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Discover Financial Services (NYSE:DFS)

Q1 2012 Earnings Call

March 21, 2012 5:00 pm ET

Executives

Craig A. Streem - Vice President of Investor Relations

David W. Nelms - Chairman and Chief Executive Officer

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

Analysts

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

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

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

David S. Hochstim - The Buckingham Research Group Incorporated

Mark C. DeVries - Barclays Capital, Research Division

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

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

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

Moshe Orenbuch - Crédit Suisse AG, Research Division

Bradley G. Ball - Evercore Partners Inc., Research Division

Martin Kemnec - Jefferies & Company, Inc., Research Division

Matthew Howlett - Macquarie Research

Operator

Welcome to the 2012 First Quarter Earnings Release Call. My name is Hilda, and I will be your operator for today's call. [Operator Instructions] Please note that this conference is being recorded. I will now turn the call over to Mr. Craig Streem. Mr. Streem, you may begin.

Craig A. Streem

Today, Hilda. And welcome, everyone, to this afternoon's call. We certainly appreciate your joining us for the discussion today. Let me begin by reminding everyone that 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, 2011, which is on file with the SEC.

In the first quarter 2012 earnings release and supplement, which are now posted on 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 to investors. And we urge you to review that information in conjunction with today's discussion.

Finally, we will be holding our annual financial community update tomorrow morning at 8:30 a.m. at The New York Palace Hotel. If you would like more information about that meeting, please get in touch with me these evening by e-mail. And with that event ahead of us tomorrow, it is our intention to keep this call and your questions focused on our first quarter results and performance, and we'll certainly have much more for you tomorrow regarding our strategies for profitable growth.

Our call this afternoon will include formal remarks from David Nelms, our Chairman and Chief Executive Officer; and Mark Graf, our Chief Financial Officer. And of course, a question-and-answer session, excuse me. Now it's my pleasure to turn the call over to David.

David W. Nelms

Good afternoon, everyone, and thanks for joining us. As Craig mentioned, we are looking forward to our annual financial community briefing tomorrow morning where members of our executive team will take you through some of the exciting developments and opportunities ahead of us at Discover.

After the market closed today, we reported record first quarter net income of $631 million, or $1.18 per share, driven by continued improvements in credit performance, along with solid organic growth in receivables and strong volume growth across all of our networks. In Direct Banking, we continued to deliver good growth in card, private student and personal loans and achieved record profits in our Payment Services business and are continuing to expand our network.

I'm very pleased with our 9% year-over-year loan growth, which reflects $1.6 billion in card loan growth. And in private student and personal loans, we eclipsed $10 billion in receivables. In terms of credit card performance, we achieved 25-year lows for net charge-off rate and 30-plus delinquency rate, demonstrating the quality of our portfolio and the strength of our risk management capabilities.

Before I turn the call over to Mark for some more detail in the financial results, I want to mention some recent developments that augur well for future growth and for continued generation of solid shareholder returns. The first of these was our receipt of the non-objection from the Fed related to our capital plan and proposed capital actions. In connection with that, we announced a new 2-year share repurchase authorization of $2 billion along with our regular quarterly dividend. I do want to remind you that last quarter, we took up the dividend by 67% to its current quarterly level of $0.10 per share, and we will review the dividend level at least on an annual basis.

A second recent development for us on the business side was our announcement of a new long-term agreement with the National Payments Corporation of India, which runs the RuPay network in India. Since its founding in 2009 by a consortium of Indian banks, NPCI has grown its share of ATM process transactions in India to 95%. Our new agreement will enable acceptance of Discover and Diners Club International cards at NPCI's ATMs and, eventually, point-of-sale terminals throughout India. The agreement will also allow RuPay cardholders to utilize the Discover, Diners Club International and PULSE networks for purchases and cash access outside of India. We expect this arrangement will result in increased transaction volume over time. I am very pleased that NPCI recognized Discover as the most flexible network and best partner for the future in one of the fastest-growing, largest potential customer, or countries for payment cards. At our meeting tomorrow, Diane Offereins will have more to say about our global network strategy.

