not so sure that it's as much getting a different customer base than it is getting more usage from these new prime customers. So we're really excited about it.

R. Mark Graf

And, Moshe, I would just kind of add to that, I guess the growth is not coming from issuing bigger credit lines. Just to be abundantly clear, we continue to be real conservative in our credit granting activities and we tend to start customers out with a smaller line than most of our competitors would, to be honest.

Operator

Our next question comes from Mark DeVries with Barclays.

Mark C. DeVries - Barclays Capital, Research Division

First, I just wanted to clarify the comments around the margin. Given the strong margin this quarter and the expectation for declining margin in the second, but then rising margin in the second half of the year, is it reasonable to expect, Mark, for us to see a margin at the end of 2013 that's higher than where it ended 2012?

R. Mark Graf

I'm not prepared to call that yet, Mark, but I would say it's a possibility. I think the trajectory of your credit from here and the interest charge-off impact on that will have some degree of bearing there. Funding costs are rolling on a little bit better than we expected the funding costs were going to be rolling on at, quite honestly. So let's just say, it is a possibility.

Mark C. DeVries - Barclays Capital, Research Division

Okay, great. And then just on your personal loan segment, can you talk about how credit there, delinquencies and charge-offs were kind of tracking relative to your expectation? And what impact, if any, the growth in that segment is impacting growth in your cards business?

R. Mark Graf

I'm sorry, that was the personal loan segment, specifically, Mark?

Mark C. DeVries - Barclays Capital, Research Division

Yes. Yes, exactly.

R. Mark Graf

Yes, I would say growth there right now is tracking in line with our expectations. I think it's a business that's managing prudently for profitability with moderate growth as opposed to managing with a key emphasis on growth as the key to success in that business over the long haul. And that's indeed what we're doing. I would say, with respect to credit costs and performance, I would say it's a little bit better than last year, and also, probably a tad bit better than our target as well.

Mark C. DeVries - Barclays Capital, Research Division

Okay. And then any kind of cannibalization effects from that on your card business?

David W. Nelms

No. I mean -- I mean, you can't say there's not any, because certainly some of the people who consolidate their debt may have some Discover debt. But what I'd say is that there's not a change because we've been at this for now a number of years. And that we've been growing it for a number of years, so I'd say it's pretty steady state and the vast majority of the balances do come from external balances that consumers are consolidating to us, getting generally a lower APR, fixed repayment term, paying their debt down over time to deleverage. And that's what the product is designed to do, and it's working well.

Operator

And our next question comes from Jason Arnold with RBC Capital Markets.

Jason Arnold - RBC Capital Markets, LLC, Research Division

Just a follow-up on the Home Loans side of the equation. I know that you've talked about expanding in the home equity. So I was just wondering if you could update us there and then also maybe comment on if you're seeing other mortgage opportunities, perhaps maybe more of an opportunity on the jumbos side with some -- still what seems to be some dislocation in that market.

David W. Nelms

Yes, well, I would say it's still our intent to expand in the home equity later this year. However, we are still -- there were a lot of new rules that have just come out that were focused on home loans, but had some bearing on home equity as well. So we're continuing to go through there, look at the risk reward. And there's been no change in plans, but we haven't actually launched anything yet, so we are continuing to evaluate. In terms of jumbos, that's also something we could certainly consider long term, but I'd certainly would not expect anything on that this year. I'd say our big focus in Home Loans is on the business that we've got, the conforming Fannie, Freddie, FHA, how do we best serve customers and grow that business, maintain or improve profitability. And that's our biggest single focus.

Operator

And our next question comes from Bob Napoli with William Blair.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

A question on marketing, I was wondering if you could give maybe a little bit of a better feel for the spread of the budget there. How much of it is allocated to Discover it versus, say, the mortgage business versus and is -- are most of your originations on the card business now coming on the Discover it product?

R. Mark Graf

Bob, I would say, yes, most of the originations are now indeed coming on the Discover it product. And I would say the lion's share of the marketing dollars that are going out the door are going specifically to support the Discover it product. So I think the answer to both those questions is, yes. There are some dollars being spent around some of the other products as well. But I would tell you, they're not the drivers of the Marketing Expense line item, and they're not going to be the drivers of getting to that $3.1 billion total OpEx for the full year.

David W. Nelms

And the one thing I would add is that, that's -- what Mark said is absolutely true on the acquisition side. There's also a substantially substantial part of the marketing dollars that are targeted to our current customers as we offer Cashback bonus programs, we have activation, balance transfer programs. So that would go across primarily our credit card base.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

Okay. And then on the Student Lending business, are you -- do you remain confident in being able to replace the volume that you lost from the Citibank relationship?

