Discover Financial Services (DFS) David W. Nelms on Q4 2015 Results - Earnings Call Transcript

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Discover Financial Services (NYSE:DFS)

Q4 2015 Earnings Call

January 27, 2016 5:00 pm ET

Executives

Bill Franklin - Vice President-Investor Relations

David W. Nelms - Chairman & Chief Executive Officer

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

Analysts

Donald Fandetti - Citigroup Global Markets, Inc. (Broker)

Sanjay Sakhrani - Keefe, Bruyette & Woods, Inc.

David Ho - Deutsche Bank Securities, Inc.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Moshe Ari Orenbuch - Credit Suisse Securities (NYSE:USA) LLC (Broker)

Jason Arnold - RBC Capital Markets LLC

Cheryl M. Pate - Morgan Stanley & Co. LLC

Arren Cyganovich - D.A. Davidson & Co.

Richard B. Shane - JPMorgan Securities LLC

John Pancari - Evercore ISI

Eric Wasserstrom - Guggenheim Securities LLC

Mark C. DeVries - Barclays Capital, Inc.

Christopher R. Donat - Sandler O'Neill & Partners LP

John Hecht - Jefferies LLC

Henry J. Coffey - CRT Capital Group LLC

Jason E. Harbes - Wells Fargo Securities LLC

Bob P. Napoli - William Blair & Co. LLC

Operator

Good day, ladies and gentlemen, and welcome to the Discover Financial Services Fourth Quarter 2015 Earnings Conference Call. At this time, all participants are in a listen-only mode. Later we will conduct a question-and-answer session, and instructions will follow at that time. As a reminder, this conference is being recorded.

I would like to introduce your host for today's conference, Bill Franklin, Head of Investor Relations. You may begin your conference.

Bill Franklin - Vice President-Investor Relations

Thank you, Sabrina. Good afternoon, everyone. We appreciate all of you for joining us. Let me begin, as always, with slide two of our earnings presentation, which is on the investor relations section of 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 report and in our 10-K and 10-Qs, which are on our website and on file with the SEC.

In the fourth quarter 2015 earnings material, we have provided information that compares and reconciles the company's non-GAAP financial measures with the GAAP financial information, and we explain why these presentations are useful to management and investors. We urge you to review that information in conjunction with today's discussion.

Our call today will include formal remarks from David Nelms, our Chairman and Chief Executive Officer; and Mark Graf, our Chief Financial Officer. After Mark completes his comments, there will be time for a question-and-answer session. During the Q&A period, it would be very helpful if you limit yourself to one question so we can make sure that everyone is accommodated.

So now, it is my pleasure to turn the call over to David.

David W. Nelms - Chairman & Chief Executive Officer

Good afternoon, everyone, and thank you for joining us today. I'm going to review our fourth quarter and full year results and discuss our key focus areas for 2016. Then, I will hand it over to Mark to review the fourth quarter in more detail and share some forward-looking guidance.

Starting on slide three of our earnings presentation, we've reported fourth quarter net income of $500 million and diluted earnings per share of $1.14, up 31%, due to some one-time charges in the prior year. We were able to drive a return on equity of 18% for the quarter, despite higher loan loss provisions and higher non-recurring expenses driven by the anti-money laundering look back.

Turning to slide four, Discover achieved total loan growth of 3.5% over the prior year. Card receivables grew 3% this quarter, lower than we would like, however, this was partly due to lower promotional balance growth compared to the prior period. Total sales for the quarter increased 3% from the prior year or roughly 5% excluding gas sales. Lower gas prices have continued to impact our sales and card loan growth more than we had anticipated, however, we believe it also somewhat helped credit results in 2015.

Moving to our next largest asset class, private student loans grew 3%. However, excluding our acquired portfolios, we achieved 16% growth year-over-year. Personal loans increased to $5.5 billion, up 10% from the prior year.

On the right-hand side of slide four, we lay out payments volume growth. Proprietary volume continued to increase in support of the card issuing business, however, our third party payment segment had lower volume compared to the prior year. A large part of the volume in this segment comes from PULSE, where we saw continued declines in the challenging post-Durbin environment. Performance was good in the other network businesses, although they represent a much smaller portion of the total payments volume. Network Partners volume increased significantly, driven by AribaPay volumes, while Diners volume decreased slightly as reported, but was up nicely on a constant dollar basis.

Now, I'm going to touch on our full year financial results, shown on slide five. In 2015, our earnings crossed the $5 per share mark for the first time. Revenue increased 3% from the prior year to $8.7 billion. Moving down this slide, provisioning grew roughly in line with the average loan growth. Expense growth was primarily driven by higher regulatory and compliance costs, particularly related to our AML consent order remediation. Due to the strength of our capital generation and buyback program, EPS increased 5% for the full year versus 2014.

Moving to slide six, we accomplished a great deal in 2015 to move the business forward. We continued to grow our balance sheet with total loans up 3.5% from the prior year. We introduced new features and benefits throughout the year to attract and retain customers. In card, we introduced the innovative Freeze It capability, which allows customers to suspend their credit card with a few clicks from their app in the event it's misplaced. I can personally attest to how well it works. And we offered a promotional 10% cash back bonus on in-store purchases using the Apple Pay, which drove adoption in our card base and also attracted some new card members to Discover.

At the same time, we continued to be disciplined in managing credit, as our total net charge-off rate excluding PCI loans declined 5 basis points. Our card loss rate remains among the lowest in the industry. We also achieved record originations in our non-card loans. We increased brand awareness for student loans through radio advertising and The Freshman Experience, a unique partnership with NBC News. In December, we launched FAFSA Assistant, a free tool to help families navigate government student aid filings and educate prospective students about their funding options, which should continue to increase Discover student loan awareness in 2016.

In personal loans, we launched several new digital initiatives to help drive growth. In payments, the competitive landscape in debit remains challenging. In 2015, we established new partnerships, including network-to-network agreements, new Diners Club licensees, and at the same time, we grew volume with existing payment partnerships like AribaPay.

Perhaps most importantly, the Discover Network continues to provide significant benefits to our card issuing business, as evidenced by the fact that we are accepted at more than 37 million locations worldwide, roughly 20% more than a year ago. As we look back on 2015, we feel good about our accomplishments. We generated a 21% return on equity for the full year, and repurchased 6% of our stock.

Now, let's move to slide seven. For 2016, our vision is unchanged. We aspire to be the leading U.S. direct bank and payments partner. Our key focus areas for the year will help us move forward towards accomplishing our vision. In 2016, we are targeting faster loan growth, which you will see in the guidance that Mark goes through later in the call. We expect this growth to be balanced between new accounts and our existing portfolio. Discover it continues to perform well in the marketplace, helped by the double cash back bonus offer for new card members during the first year.