The other very recent announcement that I want to highlight relates to the launch of the first Discover-branded card in the international marketplace by our Diners Club franchise partner in Ecuador. This is an important strategic development because we believe it will allow us to market-test a model that could eventually become a framework for expanding Discover-branded card issuance into additional countries with what to date has been a purely domestic model.

One final recent announcement was earlier today, we announced a new deal with the large network in Puerto Rico, and we're excited to tell you more about that tomorrow as well.

We look forward to meeting with you tomorrow where we will share our model for long-term, profitable growth and the initiatives that will help us to achieve our goals for 2012 and beyond. With that, I'd like to hand it over to Mark Graf to review our first quarter results.

R. Mark Graf

Thanks, David, and good afternoon, everyone. I'll begin my comments by focusing on our Direct Banking segment's first quarter results. The segment earned $962 million pretax this quarter versus $677 million last year. Reserve releases contributed $226 million to pretax earnings in the quarter as credit continued to improve to a greater degree than we had expected last quarter.

Turning to yield on the card portfolio. We reported a 44-basis-point decrease from the prior year to 12.21%. This happened as our higher-priced balances declined and our promotional volumes increased. These were partially offset by lower interest charge-offs. We are now including total interest and fee charge-offs in the financial supplement, so you don't have to wait for the 10-Q for that disclosure.

Total portfolio yield was 11.36%, lower by 74 basis points compared to the first quarter of last year driven primarily by the acquisition of the private student loan portfolios in the first and fourth quarters of last year, as well as the card yield compression I just mentioned. The yield compression was slightly offset by the effect of the sale of federal student loans last month.

Net interest income increased $123 million, or 11%, versus the prior year driven by asset growth, lower charge-offs of accrued interest and the benefit of lower interest expense. Net interest margin on receivables was 9.03%, down 19 basis points compared to the prior year due to the yield compression I mentioned a moment ago, partially offset by funding cost improvement.

The modest sequential decrease in net interest margin of 7 basis points was primarily driven by having a full quarter of net interest income from the $2.4 billion in private student loans that we acquired during the fourth quarter, along with the corresponding sequential card yield compression. Again, funding cost improvement partially offset this NIM compression. Absent any inorganic asset mix shifts, we expect the net interest margin to stabilize around this level for the remainder of the year as funding cost improvement largely offsets both card yield compression and organic growth in private student loans. However, it's important to note that we also expect student loans to produce much lower average credit losses than we expect to see in the card product.

Other income for the Direct Banking segment decreased $22 million from last year's first quarter due in large part to a $16 million bargain purchase gain related to the SLC acquisition in the prior year period, as well as slightly lower protection product revenues. Higher discount and interchange revenue was partially offset by higher rewards as we increased our rewards rate on card sales to 92 basis points from 86 basis points in the first quarter of last year.

Total operating expenses for the segment were up $82 million over the prior year. Expenses were up to support completed acquisitions, the higher level of loans and higher legal reserves. The increase in expenses for this quarter reflects investments to further our diversification in Direct Banking, and we expect to benefit from these investments as we move further into 2012. Going forward, we'll continue to be diligent on expense management, and we'll provide more perspective on our thoughts around operating expenses during our Investor Day tomorrow.

Now I'll switch to lending product growth and credit performance for the segment. We achieved card sales growth of 7% for the first quarter versus the prior year. The growth in card sales was driven by our continued focus on increasing our merchant acceptance, enriching our rewards programs and leveraging our marketing investments. Our total loan portfolio grew $4.6 billion with $2.4 billion of this growth attributable to the second accretive private student loan acquisition. Receivables in our personal loan product were up $764 million from the prior year, while our credit card loans were up $1.6 billion. The sale of our remaining federal student loan portfolio was completed this quarter and is already reflected in the numbers I just provided.