David W. Nelms

Well, we -- this was the first quarter that we were marketing entirely with our own brand, and I think you saw some pretty good originations doing that. So I would say, I'd let the results speak for themselves. We feel good about having maintained our volume with the Discover brand only.

Robert P. Napoli - William Blair & Company L.L.C., Research Division

And then Mark, just a clarification, you had said -- I was not sure you had -- it sounds like had said earlier that your -- the credit outlook had improved, and I'm not sure what you meant -- this was in your opening, part of your opening remarks, if it had improved from the Investor Day or from year end or what you were...

R. Mark Graf

I would say the answer to that question is both ends. I would say it has improved since fourth quarter earnings and it has continued to improve post Investor Day.

Operator

Our next question comes from Rick Shane with JPMorgan.

Richard B. Shane - JP Morgan Chase & Co, Research Division

Two questions, one on marketing and one on credit. First, on the marketing side, I think that there has been a perception -- and I'm sure you guys receive these questions about the pick up in intensity of marketing efforts that didn't necessarily, as we now see, translate into expense. I'm curious if the -- with the Discover it program and/or product and the slight shift in that product, is there a greater geographic focus on the Northeast corridor? And is that driving some of this perception?

David W. Nelms

No, I think if you talk to folks in San Francisco or Miami or Atlanta, they're going to also say they've seen a lot more of us. It has not been focused on any particular part of the country; it's been very much a national launch. I think what's different is that we've been using much more -- number one, we have a great message to tell. So I think whatever ads you do get noticed a little more when you're seeing something new and different. And when we've got specific news on billboards, just talking about late fee forgiveness or other things, they get noticed more. But secondly, I think that lends itself to more of the nontraditional media, some of the top line media like TV. And our marketing's been moving towards the Internet for years, and so Discover it works well there. But I would, in no way, think that we've blitzed New England or something on that; it was very spread.

Richard B. Shane - JP Morgan Chase & Co, Research Division

Okay. It's funny because we have noticed a lot more radio and a lot less TV. In terms of the credit, one of the -- in response to Brian's question, I think this is very interesting -- you basically suggested that the frequency of default is decreasing. And so if you look at any individual consumer, basically what that suggests is that the probability of default, regardless of the severity of default, is falling. Given that there is an optimal loss rate within the portfolio, and it seems like you're below that, is there any shift in terms of risk profile? Are you comfortable taking a little bit more risk if you think that systemically the frequency of default is lower?

R. Mark Graf

Well, it's a good question, and certainly, we have seen significantly lower delinquency rates and default rates. And as you say, the frequency of both of those has come down a lot. I would say that we have continued to try to refine our models to identify other people that would have prime-type behavior and would have low frequency of default. And so to the extent that we can identify such enhancements in our models, we will put them in place. One of the things that Mark said in his in his -- in the text is that we have seen probably more of an improvement off of the base. And this may be partly because of the maturity of the base, the fact that we've held onto the customers and the fact that the people that at the margin were riskier, may have already been written off during the difficult times a few years back. And what we're left with is people that have extremely low default probabilities. That doesn't fully translate into new accounts because I don't think we've seen quite the same reduction in that for new accounts. And therefore, I think we have remained fairly cautious on trying to expand. We're going to be careful not to expand too much for new customers based on the behaviors that we've set -- that we've seen with customers that had been with us for 5, 10, 15 years.

Operator

And our next question comes from Scott Valentin with FBR Capital Markets.

Scott Valentin - FBR Capital Markets & Co., Research Division

The first question revolves around Student Loans. The CFPB has put out for comment, I guess, some comments or request for comment on servicing, and I understand they've been out talking to all the major student lenders. Just wondering if you have any initial thoughts on whether it will have an impact on servicing and whether it may drive expenses for servicing a little bit higher. Then I have a follow-up.

David W. Nelms

I really don't have a comment on that. Certainly, Student Loans is one of the important areas that the CFPB is looking at, and we would be fully cooperative. And I haven't seen anything that would guide me one way or another on what it will mean down the road.

Scott Valentin - FBR Capital Markets & Co., Research Division

Okay. And then just a follow up on the transaction volume. I think you pointed out in the fourth quarter you had higher rewards level versus the first quarter. Just wondering if maybe that drove part -- if you think that drove part of the slowdown in spending growth over the course of the quarter, or whether you think it was more macro driven?

