American Express Company (AXP) Q2 2012 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to the American Express Second Quarter 2012 Earnings Call. [Operator Instructions] As a reminder, this call is being recorded. And I would now like to turn the conference over to your host, Rick Petrino. Please go ahead.

Thank you. Welcome. We appreciate all of you joining us for today'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. The words believe, expect, anticipate, estimate, optimistic, intend, plan, aim, will, should, could, likely and similar expressions are intended to identify forward-looking statements. Factors that could cause actual results to differ materially from these forward-looking statements, including the company's financial and other goals, are set forth within today's earnings press release and earnings supplement, which were filed in an 8-K report and in the company's 2011 10-K and Q1 2012 10-Q report, already on file with the Securities and Exchange Commission. In the second quarter 2012 earnings release and earnings supplement as well as the presentation slides, all of which are now posted on our website at ir.americanexpress.com, we have provided information that describes certain non-GAAP financial measures used by the company and the comparable GAAP financial information. We encourage you to review that information in conjunction with today's discussion. Today's discussion will begin with Dan Henry, Executive Vice President and Chief Financial Officer, who will review some key points related to the quarter's earnings through the series of slides included with the earnings documents distributed and provide some brief summary comments. Once Dan completes his remarks, we will move to Q&A. With that, let me turn the discussion over to Dan.

Okay. Thanks, Rick. So I'll start on Slide 2. Total revenues net of interest expense came in at $7,965,000,000. That's an increase of 5% compared to last year. On an FX-adjusted basis, it's an increase of 7%. Income from continuing operations was $1,339,000,000. That's an increase of 3%. EPS from continuing operations came in at $1.15. That's 7% increase compared to last year. The difference in growth rate between EPS and income from continuing operations are the share buybacks that we've been doing. If you go 2 lines down, you can see that the diluted shares outstanding are down 4% compared to the second quarter of 2011. And return on equity came in at 27%. So moving to Slide 3, these are our second quarter 2012 metrics. Billed business comes in at $221.6 billion. That's 7% higher on a reported basis and 9% higher on an FX-adjusted basis. And throughout, you'll see that FX is having a larger impact on reported results than normal because of the strength of the U.S. dollar. If we were to look back at billed business growth, just to see a trend, if you went back to the second quarter of 2011, on an FX-adjusted basis, we had growth of 15% in billed business. That moved to 13% in the third quarter of last year, 11% in the fourth quarter. It ticked up to 13% in the first quarter of this year. However, it had the benefit of leap year and came in at 12.6%, so round that up. So I view that more similar to the fourth quarter at 11%. But in this quarter, we're 9%. So we are seeing a slowing in the growth rates over, really, the last 4 quarters. So cards-in-force are up to $100 million, up 6% from last year.…

[Operator Instructions] And our first question comes from the line of Craig Maurer with CLSA. Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division: I wanted to inquire about performance on billed business so far in July. And also, if you could comment on -- just looking at domestic billed business, seasonality would dictate growth, link quarter around the 10% range, we're a little off from that this quarter. I was wondering if you could discuss any possible specific places where it might have weakened or if it was just general?

Yes. So I think we're not going to comment on July to-date numbers. I would say, though, that in the second quarter, the growth rate that we saw in June was very comparable to the growth rate that we saw in May. In terms of categories, I would say that we probably saw slower growth in T&E categories than we saw in other categories. But really, the changing growth rates that we saw, as I illustrated on the slides, was really across all of our business lines and really across all geographies. So yes, I would say it was pretty broad-based. Craig J. Maurer - Credit Agricole Securities (USA) Inc., Research Division: And if I can ask one follow-up. Regarding the top line, you had mentioned incentive payments as an offset in discount revenue. We've heard that from you guys a couple of times now. Is there any way that we could think about modeling that? And is it worth our time to figure out how to model that as an offset to pure discount revenue?

So modeling always assumes that the future will be the same as the past, if you use historical information. We have had, over the last several quarters, higher levels of incentive payments. Those are based on new agreements with many of our large corporate clients. That is a business that has very high levels of profitability for us. So despite the higher level of incentive payments, sometimes which are triggered by new agreements, sometimes triggered by corporate customers just spending at higher level. And again, we think they are effectively worthwhile investments because it is a business with very good profitability. But the levels that we have from period to period will kind of depend on the growth in their spending and when contracts are removed.

And next we'll go to the line of Ryan Nash with Goldman Sachs.

