Bill Franklin - IR David Nelms - Chairman & CEO Mark Graf - CFO.

Mark DeVries - Barclays Ryan Nash - Goldman Sachs Sanjay Sakhrani - KBW Bill Carcache - Nomura Securities Jason Arnold - RBC Capital Markets Bob Napoli - William Blair Donald Fandetti - Citigroup David Ho - Deutsche Bank Moshe Orenbuch - Credit Suisse Matthew Howlett - UBS David Hochstim - Buckingham Research Ken Bruce - Bank of America Merrill Lynch Chris Donat - Sandler O'Neill Sameer Gokhale - Janney Capital.

Welcome to the Third Quarter 2014 earnings call. My name is Adrian and I will be your operator for today's call. (Operator Instructions). I'll now turn call over to Bill Franklin. Bill Franklin, you may begin..

Thank you, Adrian. Good afternoon everyone. We appreciate all of you for joining us. Let me begin as always with slide 2 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 furnished to the SEC today in an 8-K report and in our 10-K and 10-Qs which are on our website and on file with the SEC.

In the third quarter 2014 earnings materials 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 this afternoon 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 and one related follow-up so we can make sure that everyone is accommodated. So now it is my pleasure to turn the call over to David..

I want to thank all of you for joining us on the call today. After the market closed, we reported third quarter net income of 644 million and earnings per share of $1.37, up 14% over the prior year driven primarily by profitable loan growth and share repurchases with a return on equity of 23%.

Our Direct Banking business continues to deliver solid results. On slide 4 of the earnings presentation you'll see Discover achieved total loan growth of 7% over the prior year. This was driven by strong growth in card, personal loans and private student loans.

Card receivables grew 6.6% this quarter, which is a rate that continues to outpace our peers and indicates that we are continuing to take share. We’re driving this growth by adding new accounts and increasing wallet share with existing customers.

The overall value proposition of Discover it continues to resonate with customers as we achieved a double digit new account growth rate again in the third quarter. We believe that the increase in wallet share and our continued low attrition both of which benefit card loan growth are held by our award recognized customer satisfaction.

In the quarter, Discover tied for highest in customer satisfaction with credit card companies for 2014 according to J.D. Power. This is a first for Discover and demonstrates our continued focus on the customer is being recognized in the market place.

Discover received the highest rating in the area of customer interaction which focuses on how card members perceive the service received through key engagement channels, such as website, call centers, automated phone system, online chat, e-mail and mobile phone.

Our continued enhancement of mobile and digital technology includes developments that allow users to view account information more conveniently for ease in activate cards with a single touch and our recent release of an app that makes us first credit card company or major bank that lets card members log into their accounts using fingerprint authorization.

These are just a few of the ways we continue to deploy innovative functionality for consumers. Discover also ranked highly in the categories of credit card terms, benefits and services, problem resolution and rewards.

Along these lines later in our call, Mark will give you some insight into how we’re thinking about further improving ease of rewards redemption for card members. Card sales for the quarter increased 5.8% from the prior year.

More active accounts year-over-year driven by new accounts, higher average spend per active, reactivating existing accounts and very low attrition, all contributed to growth beyond U.S. retail sales.

Our second largest asset class, private student loans grew 5% and when you look at the organic growth, excluding the acquired portfolios we were able to achieve 23% growth year-over-year. June, July and August are peak season for student loan applications. During peak season, we experienced strong application growth of 11% over the prior year.

Although we were challenged a bit in the graduate student loan market due to previous price decreases on federal graduate student loans. This was more than offset by the gains we made in undergraduate originations.

The increase in undergraduate originations was mostly the result of our increased marketing, our in-school repayment product and the 1% rewards feature we added for good grade on new student loans. Moving to our payment segment, volume increased by 2%.

We shared earlier this year that we will be losing some third party volumes in network partners and at PULSE. For example, the Synchrony issued Sam's-Walmart card volume began running off this quarter as it transitioned to another network and we expect the majority of this volume to leave network partners results in the fourth quarter.

That said, I believe that the value that Discover Network to our card issuing business has never been greater in terms of acceptance, brand awareness and economics. We mentioned at our financial community briefing earlier this year that we would be competing for all debit.

This quarter The American Bankers Association announced their endorsement of Discover Debit. Historically banks had only two options for their signature debit cards. We want to give them another option. We believe our Discover Debit product can offer superior economics, simplified rules, fee transparency and similar acceptance.

Another item we discussed at our financial community briefing when we covered our key priorities was risk management. The regulatory environment continues to be challenging and we like others in the industry are dedicating significant internal focus to regulatory and compliance initiatives.

Before I turn the call over to Mark through the details of third quarter performance, let me say that I'm proud of our operating results, great credit performance and our ability to continue to drive solid prime loan growth.

