Sep 27, 2012
Executives
Bill Franklin David W. Nelms - Chairman and Chief Executive Officer R.
Mark Graf - Chief Financial Officer, Chief Accounting Officer and Executive Vice President
Analysts
Ryan M. Nash - Goldman Sachs Group Inc., Research Division Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division Eric Beardsley - Barclays Capital, Research Division Donald Fandetti - Citigroup Inc, Research Division Bradley G.
Ball - Evercore Partners Inc., Research Division Andrew McNellis - Evercore Partners Inc., Research Division Kenneth Bruce - BofA Merrill Lynch, Research Division David S. Hochstim - The Buckingham Research Group Incorporated Scott Valentin - FBR Capital Markets & Co., Research Division Richard B.
Shane - JP Morgan Chase & Co, Research Division Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division Matthew O'Neill - Credit Agricole Securities (USA) Inc., Research Division Daniel Furtado - Jefferies & Company, Inc., Research Division Michael P. Taiano - Telsey Advisory Group LLC Henry J.
Coffey - Sterne Agee & Leach Inc., Research Division
Operator
Welcome to the Third Quarter 2012 Discover Financial Services Earnings Conference Call. My name is Sandra, and I will be your operator for today's call.
[Operator Instructions] Later we will conduct a question-and-answer session. Please note that this conference is being recorded.
I will now turn the call over to Mr. Bill Franklin, Vice President, Investor Relations.
Mr. Franklin, you may begin.
Bill Franklin
Thank you, Sandra. Good morning, everyone.
We appreciate all of you for joining us on this morning's call. 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, in our Form 10-K for the year ended November 30, 2011, and in our Form 10-Q for the quarter ended May 31, 2012, which are on our website and on file with the SEC. In the third quarter 2012 earnings release and supplement, which are now posted on our website at discoverfinancial.com and have been furnished to the SEC, 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 morning will include formal remarks from David Nelms, our Chairman and Chief Executive Officer; and Mark Graf, our Chief Financial Officer.
After Mark completes his comments, there will be time for a question-and-answer session. [Operator Instructions] Now it's my pleasure to turn the call over to David.
David W. Nelms
Thanks, Bill. Good morning, everyone, and thank you for joining us.
Before the market opened, we reported quarterly earnings of $627 million or $1.21 per share, driven by continued improvements in credit, robust loan growth and share repurchases. During the quarter, we generated a return on equity of 28% and returned approximately $400 million of capital to shareholders through share repurchases and dividends.
Before I further discuss our third quarter, let me first acknowledge that during the past week, we entered into a consent order with the FDIC and CFPB regarding the previously disclosed matters related to the telephone marketing practices of certain credit protection products. We agreed to provide refunds of approximately $200 million to cardholders who bought the products from December 2007 to August 2011 and to enhance our marketing practices.
We will also pay an additional $14 million in civil monetary penalties. I am pleased that this settlement has been concluded.
All of us at Discover are committed to doing the right thing for our customers. Now let's talk about our third quarter performance.
We achieved strong growth over the prior year as revenues were up 10% and total receivables grew 9%. Credit quality continued to improve for our card business, which, once again, realized historic lows for the over 30-day delinquency and principal charge-off rates.
Another achievement during the quarter was an all-time high level of active merchants generating Discover Card sales, a direct consequence of our acceptance and awareness initiatives. Discover year-over-year sales growth moderated somewhat over the prior quarter, in line with the movements in lower consumer confidence.
August, however, was the strongest month in the quarter, and one thing I am particularly pleased with is that at a time when revolving debt for the industry is roughly flat over last year, we grew our card receivables by 4%. We also continued to grow private student and personal loans, which we expect will offer similar normalized returns to card.
In addition to growing our loan portfolio, we are executing on our strategy to be the leading direct banking and payments company with the launch of Discover Home Loans in June. Acquiring the assets of Home Loan Center from Tree.com allowed us to enter the mortgage business with a low-cost acquisition and an originate and sell model.
During the first 100 days after launch, we originated approximately $1 billion in mortgages through this platform. Our payments business continues to leverage existing assets in unique ways and build upon acceptance achievements.