Turning to card credit quality. Our positive momentum continued this quarter as the card net charge-off rate and 30-plus delinquency rate each declined 17 basis points sequentially. The card reserve rate decreased 44 basis points as well, reflecting a brighter forward 12-month outlook for credit performance, which resulted in a $235 million card reserve release. Going forward, we still expect to build reserves at some point in the next 12 months as our loan portfolio continues to grow. However, the underlying economic environment clearly seems to be more constructive at this juncture.

For our private student loan portfolio, the net principal charge-off rate, excluding our purchased portfolios, was 49 basis points. The charge-offs and delinquencies in our private student loan portfolio were performing according to our expectations.

In terms of personal loan credit performance, loans greater than 30 days past due fell 6 basis points sequentially, and the personal loan net principal charge-off rate was essentially flat at 2.59%.

On the payment side, we had another quarter of record pretax earnings and payment volumes. Pretax income was up $9 million, or 21%, from the prior year to $52 million, driven by higher-margin point-of-sale volume from our PULSE PIN debit network business. Volumes were up 8% against the prior year, driven by 9% growth in PULSE debit volumes and 15% growth in our third-party issuing volumes. The increase in third-party issuing volume was driven mostly by spend on Walmart and Sam's Club Cards and higher prepaid volume.

Let's move on to liquidity, funding and capital. Our liquidity levels were strong to end the quarter with total actual and contingent liquidity of $28 billion. Our liquidity portfolio ended the quarter at $12.1 billion, up $1.9 billion from the prior year as we opportunistically pre-funded upcoming maturities, including by issuing a $1 billion, 3-year ABS deal prior to the quarter's close at a fixed rate of 81 basis points.

Direct-to-consumer deposits are once again our largest source of funding at 46%. Our funding cost is continuing to fall as we replace higher-cost deposits that we originated in a much higher rate environment. I'll take you through our expected quarterly maturities for 2012 and 2013 in my presentation tomorrow. As we've said before, we continue to remain opportunistic across all our funding channels by tapping all but not exhausting any of them.

Turning to capital. For some time now, we have benchmarked our key capital ratio as tangible common equity-to-tangible assets with a target of plus or minus 8%. Going forward, we will switch to focusing on our Tier 1 common capital ratio as it better represents how regulators and the industry look at capital levels, and we have established a 9.5% long-term target. We ended the most recent quarter at 14.3%. We'll address both this new target and our approach to excess capital in more detail tomorrow.

The strength of our capital position allowed us to announce the new $2 billion share repurchase authorization last week after completing the capital review process with our regulators. We remain focused on returning capital to shareholders via a mix of share repurchases and dividends as well as opportunistic acquisitions at the right price.

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

Question-and-Answer Session

Operator

[Operator Instructions] We received a question from Sanjay Sakhrani from KBW.

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

I had a question on revenues and capital management. Just first on revenues, I was hoping you could just talk, Mark, about your card yield expectations embedded in the net interest margin expectations for the remainder of the year. And then secondly, on the third-party payments segment, it seems like the pretax margin has been expanding at a pretty rapid rate. Could you just talk about what's happening there? And then just on excess capital, I don't want to front-run your comments tomorrow but maybe you can just talk about how you intend to utilize the share repurchase program, especially in the context of kind of what you guys did in the first quarter.

David W. Nelms

Sure. Absolutely, Sanjay. There was a lot in there. I'll try and touch on all of them. Please feel free to catch me if I don't touch all of them. With respect to expectations for card yield, I think we -- we'll be providing some greater detail on that thought during our Investor Day tomorrow, so I don't want to jump the gun too much. But what I would say is we continue to expect to see some continued compression coming primarily from the attrition of some of those higher-rate balances that predate CARD Act. That is continuing at this point in time. But we expect the compression resulting from that, as well as our other activities, to essentially be offset by the funding cost tailwind we've got right now. Actually, on a card yield loan basis, it'll more than offset it, I think. So it's -- that's the right way to think about it, range it in. Again, a little bit more detail tomorrow. And then with respect to the share repurchase thoughts, we are going to give some guidance around our expectations and cadence in terms of how we'll be looking at that going forward during the Investor Day tomorrow as well. So I would encourage you to stay tuned because we'll give you some pretty specific thoughts there.