Mark?.

Thanks David. I will begin my comments today by going through the revenue detail on slide 5 of our presentation. Net interest income increased $129 million or 9% over the prior year due to continued loan growth and a higher net interest margin.

Total non-interest income was relatively flat at $552 million as several puts and takes within various line items essentially offset each other. Specifically, net discount and interchange revenue increased by $19 million or 7% year-over-year driven by higher Discover Card sales volume.

Protection product revenue continues to decline down $12 million year-over-year given our suspension of protection product sales in late 2012. Partially offsetting this, loan fee income was up $7 million.

Other revenue decreased $15 million mostly due to a prior reclassification of some merchant fees now recognized in discount and interchange revenue as well as lower mortgage related income.

Our rewards rate for the quarter was 103 basis points which was 5 basis points higher than last year due to an increase in standard rewards driven in part by higher Discover it sales.

Relative to the prior period, the rewards rate was up 12 basis points a result of more 5% cash back bonus activity as the third quarter category was gasoline as well as lower forfeitures.

Following up on David's earlier comment I want to share some of our latest thinking on the rewards program and some potential impacts to the P&L in the fourth quarter and beyond. We've said for some time that we are focused on maintaining our strong position in a very competitive rewards environment.

And as I’ve mentioned at a recent conference, we're currently revisiting our rewards program with a goal of delivering greater ease of redemption and eliminating most or all forfeiture triggers. To that end we are contemplating a series of changes to the redemption elements of our rewards program.

While not yet finalized we estimate these changes could result in a onetime charge of up to 185 million in the fourth quarter due to the extinguishment of all or part of our current reserve for rewards forfeiture. The ongoing run-rate impact of these contemplated changes should be very manageable, somewhere less than five basis points per annum.

Continuing on slide 5, Payment Services revenue for the quarter was down slightly relative to the prior year, but overall we grew total company revenues by 6% for the quarter, driven by strong Direct Banking segment performance.

Turning to slide 6, total loan yield of 11.36% was up 7 basis points over the prior year driven by higher card and private student loan yields. The modest year-over-year increase in card yield reflects a higher portion of balances coming from revolving customers and slightly lower interest charge-offs.

The year-over-year increase in private student loan yield relates to the PCI accounting favorability we began recognizing in the fourth quarter of 2013 which I discussed in more depth on last quarter's call.

Overall, higher total loan yield combined with lower funding costs resulted in a 14 basis point increase in net interest margin over the prior year to 9.78%. Sequentially, net interest margin was down as card members took advantage of promotional offers which benefited loan growth.

Additionally we capitalized on the funding environment and issued two longer term deals in the quarter, $1.2 billion a five year fixed rate ABS and $750 million of seven year fixed rate senior bank notes. These deals suppressed some of the funding cost improvement we would have delivered had we done shorter term floating rate issuances.

However these longer term fixed rate deals are part of our funding strategy to extend duration at attractive pricing in order to position ourselves for a higher rate environment in the future. Looking forward, we expect modest sequential pressure as we continue to extend the duration of our funding and card yield continues to come down modestly.

Turning to slide 7, total operating expense increased by $44 million or 6% over the prior year. The most significant driver of the increase was increased compensation and benefits associated with higher head count to support organizational growth and compliance initiatives.

We also invested in more marketing this year particularly in card and personal loans. In addition we continue to enhance our technology which contributed to higher professional fees year-over-year, partially offsetting these increases other expense was down due in part to several onetime items that in aggregate were worth about a penny of EPS.

For the quarter, our total company efficiency ratio was 37.8%. As we look forward, the expense base will have a modest upward bias based on a number of factors including additional marketing spend, regulatory and compliance staffing and technology enhancements.

All in, we expect our 2015 efficiency ratio to be modestly above our 38% long term efficiency target. Turning to provision for loan losses and credit on slide 8, provision for loan losses was higher by $21 million compared to the prior year.

The primary contributor was a $33 million increase in net charge-offs driven by loan growth and lower dollar recoveries. I would remind you the recovery dollars are declining as the available inventory from previously charged-off loans diminishes and isn't refilling as quickly with new charged-off balances.

Partially offsetting higher net charge-offs was a $12 million lower reserve build compared to the prior year but reserves were up sequentially. The credit card net charge-off rate was 2.16% up 11 basis points year-over-year and down 17 basis points sequentially.

The 30 plus day delinquency rate was 1.71%, four basis points higher versus the prior year and up sequentially by eight basis points.

The private student loan net charge-off rate excluding purchase credit impaired loans was down 16 basis points sequentially to 1.14% due to seasonality related to lower charge-offs and higher disbursements in the third quarter. The 30 plus day delinquency rate increased by 12 basis points to 1.78% as the organic book continues to come into repayment.