We have created momentum and established ourselves as a flexible partner in the evolving payments landscape. For instance, in the U.S., we will bring PayPal to the physical point-of-sale at millions of merchant locations currently accepting Discover.
Over the next few quarters, we will be working hard to accommodate PayPal's launch. On the international front, Diners Club added Industrial and Commercial Bank of China, which is the largest Chinese credit card issuer, as a franchisee.
Also, we've recently extended our existing relationship with Russian Standard Bank, the largest Russian credit card issuer, which will now issue and promote Discover-branded cards in Russia. This is the second Discover card agreement outside of the U.S.
We are pleased with our results this quarter, particularly with the momentum we have created through our new payments and direct banking initiatives, as well as our card sales and receivables growth. Now I'll turn the call over to Mark.
R. Mark Graf
Thanks, David, and good morning, everyone. I will begin my comments this morning by focusing on the Direct Banking segment, which earned $963 million pretax this quarter versus $1 billion last year.
Net interest income increased $133 million or 11% over the prior year, driven by asset growth and a higher net interest margin, which was 18 basis points higher than the prior year at 9.44%. Lower funding costs and lower card charge-offs more than offset asset yield compression of 33 basis points from the prior year.
In terms of specifics, card interest yield declined 19 basis points from the prior year to 12.27% due to more promotional price balances, as well as a decline in higher APR balances. Additionally, total yield was further depressed by the acquisition of lower yield student loans during the fourth quarter of last year.
I will remind you that while private student loans do have lower yields, they also have lower charge-offs and operating expenses. Interest expense as a percentage of average receivables was down 47 basis points over the prior year to 2.24% due to the continued benefit from refinancing maturing liabilities at lower rates.
We expect net interest margin to remain elevated through the end of the year due to slower-than-expected yield compression and continued benefits from a favorable funding environment. Other income for the Direct Banking segment was $25 million higher than the prior year mainly due to the inclusion of revenue from Discover Home Loans, our mortgage business launched in June of this year.
This product launch also added to expenses, so I would remind you of our prior commentary that we continue expect -- to expect it to remain relatively immaterial to earnings for some time. Continuing with other income.
Our rewards expense, a contra revenue item, increased to 99 basis points on card sales during the quarter. We're comfortable with this level of investment in the current environment and presently expect the rewards rate to be around 1% going forward.
Another component of other income, protection product revenue, was down from last year, and as we've said previously, we expect this line item to continue to decrease over time. Operating expenses for the Direct Banking segment were up $178 million over the prior year or 29%.
This growth was due to a $94 million increase in expenses for legal reserves associated primarily with the recently concluded FDIC and CFPB settlement, along with expenses related to the Home Loan Center acquisition, higher marketing expenses and higher headcount. To put things in context for you, excluding the increase in legal reserves and the expenses associated with Discover Home Loans, operating leverage would have been flat.
Excluding all nonrecurring items, we would expect expenses to increase sequentially for the fourth quarter due to the timing of certain marketing campaigns. Private student loans, including the $2.4 billion acquisition in the fourth quarter of last year, were up $2.9 billion over the prior year.
We just completed the peak student loan origination season, and we're pleased with the results. Our fixed-rate student loan product, which was launched in May, continues to receive strong interest from borrowers.
Credit card loans were up $1.9 billion, and personal loans were up $675 million from the prior year. Turning to credit.
Credit card delinquency and charge-off rates were, once again, at historic lows for the quarter. The credit card 30-plus day delinquency rate declined 10 basis points and the net charge-off rate declined 36 basis points sequentially.
The over 30-day delinquency rates for student loans increased 26 basis points and the net charge-off rate, excluding purchase credit impaired loans, increased 6 basis points from the second quarter. These credit metrics reflect increased seasoning of the organic portfolio.
The credit performance of both our organic and the purchase credit impaired portfolios continues to be in line with our expectations. The personal loan over 30-day delinquency rate was down 5 basis points and the net charge-off rate for personal loans was down 10 basis points sequentially.
The improvement in card delinquencies and the prospects for future credit performance led to a $182 million loan loss reserve release this quarter. Turning to the Payment Services segment.
Pretax profit increased 31% over the prior year to $49 million. Increases in higher margin point-of-sale volume for our PULSE PIN debit network and higher third-party issuing volume were partially offset by global acceptance- and Diners-related investments.
