Mar 19, 2008
Executives
David W. Nelms - Chief Executive Officer Roy A.
Guthrie – Executive Vice President, Chief Financial Officer Craig Streem – Vice President of Investor Relations
Analysts
Howard Shapiro - Fox-Pitt, Kelton Inc. Kenneth Posner - Morgan Stanley & Co.
Inc. Christopher Brendler - Stifel, Nicolaus & Company, Inc.
Sanjay Sakhrani - Keefe Bruyette & Wood Inc. Michael Taiano - Sandler O'Neill & Partners, L.P.
Andrew Brutchoff – Oberium Capital Moshe Orenbuch - Credit Suisse Securities LLC Darren Palor - Lehman Brothers Inc. Jeff Feinburg – JLF Asset Management
Operator
Good day, ladies and gentlemen. And welcome to the First Quarter 2008 Discover Financial Services Earnings Conference Call.
My name is Favin. I’ll be your coordinator for today.
(Operator Instructions) I would now like to turn the presentation over to the host for today’s call, Mr. Craig Streem, Vice President of Investor Relations.
Please proceed.
Craig Streem
Thank you, Fav. Good morning everyone.
I want to welcome you to this morning’s call. Appreciate your joining us.
I also want to remind you that we will be hosting a financial community briefing tomorrow morning at the New York Palace Hotel and we will be webcasting that event and the webcast will begin at 8:30 a.m. New York Time and we would certainly encourage you to join us for that.
I want to 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 the company’s Form 10-K for the year ended November 30, 2007, which is on file with the SEC.
In the First Quarter 2008 Earnings Release and Supplement, which are now posted on our web site at DiscoverFinancial.com, and have been furnished to the SEC, we have provided information that compares and reconciles the company’s managed basis 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. Our call this morning will include formal remarks from David Nelms, our Chief Executive Officer, and Roy Guthrie, our Chief Financial Officer, and of course, a question and answer session at the end.
Now it is my pleasure to turn the call over to David.
David W. Nelms
Thanks, Craig, and good morning to all of you. Let me begin by saying that where relevant, we will be talking about results from continuing operations, which excludes items related to the sale and operating results of the UK Business, now reported in discontinued operations.
Overall, our results this quarter demonstrated strong profitability, despite rising credit costs. Continuing operations net income was $239 million, or $0.50 a share, down a bit from last year, as we added $100 million to lost reserves in this year’s quarter versus a $41 million reserve release last year.
This quarter we achieved what we generally expect from our US Card business model in a soft economy. Historically, lower funding costs have tended to offset higher credit losses.
We achieved continued solid growth in US Card sales volume, up 5%, with receivables up 2%, which we believe is appropriate growth in the present environment. Sales growth generally became more concentrated in everyday categories such as groceries, gas, or discount stores with less growth in specialized retail segments such as department stores and home improvement.
This quarter we reduced balance transfer volumes by 43%, which boosted our yield, reflecting higher balance transfer pricing and tighter credit and marketing criteria for balance transfers, given recent market trends. Managed net interest income for the US Card business was almost $1 billion this quarter, up 11%, with a net yield on receivables widening to 8.09% in the quarter, 42 basis points above last year.
Fewer low-rate balance transfer loans more than offset lower pricing on variable rate APR accounts during the quarter. On the credit side, managed charge-offs were 4.37% in the quarter, and our managed 30+ day delinquency rate cut came in at 3.93%.
These two measures reflect the weaker consumer credit environment but remain consistent with our current expectation for a full year average managed charge operate in the range of 4.75% to 5%. We continue to be intensely focused on strong credit risk management and I am very pleased with our strong relative performance over the last year.
The U.S. consumer is dealing with a softer economy, which has implications for card industry credit performance.
However, our consistent prime credit criteria and control of growth over the past several years has positioned us well for a more difficult part of the credit cycle. I will remind you that as recently as last May, Discover achieved its lowest 30+ day delinquency rates in 20 years.