Overall, the student loan portfolio continues to season generally in-lines with our expectations. Switching to personal loans, the net charge-off rate was down three basis points sequentially to 1.92% and the over 30 day delinquency rate was up nine basis points to 75 basis points.

Across all of our portfolios we remain pleased with our strong credit results. However, we do believe our loan growth over the last several years places us on a reserve build trajectory.

One last item I would call out on the income statement is that during the quarter we were able to recognize certain prior year tax benefits which reduced our effective tax rate to 36.2% for the quarter. Next I will touch on our capital position on slide 9.

You'll note that in addition to our traditional Basel I view we've added a new ratio, an estimated common equity Tier 1 capital ratio. This new line item assumes fully phased in Basel III requirements and stands at 14.7%, roughly in-lines with our Basel I Tier 1 common ratio of 14.8%.

During the quarter we repurchased 622 million of stock, an accelerated pace from the second quarter as we made up for lower buy backs in the prior period. One of our top priorities is to drive shareholder value through effective capital management.

To that end we still plan to repurchase a total of $1.06 billion of common stock for the four quarter period ending March 31, 2015 the same amount as our CCAR capital action submitted to the Fed. Also on slide 9 is our outlook for the remainder of 2014.

As we look to the fourth quarter, we expect NIM to be down slightly as we continue to extend funding duration in this low rate environment and also look to continue to drive card loan growth. With respect to rewards, the fourth quarter will reflect a broad 5% category for holiday shopping.

However we still believe the full year will be consistent with our comments last quarter likely coming in a couple basis points north of 1% excluding any potential redemption changes. That concludes our formal remarks. So now I will turn the call back to our operator, Adrian to begin the Q&A session..

(Operator Instructions). And we have Mark DeVries from Barclays on line with a question. Please go ahead..

I want to ask about kind of competitive intensity around card rewards. I appreciate you get this question in different forms almost every quarter. The reason I'm asking is we're starting to see some offers that just cause you to scratch your head on how the economics work for the issuer.

Without naming anyone in particular, I'll just reference the double cash rewards offer where you've got effectively 2% back from an issuer that's basically only collecting probably 2% of discount rate.

The question David is how much longer do you think we can see offers like this? In your experience when an issuer tends to over shoot with an offer that seems overly aggressive, how quickly can you see a response of them kind of dialing that back?.

Well I actually think that there has been more stability and competitive intensity than one might think. This has been an intense -- specifically rewards and cash back has been intensely competitive for many years and this is not the first time that we've seen issuers come out with what might look to some of us to be unsustainable.

My experience is they don't dial them back real quickly but after two or three years they start seeing the profit numbers not hitting hurdles and then they'll dial them back. I would also say and in fact in recent quarters we've seen some issuers actually dial back earlier rich programs. So that's been a history in the industry.

The other thing I'd say is that I wouldn't over focus on one measure. Clearly rewards are very important but service, features – there is a lot of other things that are very important to customers. And so you don't have -- if people don't have the full package like Discover it, we think it's got a great rewards but a lot of other things.

The full package still continues to be more resilient than just having one headline number that you're competing with..

And our next question comes from Ryan Nash from Goldman Sachs. Please go ahead..

Mark on your comment about the modestly above 38% on the efficiency ratio can you just maybe give us a little bit more context, help us understand what assumptions are going into that? What are we assuming for interest rates? What type of loan growth? How do we think about trajectory of the expense base that got you to that above 38%?.

Yes there is a bunch in that Ryan and I will try and tackle the ones that really hit the 38% number specifically. I would say there is a couple different things.

First of all is we'll be looking at a couple of onetime expenses coming at us next year such as roll-out of EMV, and then I think we're also facing a number of expenses that the entire industry is facing that David eluded to, really additional compliance and regulatory functions and meeting significantly higher expectations obviously is going to be driving some of that as well.

We do continue to invest in our technology infrastructure with a principal focus around digital but it's broad based investing that's taking place as well. So those would be the really key drivers of the elements that I see taking our expenses higher as I look into next year..

And then you noted in the release that continued growth would drive reserve actions I guess.

Should we expect to see a change in the pace in which you're adding to reserves then? Is it fair to assume that you’re starting to see some higher credit losses in the more recent vintages that is driving this comment or is it just that it's a function of growth?.

I think Ryan it's really a function of growth. I think the key thing to bear in mind is the vintages are generally seasoning in line with our expectations.

But I would also point out that we're coming into the period of time now or if you think about peak losses occurring on a card book somewhere generally between 18 months and 30 months after origination of a vintage.