Dan, just a follow-up on the prior question. Just in terms of the spend volumes, are you seeing any changes in terms of spending patterns, both here and internationally, whether it's moves from discretionary to nondiscretionary, were there any changes throughout the quarter?

Yes. I don't know that there was big shift between discretionary and nondiscretionary. I guess I would just point out that last year in the second quarter, we grew 15%. I don't know that any of our competitors grew at that level. So to the extent you have that kind of growth, when you come to the next year, it's just a higher challenge in terms of growth rates. So given those higher comparables, I think our growth rates remain healthy and are reflective of the fact that the investments that we've made over the past couple of years continue to pay off.

Okay. And then just on the capital, so you've now repurchased $2 billion for the year, and I'm guessing some of this quarter was a catch-up from last quarter, but how do we think about for it over the next 3 quarters, given what your CCAR allotment is? And I know you've talked in the past about having some safer acquisitions, but it seems like we've been pretty quiet on that front. So I just want to think about how we should think about the path over the next 2 or 3 quarters. And second, now that we've gotten the NPR from the regulators, any sense of what the all-in Basel III capital level looks like?

Okay. So as you say, from the balance of the year, we have approvement based on our submission to buy back $2 billion more through the end of the year. We could afford to do modest levels of acquisitions and still buy back $2 billion more. If we had acquisitions at higher levels, then we would moderate the buybacks accordingly, which is, I think, very consistent with what we've said our plan would be as we to go through the course of this year. So no really -- no change there. In terms of new Basel information, what I remind you of is that we have our ratios calculated under Basel I, right? We are still in the process of developing what they would be under Basel II, so we don't have that information yet. But the impact in this quarter of going from Basel I to Basel III is approximately 30 basis points. It varies from quarter-to-quarter, but has generally been in the kind of 20- to 80-basis-points range, depending on quarter. This quarter it was about 30 basis points.

And our next question comes from the line of Don Fandetti with Citigroup.

Dan, I hope you could talk a little bit about, post the MOU merchant settlement, if you can kind of remind us what you allow in terms of surcharging and what the potential impact might be going forward?

Okay. So I think, as most people know, we were not party to that litigation. That lawsuit was filed against Visa and MasterCard, and they control about 70% or 80% of the market. A fundamental legal difference is -- between us and Visa/MasterCard is that they have market power. The courts have recognized this and determined that they used that power improperly. American Express does not have market power. We continue to believe that there's no merit to the separate merchant cases that we are involved in, and we believe that we have strong legal defenses. Now as it relates to surcharging, surcharging is not consumer-friendly. The terms and conditions within the settlement agreement that deal with surcharging are very complicated. So given that complexity, we think it's too early to know what the impact of the rule changes might actually have in the marketplaces, but we obviously will monitor the situation and respond appropriately. Now we've seen different reactions in different international markets where surcharging is allowed by law. In Australia, some merchants have introduced surcharging. It was first allowed there back in 2003, and we've been able to respond effectively and continue to operate successfully. In contrast, in the U.K., we've seen very little evidence of merchants surcharging, and that was first allowed by the Thatcher government many, many years ago. The other thing I'd point out and you should keep in mind is that in the United States, there are 10 states that have laws that prohibit surcharging, and these states represent about 50% of our U.S. billings volume. So the Visa/MasterCard rule change doesn't change the terms of our contracts with merchants. We do not prevent merchants from surcharging, but we do continue to require parity treatment so that our cardmembers are not discriminated against at point of sale. And by parity treatment, I mean that if a American Express cardmember is surcharged 100 basis points, any other credit card that is presented would be charged -- surcharged the same 100 basis points.

And next, we'll go to the line of Ken Bruce with Bank of America Merrill Lynch.

I was -- you pointed out in your earlier remarks that the total cards-in-force have been growing quite a bit more in the network partner area, I believe you stated 15% versus 2% proprietary. Can you dimensionalize maybe the differences in the customer base for network partner card versus the proprietary card? What you expect in terms of spend on a partner card versus a proprietary card, anything that we could -- let us maybe better forecast the overall growth on that line.