While we anticipate the majority of our new account growth will come from our flagship Discover it card, we expect to see additional growth from our Miles it card and the recently launched secured card. To support the growth of the Miles it card we introduced last year, we've recently aired our first television advertisement to increase awareness of the product and features. In addition, we announced the broad market launch of the Discover it secured card on Monday. This product will give customers who are new to credit access to the features and the benefits of a Discover it product, fully secured by a cash deposit. This is another opportunity for us to reach new customers and retain them, as they develop a strong credit history.

In the existing portfolio, we have a number of initiatives, some of which are already underway, to support loan growth, including a strategy to re-engage inactives when they receive their EMV card, appropriate credit line increases for eligible customers, and profitable balance transfers. Underlying all these initiatives is our commitment to a disciplined approach to credit management, which has served Discover well through previous credit cycles.

In addition, we will continue to build out our digital capabilities with enhanced customer features. By the end of the month, we will have completed the full rollout of our unique Pay with Cashback functionality, online and in our app. This will offer customers the ability to pay their monthly card bill using their cashback bonus seamlessly. We continue to innovate in the features and benefits that drive customer satisfaction and long-term loyalty.

Moving down the slide, in 2016 we will be very focused on operating expense leverage. Historically we've had one of the best efficiency ratios in the industry. While our 2015 ratio was elevated due to some one-time items, we are managing the business to trend back towards our long-term target. In 2016, we expect to invest in growth and to see increases in ongoing compliance costs while also finding ways to optimize the core expense base.

We have a unique set of payment assets which present many long-term opportunities for us. Near term, we are focused on getting the most from our proprietary network for our card issuing business, including increased acceptance and brand differentiation. While Payment Services has struggled with some third-party volume losses, we expect volume to stabilize prior to the end of the year and we continue to seek opportunities to bring more volume from third parties on to our network. We are looking broadly across this segment; domestically, internationally, in business to business, and in consumer payments. We have the ability to scale significantly and are committed to driving value.

In 2016, we will be particularly focused on closing out our AML look-back and continuing to enhance our compliance-related functions. Investing in compliance and risk management will enable us to meet increasing regulatory requirements while also strengthening our operations and supporting our leadership position in customer service. And lastly, we will optimize our capital deployment so we can consistently deliver strong returns to our shareholders while driving quality organic growth.

We have big goals for 2016, and are hard at work to achieve them. We're especially working to accelerate profitable loan growth.

Now, I will turn the call to Mark to discuss the details of our fourth quarter results and forward-looking guidance. Mark?

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

Thanks, David, and good evening, everyone. I'll start with the revenue detail on slide eight of our presentation. Net interest income increased $60 million or 4% over the prior year due to loan growth. Total non-interest income was up $108 million. I would remind you that the prior year period included a one-time charge of $178 million related to the elimination of the rewards forfeiture reserve. Excluding this one-time item in the prior year, non-interest income declined $70 million.

The rewards rate was 118 basis points, up 8 basis points from the prior year on an adjusted basis, largely due to the double rewards program for new card members as well as our fourth quarter Apple Pay promotion.

Protection products revenue continues to decline, down $15 million year-over-year, given our suspension of sales in late 2012. Other revenue decreased $30 million, primarily due to the loss of mortgage origination revenue as we closed our direct mortgage operation this year.

Payment Services revenue was down $14 million, primarily due to lower transaction processing revenue at PULSE. This was largely the result of the previously disclosed loss of volume from a large debit issuer.

Turning to slide nine. Total loan yield of 11.49% was up 9 basis points over the prior year. This higher yield was offset by higher funding costs and a larger liquidity portfolio. Combined, these drove net interest margin on receivables down 1 basis point from the prior year to 9.75%. However, on a sequential basis, NIM expanded by 13 basis points, driven by higher card yield due to portfolio mix.

Personal loans were the only asset class where the yield declined from the prior year. Shorter terms year-over-year and a $5 million one-time adjustment to deferred loan origination cost drove the decline. As the origination cost adjustment was nonrecurring, we would expect that in the first quarter of 2016, personal loan yields will rebound to levels roughly in line with the third quarter of 2015.

Turning to slide 10, total operating expense was roughly flat, in part because both periods included some one-time items. In the fourth quarter of 2014, we recognized $48 million in charges in other expenses associated with two items. First, a $27 million impairment of goodwill related to the mortgage origination business, which we subsequently exited. And second, a $21 million mark to fair value related to Diners Club Italy being classified as held for sale, which we've now sold.

In the current period, we incurred $37 million in expense resulting from the anti-money laundering look-back project. Adjusting for these items, expenses were $12 million or 1% higher year-over-year.

Turning to provision for loan losses in credit on slide 11, provision for loan losses was higher by $27 million, due primarily to a higher reserve build compared to the prior year. As David mentioned earlier, provision growth on a full year basis was essentially in line with average loan growth. The credit card net charge-off rate was 2.18%, down 8 basis points year-over-year and up 14 basis points sequentially. The 30-plus day delinquency rate was relatively flat year-over-year at 1.72%, and up 7 basis points from the prior quarter. The private student loan net charge-off rate excluding purchase credit impaired loans decreased 10 basis points year-over-year to 1.3%. The 30-plus day delinquency rate increased by 11 basis points over the prior year to 1.9% as the organic book continues to enter repayment.

Switching to personal loans, the net charge-off rate was up 8 basis points year-over-year to 2.3%, due to the seasoning of newer vintages in line with expectations, and the over 30 day delinquency rate was up 10 basis points to 89 basis points. Across all of our portfolios, we remain pleased with our strong credit results.

Next, I'll touch on our capital position on slide 12. Our common equity Tier 1 capital ratio was 13.9%. The sequential decrease in our capital ratios was driven by a combination of seasonal loan growth and capital deployment. On that latter point, we repurchased $435 million of stock in the quarter. In total during 2015, we returned over $2 billion in capital to shareholders with a 94% payout ratio. To complete the repurchases we submitted as part of last year's CCAR capital actions, we plan to buy back over $800 million of shares in the first half of 2016.

Moving to long-term guidance on slide 13. The majority of these items have not changed since our last investor day. So I'll focus only on the two that have changed and are circled on the page. I would remind you that the items on this page represent expected averages through the cycle, and do not necessarily reflect our expectations for 2016. Going forward we'll be guiding to total loan growth as opposed to the component pieces. We expect long-term total loan growth of 4% to 6%. Consistent with this change, we've also updated the long-term guidance to reflect the total net charge-off rate excluding PCI loans, which we expect to be 3% to 4%.