We've got several larger vintages as a result of the growth we've come up over the course of the last couple years coming into the seasoning mode. So continuing again generally to season in-line with our expectations but as the larger vintages come through it will have a modestly larger impact on the overall totals..

And your next question comes from Sanjay Sakhrani from KBW. Please go ahead..

I've got a couple questions, just back to the efficiency ratio guidance, I was just wondering how much flexibility there might be to the extent that other metrics don't go as planned? I mean how much discretion do you have over some of the expenses that you mentioned or other expenses in case the provision goes up more than you expect it to? And then secondly just David in terms of the above industry average growth that you're seeing, how long do you think that persists given the current competitive environment? Thank you..

So Sanjay I'll tackle expense one and then I'll pass things over to David. I would say there is definitely expense leverage in the model that we can avail ourselves of if we feel we need to go down that path.

What I would say is we're continuing to drive very strong growth at this point in time and feel good that our ability in the near term to keep doing that. So it doesn't feel like the time you would want to be pulling back on those levers, all right.

So that's why I think we're kind of indicating we expect to see some increased expenses next year because we're choosing to keep those engines running to keep that production coming online at this point in time.

David?.

And Sanjay on the growth, I think we're very pleased that again we performed well above the targeted range that we had laid out a few years back. And I think one of the things that's happening -- well two things are happening.

One is we're seeing good results from Discover it, the new features, free FICO, security things that we're putting in place, our advertising and I think we're starting to get an industry that is maybe showing a little more signs of modest growth. We've been growing despite a shrinking industry.

And so I think that if the industry itself picks up a little bit then that obviously would be helpful for our ability to continue to grow as robustly as we are as we have been the last two quarters certainly.

So probably early next year we'll be actually revisiting and trying to make a decision do we stick with that original guidance that we gave a few years back or do we change it and the industry and our results will be informative in that decision..

And our next question comes from Bill Carcache from Nomura Securities. Please go ahead..

Mark, I had a question on the calculus of growth driven reserve building. So let's say that we remain in an environment where A, there is no evidence of credit deterioration and B, you continue to grow loans.

If we hold everything else constant to isolate the impact, how do you think about the interplay between the tailwind that you get from the additional interest income that you generate on your loan growth and the headwind from higher provision expense associated with the need to build reserves on a growing book? Just factually speaking, what's the math of netting those pieces together in terms of the impact on EPS growth?.

That's a really big question that can have an awful lot of calculus impacting both ends of that equation, so how about if I just tell you about the pieces of the puzzle that go into each of them? Because we don't provide EPS guidance, I will stay away from the specific correlation between the two.

I guess what I would say is that provisioning itself as I said earlier and as you noted in your question it's really going to be dictated going forward by loan growth. The seasoning of the new vintages, some of the vintages that are coming through are slightly larger than some of the vintages that we've seen before.

So that will -- again they're seasoning generally in-line with our expectations but the vintages themselves are slightly larger.

The other things that go into the calculus on that side of the equation really are going to be recoveries, right? What is the trajectory at which we continue to realize recoveries off that declining pool but nevertheless still out there of crisis period charge-offs? I would say the economic environment comes into it, bankruptcy filings come into it.

So I think there is a lot of different things. I think our comments are really kind of directed at helping you kind of get the fact that the larger vintages are starting to mature.

So we do believe that growth will drive incremental provisioning expense, but again I would underscore we don't see any fundamental changes in the economic environment at this point in time.

On the net interest income side, again a lot of things taking place there because it depends on the components of growth, right? Are you bringing in lower priced tiers of new accounts? Higher priced tiers of new accounts? Is there a level of promotional activity taking place? What are you doing with your funding costs, both in terms of the market rate environment as well as what levers are that we're pulling right now to fix costs and extend duration on our funding, right? As I said in my prepared comments we're purposely taking our funding costs slightly higher so that we perform better in a rising rate environment locking those in for long periods of time for tranches of the funding.

So there is a whole bunch of pieces of the puzzle that go into that that aren't necessarily inter-related but those are the basic levers..

Okay and on a related note regarding your reserving methodology.

Let’s say that you’re 100% correct in estimating your allowance today, does that mean that the sum of your net charge-offs for the 12 months would total your current period allowance?.

It would be forward looking. I am trying to process the question..

Yes I mean I guess if it's different, so I mean I guess to the extent that the sum of your charge-offs over the next 12 months is the driver of what your reserve is and you could have -- and you’re 100% correct in estimating what those next 12 month charge-offs are going to be is that what your reserve is today? Or if it's different then why would it be different?.

Generally speaking yes, there is a couple little puts and takes around the edges but for the sake of simplistic answer to the question, yes that would be correct..

And we reserve for interest charge-offs as well Bill, unless some of our competitors don’t have it going through that allowance line..

Okay.

