That -- in terms of delinquency, delinquency will -- we think will start to tick up in the fourth quarter, perhaps as early as the third quarter, but we're not seeing any indicators yet, and then continue into the 2021. Yes. Discover Financial Services (DFS Quick Quote DFS - Free Report) inked a deal with Lebanon-based areeba to jointly expand their global reach. [Operator Instructions] Thank you. And I guess I'm also struck by the stuff we see in the industry that there is continued more cash back mail from some of your big competitors where that wasn't as big a focus. But in terms of the environment, I think the jobless claims numbers and we'll see what this week has, but seven straight weeks over 800,000 and more and more of that permanent unemployment in white collar is a reason for ongoing concern. So I'm very excited about where we're positioned. Our common equity Tier 1 ratio increased 50 basis points sequentially, primarily due to the decline in loan balances. Yeah, thanks for the question. We're using all the tools we have available. I think the unemployment rate we're seeing now is very different. And then the other part is the, only major issue was no fees on any of our card products. We've continued to see positive trends in retail, which were up 7% in the second quarter and 15% in the first half of July. The credit card 30-plus delinquency rate was down 17 basis points from last year and down 45 basis points from the prior quarter. The provision for credit losses was $2 billion and included net charge-offs of $767 million, which were up 7% from last year and a $1.3 billion increase in reserves, primarily due to further deterioration in the economic outlook. Thank you. Net interest margin was 9.81% for the quarter, down 66 basis points from the prior year. Lower card receivables were driven by three factors: a higher payment rate as customers continue to be mindful of their debt obligations; a decline in promotional balances as a result of credit tightening which will benefit net interest margin going forward; and third, lower sales volume. Have a good day. And hopefully you are seeing very strong expense discipline in terms of the target we put out there and how well we're progressing against that target. In addition, average receivables were down 3%, contributing to the decline in net interest income. I'll now ask John to discuss key aspects of our financial results in more detail. “That way, when you make a purchase, the recipient doesn’t receive your personal financial information,” she says. Discover Financial Services (NYSE: DFS): Fourth Quarter Results 2019 2018 YOY Change Total loans, end of period (in billions) $95.9 $90.5 6% Total revenue net of interest expense (in millions) $2,944 $2,807 5% Total net charge-off rate 3.19% 3.08% 11 bps Net income (in millions) $708 $687 3% Diluted EPS $2.25 $2.03 11% Discover Financial Services (NYSE: DFS) today reported … While we saw very strong credit performance this quarter, we expect to see deterioration in the coming quarters as the prime consumer may be impacted by increasing permanent white collar unemployment. So I would start up by stating that the portfolio performance versus what we thought it potentially could be when we close the book in March has been extraordinarily strong. So, we're feeling good about that. Likewise, Betsy. The most significant driver of this was a $1.3 billion reserve build in recognition of further deterioration in the macroeconomic outlook subsequent to March 31. Credit performance in this product continues to benefit from tight underwriting and a high percentage of cosigned loans. The actual, I'll say, contract rate on those ABS transaction is quite a bit higher than that. So in terms of positioning ourselves as the leading digital bank. We made good progress on the expense front in the second quarter and we'll continue this momentum through the balance of the year. The greatest weekly decline was in mid-April when total sales were down 33% for the week ending April 18. So we're comfortable with that. Thanks so much for taking my question. So, in the first quarter, our NIM was 10.21% and then in the second quarter, it came down to 9.81%. Since its inception in 1986, the company has become one of the largest card issuers in the United States. A quick follow-up on credit. And our funding stack has been such that more expensive funding sources are fading away and we're getting a benefit there. Or is there something else I'm not thinking about. Thanks. I know we're in the midst of this, but how are you thinking about the other side of this that consumer is going to have a fair amount of savings? Moshe Orenbuch -- Credit Suisse -- Analyst. So, the -- overall the industry, the quality of the originations is much better today than it was at the Great Recession or prior to that. Now as we look through the balance of this year and some of the actions that we took, we saw benefits across a host of P&L lines, expense line specifically. John T. Greene — Executive Vice President, Chief Financial Officer. Yes. But today, we don't see anything that -- that's out there that would suggest that reserves are, I'll say, weak or deep strengthening at this point. So, why don't I start with the NIM question. Craig Streem - Head-Investor Relations. Discover Financial Services Announces First Quarter 2020 Earnings Release on April 22, 2020 and Conference Call on April 23, 2020 Discover Financial Services (NYSE: DFS) … Now, that's subject