Turning to slide 14, let's spend a minute on guidance that is specific to 2016. First, we expect total loan growth to be in the range of 4% to 6%, in line with our long-term target. Keep in mind that card represents roughly 80% of our portfolio. So achieving 4% to 6% total loan growth requires us to accelerate card growth from the recent trend.

On that last point, I want to remind you of a nuance in how we report our monthly loan data. We don't process payments for the card business on Saturdays. So when a month ends on a Saturday, our 8K reported receivables include Saturday's sales, but no payments from that day. This can create distortions in year-over-year comparisons. A good rule of thumb is to expect a positive bump of 50 basis points to 60 basis points to the year-over-year growth when the current month ends on a Saturday, and to expect a drag of 50 basis points to 60 basis points when the prior year month ends on a Saturday. Obviously, this is just a timing impact, but we are calling it out because both January and February ended on a Saturday last year. As a result, our relative year-over-year growth will be understated in our reporting for each of those months this year.

Moving to our outlook for net interest margin in 2016, we expect it to be what I would call relatively stable when compared to our full year 2015 NIM of 9.68%, perhaps with a bit of an upward bias. Further increases in rates would benefit us, based on the modest asset sensitivity we built into the balance sheet. But we may also see some offsets depending upon the level of card promotional activity and runoff in higher rate and default-priced balances.

With respect to rewards, we're planning to spend more on a full-year basis in 2016. Specifically, we expect the full year rate around 115 basis points or roughly 7 basis points higher than 2015. A good portion of the increase is the first year double rewards program, which has delivered a lower cost per account and brought on more engaged customers; well worth the investment.

Moving to non-interest, non-interchange revenue, as we've said throughout 2015, we expect this line item to be lower this year. The primary drivers are the exit of the direct mortgage origination product, which generated roughly $74 million in revenue in 2015; continued runoff in protection products revenue, which we estimate to be about $40 million lower in 2016; and lower Payment Services revenue, in part reflecting the sale of the Diners Club Italy franchise. Taking all of this into account, we expect non-interest, non-interchange revenue to decline approximately $125 million in 2016.

Moving to the total net charge-off rate ex-PCI loans, we expect it to be slightly higher than 2015. The credit environment continues to feel benign, with our reserve build in the fourth quarter reflective of the seasoning of several years of card loan growth at levels above the portfolio charge-off rate, in line with our expectations. In addition, we assume a more modest outlook for improvement in the U.S. economy in 2016.

Finally, we expect operating expense to be slightly above $3.5 billion next year. This reflects the roll off of the AML/BSA look back expenses over the course of 2016, incremental expenses for ongoing regulatory and compliance costs that are facing all participants in the industry, initiatives to accelerate loan growth, as well as operating efficiency improvements. Based on this level of expense, we expect to drive positive operating leverage and decrease our efficiency ratio, which is already one of the lowest among large banks.

To close things out, we have a business model that is generating strong returns on equity. While third party payment volume has declined recently, we expect our Payment Services segment volume to stabilize prior to the end of the year. This should position us for growth in future years, which is why we are keeping our long-term payments volume growth target at 10%.

Near term, we are very focused on the remediation of our AML/BSA consent order and reducing expenses in 2016. We'll be focused on accelerating total loan growth in a disciplined fashion, focusing on opportunities that are profitable for the long term, and not sacrificing credit for the sake of growth.

Last but not least, we have a strong capital position that enables us to both invest in the business to drive growth and deliver prudently aggressive payouts to shareholders within the constraints the CCAR process. That concludes our formal remarks. So now, I'll turn the call back to our operator Sabrina to begin the Q&A session.

Question-and-Answer Session

Operator

Thank you. Our first question comes from the line of Don Fandetti of Citigroup. Your line is now open.

Donald Fandetti - Citigroup Global Markets, Inc. (Broker)

Yes, David or Mark, I just wanted to confirm the reserve build this quarter was just sort of a seasonality and you're not seeing anything at least today that would suggest any weakening in the overall portfolio. I was wondering if you can comment on that. And I know in the past, you've provided a provision to average loan ratio. Would you care to provide that for 2016?

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

Yeah, on the fourth quarter number, Don, I would say the card reserve rate was 2.68% this quarter, I believe. And over the last five quarters to six quarters it's been pretty consistently in that 2.6% to 2.7% range. So I would say, you know, it's consistent. The provision really on a full-year basis is consistent with the loan growth on a full-year basis which is kind of, I think, what we've been saying people should be expecting. So, no, we don't see any change at all in the dynamics of the portfolio. Our guidance for next year reflects what I called, I think, a slight increase in charge-offs. We still expect that to remain clearly in the low 2%s range. I think, we learned our lesson last year trying to give provision guidance and we're shying away from that this year and just sticking with charge-offs.

Donald Fandetti - Citigroup Global Markets, Inc. (Broker)

Got it. And then on the rewards obviously going up for good reasons, but I was just curious, would your sense be that that's likely to sort of – if you are wrong, maybe you're going to tick a little higher or are you being pretty conservative? It seems like competition is going to remain pretty healthy into 2016.

David W. Nelms - Chairman & Chief Executive Officer

Well, I think, we've given guidance based on what we expect. Certainly that can always be a little higher or a little lower than guidance depending on – because there's a lot of promotional decisions that we make along the way, and so it could vary from that, but what I would say is that it's less about competition and more about us doing tests and controls and deciding what to spend in rewards versus the marketing line and what has the best net present values for new accounts and stimulating the portfolio and that means that has led to higher spend over time in this line.

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

I would say the big driver, Don, is the double rewards program on new accounts and that's driving a very low CPA, cost per account acquired right now. And the customers who are coming on with the new accounts are driving very engaged type behaviors, that we expect to materialize in loan growth as we move forward throughout 2016. So, I think, it's a pretty potent investment right now is the bottom line, based on what we see; but I would echo David's comment, it's something that we look at from time to time and could change. As always if we update our outlook and our guidance, you'll know about it.

Bill Franklin - Vice President-Investor Relations

Next caller.

Operator

Thank you. And our next question comes from the line of Sanjay Sakhrani of KBW. Your line is now open.

Sanjay Sakhrani - Keefe, Bruyette & Woods, Inc.

Thank you. I guess 2015 was a year of lot of surprises on the expense line. As we look towards 2016, how much execution risk is there in terms of surprises not popping up on expenses? I mean, do you guys feel like, you know, you have enough levers available to you so that if there are surprises, you could still meet your expectations? And secondly, just to Mark, could you define slight in terms of the increase for charge-offs? Thank you.