In fact, today only 4% of our balances and 2% of our active customers are 30+ days past due on their accounts. Over the past several years we have focused on geographic regions and customer segments for credit characteristics where consistent with our prime lending approach.
Our receivables growth has not been overly aggressive, so we do not anticipate seeing the same sort of vintage pressure we saw in the 2003 cycle. We will have more to say about credit risk management during our Investor Day presentation tomorrow morning that Craig mentioned.
Now I want to briefly recognize our third-party payments business which turned in another very solid quarter with pre-tax income of $16 million, up 30%, as total debit and credit volume reached over $26 billion, which was up 24% from last year above our long-term 18% target. We continue to be quite pleased with the progress our network businesses are making to grow volumes, profits, and especially acceptance, as we continue implementing our new merchant acceptance model across North America.
Before I turn the call over to Roy I want to briefly comment on our recent announcement to exit the UK Card issuing business. That decision fundamentally reflected the likelihood that the credit and funding environment in that market will not allow us to achieve appropriate return levels in a reasonable time period.
The UK Office of Fair Trading has cleared that sales transaction as of March 7 and we are on track for a closing during our second quarter. At this time I would like to turn the call over to Roy Guthrie for his comments.
Roy A. Guthrie
Okay, thank you, David. I think as David commented on some of the continuing operations, I would like to quickly review the financial impacts of the sale of the UK Business so that we can lock together the recorded results with our continuing operations and then get back on track with the discussion of the great quarter he was outlining.
As you can see all in we were at $81 million in the first quarter, or $0.17 a share, including the after-tax loss of $158 million attributable to lower characterizing down of discontinued operations, which in effect is the UK Business. On a per share basis the UK impact was $0.33 so EPS for continuing ops is $0.50 for the quarter.
As David said, it was a very strong quarter reflecting, I think, a lot of balance in the business model and the conservative underpinnings of our approach to risk management coming into this credit cycle, and I will get to that more fully in a moment. But back to the UK, our agreement to sell this card business was announced back in February and as a result we have reclassified the business to discontinued operations and have restated the prior periods’ balance sheets and income statements for comparability.
The first quarter loss from discontinued operations includes $172 million charge to write the assets down to their fair value, which will be the way they are carried on the balance sheet. As you recall, when we announced this transaction last quarter we estimated that loss to be in the $190 million to $210 million range, so recording here $172 million we have somewhat recorded a lower loss there.
The improvement in that loss is driven by several factors. First of all, we benefited from a lower exchange rate compared to November.
Our shut down, or transaction costs, that were recognized in the first quarter were lower and our contract termination costs will be much lower than we had originally anticipated in our estimate. And finally, I think we refined the tax position that we used against the charge.
Discontinued operations also includes net income from the operation as a segment for the quarter of $14 million and those results include a gain--$33 million of pre-tax gain—from the sale of certain assets that didn’t go along with the sale of the business to Barclays. Closing conditions for the transaction have proceeded as we would hope they would and so we continue to expect the sale to close in our second quarter.
The sale of the UK business removes just over 10% of the receivables of Discover and importantly also removes an almost equal amount of funding requirement. Within the sale transaction we will transfer our interest in the Cumbernauld Trust, which has $1.2 billion of asset-backed securities outstanding, as well as $2.7 billion of funding which was sourced from the UK asset-backed commercial paper markets through partner banks.
So, accordingly, I think Discover’s risk profile will be reduced and, in effect, this deal frees up capital to be used in other parts of the business. Looking now at results in each of our segments, the US Card turned in a very strong quarter, earning $375 million pre-tax.
Its higher loss provisions were largely offset by pretty significant increases in net interest income and other income. The net yield on loan receivables improved nicely from last year and looking then to the asset side, we benefited, first of all, from the fixed-rate receivables that are inherent in the portfolio and the sharply lower level of balance transfer activity that you heard David mention.
On the liability side our funding costs benefited from the sharp reduction in Fed Funds target rate, primarily offset by unusually wide spread between LIBOR and Fed Funds. Our asset backs reset off of LIBOR.