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

And just the third-party payment segment and the pretax operating margin there?

David W. Nelms

I'd say we are -- continue to focus on higher-margin business and also get some benefits of scale given the fixed cost as we grow that business.

Operator

Our next question comes from Ryan Nash from Goldman Sachs.

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

I guess a question on the reserve. I guess you released more than most of us had been expecting. And Mark, I think you highlighted a brighter outlook, but you said that you will be building as reserves grow. So I guess I'm just trying to understand the takeaway message in that. Are you saying that the build is going -- is solely going to be a function of the fact that loans grow? So can we assume that if -- assuming your outlook holds, that if re -- if loan balances stay flat, that the reserve would stay flat?

R. Mark Graf

Yes, our current outlook would lead us to conclude that we don't expect to see a turn in credit performance in the forward 12-month period of time. So yes, Ryan, you're correctly reading what we're saying in that we expect any reserve build going forward to be directly related to growth in the loan book itself.

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

Okay. And I guess just another question. I think if you look at your loan balances, I guess, quarter-over-quarter, they were down about 1.5%. If you look in the industry, I think they're down sizeably more. Can you just give a sense of, one, where you think you're taking market share from? And do you think it's the fact that your portfolio is outperforming is just more a function of some people just have more seasonality in their books? Or you actually think there is some market share benefit happening there?

David W. Nelms

Well, Ryan, I would say that we tend to look at it year-over-year to remove the seasonality of that, and we have been outperforming for quite some period of time. Part -- I think I'd start with lower charge-off rates. We're not losing off the top. And we also believe we have higher customer retention of longtime balances. So that really helped. And then obviously, we are very focused on acceptance, as well as our cash rewards program and enhanced marketing. So there's no one piece, but it all adds up to us growing and many of our competitors working to try to get back to 0.

Operator

Our next question comes from Chris Brendler from Stifel Consulting.

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

Can you give us an update on the success you've had in your PULSE segment, of adding additional issuers around the Dodd-Frank requirement around the exclusivity that starts on April 1? Any meaningful progress there?

David W. Nelms

Well, I think that -- you'll recall that this is a 2-step process. We have to first sign the issuers and then there's new routing rules that go in place in April. PULSE recently announced that we signed 129 issuers last year, which we feel good about, and so we feel good about where we stand on that first step. But I think that there are a lot of -- there's a lot of changes going on in the industry right now, so we're going to have to monitor that carefully over the coming months, too.

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

Okay. And then a second question would be just can you give us an update, David, on credit card loan demand? What you're seeing on the frontlines from your consumers? And we seeing good spending volume and loan growth for Discover this quarter is a little bit ahead of our expectations. But I think you've been dealing [ph] pretty cautious on the outlook for loan growth. Any change to that over the last 3 months? And any commentary on uptake of Tier 3 [ph] offers would be helpful.

David W. Nelms

I wouldn't say that I've seen any dramatic change in trend over the last quarter. We continue to see sales growing obviously faster than loans. But consumers are continuing to expand spending, but they've kind of finished their deleveraging process, and I don't see them certainly expanding dramatically their debt at a greater pace. So I think it's a slow, steady increase. I personally expect the industry to eventually return to growth at about GDP growth, and I think that's going to be more driven by sales than by future rates or balance transfers, which was the other part of your question. I haven't seen a big change on that.

Operator

Our next question comes from David Hochstim from Buckingham Research.

David S. Hochstim - The Buckingham Research Group Incorporated

Can you give us some color in terms of what you saw in the way of -- any changes in spending during the quarter? And I guess I wasn't clear on how much of the spending growth was attributable to new cards and -- and then new cards in the quarter and new cards over the last year. And then did the changes in gasoline prices have much of an effect on overall spending growth this quarter?