Segment volumes were up 13% over the prior year, driven by a 17% increase in PULSE volumes and 12% growth in Discover Network third-party issuing volume. As David mentioned, we recently signed several agreements that should contribute, longer term, to volume growth.
Next, I'll touch on liquidity, funding and capital. Our on-balance-sheet liquidity portfolio ended the quarter at $12.1 billion.
Total available liquidity was $29 billion, an increase of $1.4 billion over the prior quarter. The increase was largely driven by opportunistic securitization funding that allowed us to prefund upcoming maturities.
During July, we priced a dual-tranche ABS deal consisting of a $1 billion 7-year fixed-rate tranche, with a coupon of 1.67%; and a $650 million 3-year floating-rate tranche, priced at 1 month LIBOR plus 20 basis points. We will continue to opportunistically fund our business by tapping all of our available channels.
We ended the quarter with a 13.9% Tier 1 common ratio, which was 10 basis points lower than the last quarter, as we continue to grow receivables and deploy capital. Let me conclude with some final comments.
During the quarter, we generated strong earnings through continued credit improvement in the card book, growth in loans and a higher net interest margin. The Payments business leveraged our network and acceptance footprint to enter into a key service provider relationship with PayPal.
We also expanded our Direct Banking product suite by launching Discover Home Loans. And lastly, we continue to deploy capital by repurchasing over 4% of our shares in the last 2 quarters and have $1.2 billion remaining under our existing share repurchase program.
That concludes our formal remarks this morning. So now I'll turn the call back to our operator, Sandra, to open things up for questions and answers.
Operator
[Operator Instructions] The first question is from Ryan Nash from Goldman Sachs.
Ryan M. Nash - Goldman Sachs Group Inc., Research Division
So just on payment protection, now that you've settled with the agencies and refined your practice, can you just help us how we think about that line going forward? I know you've said historically it should migrate lower.
And I know that you have changed some of your practices and pulled back on marketing, so could you just give a sense how we should think about that as we look forward?
R. Mark Graf
Yes, Ryan. It's Mark.
I guess what I would say is we do continue to market the products, but the best guidance I can give you at this point in time is we continue to expect that line item, as you well noted, to decline over time. We're still working through a number of things in that consent order, and until all that's finalized, it's really hard to give you more definitive outlook.
Ryan M. Nash - Goldman Sachs Group Inc., Research Division
Okay. And then I guess I'll ask one follow-up.
Just in terms of the margin, I think you said, Mark, that you think it's going to be elevated from now until the end of the year. But can you help us think of how we should think about the outlook as we look beyond that?
I think you've said as we moved into year end, we should start to migrate towards the 9%. Any change in that outlook?
I know some of the maturity is slow as we look out over the next couple of quarters, but anything beyond just the next quarter or 2?
R. Mark Graf
Yes, I would say we can see a path to an elevated margin beyond just the next quarter or so. I'm a little reticent to say it keeps getting better forever and ever because there can be shocks to the funding environment that change things.
And at some point in time, credit will actually turn on us, and these interest charge-offs won't continue to decline at the rate they have. But at this point in time, Ryan, I guess what I would say is clearly the margin can remain elevated beyond the end of the year.
Exactly how much longer, candidly, remains to be seen.
Operator
And the next question is from Sanjay Sakhrani from KBW.
Sanjay Sakhrani - Keefe, Bruyette, & Woods, Inc., Research Division
I guess the question I have is, one of the more significant intra-quarter items that you guys talked about earlier is the deal with PayPal. I was wondering, David, can you just talk about how we should think about this opportunity strategically for Discover and whether or not we could see more of these types of opportunities as e-wallets evolve in the marketplace.
And then secondarily, just a question for Mark. You talked about the rewards expense kind of staying elevated.
How should we think about that net interchange income line? I mean is that the way to look at it?
David W. Nelms
Well, Sanjay, we've been talking for quite some time about our strategy in the payments area to be the most flexible and best partner for a number of other players. And you've seen us execute that strategy with a number of foreign networks over -- ranging from the Japanese, Chinese, Koreans, to open up our network to their cardholder base and to provide full acceptance across the U.S.
for them. And so one way to think about this is PayPal is entirely consistent with that.