That cap historically has been about eight basis points but as you know, into the last couple of quarters we have seen that gap widen to 30 and 32 basis points, respectively, for the last two quarters. And I’m pleased to say that by the end of this first quarter we began to see that spread normalize so if that continues we should see an additional benefit into our spread going forward.
And I think that is a great platform for continues strong yield on into the rest of the year. Other income in the US Card segment also grew substantially from last year, reflecting a $75 million write-up in the residual interest that we maintain in our asset-backed securities and higher merchant discount and interchange revenue that are consistent with the sales growth that you heard David talk about.
Similar to what we saw in the fourth quarter, the residual interests were written up largely due to the lower absolute LIBOR rate that we saw at the end of the quarter. Operating expenses in the US Card segment were up just 2% in the quarter, as marketing and business development were up slightly from last year while all other expenses remained relatively flat.
Expense control remains a very strong focus here at the company and we continue to make a lot of progress that we have talked with you about with the tail-end of our separation from Morgan Stanley where we will see expenses relief from discontinuance of their transition service support in the back end of this year. As a final note on the P&L for the quarter, our tax rate you see here of 38.9%--that is running about 1% higher than we saw last year and this is attributable to various state legislation that has been put in place, as well as our adoption of FIN 48 and the provisioning associated with that.
So I would like to guide you to think about this year’s full-year tax rate in the 37.5%—38.5%—excuse me—range, about 1% higher than last year. The last topic I want to cover this morning relates to capital and liquidity.
And a simple measure of capital is tangible equity to managed receivables. And by that measure, our capital has grown from the 9.4% [inaudible] is talking about its spin-off, to over 11% at the end of this first quarter.
We finished the quarter with about $5.3 billion of tangible equity, or 11.5% of managed receivables. Using the spin-off benchmark of 9.4% on the February receivables, this would indicate that we have built about a $1 billion cushion into our balance sheet capital.
That improvement is due to earnings that have been retained in excess of capital requirements of the business, as well as, I think, importantly, the previously mentioned positive results of the UK sale. We have not, as yet, executed any share repurchase activity against the previously announced repurchase authorization, principally because of the pending UK transaction that we’ve already discussed here, as well as conditions that we see in the market today.
So tangible capital, therefore, has continued to grow. In terms of funding, the credit card asset markets so far this year have seen issuance actually higher than a year ago.
We have seen, up through today, $23 billion of domestic credit card ABS issuance. And I think many are estimating that 2008 could be a record year for volume.
However, I would like to point out that there are some pretty significant differences in the two years’ markets. In 2008 we are seeing spreads that are significantly wider, tenors that are shorter, and a buyers’ universe that has significantly narrowed.
It’s important to note, however, that the fundamentals of our issuing trust remain very, very sound. Excess spread from last month was just reported earlier this week for our trust at 8.29%.
So we have continued to be successful in issuing ABS in the public market. $900 million in the first quarter and a $1 billion deal that was launched in the first week of March, both upsized from the initial launch sizes that we had indicated.
These have been complimented by the use of partner-bank conduits and CD issuance to keep all of our funding programs well on track. We closed the first quarter with pretty good contingent liquidity as well.
That comes from three principle sources: number one, cash at $8.3 billion; number two, committed conduit capacity at partner banks representing about $900 million; and thirdly, capacity in our master trust to issue AAA securities representing just over $5 billion. When you add that to the $2.5 billion bank revolver we have in place, we have a total of about $16.7 billion of contingent liquidity, $1.4 billion higher than the last quarter.
So let me conclude by saying I am very comfortable with the balance sheet; it’s well capitalized. I believe we have sufficient funding capacity to continue to grow the business.
And so that concludes my formal remarks and I will turn it back to you, Fav, for the Q & A.
Operator
(Operator Instructions) Your first question comes from the line of Howard Shapiro from Fox-Pitt.
Howard Shapiro - Fox-Pitt, Kelton Inc.