Okay. So GNS partners, when we speak to them, their products are targeted to their more affluent customers. That's really the design of the product. It's designed to encourage spending, so they are more affluent customers. Now I would say that the average spend within GNS partner customers is lower than the average spend in proprietary American Express cards. But we see the GNS business as a terrific business for us in that it brings more cardmembers into merchants, so it makes the American Express network more relevant in more markets. And often, these are customers that we would not be able to reach other than through the GNS partner relationships. Today, GNS has grown over the years to be a important contributor to income. Now while the dollar profit that we earn on each dollar of GNS-billed business is lower than what we earn on a dollar of proprietary billed business, it requires very little capital, and so the returns are good. The other thing I'd point out is that some of the -- that many of the GNS partnerships operate in both -- some markets are developed markets and some are developing markets, so you need to take that into consideration as well. But net-net, we think it is a good business overall in terms of the contribution and mix.

Yes. And so, just as a follow-up, I guess we just need to think about how that's going to impact the discount revenues versus overall spend. Also, I -- if I remember correctly, the network cards are mostly on a credit card platform versus a charge card platform. Is that correct?

Yes. I mean, so their products and our products run on our network, right? The cards that the GNS partners issue are often credit cards, so that's a difference. But they run on our -- they don't work -- run on a different network. It's the American Express network.

Okay. And maybe just if I could get one last one. On the refunds that your -- that you took the charge on for in the quarter, can you expand on that at all? We've seen some other peers that have taken similar charges, and I guess I'd just like to better understand what those refunds are.

Yes. So these are -- relate to certain changes that we've made in our CARD practices, and the changes generally relate to items around either pricing, exposure or collections. So that's a -- that gives you a little bit more flavor in terms of the changes we're making that led to the refunds that we're making to customers.

And our next question comes from the line of Scott Valentin with FBR Capital Markets. Scott Valentin - FBR Capital Markets & Co., Research Division: Just as you pointed out, billed business during the quarter slowed across the board and across all platforms. So I'm just wondering, you also reiterated the desire to kind of continue to generate positive operating leverage. Just curious how much flexibility there is if we assume a further slowdown in billed business, given the global economic outlook, how much room there is to still continue to cut costs or accelerate the decline in costs?

Yes. So I think when we talk about our desire to contain operating expense, it's really a long-term view. So it's not just related to this quarter or next quarter or related to a potential slowdown. I think it's really a desire to create operating leverage so that expenses are growing at an appropriate level that enable us to have the investment dollars that we desire so that we can drive business over the long term and achieve our financial targets on an average and over time. So the whole notion of operating leverage is really designed as a long-term objective and not necessarily related to a short-term slowdown. We also could react if there was a severe short-term slowdown the way we have historically when there's been a recession. But I would think of those as really, really 2 different types of focuses on operating expense. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. So I mean, given -- assuming a modest slowdown in billed business growth, you'd still expect to generate operating leverage?

It's our goal to continue to generate operating leverage from where we are today, yes. Scott Valentin - FBR Capital Markets & Co., Research Division: Okay. And then just as a follow-up, and you mentioned before M&A, if you do anything that's, I guess, not large, you still have limited buyback as well. Where are you seeing -- I mean, you haven't done anything recently, but where are you seeing the opportunities and where are you focused on M&A?

Yes. I think M&A, we would focus on what I'd describe as kind of bolt-on acquisitions, not very large acquisitions. They would be to enable us to achieve our strategic business objectives and/or be in something that's a very close adjacency. Loyalty partners is a good example of that, where they had a coalition loyalty platform in -- primarily in Germany, but in several other countries, we have a significant amount of loyalty experience and we have global reach, and we thought that was a very good combination. And we'd generally be in areas that would generate fee business going forward. So those would be the general parameters of what we're endeavoring to achieve.

And our next question comes from Chris Brendler with Stifel, Nicolaus. Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division: Just want to get a little more color, if you can, Dan, on the spending trends. I believe you said that June levels were similar to May levels, and it's a little early to get into July. But just looking at the June and May, I was under the impression that your last public update in June call, I think it was, guided to 9% to10% billed business growth through May. So I'm just trying to reconcile how it slowed all the way down to 7% with just the month of June if June was in line with May. Do I have those numbers right?

So I think you have the numbers right. But the 9% to 10% that we related to April and May were FX-adjusted. Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division: Okay. So right in line, then.

The comparable number is 9% for the quarter. Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division: Got it. Right in line, okay. And then the second question would be on the expense side, just getting a little more color on the HR costs, salaries and benefits line. The first time you've had a negative growth rate there since '09. I think you did call out the reengineering, but even if I adjust for reengineering, it's still down on a year-over-year basis versus up 7-plus percent in the first quarter. Anything else that helped cut costs this quarter on a personnel side? Is it lower bonus accruals that go along with this lower spending, or anything else that was one-time in nature that helped the OpEx growth slow so much on the PL -- personnel line?