It is different because they have a huge customer base and they are very big online and they're uniquely focused and uniquely positioned. So there won't be -- I don't think there will be any deal exactly like this one because no one else is positioned as uniquely, and in some cases, as well as PayPal because, to some degree, a lot of people are talking about wallets these days and getting into it, but they've been in it a long time.
They've enhanced it and they've got a huge customer base, huge volume online. We're opening up the offline to them and doing it in a way that is backward-compatible with existing terminals and future-ready for all the new technologies that will be deployed at point of sale.
So I expect us to continue executing that strategy. We're very focused and excited about PayPal.
But we will also continue to do different kinds of deals with multiple other parties over time.
R. Mark Graf
Sanjay, it's Mark. With respect to the rewards situation, I would say we're the leader in the cash rewards space in terms of market share, and we will continue to reinvest in our product as you might expect a leader to do to not only protect, but to enhance that position.
In terms of the net interchange revenue line item that you noted, I think that's probably a pretty good way to think about things and about one of the metrics we use to look at things. I would say any of the enhancements we make, we look at the NPV of those enhancements to the products to make sure that they're in the best interest of shareholders over the long haul with all the puts and takes.
And I would expect that, that 1% guidance would result in that net interchange line being roughly flat going forward. It may bounce a basis point or 2 here or there due to some fluctuations in the market or in the actual product offerings quarter-over-quarter, but that's probably a pretty good metric to keep your eye on.
Operator
And the next question is from Eric Beardsley from Barclays.
Eric Beardsley - Barclays Capital, Research Division
In terms of your loan growth outpacing the sales volume growth this quarter, what would you attribute that to? Is that just increased promotional activity?
Or have you seen any changes in customer behavior?
David W. Nelms
Well, I'd say the loan and sales growth were pretty close to each other, and that is different than the last few years when, generally, sales has outpaced loan growth. I would say it could be partly a sign that the deleveraging trend that we've seen may have run its course and there may be less of a difference between sales and loan growth over time, which is not necessarily a bad thing given that most of the income in cards does come from loans versus sales.
And the other thing I would say is there's a lot of things besides just sales that go into the loan growth. And as an example, this very low level of charge-off rate that we're experiencing means it helps support the loan growth beyond what it would be in a time of higher charge-offs and payment rates impact as do promotional rates balances.
Eric Beardsley - Barclays Capital, Research Division
Great. And just one follow-up.
In terms of your percentage of balances that are in your default bucket and promo buckets, could you provide an update on that?
David W. Nelms
Yes. We generally do that, as you know, at investor day, and we'd expect to update it there.
I would just say that our promotional balances, in total, are slightly up from the prior quarter, but not meaningfully so.
R. Mark Graf
Yes, I'd say they remained well below the precrisis levels that you would have seen.
Operator
And the next question is from Don Fandetti from Citigroup.
Donald Fandetti - Citigroup Inc, Research Division
David, I was wondering. The ROAs in the card business remain remarkably strong.
I was just curious if you see any risk from competition in terms of the card deals around the regulatory side. We've all sort of put regulatory in a bucket that looks pretty contained.
David W. Nelms
Well, I would say that there's no doubt that ROAs that we are achieving are well above what our model target is and frankly, above what most competitors, we believe, are at. And so I think over time, as both charge-offs, credit and as well as cost of funds normalize, you would expect ROAs to come back to more normal levels.
That -- and certainly, the competition remains robust in the card business. I don't see a big change, getting more or less.
It's a competitive business. But that being said, it doesn't appear to me that there's going to be any real near-term change, and I think that ROAs, we believe, are likely to remain elevated for, potentially, quite some time.
Donald Fandetti - Citigroup Inc, Research Division
Okay. So you don't really see anything from the regionals or other entrants that would put pressure on yields, near term?
David W. Nelms
This is such a scaled business that it is -- I think it's hard to be competitive and offer all the services, to be cost-competitive, to provide the level of services, the product features. I think that what we see is very robust competition from the handful of players who have enough scale to be huge players in this business.
And so those are the kinds of players that I'm focused on and that we run across every day in the marketplace.
Operator
And the next question is from Brad Ball from Evercore.