David W. Nelms - Chairman & Chief Executive Officer

So on the first point, Sanjay, what I would say is, look, we clearly have expense levers. You make decisions from time to time on whether or not you want to pull those levers, right? We knew that the look back project for the AML/BSA was going to be big dollars. We knew it was one-time nonrecurring and cutting muscle that drives the business forward didn't make a lot of sense, right in that regard. That being said, we covered an awful lot of ongoing expense increases in regulatory and compliance world with operating efficiency gains this year. I think you should look to see us do the same next year. Candidly, I think, we kind of landed right on top, more or less, of our OpEx guidance for the full year for this past year, came in I think, $15 million over, something like that, but on a $3.6 billion line item, kind of feel like we did a decent job. That notwithstanding, I think at the end of the day, there clearly are levers we can pull when it makes sense to pull them.

With respect to what is a slight increase in charge-offs? I kind of reiterate what I said to Don, maybe expand on it a little bit. It's going to stay clearly in the low 2% range, Sanjay. We do not see any signs of a turn in the credit environment. We are operating with many years of growth, seasoning in the portfolio right now, and as we've said, new account season at loss rates higher than legacy portfolio. So there's a bit of an impact there, but the credit environment itself continues to feel very benign and we're not trying to signal some giant inflection point in charge-offs.

Sanjay Sakhrani - Keefe, Bruyette & Woods, Inc.

Thank you.

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

You bet.

Operator

And our next question comes from the line of David Ho of Deutsche Bank. Your line is now open.

David Ho - Deutsche Bank Securities, Inc.

Hi. Thanks for taking my question. I had a question regarding your through the cycle guidance in terms of the loan growth, versus the charge-off rates. Given that's through the cycle and then obviously baking in consumer conservatism, I guess the question is, would it be possible that loan growth would be above kind of your 4% to 6% range at that level of charge-off rate assuming the economy is not deteriorating in any major fashion just on the part of consumer being less conservative. Is that the right way to think about that?

David W. Nelms - Chairman & Chief Executive Officer

Well, I think that on loan growth we have established a new long-term target of 4% to 6% of total loans, and we said that we were actually committed to being in that range next year, which implies some acceleration. Given that we're below that range today, I would not be looking for us to exceed it. I think, we're going to work really hard to get into the range this coming year and we think 4% to 6% would be gaining market share in prime credit cards and across our other businesses. So we think it would be a very good outcome, without taking excessive credit risk.

Charge-offs, you noticed that we have a long-term target and it's very disconnected with where we are, and what Mark said is slight increase. So clearly we expect to be significantly below that long-term range during this coming year.

David Ho - Deutsche Bank Securities, Inc.

Okay. And what would get you to the 3% to 4% or what factors would drive that? Is it mostly macro or are you assuming any kind of decrease in conservatism on the part of the consumer?

David W. Nelms - Chairman & Chief Executive Officer

I would say macro factors. And I think that we feel like we've been in an unusually benign time period from a credit perspective. On the flip side, it's been a very lack of loan growth time for the industry, coming off of a shrinking period, but on charge-offs, it's been unusually benign, and so we're expecting over a longer period of time for things to normalize.

David Ho - Deutsche Bank Securities, Inc.

Okay. And then just if I may, one more question on the seasoning of recent growth. At what point does some of the more recent or prior vintage years start to tail off in terms of moving down the peak of the loss curve and hopefully providing some tailwind to reserving from here?

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

So cards are the biggest driver. They tend to peak at about 24 months after origination. So if you think about it, you have three years of vintages under the peak of the seasoning curve, if you will. A year ago is 12 months in; two years ago is at the peak; and three years ago is coming down the peak, pretty much equivalent to where a year ago was more or less. The issue is if we are successful in increasing our loan growth, you will pick that up, right? Because if you have successively larger vintages, the maturation of those vintages will drive provision. It's growth math and, candidly, I think, it's a good problem to have.

David Ho - Deutsche Bank Securities, Inc.

Got it. Thank you.

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

You bet.

Operator

Thank you. And our next question comes from the line of Chris Brendler of Stifel. Your line is now open.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Hi, thanks. Good afternoon. Thanks for taking my question. Just wanted to focus again on the card business and the competitive environment. You mentioned that it's not only having an impact on your rewards rate, but we have seen an increase in the level of rewards and cashback, in particular your competition. So, maybe you could just dimensionalize, is that getting any better into your outlook. And then sort of a related follow-up. I'm surprised to see marketing investment down this quarter. I know that it was sort of lumpy quarter to quarter. But do you plan to increase marketing investment in 2016? Is some of the testing you're doing giving you some of the confidence that you're going to hit your loan growth target? Thanks.

David W. Nelms - Chairman & Chief Executive Officer

Well, to handle the first one, I mean, competition is up both overall and in rewards, and I think that's particularly true in the rewards segment. But what I said before about as we have increased our rewards, it hasn't been just because we are seeing rewards of competitors. It's because we've tested into programs that we think will produce better results.

And certainly, one of the reasons that we didn't grow marketing as much in the fourth quarter is because we chose to invest more on the rewards side, particularly promotional rewards for the new accounts, as Mark mentioned, versus cost per new account. We also have been achieving some nice savings in cost per account. So the money has gone a little bit further. And, Mark, I will let you answer the second.

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

Yeah, and as we look forward, I think the answer is we view marketing and rewards as interconnected investment. So you may see some geography flips year-on-year between those two, depending upon how we're looking to drive new account acquisition as well as utilization going forward. But I would not expect marketing expense to be flat on a year-over-year basis.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Okay. And then one quick follow-up, if I could. I think I know the answer to this, but I imagine your dipping into the secured card, the subprime space, is not a part of your increased growth expectations in balances in 2016 at this point?

David W. Nelms - Chairman & Chief Executive Officer

No. I would say the Miles card – of those two new products, the Miles card would probably have the greater impact. You see us advertising that on TV. Secured card, I view as a good feeder for the future. And I think as those customers in subsequent years, as we hope a number of them will exhibit good behavior, we'll be able to eventually drop the requirement of the security, get to more normal credit lines. And so I think 2017, 2018 is when you'd start to see some of the maturing of those secured cards in the prime portfolio, and that's our real objective.

Christopher Brendler - Stifel, Nicolaus & Co., Inc.

Great. Thanks so much.

Operator

Thank you. And our next question comes from the line of Moshe Orenbuch of Credit Suisse. Your line is now open.

Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC (Broker)

Yeah, I guess first just a quick comment. I mean, I think that I would have liked to hear, given that this is a somewhat noticeable earnings disappointment, a little more urgency as to the pulling of the levers and kind of executing on the plan. I mean, given that you have some of your competitors see stable or improving loan growth even in this industry environment. So that's just kind of an observation.

But I guess my question kind of really does relate to when you think about the growth really in net interest income, because that's really the driver of your revenue stream, are you expecting to see – what is it about the new accounts? Because in other words, if you're getting record numbers of new accounts, are they not building the balances? And how should we think about the development of that to be confident in a forecast of 4%, 5%, or 6% kind of into 2016?

David W. Nelms - Chairman & Chief Executive Officer

Well, first, I think it's important to keep in mind the reasons growth decelerated, which a number of people that were focused particularly in the prime segment didn't see growth, saw less than we did. But one driver was the slower U.S. retail sales growth, in addition to the impact of falling gas prices, we talked about that. We also mentioned some of the actions we took to optimize the profitability of some promotional programs, so that cost us some growth.

But looking forward, we do have significant urgency in accelerating growth. That's why we've committed to that 4% to 6% total growth range for next year. And that should come both from the new account side, as well as the existing portfolio, and there's a whole range of activities that we have focused on getting more new accounts, activating them more, leveraging balance transfer, the Miles card, gaining wallet share on the portfolio side as we continue to roll out features like Freeze it. So we have a lot of range of actions because, frankly, the economy and the prime market isn't very robust. So what we have to do is continue to gain market share as we've done for several years by differentiating our products.

Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC (Broker)

Thank you.

David W. Nelms - Chairman & Chief Executive Officer

Sure.

Operator

Thank you. And our next question comes from the line of Jason Arnold of RBC Capital Markets. Your line is now open.

Jason Arnold - RBC Capital Markets LLC

Hi, good afternoon, guys. David, I was just wondering if you can talk in a bit more detail about the potential opportunity to add third-party issuers, and maybe hitting on the appeal and what you see as an opportunity is perhaps as well as the challenges of getting new partners.

David W. Nelms - Chairman & Chief Executive Officer

Sure. Well, if you look at our Payment segment, obviously, PULSE has been a challenge with (37:32) and some specific volume losses, but the other parts of payments, we have actually seen some nice gains, and particularly from Ariba, which has been an important new partner. We continue to be working closely with PayPal, and I still remain optimistic that in the long term, that is going to produce some volume. We continue to make some good progress with new partners around the world. We signed the three largest banks in Brazil and with a network there, network-to-network partners. We have seen very nice growth out of our partners in China and in India on Diners Club.

So we are casting a very wide net to grow our third-party payments volume, and that's why we have still stuck to our 10% long-term growth target, even though we have been shrinking now, and so we're focused on turning that volume growth around to something positive.

Jason Arnold - RBC Capital Markets LLC

Great. Thank you for the color.

Operator

Thank you. And our next question comes from the line of Cheryl Pate of Morgan Stanley. Your line is now open.

Cheryl M. Pate - Morgan Stanley & Co. LLC

Hi, good afternoon. I just wanted to follow-up on sort of the loan growth in the card space, and sort of understand the point on rewards cost relative to marketing spend. I guess one more thing to add into the mix there is how should we think about the balance on profitable loan balance transfers, which maybe drive growth faster than rewards might take some more time to build up. Can you help us think through the dynamics there? And then secondly, just wondering if you could comment on card acquisition trends this quarter. Thanks.

David W. Nelms - Chairman & Chief Executive Officer

Okay. I think I won't comment on card acquisitions this quarter. We'll wait until the next call to answer that, but on the first two questions, loan growth from the new accounts, we've been driving – our double cashback bonus has been driving lower cost per account and a very attractive mix of cardholders. And those customers have been – we're seeing more spend, and maybe a little less balance transfer. And what that means is those new accounts we've put on – those in the last two quarters are going to continue to build their balances into next year. And so that's one of the things we're continuing to focus on is efforts that ultimately result in balance growth, and we're really pleased with the newer accounts, but it's not as instant as the balance transfer.

Now, balance transfer, I think is still an opportunity. We pulled back a bit on balance transfer because we found some areas that we thought were not profitable, didn't meet our hurdles, but we are now pursuing some opportunities that we think will be more productive and more profitable. So, I think, we can probably do a little more balance transfer as well this year than we did last year.

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

Yeah, and Cheryl, on the tradeoff between marketing spend and rewards spend, they are in one regard, one and the same, right? So you are trying to build awareness, build utilization, you can do that by staying front of mind in the television and elsewhere. You can also do it by providing a rewards product that, on an everyday basis, engages that customer in ways that incents them to utilize the card as well. So they are both – kind of have a common purpose of driving utilization spend and ultimate loan growth on the card.

The one thing I would follow on to David's earlier remarks with is loan growth from new accounts, from prime new accounts emerges down the road a little bit, right? So you originate the account. The account comes on the books. You begin to see the spend behavior come on to the card, but unless you're balance transferring a big balance over, right, it takes time for that utilization to build those balances up. So we continue to feel good about the ultimate impact of the new accounts we're putting on. We believe we'll begin to see through 2016 that manifest itself in loan growth, but there is a tad of a lag there.

Cheryl M. Pate - Morgan Stanley & Co. LLC

Great. Thanks.

Bill Franklin - Vice President-Investor Relations

Thank you.

Operator

Thank you. And our next question comes from the line of Arren Cyganovich of D.A. Davidson. Your line is now open.

Arren Cyganovich - D.A. Davidson & Co.

Thanks. I was wondering if you could touch a little bit on personal loans and student loans. We've talked a lot about credit card growth, where are your thoughts on those two categories going forward?

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

Sure. As we mentioned, we were really pleased that we had record originations in both student loans and personal loans last year. We expect to do even more in both of those areas this coming year. One of the reasons that we moved to a total loans estimate is because those two businesses have become a bigger part of our total, and certainly the fact that we expect faster growth from those two businesses than card helps drive our overall loans up. And I guess the final thing I would say is that we're quite focused on some of the digital capabilities, enhancing our target marketing, we are doing more broad market in personal loans, and I mentioned a couple of the new endorsements or marketing features we have with NBC and others in student loans, which I think are helping to increase the awareness that Discover isn't just credit cards; it's also student loans.

Arren Cyganovich - D.A. Davidson & Co.

Thank you.

Operator

Thank you. And our next question comes from the line of Rick Shane of JPMorgan. Your line is now open.