Yes. So I think if you back out the reengineering, you kind of get close to flat. And then really we were helped, as all the expense lines were, by FX. So if you look at total -- I don't know if it's exactly in salaries and benefits, but on the total, it took the growth rate from total expense to the growth rate from 2% up to 4%. So if you had a similar relationship on salaries and benefits, it would be up about 2%, which is in the realm of what you would expect if you have a constant employee base. And what we had in this quarter was similar to what we had in the second quarter of last year in terms of total number of employees. Christopher Brendler - Stifel, Nicolaus & Co., Inc., Research Division: Okay. And then one final one on the spending side again. Some of those growth rates you gave us for some of the countries within the eurozone. Any color you can give us on how much those have changed and how much of a slowdown you're seeing in countries like Spain or Italy or Germany?

Yes. I think we gave last quarter similar numbers, and I would venture to say that the countries in Southern Europe, if I remember correctly -- let's see, I actually have some data here, so let's see. So I would say each of the countries decreased by 2% or 3%, not much different than what we're seeing overall. Spain decreased a little bit more than that compared to last quarter. I think we said Spain was up 2% in the second -- first quarter this year. So not wide variation, other than Spain. Basically the same kind of trends that we're seeing across the world.

And next we'll go to the line of Bill Carcache with Nomura.

Dan, I believe you said that in the past that you think the 12% range is conservatively the Tier 1 common level that you see Amex operating at, given the uncertainties surrounding Basel II. 12% seems kind of high to me, but I wonder if you can just give us some updated thoughts there in terms of what the right Tier 1 common ratio is that we should be thinking about as your target level going forward.

So initially, when we're coming out of the recession, we said we want to be at least 10% or 11%. I think over the course of the past couple of years, we've had good capital generation. And really, in 2011, we kind of increased from that 11% range up to the 12% range, because in our submission to the Fed in January of '11, we only asked for $2.3 billion of buybacks on the assumption that we were going to use half of the capital generated to do acquisitions, which would mean we'd do $2 billion in acquisitions. In fact, that year we only did $1 billion. So we effectively wound up as a result of that of retaining another $1 billion, and that took us from 11 up to 12%. I think we taken artificially high in the first quarter because we couldn't do share buybacks in the first quarter of '12 until our plan was approved. That was in the middle of March. So I'd expect to see us to trend back towards where we were at the beginning of this year, which was 12.3%. We think our submission was appropriate in terms of the levels of buybacks that we requested. And the fact that the Fed approved that level, I think, is a demonstration of our financial strength and flexibility. So this will evolve over time, and each year, we'll probably get better insight in terms of where we want to be. And as we move forward with the work that we're doing on Basel II, which we may not have better insights until we get to 2014, but when we get those better insights, we'll have a better sense of where we want just to settle in. Now the other thing, I think, that's important is not just a raw number that your Tier 1 common ratio is, but if you look at the stress test and see where your ratio is after that stress, may start to become even more important. And certainly, if you look at the data from this year, you can see that based on the stress test that the Fed decided the assumptions on, we had very limited drop in where the Tier 1 common was in that stress, which was different than many others. So I think people start to look at that. And that will be something we'll have to consider when we ultimately set where we decide to hold Tier 1 common ratio.

Okay. And as a follow-up, can you talk about what happened with the bluebird product at Walmart? If you just give a little bit more color there? And I believe you guys have talked about the -- converging all of your prepaid offerings under one platform. I believe that was the Serve platform. Can you update us on where we are on that and whether that's -- bluebird had anything to do with that convergence?

So we do have a plan to move our reloadable prepaid product onto the Serve platform within the next couple of quarters. That doesn't have anything to do with bluebird, but it is a excellent use of the Serve platform for business that we think will be growing, and a business where we think we have a very good product in the marketplace compared to the competitions. So as it relates to bluebird, American Express and Walmart have a great partnership. Our work together on bluebird has moved to a new phase, and we continue to test different points of distribution and marketing messages while also collecting and analyzing feedback for customers who took part in our pilot. And at this time, it wouldn't make sense to speak about any future plans with bluebird, but we appreciate your interest around the bluebird project.

And next, we'll go to the line of Moshe Orenbuch with Crédit Suisse. Moshe Orenbuch - Crédit Suisse AG, Research Division: Have you got any specific plans to reduce the cost per point and how to think about that as we go forward?