So then the related part of that -- then as if we look historically at that relationship between what your actual next 12 month charge-offs have been and your allowance any differences between the two would essentially be attribute to kind of like misestimation because intend all along would be to set the allowance equal to what you expect that next 12 months charge-offs to be?.

I would say the mathematical answer to that question is yes. I would also point out to you though that in the history of mankind other than playing dumb luck I don’t think anybody has ever nailed their reserve..

And our next question comes from Jason Arnold from RBC Capital Markets. Please go ahead..

A couple of my questions already got taken but just wondering if you can comment on your thoughts on Apple Pay and any other mobile payment initiatives you are undertaking? Thanks..

Well I would say that we're excited about that potential prospect of mobile payments generally. I think that it's likely mobile payments are likely to -- well we've been hoping they took off faster.

It always seemed to take a little longer than you would like but I think mobile payments has their prospect to have more going into our cards as opposed to cash and check to add more features and functionality to consumers and their purchasing which I think is good for customers and good for our industry.

So just generically we're excited about the various mobile efforts in the industry and there is obviously a number of them going on right now..

And our next question comes from Bob Napoli from William Blair. Please go ahead..

I guess maybe a follow-up on that question if you could.

Do you expect to be in the Apple Pay? How successful do you think the Apple Pay product will be and what differentiates it from other things that are out there? Was Discover's relationship with PayPal a reason why Discover is not initially in Apple Pay and how is your relationship with -- what are your expectations for that relationship with PayPal now that they're spinning off?.

Well look I wouldn't want to talk specifically about any of our relationships. We have a lot of important relationships and one of our strategies is to be a great partner to a bunch of people. And I would say that we certainly do expect to be participating in Apple Pay.

We don't know when that will be, but we'll be actively working to be included over time..

Okay. Then let me just ask about your consumer loan business I guess. The growth rate there is still continues to be very strong but it has slowed down a little bit. The yield has come in a little bit on that product.

Are you seeing more competition? And if so are you seeing any competition from peer-to-peer? Or is it from other banks that are looking at that market as being very attractive? And do you think you can continue to grow that business at rates somewhere near where you have been recently?.

Yes, Bob, it's Mark. I will start with that and then pass to David with respect to the yield question on the personal loan business. It's come down slightly as more of the recent vintages really are coming in with shorter durations at origination than they had historically.

Remember these are fixed rate products so as they are on a shorter duration the yields are going to be a little bit lower. So you get lower yields but you also from an asset liability management perspective as we look forward to a rising rate environment there is benefit to that fixed rate product being shortened up a bit as well.

And respect to the performance to business I will pass to David for that part..

I would say there is certainly more competition in that business than there was but I would say that we’re also participating a little more broadly than we were.

We mentioned at our Investor Day that we previously did not even consider people that responded -- we had to give an invitation to apply to even be considered for Discover personal loan and we have started testing into unsolicited applications although we still are very much -- we have very strict credit criteria to manage the credit well.

So I think that percentage growth rates in that business may decline a little bit but the dollars I think have continued -- of growth have continued to be very strong, that business is now much larger than it was for us a few years ago. So we’re growing off of a lower base, but we're still you know -- our business is growing north of 20% a year.

I'm very happy with the growth rates while managing the credit and the yield..

Who is the competition? Are you seeing incremental competition there?.

Well you mention the P-to-P. They started P-to-P, I don't think they really are anymore but there are some very fast growing and very aggressive kind of non-traditional bank players and some of the more traditional banks are also perking up a bit in this space.

But generally you know I think the last two or three years we think we have been the number one originator of personal loans in the country and we continue to be a very -- it continues to be a very good business for us..

And our next question comes from Donald Fandetti from Citigroup. Please go ahead..

David, I just want to ask broadly on the consumer.

I just wanted to clarify, are you seeing any type pickup in appetite for consumer credit? And if so are you noticing any differential between up and down the credit spectrum and you know are there any -- we have seen a lot of the health, at least on the spend side it's been the affluent and trying to get a sense if you are seeing a broadening out or just a general update?.

As I’ve mentioned before I’ve seen a little bit of a pickup in industry loans and I don't think I am seeing anything real dramatic but I would say the more middle class consumer is typically more likely to revolve some or all of their products and I think what we're seeing is a little bit more confidence by the consumer to revolve some of their debt.

And so I think that's leading to a percent or two faster growth rate for the industry..

Okay, and then Mark on capital I was just curious if you think you will ultimately need some more preferred as you get into 2016. I know that’s further out, but just want to get an update given what we saw at American Express..

Yes we did issue about 575 million back in late 2012 because we only had common equity in our capital structure any significant degree. We didn't include a preferred issuance in our 2014 CCAR and we are still in the planning phases at this point in time obviously for the 2015 CCAR.