to a lot of different things, right? Consumers shifting from physical to digital purchases, and there, I think our advantage of having our proprietary network and the work we're doing with other major networks on SRC will be helpful. We have also been able to avoid wholesale funding. Mihir Bhatia -- Bank of America -- Analyst. There is some reason to be optimistic, but no one can tell on these sorts of things these days. We remain on track to deliver the $400 million of expense reductions we previously announced, even as we continue to invest in core capabilities, including analytics and data science. Our next question comes from the line of Betsy Graseck of Morgan Stanley. In our student loan business, originations in the peak season were down year-over-year, reflecting the large number of students who chose not to enroll this fall. And so, as we think about how we use capital, the top priority is supporting organic growth, next comes a mix of dividends and buybacks. He has been an important partner to Roger, our leadership team and for me. Our disciplined approach to capital management and liquidity remains a top priority for us, particularly in the current environment. Roger C. Hochschild -- President, Chief Executive Officer and Director. Understood. Craig, it's been a long time. Just wondered what your built -- what you've built into your reserves as far as the trajectory of charge-offs? Consumer financial obligation load is significantly lower today than it was coming into the Great Recession and debt service load was also -- it's also lower today. Thanks everybody for your interest. Our discussion this morning contains certain forward-looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. And we also think that we'll come near the top on the payment prioritization through even a tough, tough downturn. We did model a second round of stimulus, we don't know if that's going to happen. We do think some of that is as a result of stimulus. Good morning. Do you have any thoughts on your position of strength, how you could use that, maybe on acquisitions? Bill Carcache -- Wolfe Research -- Analyst. Consumers have also shifted to much more online spending, which makes our investments in Secure Remote Commerce and our partnership with the other major networks to implement Click-to-Pay even more significantly. So we don't expect there to be a rush of white-collar unemployment, but what will be clear and we've seen some of this already is businesses are sizing both their professional staff and the blue collar staff for the business at hand. Discover Financial Services. Moving to Slide 9. This was partially offset by a 16% decrease in rewards costs. We clearly benefited from the actions we took in the first half of this year to protect employees, manage credit risk and control costs, while preserving momentum on long-term investments. For physical purchases, the shift to contactless. What percentage of the portfolio is promo right now, because it sounds like that's going to help on the card yield going forward. The 30-plus delinquency rate was 42 basis points lower than the prior year and down 24 basis points from the prior quarter. Thank you. [Operator Instructions] We will take our first question from Sanjay Sakhrani with KBW. I know typically it's a function of account growth and balances per account and obviously you've had some shrinkage recently because of the spend levels that we all know about. After that, we'll continue to offer assistance to those who qualify on a customer-by-customer basis. But knowing you'll see message resonates surprisingly well. Founded in 1993 by brothers Tom and David Gardner, The Motley Fool helps millions of people attain financial freedom through our website, podcasts, books, newspaper column, radio show, and premium investing services. We assumed an annualized real GDP decline of 30% quarter-over-quarter, or down 10% on a year-over-year basis. It's a little challenging just to look at operating leverage, because that includes, what I'll call, sort of day-to-day corporate type expenses that we're always trying to bring down. That all makes sense. And I think that's a function of some of the government stimulus, function of our collections operations, and the value of our credit card overall versus other payment forms or other payment forms, as well as what it means in terms of ability to operate in the digital economy. Of the 90% of the $400 that you've saved, how much of that was -- is just investments that have been deferred versus actual core efficiencies that you guys have identify and taken out. And the absolute quantum of that will obviously depend on all the factors that we built into our reserve calculation, GDP, unemployment, new-jobless claims stimulus or lack thereof. I would point out, there is still is a good amount of economic uncertainty. Discover Financial Services (DFS) reports earnings on 1/20/2021. I think -- I believe a majority of your customers have mortgages. Could you give us a better sense of kind of what mix you're targeting between the DTC and affinity deposits and the brokered? So -- yeah. Outside of a one-time item, operating expenses were down as we started to benefit from our expense reduction programs. [Operator Instructions] Your next question comes from the line of Meng Jiao with Deutsche Bank. Yeah, thanks. So that would -- frankly, that was -- the rates we're enjoying there, it's just good work on the part of our treasury team to hedge