Hi. Thank you very much and congratulations on the quarter.
I wasn’t sure I heard it right; could you just tell us what, again, the capital was freed from the UK transaction, and then, also, what percentage of your managed loans are fixed?
Roy A. Guthrie
Okay, Howard, of that about $1 billion that I cited, I would say between 30% and 40% of that would have been attributable to the UK sale.
Howard Shapiro - Fox-Pitt, Kelton Inc.
Okay.
Roy A. Guthrie
The rest, really, I think, relating to earnings over the periods [inaudible]. And in terms of fixed, we have really not disclosed the fixed rate portion of our domestic receivables, but I would give you some guidance that it would be in excess of 50%.
Howard Shapiro - Fox-Pitt, Kelton Inc.
Okay. And then just one other question.
Where did you see the LIBOR-Treasury spread at the end of the quarter?
Roy A. Guthrie
We saw it—it was very difficult to read at the end of the quarter given the anticipation of LIBOR in the Fed targets—in the Fed reductions. So it is probably a little bit of a misread, but I think that the--we used the forward curves in the IO evaluation, so to the extent that the anticipated reduction in interest rates would build into that over the coming three to four months following the February balance sheet date, it would have been incorporated in the IO calculation.
Howard Shapiro - Fox-Pitt, Kelton Inc.
Perfect. Thank you very much.
Operator
Your next question comes from the line of Ken Posner from Morgan Stanley.
Kenneth Posner - Morgan Stanley & Co. Inc.
Thanks. Good morning.
You know, I think some of the surprise in terms of your results versus where the consensus was had to do with that perhaps people not realizing that the net interest margin would expand in this environment. The Fed just lowered rates by 75 basis points yesterday.
Can you give us a sense as to what that would mean to the margin given that your balance sheet is currently positioned?
Roy A. Guthrie
Well, I think that it is not unlike what we saw last month. So your best guide would be to go back and monitor fourth quarter fall flowing in the first and the results that we saw from that.
Because in effect, it is taking it down—that is pretty much what we saw right on the heels of the 75 basis points that occurred in the first quarter. You know, I think at the end of the day--there’s a number of things you heard David talk about; I might try to articulate on a couple of them—but there’s more than just short-term interest rates at work here.
I mean, there’s clearly the operation of default pricing that associates itself with the underlying performance of the portfolio; there’s the promotional rate discussions that both, I think, David and I made in our formal remarks that in effect gives a lift to the spread; as well as the liability sensitivity that inherently is built in as a market-risk control by our team here. So, a lot of things at work there.
I wouldn’t lay it of on any one of those, but I think that there’s a number of things that perhaps were underestimated by the Street and now we’re saying the fact that we have tried to articulate that there are a lot of built in controls that balance this model during periods of rising stress on the portfolio.
Kenneth Posner - Morgan Stanley & Co. Inc.
And if I could also ask a little bit about the reserves. David mentioned that you built reserves by $100 million.
Can you just tell us where you are in terms of reserves to the owned portfolio, and you know, every company seems to have a different philosophy for reserves, so how would we think about where you want to be reserved going forward?
Roy A. Guthrie
Well, I think that what I would suggest that you—I mean, I think what you will see with Discover is a very consistent application of a reserving policy and I would guide you to follow the 90-30 day balances of the portfolio. You can clearly calculate the reserve rate; we’ve offered it in our statistical supplement.
You see the owned receivables; that’s what the reserve is established against. And I think that you should expect to see those move in lock-step.
Unless we report to you some change in the way we are going to be anticipating portfolio behavior. And in that regard it has been very consistently applied across many, many quarters, beyond—preceding when we became public.
Kenneth Posner - Morgan Stanley & Co. Inc.
Okay. And then my last question, if I may.
Obviously you guys have been embarked on this process of outsourcing the—some of the merchant processing function—to third parties. And my understanding is that could lead to more favorable revenues for Discover, or more favorable balance of revenues across.