So I can't comment on it specifically at this point in time although I would just begin reiterate what we've said before and that is our goal in that CCAR process is to have a prudently aggressive ask, because we fully recognize that our shareholders would like some more capital returns..

And our next question comes from David Ho from Deutsche Bank. Please go ahead..

We talked a lot about competition and the rewards space particularly in the prime revolvers.

How quickly does that extend into pricing and then subsequently terms and conditions?.

Are you talking David, about APR competition?.

Right for spreads and just underlying maybe folks moving down the credit spectrum a little more..

Well I would say I've seen a fair amount of stability in both pricing and credit aggressiveness.

I'm not seeing with very rare exceptions, I'm not seeing people get back into subprime credit cards and I think that the pricing has been pretty stable for the industry in part because people you know (indiscernible) people know that the price they have to set they have to live with for potentially 10 - 20 years and so I think people are being careful to have an adequate spread.

I would also say there has been some consolidation of the industry and the people that are left are probably not going to underprice and I think historically there were some that underpriced and then came back with price increases afterwards..

Okay. And just a follow-up on the higher efficiency ratio target for 2015, how much of that would be a build and marketing spend? It wasn't really mentioned.

Kind of where are the different areas that you will be investing in marketing? Will it be broad based, the launch of checking maybe some new products and how sticky are these compliance and regulatory costs as maybe the new run-rate going forward?.

Yes, I would say we aren't prepared yet to quite break down the components of that growth for next year. I think we just kind of put them into those broad categories and aren't going to attribute them yet.

But I guess without reference to specific numbers what I would say is I think we continue to see great new account acquisition numbers and good loan growth, so I think some continued investment in the marketing space, additional investment in the marketing space is clearly going to make sense both in the card space as well as for certain other products.

The regulatory expenses David, I would tell you bluntly, are sticky, all right? I mean I think there is a new higher level of expectation to which the whole industry is being held. I don't think this is unique to us in terms of what you're hearing on this front.

It's really across the industry that there are much, much higher regulation and compliance expectations and those drive costs. So I would say those are going to be sticky costs going forward..

And your next question comes from Moshe Orenbuch from Credit Suisse. Police go ahead..

I mean there is a lot of talk about more competitive environment and marketing spending and alike, can you just talk about the trajectory of costs to put accounts on the books because I mean that’s been a key competitive advantage of yours in terms of your account acquisition cost..

Moshe, I would say that's been relatively stable for us. I think that we've continued to move more and more to online verses the traditional direct mail and if you do that well that can be a cost savings. I also think that we have invested very heavily in having a differentiated product that appeals more to consumers, has a better pull rate.

So we're continuing to basically make our product more and more appealing so that it's not just pricing as I mentioned before.

It's service, it's brand perceptions, it's a lot of work to create more differentiation and that is helping us to I think sustain an average cost per account that you know might otherwise be under pressure if we didn't do any of those things and just watched the competition come back into the market..

And just as a kind of follow-up, you know the change that you're making in terms of the rewards, forfeiture rewards, should we think about that cost as somewhat additive as we go -- as we think about the level of rewards expense or is that kind of baked into the numbers that you talked about?.

There is two component pieces there. The 185 million is a onetime charge to basically extinguish the reserve that's set up on the balance sheet now that's been built-up over a number of years. The five basis point run-rate expense, yes I think you should think that as a marginal increase in the rewards cost. It probably won't be quite that high.

I think I said it will be up to five basis points or somewhat less than five basis points I think is exactly what I said. Depending upon component parts and pieces we choose so it's going to be very manageable..

And your next question comes from Matthew Howlett from UBS. Please go ahead..

Just on I guess oil prices if they continue to tread lower or stay down here does that have impact on spend volume? And then I guess no one has touched on the private [ph] student lending that appears to be flattish, just didn't know what was going over there and then maybe if you could just comment on the home lending segment where you are -- it seems like margins are starting to turn there and kind of better volume here in the back half of the year into '15?.

Well certainly gas prices all other things equal will depress a bit the sales gain because order of magnitude about 10% of credit card sales tend to be gas prices. So you can kind of multiply through and figure out what the impact is on total sales as gas prices go up or down.

The knock on effect is that if people are paying less on gas then it tends to be somewhat helpful for credit. People may have more discretionary spend to put into other items besides gas. So there may be some off sets but all other things equal it does suppress sales a little bit if gas prices are down.

In terms of student loans as I mentioned, I'm very pleased with the growth that we achieved.

You know we always do report both on the organic portfolio and the acquired portfolio and so obviously the acquired portfolio which was sizeable when we purchased, it will continue to paydown as those students finish paying their loans in full, and so if you look at the organic growth portfolio you know we were up by more than 20% year-over-year.