Richard B. Shane - JPMorgan Securities LLC

Thanks, guys, for taking my question. We've heard you talk about something a little bit today that we haven't heard in a while which is gaining wallet share through line limit increases. Can you just talk about that opportunity, the pluses and the minuses there, and what makes you at this point more comfortable using that as a growth tool again?

David W. Nelms - Chairman & Chief Executive Officer

Well, I actually think we've been much more consistent than certain other competitors who I think went from not doing any to doing a bunch and saw a runoff and then saw big increases. We've actually been pretty steady. So I would say that we'll continue to appropriately increase lines, but I wouldn't call that out as any dramatic change for us.

Richard B. Shane - JPMorgan Securities LLC

Okay. Great. I mean, it strikes me, given that your borrowers have proven to be very responsible over time, it's a pretty convenient – or it's a pretty easy way to move up in wallet.

David W. Nelms - Chairman & Chief Executive Officer

Well, it is if you're careful in how you do it. And so we are giving lines where we can. We are finding some opportunities. Certainly the further we come into stable credit lines and the more stability many consumers have, the better their FICO scores are, the more history they have, it gives us greater confidence in being able to extend somewhat bigger lines. So I think both initial lines for new accounts, as well as line increases done to the right segments can be very profitable and can be done without driving up charge-offs.

Richard B. Shane - JPMorgan Securities LLC

Thank you very much.

Operator

Thank you. And our next question comes from the line of John Pancari of Evercore. Your line is now open.

John Pancari - Evercore ISI

Good afternoon.

David W. Nelms - Chairman & Chief Executive Officer

Hi.

John Pancari - Evercore ISI

I just want to ask questions around your expectation on the BSA/AML cost for 2016, how we should think about that. It looks like it came in just shy of $100 million for 2015. Is that a fair level that we should assume for 2016?

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

I would say no. I would not assume that as a level for 2016. The number we've been calling out for BSA/AML compliance we specifically identified as a project, right? This is a look back on transactions over a period of time historically. And it's got a finite end date and a finite process it runs. So that definitely bleeds off as we go into 2016, and the cost of that is included in the expense guidance that we gave earlier. So we are considering the lingering effects of that as we look at the remainder of this year.

What I would say is there are obviously ongoing costs associated with the BSA/AML program enhancements. Those we have largely been covering with either run rate operating efficiencies that we have found to-date and we'll look to find ways to offset those expenses as we move forward, but they are fractions, very small fractions of the total number we're talking about around the project.

John Pancari - Evercore ISI

Okay. And then just to reconfirm that expectation for the BSA/AML cost, that is included in your 2016 expense projection of $3.5 billion, correct?

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

It is included in it, yes.

John Pancari - Evercore ISI

Okay. All right. Thanks.

Operator

Thank you. And our next question comes from the line of Eric Wasserstrom of Guggenheim Securities. Your line is now open.

Eric Wasserstrom - Guggenheim Securities LLC

Thanks very much. Mark, I just wanted to quickly clarify or rather maybe make sure I've understood your expectations around allowance. It sounds like what you expect to pursue is that the allowance will grow roughly in line with projected loan growth. Is that correct?

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

Well, so the allowance will respond to what we actually see as trends in the portfolio. Based on what we see now though, we continue to believe provision increases will be largely driven by and in line with loan portfolio growth.

Eric Wasserstrom - Guggenheim Securities LLC

Got it. And so from that perspective, just mathematically, it would continue to be in the range of 2.6% to 2.7% of card loans?

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

It would depend on the size of the new vintage, right? If you had a meteoric increase in the size of a vintage, that could impact it, but generally speaking, I think that's a reasonable proxy for looking at the stability of the credit environment.

Eric Wasserstrom - Guggenheim Securities LLC

Thanks very much.

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

You bet.

Operator

Thank you. And our next question comes from the line of Mark DeVries of Barclays. Your line is now open.

Mark C. DeVries - Barclays Capital, Inc.

Yeah, thanks. Just another follow-up on that point, because I think obviously I have some confusion on your comments, Mark, because when you say reserving at kind of 2.6%, 2.7% level, and they have been kind of consistently there for the last four quarters, you are referring to the reserves per loans as opposed to the provisions per loans, because provisions per loans really have bounced around a lot. And they were 2.7% this quarter, but if we look at a world where you are guiding to charge-offs in the low 2%s, and we are now at 2.7% on a reserve to loan ratio, would that imply that, at least with absent really strong loan growth, that the provision to loan should be lower in the coming quarters than they were this quarter?

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

So what we're specifically calling out with that number is the reserve rate for cards that we disclosed in our financial supplement. So it's just bounced around. I'm looking back, December of 2014, it was 2.63%; 2.79% in March of 2015; 2.62% in June; 2.62% in September; 2.68% now. So it's pretty consistently in that 2.6%, 2.7% range. I would tell you based on the seasoning of the growth we've put on the books over the course of the last couple years as well as the challenge that David has put in front of the team to accelerate loan growth as we go into this year as well, I would not expect the provisions to decrease.

By the same token, I would very clearly state so that I'm not misunderstood, don't expect some giant increase in that card reserve rates right now, based on what we currently see in our models.

That obviously changes, but if you think about it, Mark, the next six months are pretty well known, right? So we're reserving for 12 months out. The next six months we can pretty well see in the role buckets. It's really that period of 6 months to 12 months out where you've got a little bit of uncertainty, where your models get impacted to a degree by the macro variables and your assessment of the health and the strength of the economy and what that's going to do to a borrower. So there's always a little bit of uncertainty in this. It is a forecast, so by definition, it's wrong. You try and be as right as you can. We're thumping along the bottom of the credit cycle. We have been for a while. So there will be a little bit of volatility here. But, what I always just try to remind everybody is this is a $1.8 billion balance sheet item. So, a little bit of volatility drives some moves in EPS.

Mark C. DeVries - Barclays Capital, Inc.

Okay. Thanks.

Operator

Thank you. And our next question comes from the line of Chris Donat of Sandler O'Neill. Your line is now open.

Christopher R. Donat - Sandler O'Neill & Partners LP

Good afternoon. Thanks for taking my question. David, I just wanted to ask on the secured credit card and your launch of that, you're typically very methodical about new products and I imagine this has been in development for some time. Can you give us some color on what sort of development process you went through and what you might have considered adding or not adding with the card or just trying to understand when you guys launch something, I know you put a lot of investment into it, so what you're getting for it.