Bradley G. Ball - Evercore Partners Inc., Research Division
Could you talk about overall volumes? What was the driver behind the strength in PULSE?
Was there a Durbin impact? Why was Diners volume a little bit weaker?
And was there any FX impact to speak of this quarter?
David W. Nelms
Yes, well, I guess, doing Diners first. There was an FX impact, and certainly, some of the situations in Europe have not been helpful.
And frankly, we've announced a number of new deals in China and Russia and other places that we're quite excited about, but those will take some time to bear fruit. So we -- I don't think that we're going to see a big upturn in Diners Club until some of those things really start to kick in and we get past, hopefully, some of the headwinds that we see right now.
In terms of PULSE, I think that I'm just very pleased with the execution. I think it's pretty consistent with more of how PULSE has executed the last several years.
Really, since we bought PULSE, they've managed to gain share in a very competitive environment. I think in terms of Durbin, it's really too early to tell exactly whether that's going to be helpful or hurtful, frankly, given some of VISA's actions that we've been on record that we're concerned about and that the DOJ is looking into.
Bradley G. Ball - Evercore Partners Inc., Research Division
Okay. We also have a follow-up PayPal question from our Evercore Internet team, Andrew McNellis.
I'll just hand it to him quickly.
Andrew McNellis - Evercore Partners Inc., Research Division
We just wanted to follow up on PayPal. Specifically, are you collecting the standard network fee on each transaction?
And if so, do you see PayPal driving meaningfully more volume on the Discover Network?
David W. Nelms
We obviously wouldn't go into the details of our -- of a confidential deal. But I would say, generally, we would expect to earn revenues based on volume, just like almost any network deal one could imagine.
I'd probably leave it at that.
Operator
And the next question is from Ken Bruce from Bank of America Merrill Lynch.
Kenneth Bruce - BofA Merrill Lynch, Research Division
I'd like to have you address a little bit more on the competition side of the equation. Obviously, today credit is quite good, and your comments are certainly suggesting that you expect it to remain that way.
I guess I would like to understand if you're seeing any changes in terms of the competitive backdrop for underwriting of card balances, if you're seeing any more aggressive activity, any loosening of standards or if there's been really no meaningful change.
David W. Nelms
I would say that I haven't seen a meaningful change on the credit side. And I think in terms of the marketing budgets and marketing levels, I think it may be slightly less robust this year than it was last year, when some of the players had some significant reserve releases and it looked to me like we saw some -- just a huge recovery in direct mail volumes, as an example.
And I've seen evidence that some competitors may be moderating a little bit in that. But generally, it remains robust competition, and I'm pleased that we're able to gain market share, particularly in loans, despite that competition.
Kenneth Bruce - BofA Merrill Lynch, Research Division
Okay. And just if you could reflect a little more.
You've indicated that some of your partners really look at Discover as a strong domestic -- having a strong domestic merchant acceptance footprint. I guess I'd like to maybe have you discuss how you look at the global merchant acceptance footprint, where you think that needs to go in order for Discover to be really viewed as a full global competitor on that standpoint, please.
David W. Nelms
Well, we think we're #3 globally, and I think increasingly people look at us not just as a domestic but as a true global option. And while the PayPal deal starts off as a domestic deal, we're hopeful that, that will actually morph into a global acceptance deal that we certainly would be willing to offer both PayPal and others that option.
We're already doing that with a lot of people. Some of those net-to-net deals that I talked about earlier, like with the Koreans or the Indian one we've done, are in fact opening up our global acceptance network.
And we have made some very significant investments to strengthen our acceptance and really have made big changes in places like the U.K. or other markets.
And so we're very proud of where -- our momentum, as well as our how we are viewed as a -- as really the alternative to the standard kind of deals out there globally.
Operator
And the next question is from David Hochstim from Buckingham Research.
David S. Hochstim - The Buckingham Research Group Incorporated
I wonder if you could just talk for a minute about what's happening. I think you're in the market testing a new card, the Discover it Card.
Just give us a sense of how that's going and what you're discovering so far in terms of customer interest.
David W. Nelms
I would say we are very pleased with our early results from Discover it. It is quite innovative and one of the most different kinds of products across all phases, not just features and service, but the look and feel of the card itself, the delivery.