So that's quite healthy growth..

Just real quickly, any update on the home mortgage segment?.

Home mortgage continues to be a challenge. I think we had -- you know it is slightly suppressing our overall earnings you know maybe a penny a quarter. So it's not a big driver of our bottom line.

It was never a big positive either, but the combination of a difficult business environment and a difficult regulatory requirements make that business challenging. I don't see either of those factors changing any time real soon..

You’re still strongly committed to growing that? I mean could you look at possibly acquisitions? I mean is that something you still feel strongly about when you got into it?.

I would say that we’re still figuring that out. I think that if you look back from -- we would have expected from the time we bought it four years ago to today we would have expected it to be you know further along but there has been a lot of changes, regulatory market, etcetera, since that time.

So we are looking at options of what more do we need to do to make it more significant and a contributor..

And our next question comes from David Hochstim from Buckingham Research. Please go ahead..

Can you just talk about the -- is there a business benefit from eliminating that forfeiture reserve? Can they have lower attrition rates, higher customer satisfaction?.

We think that there is a business benefit, that's why we would be doing it. I think that one of the -- as we research rewards customers are pretty focused on an easy and good redemption process. It gives them more confidence since they earn these rewards that they know they're going to be able to actually redeem it.

And historically our breakage was a much bigger savings if you will for the company. But between our card attrition which has come down to extraordinarily low levels, our delinquency rates which have come down to extraordinarily low levels.

The ease of which we have given people -- we have made it so much easier to redeem through for instance Amazon Instant in any amount, so the breakage has come down to well below -- has come down to five basis points or lower which means we have to kind of say well could we cost effectively satisfy customers even more? And we would expect that both attracting new customers to our franchise as well as not losing customers and getting more wallet share that it wouldn't take much movement in any of those levers to offset five basis points of higher cost..

Okay and then just update us on the rewards checking and rewards for that when they become meaningful show up in same reward line as card rewards?.

Yes, they would..

Are they meaningful yet?.

No, they are not meaningful at this point..

And our next question comes from Ken Bruce from Bank of America. Please go ahead..

My question also relates to what many of the questions are getting at as it relates to rising rewards cost and some of the other competitive dynamic that's playing out.

I guess many financial institutions have suggested that they're willing to erode margins, cannibalize margins in order to improve customer loyalty and growth and as you have noted yourself you’re seeing a pickup in that growth.

I guess I'm wondering at what or how much are you willing to essentially erode your own margins in order to stay on the growth trajectory that you're on? You're operating well above the ROA hurdle, so some of the concern is that this business could quickly become a race to the bottom in terms of pricing competition not on APRs but in terms of rewards cost.

I'm just trying to get a better sense as to how you think that the margin dynamic, the ROA dynamic plays out? How far are you willing to go in order to maintain your growth trajectory?.

Well I would say generally we are seeing people copy us. I mean people don't have the loyalty that we have. Historically people were not as focused on rewards as we've been.

So I think when you look at competitors the big switch is they have moved their marketing from a mix of rewards and non-rewards to now almost all rewards and that would erode their margins whereas we have certainly invested more in cash back bonus [ph], you know a number of years ago we were closer to 80 basis points, we’re now a bit north of 100 basis points of rewards cost.

We have put in place the 5% program. We've got merchant funded rewards which doesn't hit our bottom line but benefits customers.

As Mark mentioned we’re considering reducing breakage which drives up costs but also satisfaction but we’re being very careful do it in a levered and sustainable way so that we never get in the position of having to devalue rewards the way many of our competitors have over time..

I think you know the best fact that I can point to, to kind of underscore what David is talking about is if you look at year-over-year growth in receivables in the card space by far the largest component of that was just regular way spending, all right? So as people building receivables the old fashioned way, going out and using their Discover Card.

So it doesn't feel like we're faced with anything like that kind of a decision at this point..

I guess as you kind of look out, I mean your success has been tremendous in many respects and you have pointed out a number of those.

I guess it feels like the competition has maybe awoken to some of what's going on and I guess I am trying to understand if there is a backdrop for them to essentially become more competitive to the point where you all just are willing to see some of the growth that's maybe out there otherwise..

I would say they woke up 10 years ago. I mean before that, we were pretty much the only game in town on cash rewards and now everyone has one or multiple cash programs, and so I'm not seeing any kind of inflexion point at this point. I just think that we’re -- I think this very competitive rewards competition is not going to go away.

It's the new normal but it has been for quite some time..

And our next question comes from Chris Donat from Sandler O'Neill. Please go ahead..

I wanted to ask on the strategy you’ve had well certainly in the third quarter than in prior quarters, also have -- of basically trading call it a little bit of NIM for extended maturities, is that a strategy we can expect you to continue assuming market conditions remain opportunistic?.