And I want to know when we might expect to see that flowing through the numbers?
David W. Nelms
Well, Ken, we will be providing a little more detail tomorrow, at our Investor Day—our first Investor Day—and the head of our network, Harit Talwar, will be one of the presenters, in fact. I would say we are already starting to see some increase in revenue; we’ve already cited the other income has been rising.
In part that is because sales are growing faster than receivables and in part we’re continuing to see some net benefits from effective merchant discount, or interchange, as we switch to the new model—see some benefits. You know, this is very much an implementation here.
We had announced that 95%, by volume, of the acquirers had been signed and we are pleased with the progress of our implementation but certainly not all of the benefit is in our numbers yet, but it is starting to flow in quarter by quarter as we continue to bring the rest of the small merchants online for Discover acceptance across the country.
Kenneth Posner - Morgan Stanley & Co. Inc.
Thank you.
Operator
Your next question comes from the line of Chris Brendler from Stifel. Chris, your line is open.
Please proceed with your question.
Christopher Brendler - Stifel, Nicolaus & Company, Inc.
Thanks. Good morning.
You mentioned in the press release that you had cut back pretty significantly on balance transfer promotional activity. Can you just talk about what are the effects that we should be looking for as you go forward?
Is that going to help the margin as more of your portfolio is not at teaser rate and is there any credit effect from slowing down that activity?
David W. Nelms
Well, Chris, I would say we took the action to pull back on balance transfers for two reasons and I should point out one of the reasons we’re down 43% is because the first quarter of last year was a particularly high quarter. But apart from that, early in the quarter, as Roy mentioned, LIBOR was unusually elevated versus Fed Funds so we did proactively take some action to help reduce—particularly 0% promo rate balances—to help offset what otherwise might have been some yield compression.
Now, the pressure on that has diminished, as Roy mentioned, but that was one of the reasons. But we also took some credit actions as we saw some parts of the country and some consumers pull back from—you know, maybe have some issues in the real estate area.
We wanted to ensure that we didn’t just end up with balance transfers of what might be problem loans for us. And so we took some—we were happy--did become a little more conservation on credit criteria and ensure that we don’t end up with something unfortunate.
Christopher Brendler - Stifel, Nicolaus & Company, Inc.
Okay. And then I guess, on the credit side, as how things trend in the quarter, are you still comfortable with your loss guidance and what do you think the impact will be from the additional tax refund?
Does that mean your guidance . .
.?
David W. Nelms
Well, as we said in the press release, we remain comfortable with the 4.75% to 5% full-year number. We now, obviously, have one quarter of actuals and we also have a strong visibility for particularly the next two quarters, and so our certainty will obviously increase as we go through the year.
In terms of the tax refund, we’re not anticipating any particular impact one way or another. On that I would hope it would be a positive, for consumers and for us.
But it’s a little hard to predict.
Christopher Brendler - Stifel, Nicolaus & Company, Inc.
Okay. And then one final thing.
In terms of transaction volume ex the cash—still pretty healthy 5%--any deterioration of that number within the quarter or are you seeing any signs of slow down in spending in your portfolio as you stand today?
David W. Nelms
You know it’s been a bit uneven. Actually, the weakest time period was the three weeks right before Christmas—during the quarter—and I would say that is consistent with the—that’s when the most discretionary income--or spending happens.
And so then it’s been stronger since that first three weeks, but there are still some consumers who I think are starting to pull back a little bit on spending. So, we were pleased with the overall 5% and it wasn’t that we saw some big tailing off in that number.
Christopher Brendler - Stifel, Nicolaus & Company, Inc.
All right. Thank you very much.
Operator
Your next question comes from the line of Sanjay Sakhrani from KBW.
Sanjay Sakhrani - Keefe Bruyette & Wood Inc.
Thanks. You mentioned a surplus of capital.
I was just wondering—should we expect that you guys will be in the market buying back stock this quarter and in subsequent quarters this year? And, or are there other opportunities to deploy that capital?