David W. Nelms - Chairman & Chief Executive Officer

Well, and this has been in test for a while. So we have experience with some accounts and we got to the point where we had enough experience that we felt that we could make it an official launch. And I would say we're certainly seeing in the marketplace right now people that are in the – lesser credits are seeing significant growth, and the prime market is really not growing hardly at all. And so we're not willing to sacrifice our credit to go into subprime, but what this product allows us to do is to get people that might currently be considered subprime to get our product and for us to be protected from losses because we have the security deposit and to work with those customers to graduate them into prime loans when they're ready. And so it is our way of new to credit or blemished credit in a way that protects our losses.

And so I guess the final thing I'd say is we did a lot of market research looking at competitive products, and we don't see anything in the marketplace that is like this. Most other cards are stripped down cards. They don't have rewards. They don't have benefits. They service the cards offshore. This is a real Discover it card with everything that comes with it. And the only thing unique is it's fully secured, and so when the credit improves, they continue that product, but it becomes unsecured.

Christopher R. Donat - Sandler O'Neill & Partners LP

Okay. And then just related to that you said you're seeing more opportunity with the subprime side and certainly we see from other card issuers some pretty dramatic growth in loan balances in the subprime category. But are you seeing changes in consumer behavior? Like, I hear anecdotes of millennials not embracing credit cards the same way that, say, baby boomers did. Is that any part of the thesis here or is that just in the background?

David W. Nelms - Chairman & Chief Executive Officer

Well, it's probably a component, because new to credit is part of it, and we are seeing a few more people that aren't establishing credit early on. And so they may need to start out with a secured card just because they just didn't get any credit, didn't get a credit history. So this helps address that need.

A lot of what's happening, though, is the big bounce back, in my opinion, in the subprime market because I think that declined far more a few years ago than the prime did even. And there were very few competitors in it, and now the very few people who are in subprime still, including the private labels that tend to have high yields and lower credits, are seeing a big bounce back. But it's a smaller segment than the prime segment. I think the more important thing for us is to gain share in prime, but what we want to do is identify the people that can become prime over time and get them started before they're all the way there to prime.

Christopher R. Donat - Sandler O'Neill & Partners LP

Got it. Okay. Thanks very much.

Operator

Thank you. And our next question comes from the line of John Hecht of Jefferies. Your line is now open.

John Hecht - Jefferies LLC

Good afternoon, guys. Thanks for taking my questions. I guess I'll ask one about margin. You're guiding for a flat margin. Is that just I guess you're not anticipating many rate hikes this year, or is there something else going on with the trajectory of rates, yields and cost to fund that we should think about?

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

So we are working off of an operative assumption of one or two rate increases this year as opposed to the four we were looking at in the forward curve toward the very end of last year. I would say we have not yet seen the benefit really of repricing in the card book fully from the Fed rate increase because we don't reprice card customers until cycle date. So you will get some lift from that coming in.

So I think what we're trying to say in NIM is there's an upward bias in NIM. We're well positioned right now. We may choose to invest some of that increase in NIM in marketing dollars, some promotional dollars and other places to really drive the growth that I think is the key thing we understand the market wants to see from us. So we may take some of that excess and reinvest it. Absent doing that, you would have more NIM expansion than you're likely to actually see.

John Hecht - Jefferies LLC

Okay. And separate and distinct question. You did speak to the typical trajectory of your prime accounts and the utilization rates, but just looking at your Master Trust data, you've had elevated payment rates for some time. And I'm wondering if you can speak to kind of just generic changes you see in customer utilization or payment behaviors or is there something that's changed you think that's going to take a while to shift or that's, I guess, worthy of discussion?

David W. Nelms - Chairman & Chief Executive Officer

Well, I would just say that the mix between balance transfer and sales can impact payment rates along with credit. And so certainly credit is great and so that tends to relate to a bit higher payments rates than one would otherwise have. But as we have shifted to a little more transaction volume turning into loans versus a little less balance transfer on new accounts that is going to impact the payment rates. And so people will tend to pay more of their sales down than they will of their balance transfer down.

John Hecht - Jefferies LLC

And so based on the, I guess, current marketing strategy, the elevated payment stream, do you think that stays around for a while or would we see that shift?

David W. Nelms - Chairman & Chief Executive Officer

I don't think that we're forecasting a big change in that relationship.

John Hecht - Jefferies LLC

Okay. Thanks very much.

David W. Nelms - Chairman & Chief Executive Officer

Sure.

Operator

Thank you. And our next question comes from the line of Henry Coffey of Sterne, Agee. Your line is now open.

Henry J. Coffey - CRT Capital Group LLC

Good afternoon and thank you for taking my question. Mark, when you look at some of the one-time expense items outside of the AML/BSA spending this year and last and some of the changes – you've closed down the mortgage company and then, of course, you sold off Italy. Can you give us a sense of sort of what the net impact of those two developments were? I mean, I know revenue goes down from those two, but so does some cost.

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

Yes, I think, Henry, some of the one-time expenses or some of the revenue reductions you see in the fee line actually are accretive to the P&L, right? So, for example, we called out $74 million in lost revenue next year from the mortgage business. I'd remind everybody when we exited the mortgage business, we said the reason we were doing it or one of the reasons we were doing it is it was not P&L accretive, right. So I think that's a very good point there.

If I think about the expense base generally right now, I think we are very lean. We are very efficient today, as evidenced by that efficiency ratio. We are always looking to find further efficiencies to get operating synergies and drive even greater returns on that.

As I said earlier, we do have some levers we can pull, if we get there, but I think those are the kind of levers you pull when you are in a turn in the credit cycle and you see things. Right now, we're still trying to drive growth, right. And I don't think you drive growth by kind of coming in and trying to whack the heck out of expenses, especially when you are already as efficient on that as we are. So we're trying to balance prudent investments in growth, maybe investing some of this additional NIM, to drive that going forward.

Henry J. Coffey - CRT Capital Group LLC

In the Payment Services business, on the international front, Diners card has gone through a lot of change, including the sale of Italy. What is the outlook there? And thank you for answering my questions.

David W. Nelms - Chairman & Chief Executive Officer

Sure. Well, I feel like we have really stabilized and positioned Diners to be able to grow from this point forward. And apart from FX rates, we saw some healthy growth, some of the best growth we've seen since we owned it. I think that Citi has largely exited the franchisees that they were going to exit. We've gotten franchisees into new hands, some very strong bank partners in China, India, and Japan, and we've dramatically increased acceptance across the world. So Diners is a pretty small total volume but the trajectory, I think, looks much better now.