Yes, I think that absolutely is a strategy you would expect to see us continue.

I think we’re just being realists in looking and saying in the future, we are not smart enough to tell you exactly when rates change but we are pretty confident there is really only one direction they can go and a balance sheet is a dynamic thing and continuing to take the right actions as inflows [ph] to make sure we are positioned from an asset liability management and earnings standpoint, the best we can.

Yes we'll sacrifice some current margin right now to make sure we got that right..

And our next question comes from Sameer Gokhale from Janney Capital. Please go ahead..

Just a couple questions, going back to that $185 million charge and some of your commentary, David about I think you referenced the five basis points number as the forfeiture rate currently and if I heard you correctly I think you had attributed part of the decline in the forfeiture rate to improvements in credit quality as fewer charge-offs and so you have more redemptions.

But if you assume that right now we’re at a kind of a trough in terms of charge-offs and then charge-offs while relatively stable are likely to only move higher compared to where they're at now why eliminate all of that reserve now? Why not wait a little bit to see how that plays out? I mean I'm just curious about -- and again I think Mark I heard you say that all of that $185 million was just eliminating all of that forfeiture reserve..

Yes, so a couple things just to level set you before David answers there Sameer, what we said as we could do up to the 185. The 185 would be eliminating all of the forfeiture reserve.

The other thing I would say is that you know we're considering a number of different pieces and there is still a few decisions to be made around that but we wanted to guide you towards you know what it could be. And then I think the other piece of the puzzle is the five basis points you're referencing.

That is the ongoing incremental costs we will incur on our rewards rate as a result of having done that. It's not our current forfeiture rate. And it will actually be somewhat less than that five, I think we kind of hung five out there and said it would be somewhat less than that. We think we can manage that down a little bit.

So there will be some incremental impact but probably not that full five. So that’s just to align all the math there and now I will pass it over to David..

Yes and I would say that we -- while I accept the point that delinquencies are at a low point likely now we don't expect them to go back to what they were for the industry or for us you know five years plus ago.

And other than that the changes in terms of our loyalty rate as well as the changes that we've put in place like the Amazon redemption are more structural changes that we've put in place and we don’t -- if anything we would expect breakage to become less and less as we try to replicate the success of things like Amazon maybe with some other people.

So I don't think that the five basis points is suddenly going to grow to some you know higher number. I think it would be a modest cost for an anticipated good marketing and customer gain..

Okay.

And then you know on a different note you know just going back to your funding mix and deposits, you may have talked a few quarters ago but if you could refresh my memory when you look at the direct-to-consumer verses broker deposits, you know broker deposits have been growing -- direct-to-consumer deposits have been relatively flat and of course DTC [ph] seems to be more economical for you, brokerage, a little more expensive.

So how do you think about that mix going forward and perhaps emphasizing direct-to-consumer more again or should we expect broker to continue to grow as a channel?.

I would say as an organization we would always have a decided preference for the direct-to-consumer because it comes with a customer relationship and that gives us opportunities to cross sell and more effectively serve them.

If you look at the component parts and pieces the direct-to-consumer business -- we built up pretty quickly in the crisis, right, and we built it by being a rate payer.

Over the course of the last 3 to 4 years we’ve gone through a very purposeful exercise to basically reposition ourselves in the rate tables and shake out what I would call our retail capital market depositors sitting in the DTC space. That’s been a big part of what's driven our asset sensitivity we currently have on the balance sheet.

So while DTC looks flat over the course of the last couple years, if you looked at components you would actually see good solid top line growth that isn't quite so rate driven and attrition of the folks with a beta of one or greater out of that book.

The DTC, look it's a cost effective way for us to get some duration in the market place pretty effectively and pretty easily..

Brokered..

Excuse me, the brokered. Thank you, David. I appreciate that. It's a cost effective way for us to get some duration in the market place. And the other thing is we tend to use it as we head into the holiday season as we ramp up and see seasonality in the book as well because it's easy to flex up and then run back off after that period of time also.

So we use it both for duration and we also use it for short term needs..

So at what point do you think you will have that attrition done in the DTC deposit base of the folks with betas more than one?.

I think it's an ongoing process right, because a bunch of that book historically was CDs.

So as those maturities occur and I think you get our CD maturity schedule in our Annual Investor Day packet, you can look back on that one and kind of see what the maturities were coming at us and that will give you a good way to approximate what that rotation looks like..

Thank you. I will now turn the call back over to William Franklin for final remarks..

Thanks Adrian. And thank you everyone for joining us. As a reminder the Investor Relations team will be here this evening to answer any more questions that you have. Everyone have a goodnight..

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