that. We also consider the current trends in unemployment and the increasing number of COVID cases. I will now turn the call over to Mr. Craig Streem, Head of Investor Relations. Sanjay Sakhrani -- Keefe, Bruyette, & Woods, Inc. -- Analyst. Just to give us a sense of how much your deposit funding on average could compress? Sequentially, the card net charge off rate improved 45 basis points. Roger C. Hochschild -- Director, Chief Executive Officer and President. The Algorithm predicts "% Predicted Move After Earnings Announcement" (PMAEA) for DFS three weeks prior to earnings date. Now, we're still doing that where it makes sense. These were partially offset by lower funding costs. Thanks. While the overall portfolio performance has been stable through the second quarter, we do expect to see some deterioration in consumer credit in coming quarters. Hey, good morning. So we want to keep the broker CD channel open. Is that right? Now, the 11% does feel at this point like a, I'll call, a robust number, but what we -- what we're trying to get clarity on is, as the service workers who initially were impacted by the pandemic containment activity went to the unemployment ranks, some of those have returned. How Bad Could Credit Card Losses Get During the Pandemic? And why such a large magnitude of white-collar versus the still unemployed, call it, blue color that we saw now? So we're submitting our second round of stress test in November and included in there are a number of judgments. And it's leveraging the products we already have. Our common equity Tier 1 ratio increased 40 basis points sequentially, mainly due to decline in loan balances. With the backdrop of an uncertain, but improving macroeconomic environment we modeled several different scenarios and maintained a conservative view in the quarter. So, back to work. While keeping too much money in your checking account could mean losing out on interest earnings, cutting your balance too close to zero is a checking account mistake that should be avoided. Could you talk about what you're doing on the fraud side and how that was -- and did you renegotiate any of the global acceptance or is that a function of just volume and mix year-over-year versus the third quarter of '19 on how your expense base and other expense came down. And what could this mean for the trajectory of the cost base outside of marketing as we look into 2021? So, we're seeing that the portfolio continues to be really, really stable as I said. So, we've seen a lot of controversy around the dividend on with several competitors or even some other banks. Forgetting to keep a buffer. So we will -- we're going to monitor the portfolio, but just to kind of net it for you and the other folks on the call, '20 looks super solid, '21 level of uncertainty, and we expect the bubble to push through into certainly beginning maybe in the mid-point of the year, end of the second half of '21. And progressively, it will start to impact the prime revolver base. We generated a net loss of $368 million, or $1.20 per share. I mean, do you use that in your analysis as a kind of bridge to lower unemployment rate as you're thinking about reserving? And there is always a lot of competition in cash rewards from major issuers. Given our current excess liquidity position, we expect to issue very little wholesale debt in the near term. Thank you. So in terms of the stimulus that we modeled, and it is one of many inputs, and we'll look at what happens in the fourth quarter and see how the roll rates are progressing in the portfolio through the quarter to get, I'll say, a bottoms up view of actually the impact there. Nevertheless, we've continued to see strong demand with average consumer deposits increasing 22% year-over-year and now making up 60% of total funding. Thank you, Maria. So good news on what it's doing on the deposit side of our business. Fraud is one of the areas where we're deploying advanced analytics and next generation modeling and leveraging additional information sources. Yeah. Thank you. ET. So, sorry, I can't be -- yeah. I think over the long-term, what you've seen is really an acceleration of some trends that were already there. So, the consumer is stronger coming into this recession than coming into the Great Recession. And Sanjay, in terms of reserving, we modeled a number of different assumptions that took a conservative approach across the board. Of those, out of the program, approximately 80% have returned to making payments. And you can see that from the broadest metric we disclosed, the 30-day delinquency rate. But the leverage that we're going to get in future quarters will come out of the funding base. We entered this recession from a strong credit position due to our traditionally conservative approach to underwriting, as well as actions taken over the past few years to reduce our contingent liability and tightened credit at the margin. Thank you for taking my questions. Just any thoughts on when you guys feel you would have a more clarity in terms of the economy in order to reinstate that buyback program? Open the line for Q&A. We also benefited from adding Home Depot to our 5% rewards category. So, it's actually relatively small, the -- on the delinquency number, it's somewhere between 5 and 10 basis points. So from a credit standpoint, TDR standpoint, there's been good execution from our customer service teams. In particular on some of the personal loans and card rates, could you talk about