And I'm optimistic that we'll be in a position to consider rolling that out next year.
David S. Hochstim - The Buckingham Research Group Incorporated
Should that have much of an impact on margins or I mean, the net effect on the P&L?
David W. Nelms
Well, I would say the thing that we most hope is that it will have a good effect on our ability to grow accounts and ultimately, sales and receivables, more than anything.
R. Mark Graf
We are -- I just have to jump in and say we are -- obviously, we view ourselves as responsible stewards of our shareholders' capital, and we're not going to roll it out if it doesn't make economic sense to roll it out. So we are in the testing phase.
It's too early to give you more specific answers to that question until we know more where this is all shaking out.
David S. Hochstim - The Buckingham Research Group Incorporated
Okay, great. And then as a follow-up, you mentioned that August sales, I guess, was the best in the quarter.
Give us a sense of how September -- the first 3 weeks of September compare to August.
David W. Nelms
Yes. I would say September, so far, looks a whole lot more like August than it did the first 2 months in terms of being better year-over-year.
Operator
And the next question is from Scott Valentin from FBR Capital Markets.
Scott Valentin - FBR Capital Markets & Co., Research Division
With regard to returning capital, I think you pointed out this quarter, David, that $400 million returned, about 65% of earnings. How should we think of that going forward?
As a percentage of earnings, how much do you want to return to shareholders per year?
R. Mark Graf
Yes, I think -- this is Mark. I guess what I'd say in respect to that is just preface the comment by reminding everybody, not that you need a reminding, but I just feel I have to do it, that we now have to get any capital actions approved on an annual basis, if you will, as part of the CCAR capital process with the Federal Reserve.
But with that as the backdrop, I think they have sent a pretty clear signal that 30% dividend payout ratios are kind of the maximum that they're looking at in terms of dividends. We are well below that and see meaningful room to increase our dividend over time.
I would say that the repurchases would make up the remainder. We clearly don't have any intention of continuing to run at a 14% Tier 1 common ratio over the long haul.
And I think we've got $1.2 billion remaining under that current repurchase authorization. I think we've kind of provided guidance earlier that we'd expect we would use over half of that $2 billion authorization over the remainder of our fiscal year.
So I would say that's still probably good guidance at this point in time given where we sit right now, absent anything popping up or changing. But over the long term, as we move forward, I think we are going to continue to look for opportunities to deploy and/or return that capital in our shareholders' best interests.
Scott Valentin - FBR Capital Markets & Co., Research Division
Okay, that helps. And then just a follow-up question with regard to the comment earlier.
Rewards -- I'm sorry, marketing expense generally increased with the seasonal fourth quarter. Should it be comparable in size or percentage to what we saw last year?
I think last year was about an 8% increase from -- quarter-over-quarter from 3Q to 4Q. I'm just wondering is that kind of what you're thinking or is there -- do you think there's room to increase even further.
R. Mark Graf
Yes, I think it could be a slightly larger increase than that. I'm not prepared to give really specific numbers at this point in time, but I think it could be somewhat bigger than 8%.
Operator
And the next question is from Rick Shane from JPMorgan.
Richard B. Shane - JP Morgan Chase & Co, Research Division
In going through the master trust filings, one thing we noticed over the last year is an increase both in higher line limits and also, higher FICO scores. It's enough to at least sort of call attention to.
Is that going to be the intention going forward? Are you focused on that higher-end customer and/or how do you feel about that increase in line limit availability?
David W. Nelms
I would say -- it's David -- that I'm a little surprised that you would have seen a difference in 1 quarter. I mean we did a significant securitization during this quarter, so it might have just been some movement in the trust date, as opposed to the overall portfolio as, generally, I would expect a fair amount of stability from quarter-to-quarter.
And I would kind of ...
Richard B. Shane - JP Morgan Chase & Co, Research Division
David, it's over an 8- or 9-month period. I didn't want to suggest it was 1 quarter, I apologize.
David W. Nelms
Okay. Well, we could follow up with you specifically on that.
But I'd say just generally, we have been a prime card issuer, and we are not making any significant moves, either on credit lines or credit quality. We're always enhancing, fine-tuning.
If we find prime people that we can give more lines to, we would do so, but nothing dramatic.