David W. Nelms

Well, our large fourth quarter promotions actually ran through December. And I guess, the fact that our sales continued to be very strong in January after we were into the first quarter promotions would suggest to me that the change is more macro than it was with our programs.

Operator

And our next question comes from Sameer Gokhale with Janie Capital.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Most of my questions have been asked. I guess, a couple of them, number one, I just wanted to get a sense for how actively or aggressively you might be marketing the Discover it card to your existing customer base. I know you said there were more positive responses and dynamics associated with that product, maybe, relative to your other products. So it seems like Discover has been a leader in terms of brand loyalty. I mean, I've had my Discover Card since 1995. And one of the issues used to be you have the long tenure, but you need to stimulate spending. Clearly, you focused attention on that. But it seems like marketing the Discover it Card aggressively to your existing customer base may make sense, so I just want to get a sense for that. And then I just had a separate question.

David W. Nelms

Well, first, thank you for being a loyal customer since 1995. And I would say that our primary focus has been on originating new -- new to Discover customers. We certainly make it easy for anyone who wants to switch to do so. But frankly, our More customers, like you, have been really happy. I mean we've just won the Brand Keys Award for customer loyalty for the 17th year in a row for our industry. And so our current customers are quite happy generally. And I think we see our bigger opportunity to attract some of the other consumers who may not have experienced the service and rewards that Discover offers to the product -- to the company and that's where focusing our marketing efforts on Discover it.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

But David, I mean, just along those lines, I mean there's difference of having the card for a long time and using it for spending. So over time, have you seen a significant improvement in stimulating spend for those folks? Like can you give us some striation for people who have been with you for 15 years, 10 years, what the incremental lift in spending has been over time? Because I think that was one of the areas you might have been focused on. So if there's any data you can share with us to show if there's been an improvement in actual usage among those longer-tenured customers?

David W. Nelms

Well, absolutely we've had improvement in usage activation, balances from long-time customers, from lots of different activation efforts, as well as from their experience with us. As an example, customers, when you came on in 2000 -- a number of years back, at that time, we didn't have the broad acceptance we have now. So you probably increased your usage just because of acceptance. Our rewards; we've added the 5% program and many other things. We've chosen to keep all of our customer service in-house, onshore, unlike other competitors. So we've had lots of activation efforts. Over time, if we see a way to stimulate more usage from current customers by cross-selling 'it' or what have you, we will do that. But right now, 'it' is really focused primarily on new customers. And the current customers would probably be a potential incremental opportunity down the road, but we're pretty busy with new customers right now on that part. We've got a lot of other efforts for our current customers.

Sameer Gokhale - Janney Montgomery Scott LLC, Research Division

Got it. And just the other question that I had was on student loans also. I know that recently, you basically said that on new student loans, you are not going to be charging any late fees or returned check fees. And clearly, that appears to be consumer-friendly, but was that something done in the prompting of the CFPB? And when you think about it competitively, I mean, there are only you and a couple of other guys are really players of any given size in the Student Loan business, so why reduce some of your fee generation opportunities when your competitors will likely match that and then you'll just end up reducing profitability? Why not just leave the model as is? So if you can talk about that, that will be helpful.

David W. Nelms

Sure. Well, that was purely our decision. There was no external prompting whatsoever. But we obviously did it because we felt that it would be good for our business going forward. That -- I don't know whether competitors will match that or not, but we certainly think it makes our product even more attractive to students and parents. And with pretty low delinquency rates, anyway, with the way we underwrite, it wasn't that -- it's just not that big of a -- it wasn't a big revenue producer anyway. So we felt like it was a good business decision for us to do it, so we're excited about it going forward.

Operator

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

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Just one quick question on the rewards spending, which was -- or the rewards as a percentage of sales. Since it was elevated in the fourth quarter, you commented at the time that, that was something that you -- that was positive in the sense that it drove higher customer engagement. And then as commented earlier on this call, as our sales drop off a bit, like David said, it was strong in January. I'm just wondering how we think about this going forward as a way -- do you feel like it's being gamed by customers at times, or does it -- is the engagement really sticky there for these 5% quarterly programs as they rotate through sectors?

David W. Nelms

Well, what I would say -- I'd never think about things as gaming, I think about things as customers taking advantage of great things we have to offer. And we are constantly evaluating how much usage, how many enrollments, what it does to behavior within the category we're stimulating, what it does to behavior after the category, what it does both during the time of promotion and after the time of promotion. And so I would just say, generally, we've been incredibly happy with the 5% program that we pioneered and have offered and enhanced over the years. And we're going to continue -- I mean, it is a promotional programs so we change it every quarter and every year, and every -- and we're constantly evaluating how to make it more effective and even better and easier for customers. And it's -- a lot of it is not about the rate. It's also how easy is it to redeem, how can you redeem with various partners. What categories is it in -- during what type of the year. We've got customer service people that actually work with our customers to help them maximize the benefit. And so, it's kind of an all-encompassing program that we'll continue to refine and enhance.