David W. Nelms

Well, you saw our spend growth year-over-year will be pretty stable this last quarter as well as the quarter before. I don't -- a lot of this increase in gas prices really happened towards the end of the quarter, so I wouldn't say there was anything that really -- I don't think that was a huge driver. And frankly, I -- during the quarter, we saw a lot of continuation of the trend that I've seen and that we've seen in previous 2 quarters with gradual improvement across multiple spending categories.

David S. Hochstim - The Buckingham Research Group Incorporated

So existing cardholders spending at -- growing spending about the same rate as the average for the portfolio?

David W. Nelms

Yes. A good amount of -- probably the majority of this -- of our spend increase tends to be from existing customers. We are putting on new customers at a somewhat higher rate, but I wouldn't say dramatically so. So I think we're seeing a pretty balanced improvement across categories, across current and new customers, and obviously, still focused more on the better-credit-quality, higher-FICO-score customers, if you will. I mean, that's one place I will see a little more robustness.

David S. Hochstim - The Buckingham Research Group Incorporated

And then, sorry, could you just remind us how much you had in soft loans that you sold during the quarter? And was there any gain on that sale?

R. Mark Graf

No, there was no gain on that. And the remaining portion in the held-for-sale was around $700 million.

David S. Hochstim - The Buckingham Research Group Incorporated

So you sold the whole -- that $720 million, whatever it was that...

R. Mark Graf

Correct.

Operator

Our next question comes from Mark DeVries from Barclays Capital.

Mark C. DeVries - Barclays Capital, Research Division

Mark, I know you addressed some of these at a high level, some of the expense items. But is there anything specifically you can point to on the other expense line and the employee comp that causes it to be up meaningfully?

R. Mark Graf

Yes, I wouldn't say -- if you look at the other, other expense line, Mark, there's a number of different pieces moving around in there. One is clearly year-over-year. You have the full integration of the Student Loan or the continued integration of student loan business and significant increased expenses related to that, as well as some increases related to some of the new business initiatives that we'll be talking about pretty extensively at our Investor Day tomorrow. The other thing, obviously, that shows up in other, other is the litigation reserve. And I would say it's -- that a meaningful portion of the year-over-year increase in that other, other piece is due to reserves related to litigation and regulatory matters. And I'd point you back to our 10-K disclosures on that one. There's a number of litigation matters we're involved in currently and, by policy, we don't tend to talk about them specifically. So I can't really provide any further color. But that's kind of where I take it.

Mark C. DeVries - Barclays Capital, Research Division

Okay. And then rewards picked up a little bit as a percentage of interchange revenue, discount revenue. Is -- does this represent kind of a new run rate? Are you still seeing a little bit of upward inflation in rewards expense?

R. Mark Graf

Yes, I think as we look at the reward expense line item we guided last quarter, we thought it will be somewhat higher this quarter. Indeed it was. I think as we look at where we are right now for the remainder of the year, we think we'll be somewhere in this general range. We've got the ability to be slightly higher possibly, but somewhere around the range where we are right now feels about right to us.

Mark C. DeVries - Barclays Capital, Research Division

Okay, great. And can you give us an update on kind of where you stand as far as the mix of promotional balances versus standard and your default pricing bucket?

R. Mark Graf

Harit is going to be speaking about that directly in his section during the Investor Day tomorrow, so I don't want to steal his thunder.

Operator

Our next question comes from John Stilmar from SunTrust.

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Two quick questions, the first of which, and maybe this is also for tomorrow, I was wondering if you might be able to touch a little bit more about your really impressive move with regards to recoveries and that you still continue to show growth in recovery dollars despite your continued cautiousness here. I'm wondering if you can kind of give us a little -- some color as to what pockets you're seeing and -- because it certainly define the lag conditions relative to previous charge-offs that we had certainly talked about. And then my second question is, where is pricing today in private student loans? I was wondering if you could just give us the average private student loans that were originated this quarter. Well, I'm just trying to get a sense for where we are in terms of the pricing environment.