So I think the cost per point is something that we're focused on just in terms of -- so the offerings that we put into the program are designed to create value for our customers. We have over 100 different options within the program that are part of what make it an excellent program. And certainly, as we think about adding customers and options, we do think about the overall costs to us. So it's a balance between value to our customers who participate in the Membership Rewards program and the cost of the program in terms of the overall economics of the products that we offer. So for years, we've been focused on the cost per point and endeavored to manage it, and we will continue to do that as we go forward. In this period, it was really not a result of changing the offerings within the program. It was really driven by customer behavior and a change in mix. So in this quarter we just had a shift in mix, really, away from the amount that was being redeemed for airlines compared to what we have had in prior quarters. And that's what really drove the weighted average cost per point down in this given period. Moshe Orenbuch - Crédit Suisse AG, Research Division: And I know you said before that you don't strive for the lowest loss rate, but rather kind of an economic answer. But could you talk a little about why you've got kind 50-, 60-basis-point increase in charge card losses in the first half of this year versus first half of last year?

Yes. So our strategy is to focus on growing spend products, so those would be charge cards, as well as premium lending cards. So as we strove to grow the charge business, to see write-off rates go up a bit is perfectly fine with us as long as we're attracting customer groups that have good long-term economics. And as you know, when you're bringing a lending customer, sometimes it takes 12 to 24 months before the portfolio seasons because people can make minimum payments. In charge card, on the other hand, it's a pay-in-full product, so you see it a lot more quickly. So I think that's part of what drove the increase that we saw through the first quarter. On the other hand, we continue to get focused on what's taking place within our portfolio. And I think that focus is what enabled the write-off rate actually to come down in the second quarter compared to the first. But still, all-in, these are very low write-off rates. And if we can drive the right economics and acquire the right customers, having write-off rates being higher than where they are today are perfectly fine. Moshe Orenbuch - Crédit Suisse AG, Research Division: Great. Just one last very quick thing, and that is the ancillary products that you mentioned in -- are those sold through a third party, or do you sell them directly?

So which ancillary products? Moshe Orenbuch - Crédit Suisse AG, Research Division: The ones that you're talking about having customer rebates before.

I -- so I know -- so I don't know the specific answer to that question. I know we have been focusing on them, and I suspect that at least a portion of them, I think, are sold through our proprietary process. But I don't have a specific split between what's proprietary and what might be with third parties.

And next, we'll go to the line of Mike Taiano with Telsey Advisory Group.

So I just wanted to make sure that I understood your question -- the answer on the surcharging question. So as I understand it, so if Visa and MasterCard were to charge, let's just say, 2% -- or if merchants were to charge 2% on a Visa/MasterCard transaction, your rules would not allow merchants to charge a higher amount than that, even if your cost of acceptance to the merchant is higher?

Our provision does not prohibit surcharging but requires that the surcharging be on a parity basis so that our cardmembers are not discriminated against at the point of sale. So if someone was charging 2% to our customers, then our contracts would require that any other credit card that's presented would be required to have the same surcharge.

Okay. So it's -- they would then have to charge MasterCard or Visa cardholders the same as they're charging you and not vice versa?

No. So our contracts cover our cardmembers, right? The Visa and MasterCard rules cover theirs. So if a merchant has a contract with us, it requires that our cardmembers be charged on parity, as I just described, with what -- and that other credit card companies -- other credit cards that are presented would have to have the same surcharge.

Okay, got it. And then just one follow-up on a -- I saw you guys are adopting the EMV standards. Was just curious what you think that impact will be if there is a additional costs that you'll have to incur later this year or early next year on that?

So we're going to start issuing cards that have EMV enabled, and we will convert cards over, over a multiyear period. So the cost of doing that will not be in 1 or 2 quarters but would be over a several year period.

Next we'll go to the line of Bob Napoli with William Blair. Robert P. Napoli - William Blair & Company L.L.C., Research Division: The -- just a comment on the long-term growth model revenue and earnings growth model, if you can. I mean, obviously, your targets are at least 8% revenue growth and 12% to 15% earnings growth. And I think ken suggested looking at 2010 is kind of a base. As we look forward to 2013 and '14, it doesn't seem like the economic trajectory is going to change all that much from here. It certainly doesn't feel like it today. But are you able to -- do you feel good about being able to hit those targets? I mean, you're blowing out your return on equity target pretty significantly. But can you hit those -- the revenue and EPS? Do you feel confident in those targets?