Roy A. Guthrie
Sanjay, I think we had tried to indicate a couple of things there in my formal remarks. Maybe it would be worthwhile articulating them again here.
Clearly, with the UK transaction in motion we stayed out of the market. But having said that, I mean, market conditions, as they exist today, are not, I think, as conducive as we would like for them to be for us to aggressively pursue that program.
So I think capital is sort of a complex collection of a lot of things and clearly we have indicated over the term--the long, the intermediate term-- that clearly the authorization we put in place was intended to be a capital management tool to manage the level of capital that we see appropriate against the risk that we see in our business. The evaluation of those are going to be very dynamic and so I think right now I’m suggesting to you that there’s sufficient things going on—I don’t want you to soft-circle the large, aggressive stock repurchase program.
But having said that—actually, I’m not going to give you any guidance because we’re going to publish at the end of the quarter exactly what transpired during the quarter, but I want to make sure everybody understands that we are looking at this thing in a very balanced, very wholesome way and I think one of the things that you can read into the way we run this company is very conservatively and very much in anticipation of contingent things that could occur. And so you are going to see that sort of balance; you will see it in the way we position the portfolio, you will see it in the way we are provisioning for the portfolio; you will see in the way we are managing the segments.
So at the end of the day, I will conclude by saying, yeah, there could be potential uses of it in the form of inorganic uses and those should never be left off of the table but they will be episodic and so we’re not going to really comment on those either.
Sanjay Sakhrani - Keefe Bruyette & Wood Inc.
Okay. And then just, Roy, on the funding side, how much in funding commitments do you have the securitization side and how much in AAA capacity do you guys have?
Roy A. Guthrie
Well, we have--I’ve got about $1 billion committed by banks and I have $5 billion structured in the trust. For AAA.
Sanjay Sakhrani - Keefe Bruyette & Wood Inc.
Okay. And then how much are coming due over the course of the next six months or so?
Roy A. Guthrie
We have about $5 billion in maturities over the remaining year. And most of it is in the fourth quarter.
Half of it—over half of it is in the fourth quarter.
Sanjay Sakhrani - Keefe Bruyette & Wood Inc.
Okay. Great.
And then just one other question. I recall you guys had a large sort of inactive account base.
Are steps being taken to shut those down, or mitigate the risk associated with that?
David W. Nelms
Yes. That’s one of the actions we took--that we’ve started taking over the last few months, is to more aggressively call our long-time inactive accounts, to reduce our contingent liabilities.
Sanjay Sakhrani - Keefe Bruyette & Wood Inc.
Okay. Is that a disclosure we will get tomorrow maybe?
Or sometime soon? Like what the inactive to active account base is?
David W. Nelms
Let me think about that and we will look at when and how we might disclose that.
Sanjay Sakhrani - Keefe Bruyette & Wood Inc.
Okay, great. Thank you very much.
Operator
Your next question comes from the line of Mike Taiano from Sandler O’Neill.
Michael Taiano - Sandler O'Neill & Partners, L.P.
Hi, good morning. I had a question on the portfolio that’s priced at a fixed rate.
How should we think about that in the context of the recent Fed rate cuts? Is there greater risk of attrition on those accounts because of the price of the fixed rate that a competitor could potentially come along and potentially price those loans away from you?
David W. Nelms
Well, a couple of things. One is most promotional rates are fixed rates and so that—those are obviously very attractively priced loans and so those would be a very low risk.
In terms of the other—the rest of the fixed-rate portfolio, these are in accounts that didn’t generally rise as rates went up and generally would tend not to fall significantly as rates fall. So we have not, in past cycles, typically seen a big change in fixed-rate performance up and down.
Obviously at some level of funding costs, it might allow us to take some action on reducing even some fixed rates, but generally we’ve got customers who like the fixed rate and like the fact that across cycles there is a consistent rate.
Michael Taiano - Sandler O'Neill & Partners, L.P.
Okay. Could you give us some quantification on what the breakout is between the fixed rates that are on introductory rates versus the ones that are just permanently fixed?