David W. Nelms

Well, I'll handle the first one. I don't -- I'm sorry, why don't you do the second one?

R. Mark Graf

Yes, go ahead, please.

David W. Nelms

Well, repeat the first -- the first question was?

Craig A. Streem

Recoveries.

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Recoveries.

David W. Nelms

Recoveries. I'm sorry. Sorry, I was thinking about your second one. A big part of it is just our recovery. Our total inventory of the charge-off dollars is still very significant from the last few years. And I think that as some people go back to work or have a desire to repay some of the loans, I think we've been pleasantly surprised by some of that debt over the last few years that is at least partially repaid. I wouldn't point you to any specific pocket or strategy. Maybe Jim will be able to shed a little more light on it tomorrow. But I will say the big factor is just large inventories on which we're parking. Mark, on the second one.

R. Mark Graf

Yes, in terms of the yield on the student loan Portfolio, I'd say it came down about 105 basis points year-over-year. That was principally due to the addition of the $2.5 billion in private student loans that we closed on September 30. They came on at a much lower yield, but also a much lower loss expectation than we had in the first acquisition. So that had some impact there. And I would say sequentially, the yield decreased about 46 basis points because you only have the impact of that $2.5 billion acquisition in parts of last -- the last quarter. And so it fully kicked in. You had the full impact of it this quarter.

John W. Stilmar - SunTrust Robinson Humphrey, Inc., Research Division

Yes, I was just curious in terms of new loans that you've originated in the quarter that may not have shown up, like just the absolute coupon that you put on the books this past quarter. I was wondering if you have that available.

R. Mark Graf

I don't have it at my fingertips, but we'll be happy to address it tomorrow for you.

Operator

Our next question comes from Craig Maurer from CLSA.

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

Mark, in light of the multi-decade lows you're seeing in credit quality metrics, can you comment on where new card volumes might fit in with the current metrics as they season what your expectations are?

R. Mark Graf

David, do you want to take the first stab at that and I'll follow on?

David W. Nelms

I would say that the larger improvements on credit quality have probably come from more of the base. And we've seen maybe less dramatic of an improvement on the newest vintages originated in the last few years. But we are still seeing some improvements even on those new vintages. And it's probably partly related on us refining our models and maybe partly environmentally, things are starting to improve a bit more.

R. Mark Graf

Yes. I mean, as we look -- as I indicated earlier, as we look at our 12-month forward loss forecast, we continue to be surprised, as the quarter rolls up and a new quarter rolls on, at the fact just the performance continues to look very, very solid going forward. With respect to specifically where we think credit trends look over the course of the cycle, if you will, as opposed to spot at this point in time, Jim Panzarino is going to provide some pretty significant detail around that at our Investor Day tomorrow. I think it's fair to say that -- that it's -- we view it as likely good news, not bad news. Let's put it that way.

Operator

Our next question comes from Bob Napoli from William Blair.

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

I guess maybe just trying to follow up on that question on normalized credit losses, if you will. And I -- where -- more tomorrow. I don't want to go too far. But the -- I mean, your return on equity is obviously way above your goals, even after you adjust for reserves. The industry is generating substantial excess capital above normalized levels, I think, now. I mean, don't you expect that credit losses would kind of normalize back at historical -- I mean, would 5% be kind of around where you would expect normalized credit losses to be through a cycle?