Christopher R. Donat - Sandler O'Neill + Partners, L.P., Research Division

Okay. So if I thought, and I could be wrong here, but the reward program was maybe too rich in the fourth quarter, you've got a number of dials besides -- a number of dials you can turn to adjust this, if that's your perception, too.

David W. Nelms

I mean, one of the unique things in the fourth quarter, we usually do a program by category, and we had 2 huge categories. I mean, we had stuff you buy in the Internet and stuff you buy in department stores for 5% during the holiday season. And so that was probably, by far, the richest program we had offered. I think more normally, we would offer 1 category, not 2 at a time. But we were in a big push in the fourth quarter and we've got even more take-up than we originally expected from it.

R. Mark Graf

And Chris, I would say, look, from -- to the very hard and specific point of your question, yes, there is a group of customers who do, who will tend to game this process. All the spend, if you will, in the card in that quarter is in the 5% category of that quarter; it's a very small percentage of the overall base.

Operator

Our next question comes from Daniel Furtado with Jefferies.

Daniel Furtado - Jefferies & Company, Inc., Research Division

Just a quick question. What's your gut telling you is the root cause of the moderating spend we've been seeing over the past couple of months?

David W. Nelms

Well, my assessment is that it is kind of in line with what I'm seeing retailers generally report. So I think our spend is kind of market environment. And then -- so if you go from that, okay, is it taxes, sequester? I mean, I don't have any additional data to say it's -- what exactly is causing consumers to spend a little less. It's not huge moderation, but it definitely seemed to be a little bit lower, as I said before, later in the quarter versus earlier. And you've seen a bit of consumer confidence drop off and certainly there have been a number of negatives from a consumer perspective. But how much is the news about Cyprus impacting how consumers feel versus the taxes is a little hard to parse out. Even lower gas prices is a good thing for consumers, but actually causes a bit of a downtick in spending.

Operator

And our final question comes from Ken Bruce with Bank of America.

Kenneth Bruce - BofA Merrill Lynch, Research Division

My question relates specifically to the balance transfer part of your business. You clearly have had a lot of success in terms of growing balances using this particular product, and you provided some good context for how you're filtering on credit. I think I'm really adjusted in what your success is in actually retaining those balances as you roll off the teasers? If you can talk about retention and attrition and specifically, what your strategies are to improve that as you go through, please?

David W. Nelms

Well, I'm not going to be able to give you specifics. And frankly, there's lots of segments, there's new customers, current customers, there's different durations, different rates. And we're looking at every cell to understand whether it's adding value or not and then we're making adjustments. And so we feel good about the efforts. But one thing to recognize, Ken, is that while the majority of the 18% is balance transfers, as you think about them, there's a nontrivial part that's actually retail promotional rates, and we do add those 2 together; when we give you the 18%, it's really total promotions of BT plus retail promotions. But there's a significant financial discipline around planning the administration and the analysis. And frankly, it also is changing over time. We see consumer behavior change a bit depending on what's going on in the environment, the interest rate, the competitive environment. So even if I could give you something for a given cell at the current time, we may find in 6 months that we're seeing a bit different behavior.

Kenneth Bruce - BofA Merrill Lynch, Research Division

And are you able to react to how these consumers behave? So when you see certain behavior, whether that be good or otherwise, that you can effectively kind of create a campaign that effectively uses that behavior to your benefit? Or is it something that you can observe it, and I guess, make some general changes over time, but you just have to see how things manifest themselves over time?

David W. Nelms

Well, I think there's not a lot one can do for something that's already out there. But I think when we observe behavior and measure it, it feeds directly into all of our new offers. So every month and every week, we are determining who to offer what to, and so it affects the incoming volumes and terms based on the learnings of the people that went before them. And we do an awful lot of testing, too. We'll do testing control and some of the things we try work, and some of the things we try don't work. And it's -- the reason we offer promotional rates is to get people to try our product and then use our product on an ongoing basis. And if we're getting trial, but no usage, that's not what we want to do. We want long-term loyal customers.

Craig A. Streem

All right, thank you, everyone, for joining us this morning. Feel free to call Investor Relations if you have any follow-up questions. Take care.

Operator

And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.

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