Richard B. Shane - JP Morgan Chase & Co, Research Division
It may just be noise in the data then -- which is a good answer.
Bill Franklin
[indiscernible]
R. Mark Graf
Yes. Just to be abundantly clear though on that front -- thanks, Bill.
I just want to remind everybody, we haven't put new accounts into the trust in a long time. So any movement you're seeing in the trust data is reflective of movement of the underlying line size or the credit quality of the folks who've already been in the trust.
Operator
And the next question is from Chris Brendler from Stifel.
Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division
Two quick questions. One on the domestic cash side, it looked like -- if I back into like cash volume, this quarter was the biggest quarter you've had in cash in a couple of years.
I just wanted -- nothing huge, $2.5 billion or so, but just wanted to see if that was a result of increased promotional activity on your part or increased consumer uptake of balance transfer offers.
David W. Nelms
Well, I would say that we are continuing to try to grow the number of new accounts that we put on and that tends to -- those tend to come with a pretty high percentage of promotional balances initially. So I think it'd probably be mainly reflective of that.
Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division
Any improvement in consumer demand from your perspective, David?
David W. Nelms
I would say a lot of consistency on consumer demand, not seeing big movements one way or another.
Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division
Okay. And my final question would be, on the student lending side, delinquencies ticked up pretty meaningfully this quarter.
I just don't know how I should look at this number. What -- where do we sort of see it's heading on a fully seasoned basis.
I know this portfolio is relatively new. Just give me some parameters to help us think about delinquency rate in the student loan portfolio.
R. Mark Graf
Yes, I would -- this is Mark. I'd point you back to our investor day materials in terms of how we expect that business to perform over the long haul.
What you're seeing in the student book specifically is -- the organic student book specifically is the maturation of that portfolio as the loans begin to be coming to the repayment phase. There's also some seasonality going on there because as graduates come out of the deferral process and go into repayment is when you start to see delinquency get reflected a little bit.
But all of this is consistent with the way we've modeled the behavior internally in terms of giving a long-term guidance on the way that book is going to perform. So I'd direct you back toward that to really think through how you could model this over the long haul.
Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division
Great. Do you think [indiscernible] in line with expectations on your part?
Or is it a little ahead, a little behind? Where are we [indiscernible] can you help us think on your perspective?
R. Mark Graf
Yes, the statistics you're referring to are on the organic student loan book specifically, and they are in line with our expectations.
Operator
And the next question is from Matt O'Neill from CLSA.
Matthew O'Neill - Credit Agricole Securities (USA) Inc., Research Division
I was hoping we could just quickly come back to the PayPal questions. And what I was really looking to get at was, do you think PayPal is primarily focused on the opportunity to sell additional services to merchants versus the pure per-transaction economics as their true revenue opportunity?
David W. Nelms
Well, you'd have to ask PayPal their objectives precisely. But I can say our part in it is to open up our acceptance network and assets to what is a -- has become a very significant customer base that they have developed over time.
Operator
And the next question is from Daniel Furtado from Jefferies.
Daniel Furtado - Jefferies & Company, Inc., Research Division
This should be relatively straightforward. The other income increase in the quarter, my assumption is that was mortgage.
I just wanted to get a confirmation there. And then the second piece is, generally speaking, what has the ramp been on the mortgage origination side?
And I get it that gain on sale margins will have an impact, but generally speaking, what level of originations do you think you need to achieve in order to get past this break-even stage in that business?
R. Mark Graf
Yes, I would -- your assessment is indeed correct. The vast majority of the increase in other income was related to the introduction of the Discover Home Loans to the marketplace this quarter.
I would tell you, again, as we come up the curve in the business and given our usual prudent approach to things, we're not going to jam the pedal to the floorboards anytime soon to try and dominate the industry in the next 3 months. But I would say -- if you wanted just a little peek under the tent, I would say that the business was net contributory this past quarter, but not by very much.
Daniel Furtado - Jefferies & Company, Inc., Research Division
Got you. And -- but there's no necessary -- well, I guess you've already gone through that.
How about the ramp on the originations, has there been any material move there since onboarding the business?
David W. Nelms
Well, as I mentioned, we did about $1 billion in the first 100 days. I think it's too early to talk about a ramp.