David W. Nelms

Yes, Bobby, I think it's a good question and a difficult one to answer because I think we're in new territory at this point. We used to say 5% to 6% losses in credit cards over the cycle, and I think that there's been enough structural changes in the industry between deleveraging, consolidated industry. You just don't have all the sub-prime players out there that used to have an impact on everyone. Even the CARD Act had a certain impact on it. And so -- and I think even consumer behavior has actually taken a shift after coming through this cycle. Consumers are more cautious, and that will show up in lower losses over time. So if I had to guess, I would say eventually we're going to see more like 4% to 5% being kind of a range of normalization. And I think it's going to maybe take longer than we might have expected to get there. Mark originally -- earlier today, he said, "Look, over the next 12 months, we're not going to -- we're not really seeing any signs." I mean, we're seeing signs of maybe approaching a bottom, but you saw both our delinquencies and charge-off rates this quarter still improve." So it indicates we're not quite at the bottom yet, but we should be getting close. And so -- but I wouldn't see anything that would dramatically take it up, and I would say it's probably going to be a while before we -- if it's going to go back to 4% or 5%, it's going to be a while, we think.

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

Okay, that makes sense. The share repurchase approval, the extension, I mean, how -- I mean, you have a lot of capital. How aggressive are you going to be on buying back shares? Or, I mean, are you looking at acquisitions that would make you a little more cautious on the rate of share repurchase?

R. Mark Graf

Yes, what I would say is we're going to go into that in some detail tomorrow. So I'm unfortunately going to hold my comments on that one and make you wait 12 hours or so for that one. But I think it's fair to say we intend to be very disciplined overall.

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

Okay. And last question. The federal loans you sold, who did you sell them to? And was there a gain on the sale in the quarter?

R. Mark Graf

I'm not sure we've disclosed to the results, and I don't know legally if the contract allows us to. So I won't go there. But I know there was no gain nor loss of any significance on the sale of those loans.

Operator

The next question comes from Moshe Orenbuch from Credit Suisse.

Moshe Orenbuch - Crédit Suisse AG, Research Division

Kind of along the lines of the -- a prior question about normalized credit losses, any thoughts about kind of going either a little deeper or changing credit criteria to push balance growth faster? Is this anything -- is that something that's thought about? Or how do you discuss that?

David W. Nelms

It'll -- what I would say is that if we can find expansion areas where we can still get prime credit performance, we would certainly seek to expand our criteria in those areas. I think we don't have the appetite to kind of go sub-prime, if you will. But certainly, some of the changes we're seeing suggest that there may be -- may indeed be some sales where we could approve someone that will -- in fact our -- that prime credit performance that we're looking for. But we're -- as you know from our reputation and results, we're going to be cautious on this.

Operator

Our next question comes from Brad Ball from Evercore.

Bradley G. Ball - Evercore Partners Inc., Research Division

Can you talk about your experience in terms of organic private student loan growth and what your outlook is for private student loan growth and also personal loan growth?

David W. Nelms

I think last year, we said that we were targeting $1 billion-plus of organic growth, and I'd say we're on track to achieve that.

Bradley G. Ball - Evercore Partners Inc., Research Division

On track for $1 billion annually?

David W. Nelms

Well, we said for this year. But certainly, what I would expect is that this business, we may be able to ramp up by even a little bit more over time. But we do think it's $1 billion-plus kind of a year business for us -- growth.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And I wonder if you can comment. Senator Durbin has been holding hearings to discuss removing the non-dischargeability of private student loans. Well, if that were to go through, what kind of impact would that have on your business?

David W. Nelms

Well, just one thing quickly. And I don't know, you may have asked student and personal loans before, and the $1 billion-plus is just personal -- just student loans, and then personal loans will be something greater than that. In terms of the dischargeability in bankruptcy, it -- there's not -- I don't expect anything to happen real quickly, if at all, in this area. But if it did, it would depend on exactly how. Is it immediately dischargeable? So when someone graduates and they haven't even had time to start making money, they could walk away? Or would it be after 5 years they could be dischargeable? So I think the precise way it happened would matter. But I'd also say we have relatively low losses in this. So it -- I don't think -- I think it will certainly change how we think about pricing going forward, but I don't think it would totally undermine the business model. Certainly, the fact that most of our loans are cosigned, I think, gives us some protection from anything too dramatic.

Bradley G. Ball - Evercore Partners Inc., Research Division

Okay. And then just one separate question. What proportion of your balances, your card balances, are currently on promotional rates?