So on average and over time, I would think about a 10-year cycle, not a 3- or 4-year cycle. And clearly, in times where economic growth is slow, you would expect to have slower billed business growth in those periods than when you had a robust period. So when we say on average and over time, I think we've looked at it an extended cycle. And over that cycle, I think we're confident that we can achieve those levels, we can achieve our financial targets. Robert P. Napoli - William Blair & Company L.L.C., Research Division: And then on spend growth, I mean, your -- you had Continental. How much of an effect has Continental's switch to United had on your billed business?

So we had a fair number of initiatives in place last year when the Continental contract expired. We actually were very pleased in terms of what we are able to achieve in terms of retaining customers through those initiatives at the end of the day. And what I would point out is I don't have any specific data on how many customers we may have lost, but what I would say is over the past year, we have continued to build share in the U.S. So in total, we've continued to be successful in the marketplace when you look at the overall population of people who could -- who are using credit and charge cards. And these days, that's our aim is to be successful in terms of financial results and continuing to be able to compete successfully in the marketplace. Robert P. Napoli - William Blair & Company L.L.C., Research Division: Okay. And then just a last question on Serve, if I could. If you could give some update, I mean, you've invested -- I mean, American Express has invested at least several hundred million dollars to date in Serve, and I know that we haven't seen as many new relationships being announced recently, but when can we get some -- I mean, some information on how successful Serve is being? It seems looking at your numbers and the growth of fee income, it really still seems to be pretty irrelevant, and it's hard to forecast any benefit from that significant investment that you've been making over these last several years.

Yes. So I think -- last year was the year we wanted to sign agreements with other businesses that would put Serve in the path of their customers. This year, it's all about getting customers onto the network, and that's what we're focused on. So that's our focus now. In terms of Serve, we are seeing some successful uses of Serve. Certainly by putting our reloadable products on Serve, if we didn't have that platform, our ability to issue the product would have been hampered. We have also entered into agreements in China with Lianlian, where the basis of that is that Lianlian is going to use the Serve platform as part of their mobile pop-up process. So we are seeing spots we're able to use it. I don't think we're at the point yet where we would release financial information, but we continue to make progress against the objectives that we have set for ourselves. Robert P. Napoli - William Blair & Company L.L.C., Research Division: And then I guess as that relates to your fee income targets, I mean, it seems like you're still quite a ways away from hitting your targets on fee income, and it seems like you need to make acquisitions to grow that. Or are you disappointed with the level of fee income growth that you've been able to generate, given the aggressive target?

Yes. So our target is to exit, I think, 2014 at a $3 billion run rate. Last year, we had $1.3 billion in fee income. So we continue to make progress in the fee area and against that target. So to the operator, I would say I'll take one last question.

And that would be from Brad Ball with Evercore.

Dan, what was the amount of the accrual for refunds in the quarter? And had you accrued any in prior quarters?

So we did have an accrual back in the fourth quarter, which we mentioned at that time. As it relates to the accruals in this quarter, we don't plan to disclose the exact dollar amount. We felt that the cost in this quarter were important enough to mention, but not large enough to quantify.

The adjusted other rose by $110 million year-over-year. Is most of that driven by this accrual?

So I would say that there were 2 items that contributed to it. It was this accrual as well as investment impairments that drove it. So those are the 2 big items that are in the increase.

Okay. And then separately, you continue to show spending on lending products that are growing faster than your overall loan growth, and at the same time, you've got historically strong credit quality. And I'm just wondering when will you start pushing a little harder on loan growth and driving up your net charge-off ratio to a more economically reasonable level? At down at 2.2%, it just seems too low to drive the kind of returns and spending volume growth that you have the potential to get here.

So we have never had a target to grow loans, and I don't anticipate that we will in the future. Our focus is to make investments that have good economic returns over time, and they are currently focused on charge card as well as premium lending. So to the extent customers want have the ability to lend and we have the right credit quality, then we want to put investments up against both charge and premium lending, and to the extent we're successful, we will -- may see loan growth increase, but we don't have any specific targets for loan growth. We really target our investments for the greatest economic return over time.

And what would you say is a normalized net charge-off rate?

A normalized charge-off rate. So that's what we're going to have to wait and see, all right? So over the past 10 years, it was about 4.5%. So I feel pretty confident, not going too much out on a limb, that it will be less than that going forward. But exactly where it will go from here will be very dependent on both our strategy as well as customer behavior at the end of the day. All right. All right. So thanks, everybody, for joining the call, and have a good evening.

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