We -- this was the first quarter. And I would say that obviously, refinance volumes, in particular, are extremely robust, and the business is benefiting from that.
I think the important thing for us to get to improve our profitability is actually more on the cost side. There's obviously a good number of integration expenses.
We are changing the marketing from -- to much more cross-selling and using the Discover brand versus lead management. And it will take quite some time to get the cost structure down, independent of volume production and that's what we'll tend to -- that's what we're mainly focused on in terms of profitability.
Operator
And the next question is from Mike Taiano from Telsey Advisory Group.
Michael P. Taiano - Telsey Advisory Group LLC
Two unrelated questions. I guess first on the net interest margin expansion.
Mark, could you maybe give us a sense of how much of the improvement was a function of lower charge-offs? And then secondly, on the PayPal relationship, could you give us a sense of whether those transactions on the offline world will be billed as card-not-present transactions and carry a higher interchange fee for the merchant?
R. Mark Graf
Yes. On the net interest margin side of the equation, clearly, I would say a part of it is due to the lower net interest charge-offs.
I would say funding is driving a bigger piece.
David W. Nelms
Yes, and Mike, you can see the net interest and fee charge-offs in the supplement now. We pegged that a few quarters ago, so you can kind of see the decrease.
R. Mark Graf
And then in terms of PayPal, you would -- PayPal will be setting their pricing, and I'm not sure you should even think about it as comparison with something else. I mean, it is going to be PayPal pricing.
So my guess is they're not going to be disclosing that until next year at launch, but you could ask them.
Operator
And the next question is from Henry Coffey from Sterne Agee.
Henry J. Coffey - Sterne Agee & Leach Inc., Research Division
Focusing back on the mortgage business, how should we really think about this? Is it going to be an adjunct to the Discover card relationship like a traditional bank looks at its mortgage business?
Or are you exploring new sort of more dynamic ways to access that market? And then just a sort of a second related question, as you look at the processing challenges, which is a nice way of calling the reps and warranty risk, how have you been able to manage those issues to make sure that every I is dotted and T is crossed, et cetera?
David W. Nelms
Well, I would say that especially early on, we would expect a fair amount of the business to be cross-sell. We have -- about 1/4 of the U.S.
households have a Discover card, a Discover relationship, and so that would be the natural place to start to deliver the same kind of value and service to the mortgage origination business as we've done elsewhere. And I would think about it not as an -- not so much as an adjunct to the card, but as an important pillar in our direct banking strategy.
Mortgages are obviously the largest single consumer loan that -- category. And so as we continue on our journey to be the best direct bank, mortgages, along with credit cards and other products, will be important to fulfilling that vision of extending the Discover brand and capabilities to these other products.
In terms of dotting the Is, crossing the Ts, controls and having modest growth aspirations is very important. Obviously, we looked for 2 years-plus before we pulled the trigger on this particular acquisition, and what we liked was the operation and the foundation on which to build.
And that was critically important to us to make sure that everything was second to none in the industry in terms of doing everything by the book.
Henry J. Coffey - Sterne Agee & Leach Inc., Research Division
Now just kind of a related question, the launch of the full bank. When I can turn on my computer and have everything I'd get from some of the other major banks.
Is that going to be a sort of a gradual process? Or will we sort of see a big jump forward in marketing and sort of a major product launch?
David W. Nelms
I think it will be a gradual. I mean, if you look at -- if you go to discover.com now, what you see is we've added mortgages, we've got student loans, personal loans, credit cards, money markets and CDs with the bank.
And so as we've added each product, we've been expanding the banking suite, if you will, and I think what we've been really pleased with is the fact that while we're still mostly known as a credit card, it's starting to shift. Consumers increasingly are realizing that Discover can actually save them money and provide better value on a whole range of banking products, and so we're going to continue that journey.
Operator
This concludes the question-and-answer portion of today's call. I will now turn the call back over to Mr.
Bill Franklin for closing remarks.
Bill Franklin
Thanks, Sandra. And thanks to everyone for joining us this morning.
If you have any follow-up questions, please reach out to the Investor Relations group and we'll try to help you. Thanks.
Operator
Thank you. Ladies and gentlemen, this concludes today's conference.
Thank you for participating. You may now disconnect.