David W. Nelms
I don’t believe we have published the promo rate. I think in the past we had, at one point, a couple of quarters ago, disclosed that about 60% of our portfolio is considered fixed, generally.
And I think just a general guideline might be that about 1/3 of that might be some type of promotional rate and the other 2/3, roughly, might be fixed APRs on retail.
Michael Taiano - Sandler O'Neill & Partners, L.P.
Okay. And then just a last separate question on expenses.
It looks like your sequential operating expenses declined by about $34 million versus the fourth quarter. Is the first quarter a good runway to use the rest of the year?
Roy A. Guthrie
Well, I think that the—yes, I would say that the first quarter is, generally speaking--and you can see the seasonal flows where, in effect, the first quarter tends to be the lowest quarter, as it was last year, and the fourth quarter tends to be the highest. I would suggest that we will see, probably, a more stable pattern unfold during the course of this year.
And I would like to just reinforce the point that we made earlier about, number one, high priority of the management team; number two, we’re on track to get the Morgan Stanley interim services disconnected midyear to begin to realize the benefits of that on the back end.
Michael Taiano - Sandler O'Neill & Partners, L.P.
Okay. Thanks very much.
Operator
Your next question comes form the line of Eric Goldman from Oberium Capital.
Andrew Brutchoff – Oberium Capital
Hi. This is actually Andrew Brutchoff from Oberium.
I had two questions. First was, regarding the share buy-back that you touched on earlier, you know, the stock was around these levels when you authorized the buy-back back in December, and as you dipped quite a bit lower during the quarter I understand that the transaction was pending but, if you authorized the buy back and the stock is trading at what many would argue was well below where it should be, what would it take—or is there a level at this point where you might be convinced to exercise the buy-back or do you think that the market is simply too uncertain right now?
David W. Nelms
Well--this is David. I would just point out that we have not opened our window period since that authorization was put in place because of, at the time, a potential UK transaction that in fact became a UK transaction, so that the level of stock price has really not entered the equation.
It simply wasn’t an option for us. And I think we also are careful just not to signal and just to use the buy-back more to manage capital as opposed as to trying to time the market.
Andrew Brutchoff – Oberium Capital
I see. Okay.
But the authorization was put in place with the intention of actually using it other than just as a symbolic gesture?
David W. Nelms
Yes. Our intent is to execute toward that $1 billion authorization; it’s a three-year time period so it was not necessarily put in place to execute it all in one year.
But we’re going to continue to monitor and make decisions quarter by quarter, report on those results. And it is still our intent to be in the market at some point during the rest of this year.
Andrew Brutchoff – Oberium Capital
My other question relates to a comment—I haven’t had a chance to speak with you--that was made when the company reported earnings back in December as related to the company’s independence. I was just curious if you could comment on this.
I think the comment that you made was that if the shares were at these levels it ran the risk of becoming a take over target and I just wondered—it was a news story that ran on December 200--if you could elaborate on that a bit. Do you think Discover should be an independent company?
If you can explain what you meant by that, that would be great.
David W. Nelms
I’m not sure that that would be an accurate quote and we generally do not comment on or speculate on that kind of matter.
Andrew Brutchoff – Oberium Capital
Well, the quote I have here is that you could become a target if your stock price is too low, you were recorded as saying in the Bloomberg Story on December 20. I didn’t know if there was any context for that comment, or just get your thoughts on Discover’s independence.
David W. Nelms
I guess I would just point you back to our focus is on delivering and building shareholder value through great operating performance across cycles and I think that our results this quarter demonstrate that. They also demonstrate the fact that we did enter an agreement to sell the UK business, which was the one area where we were not achieving adequate returns on shareholder capital, shows that management is very focused on building shareholder value and doing the right thing.
But our operating performance, through cycles, is what we are focused on delivering.
Andrew Brutchoff – Oberium Capital
Okay. Thank you.