R. Mark Graf

That will be disclosed by Harit tomorrow. It's a big part of his presentation. We don't want to steal his thunder.

Operator

Our next question comes from Daniel Furtado from Jefferies & Company.

Martin Kemnec - Jefferies & Company, Inc., Research Division

This is Martin Kemnec in for Dan Furtado. I also have a question on recovery levels. So building off of John's earlier question. I mean, you guys have obviously continued to recapture your previous losses at a pretty impressive rate. I guess what I'm try to focus on, is there some type of a limitation on how far the look-back is there on that? I mean, generally speaking, after an account is charged off, what type of timeframe are we looking at for recovery? I mean, obviously, there's legal statutes around that. But if you have any guidance, that'd be helpful?

David W. Nelms

Recoveries is a very broad focus. And so for -- and one of the reasons that we tend to have high -- our recoveries have held up is that unlike many of our competitors, we haven't sold things. And so within recoveries, for instance, are people who went through Chapter 13 bankruptcy and signed up for a prepayment plan. And then that's somewhat of an annuity that lasts for many years after that. Many of our competitors sold that off in past years, especially as losses peaked. We didn't sell any. And so you get a whole variety of these, and some of these could be loans from quite some time ago that have been on a regular repayment plan but are counted as recoveries because we wrote them off. It could be 5 years-plus ago.

R. Mark Graf

We've actually also been investing very heavily in that area. We've got some what we think are some unique techniques we're utilizing on the collection side. Some of the expense growth you've seen happened toward that part of that business, and we think it's a vindication and validation of that paying off.

Martin Kemnec - Jefferies & Company, Inc., Research Division

Excellent, excellent. And then building off of Mark's question on rewards expense, thanks for the guidance on where you guys see that. I mean, stepping back more broadly, are you guys still seeing competition act rationally with respect to rewards offerings? Or how do you guys kind of frame that up?

David W. Nelms

I think it's a tough one to answer. There's -- we do think that some of our competitors are probably, in our view, spending reward dollars at unsustainably high levels. And -- but they're -- if you look back over time, the history, is that people have tended to put up reward programs, find out that they're kind of expensive and then back off and devalue. And a number of competitors have done that. Our approach has been to have a sustainable program that gives great value to consumers, and -- but is still -- is also affordable by us.

Operator

We also have Matthew Howlett from Macquarie.

Matthew Howlett - Macquarie Research

Just on the creation of the CFPV, any more -- I know it's in development. But any more clarity of what you'd expect out of that department, if anything?

David W. Nelms

Well, I think, I mean, it's been operational since summer's -- last summer, so I wouldn't say it's totally in development. But I -- it also is continuing to gain experience, and we're continuing to gain experience with the CFPV [ph]. And all I could say is that we look to have a very constructive dialogue. And our understanding is that they want to factually based. And if that's how things proceed, we think we've got good facts. So we'll just have constructive dialogue with them.

Matthew Howlett - Macquarie Research

I mean, as it stands now, do you see any major impact on, first of all, marketing or even pricing? And since -- I mean, are they -- do you foresee potentially them coming in and so asking to -- kind of adjustings [ph] on those 2 topics or anything else that could really affect the business model?

David W. Nelms

I just wouldn't want to speculate.

Matthew Howlett - Macquarie Research

Got you, okay. And then just on the student loans, I mean, great performance so far. Anything that you're seeing on the repayment when the loans hit the repayment side? I mean, anything out of the ordinary in terms of defaults? Or is that just sort of coming in, in line?

David W. Nelms

I'd say that the repayments and delinquencies and charge-offs are pretty in line with our expectations.

Operator

That was our last question. I'd like to turn it back over to you for any closing remarks.

David W. Nelms

Thanks, Hilda. I just want to thank all of you for your questions and your attention this evening, and we are really excited about tomorrow morning's meeting and look forward to either seeing all of you in person or, if not, then certainly on the webcast. So thanks, and have a good evening.

Operator

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

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