And certainly, selling Italy, I think positions us much better from a P&L perspective. And the final thing I would add, since Italy came up in the last question as well, I think we exited Italy. We took the hard decisions on the mortgage business to really position ourselves for the future. And so I feel like we had some one-times last year. I think they were relatively small, the total $3.5 billion spend, compared to some other companies, but we prefer to have even fewer and I think we've positioned ourselves, knock on wood, to have fewer going forward, especially as we get through this look-back. So I gave you two answers for the price of one question.

Henry J. Coffey - CRT Capital Group LLC

Thank you very much, sir.

David W. Nelms - Chairman & Chief Executive Officer

Thanks.

Operator

Thank you. And our next question comes from the line of Jason Harbes of Wells Fargo. Your line is now open.

Jason E. Harbes - Wells Fargo Securities LLC

Hey, guys. Good evening. Thanks for taking the question.

David W. Nelms - Chairman & Chief Executive Officer

Hi.

Jason E. Harbes - Wells Fargo Securities LLC

Just drilling down on the expenses, were there any other one-timers aside from the BSA look-back? The other expense line looked a little bit elevated and I was kind of expecting a little bit of a decline potentially from the liability shift from EMV.

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

No, I like that there was a little bit of elevated fraud cost in the fourth quarter...

David W. Nelms - Chairman & Chief Executive Officer

And a little EMV cost.

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

And a little bit of EMV cost. So I think as you continue to push the cards out, there's costs associated with that. On the flip side of the equation, I think the fraud was actually up a little bit, as you have the fraudsters trying to getting that one last hit before while swiping is still very prevalent. So I think there's a combination of both sides of the same coin that you're seeing show up in that line item.

Jason E. Harbes - Wells Fargo Securities LLC

Okay.

David W. Nelms - Chairman & Chief Executive Officer

Remember on EMV, the rollout for the industry is still in-process. There's a lot of retailers that haven't put it in, activated it yet.

Jason E. Harbes - Wells Fargo Securities LLC

Okay. And as a follow-up, can you guys give us an update on how the Cashback Checking is progressing.

David W. Nelms - Chairman & Chief Executive Officer

Sure. We continue to purely offer that through cross-sell. We achieved the targets that we set internally for the product last year just with the cross-sell, and it is my hope that by year-end we will finally be able to make it available more broadly, but we continue to enhance the operations, the functionality, the controls around AML/BSA and fraud, and we have continued to learn a lot. And I think that one of the reasons we've taken longer to launch this one than others is because it is a very important and more complicated product than typical products out there. So we want to wait to go abroad until we are all buttoned down.

Jason E. Harbes - Wells Fargo Securities LLC

Okay. Thanks very much.

Operator

Thank you. And our final question comes from the line of Bob Napoli of William Blair. Your line is now open.

Bob P. Napoli - William Blair & Co. LLC

Thank you. Good afternoon. The personal loan business, the reserve was up quite a bit in personal loans and a little bit of increase in charge-offs and delinquencies. And the growth rate also continued to slow. Is it the competitive environment in personal loans? Are you incrementally concerned about credit in that business? And with the competitive environment, with the lending (1:05:52), do you expect that to at some point over the next year or so that there's going to be something that's going to derail some of those rapidly growing Internet competitors?

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

I'll tackle the reserving question and David can tackle the strategic element of the question. I would say, Bob, what's driving it really is seasoning of the portfolio, right. I mean, I think you've seen double-digit growth rates there over the course of a number of years. Personal loans don't season radically differently than credit card loans do. There's a little bit of a change in the shape of the curve and it's not exactly the same, but they tend to season after origination. You don't get a lot of first payment defaults when you do it prudently, thankfully. So I would say it's just seasoning. Don't expect any major deterioration of any kind in that portfolio and the seasoning we are seeing is in line with expectations.

David W. Nelms - Chairman & Chief Executive Officer

And what I would say on the strategic side is we had record originations this year in that business, even with literally hundreds of marketplace competitors entering and vying for share. And I think that part of the reason is that the people that we're targeting tend to be very different than the credits that most of those are targeting. Our average FICO score is 750, 760. The figures I've seen from the leading companies in the marketplace space is sub-700 average. And when every 20 points of FICO means a doubling of credit losses that is a very big difference in target market. And so we think that we're still the leader in prime originations in the space.

In terms of whether there will be a shake out, I'm sure there will be a shake out. I'm sure some people will survive, but I don't think that there will be hundreds of competitors. And it is an unproven model through the cycle. And I believe that our model of originating and holding versus just an originate and sale that relies solely on growth, and if you stop originating you don't have revenue, I believe that a relationship, owning the credits, being able to finance it on our balance sheet and not having to rely on securitization markets that we have seen can completely dry up in a crisis I think is a more sustainable model. And so I really like our position in that business.

Bob P. Napoli - William Blair & Co. LLC

Great. And then my follow-up question, just in the spirit of trying to accelerate growth, just any thoughts on the trends in the student loan business? And then how the Ariba partnership is going and if that can be a material driver, how long does it take? Or could that business ever be a material driver of revenue growth and earnings growth?

David W. Nelms - Chairman & Chief Executive Officer

Well, answering your third question, I guess, first, we think that Ariba is going to continue to produce a lot of volume growth in the short term. It will be a while before it becomes a material contributor profitability-wise. We also think there may be some ancillary services that may provide some revenues that having that product we're working on adding some additional functionality that may produce some revenue potential. On student loans, I'm not sure I fully understood your question on the student loans.

Bob P. Napoli - William Blair & Co. LLC

Just on the growth rate outlook for that business, do you expect to see steady trends, or is there anything you're working on to accelerate growth in the student loan business or...?

David W. Nelms - Chairman & Chief Executive Officer

Yes, I think...

Bob P. Napoli - William Blair & Co. LLC

Or are there any things that are concerning that would slow it down from a regulatory standpoint or otherwise?

David W. Nelms - Chairman & Chief Executive Officer

No, I expect to originate more this year than we did last year. But I don't expect a dramatic acceleration, but I do think that the credit trends look great, the needs continue from customers, and I expect us to originate a bit more.

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

And, Bob, it is helpful to look at the organic book versus the acquired book, because the acquired we bought a number of years ago is essentially in run-off.

Bob P. Napoli - William Blair & Co. LLC

Okay. Thank you.

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

Sure.

Operator

Thank you. We have no further questions at this time. At this time, I'd like to turn the call over to Bill Franklin for final remarks.

Bill Franklin - Vice President-Investor Relations

Thanks. We'd like to thank everyone for joining us. If you have any other follow-up questions, feel free to call Investor Relations. Have a good night.

Operator

Ladies and gentlemen, thank you for participating in today's conference. This does conclude the program and you may all disconnect. Everyone have a great evening.

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