Operator
Your next question comes from the line of Moshe Orenbuch from Credit Suisse.
Moshe Orenbuch - Credit Suisse Securities LLC
Thanks. Roy, just have a quick one and then I have a question after.
But the $5 billion of AAA capacity that you mentioned, I thought that number was a little under $3 billion; you used some of it. Were you able to issue more BBB during the quarter?
Roy A. Guthrie
We did issue BBBs and retained them on our balance sheet.
Moshe Orenbuch - Credit Suisse Securities LLC
So, if you were to securitize the AAAs, does that still get sale treatment?
Roy A. Guthrie
Yes, it does.
Moshe Orenbuch - Credit Suisse Securities LLC
Okay, that’s good. Separately, just going back to the comments both you and David made about the margin.
You’ve got kind of a comparable decline in rates, possibly even a little larger decline in LIBOR, going into the next quarter. You had a low-30s basis point improvement in the margin.
I guess I wasn’t sure how tot interpret the comments that you made about the introductory rate balances. Should we be thinking that you’re going to be doing more of that because rates are lower or the same amount, or less, and the margin improvement should be comparable or higher, or are you going to be doing more of it and therefore it would reverse some of that?
David W. Nelms
This is David. Let me suggest two things: one if in several of our investor presentations we’ve shown some charts that show history during which Discover’s margin has typically widened during times when charge-offs have increased; and we have established our business model to try to have that be true.
And it is developing in that way this particular time and so we would expect some continuing expansion of margin as a result of falling interest rates—cost of funds. I would say this quarter may be a little bit of an aberration because the LIBOR versus Fed Funds was unusually wide and the actions we—and we took unusually aggressive actions on balance transfer to help offset that.
As Roy mentioned, we don’t expect that kind of a spread to continue nor do we expect to have quite the level of reductions and balance transfer over the next few quarters year-over-year; we don’t think that will be as necessary to have the yield and the spread go in the right direction.
Moshe Orenbuch - Credit Suisse Securities LLC
Okay, thank you.
Operator
Your next question comes from the line of Darren Palor from Lehman Brothers.
Darren Palor - Lehman Brothers Inc
Thanks. Most of my questions were answered but I guess just to touch quickly, again, on the expense side—I think there were two specific line items that really dropped off quite a bit, in particular professional fees.
Now it might be seasonal but it went from $94 million down to $73 million. Information process communication fees also—can you just tell me, is that a run rate on those specific lines that we should be using?
Roy A. Guthrie
Well, there is a volatility—and I should maybe just articulate this for the broader group—but those of you that follow the trends in our expenses quarter to quarter, volatility really resides on two lines: the marketing business development and professional fees. And so you are going to see, basically, those two lines sort of move around.
I think at the end of the day, we are—the level of which I think I mentioned some seasonality in the marketing business development stand, so keep in mind that we would guide you to a full-year expense, similar to what we saw there in 2007. And then the rest of these are all being pressed on aggressively as it relates to the expense initiative that we have across the complex here in Chicago and in the field.
So, professional services tends to be a little bit of a bubbler that sort of moves in there. But the volatility on that line is not going to be as significant as what you see in marketing and business development.
So think about the trend lines comment we made earlier, think about the back end of this year enjoying the benefits of moving the office transition from Morgan Stanley services and the guidance that we’ve given you here for marketing business development. I think you will come right on top of where we are going to land.
Operator
(Operator Instructions) Your next question comes from the line of Jeff Feinburg from JLF Asset Management.
Jeff Feinburg – JLF Asset Management
All of my questions have been answered. Thank you very much.
Operator
This does conclude the question and answer session of today’s conference call. I would now like to turn the call back over to Mr.
Craig Streem for closing remarks.
Craig Streem
Thanks, Fav. Thank you all for your interest and we look forward to either seeing you or speaking with you tomorrow during the briefing in New York.
Have a good day. Thank you.
Operator
Thank you for your participation in today’s conference. This concludes the presentation.
You may now disconnect. Have a wonderful day.