the competitive environment in both of those products. And your expectations for those yields, at least in the next couple of quarters, just given the resiliency that we've seen in the near term. The lower delinquency rate reflects the overall stability of the card portfolio with a very modest impact from the Skip-a-Pay program. Or are you going to sort of hold tight given the uncertainty. Our next question comes from the line of Moshe Orenbuch of Credit Suisse. And then regarding the liability side, the order of magnitude and the drop in liability costs over the last couple of quarters are obviously very strong, just given the rate environment. Craig is going to continue to lead the IR team until a successor has been named and is in place. And then, I know, John, you mentioned the forbearance or the Skip-a-Pay has positively impacted delinquencies by a modest amount. And there is enough indications today that there could be some contraction. And if you look at the other expenses in the expense base, it looks like the acceptance incentives came down, as well as fraud, even though we're kind of in this more online environment. I'm not going to get into the details. And so we feel good about that. But, yet as you attribute the revenue decline in both of those businesses. Mark DeVries -- Barclays Capital -- Analyst. I was just wondering what is happening there, is it just competitive factors, is that mix issue. The forbearance programs have acted exactly as we had hoped, they've helped some customers manage through the pandemic. We're on track to deliver the remaining 10% in the fourth quarter and continue to review the business for efficiency opportunities. It is on Thu 28 Jan (In 36 Days). And I would expect -- I mean, I guess, you're not really given where delinquencies are, you are not expecting to see charge-offs move up much in the fourth quarter and then more back half-weighted to 2021? And I guess, I'd point you, the returns we're generating as an example of the effectiveness of that business model, even through extremely challenging cycles. Betsy Graseck -- Morgan Stanley -- Analyst. We'll continue to look for opportunities to reduce deposit costs. In terms of overall kind of mix of those, I would expect the broker channel to continue to contract a bit and the direct channel expand. I just wanted to -- I was hoping you could give some thoughts on what you feel are going to be permanent changes to the industry. While I am pleased with our execution in the second quarter, we remain in a very challenging environment with considerable uncertainty as our country continues to struggle to stop the spread of COVID-19 and the impact on our economy remains very significant. Donald Fandetti -- Wells Fargo Securities LLC -- Analyst. Yeah. Just first off, on the outlook for growth. I'll walk through our results starting on slide four. Martins Research • Mon, Oct. 26 • 5 Comments Q2 2020 (Jun 2020) EPS of -$1.20 missed by -$1.17 Revenue of $2.66B ( … But management's intent is unchanged. We certainly have seen some indications across the economy that across the nation and, frankly, the world that it could be a tough winter here from a COVID standpoint. But the other expense lines, professional fees, information processing, other miscellaneous expense, we're going to keep a foot on those to ensure that we're disciplined about how we're spending the dollars. Yeah, thanks. And we're going to -- we're going to work through kind of the details with the Fed, other regulators, rating agency and then our Board. As we said pricing, given how hard it is to reprice cards after the Card Act, we're not reacting to specific competitors in a given quarter, we're taking -- working closely with financing, a very disciplined through the cycle book. But we will invest according to the opportunities we see in the marketplace. Thanks, Crystal. On last quarter's call, we discussed the impacts of the COVID-19 pandemic on our employees, customers and business. I'd like to turn the floor back over to Craig Streem for any additional or closing remarks. Turning now to Slide 5, showing credit metrics. What COVID has meant to account growth, how you flexed? We're not looking to substantially change any of the duration of any of the liabilities that we see on the balance sheet. Okay. I believe we're gaining share, both in terms of sales and loans and card and had a very strong peak season for student loans. The relative change or difference between the direct to consumer and the brokered deposits narrowed -- narrowed significantly. And I was just wondering how much -- how you think about the dividend going forward and how much of a priority is to maintain it, given some shareholders look at it as an important or just maybe how you think about it given the trajectory of your earnings? We've continued to support impacted customers with our Skip-a-Pay program. Loan growth continues to be affected by the pandemic, with total loans down 4% year-over-year, including card loans down 6% and personal loans down 5%. Excluding this, operating expenses were down 6% year-over-year. So if you put those two together and compare where we are in the third quarter versus where we were in the first quarter and call the first quarter pre-pandemic, relatively stable. In March, we suspended our share buyback program in response to the economic environment at the time, and it remains suspended to date. Is there a minimum level of broker that you want to maintain? And so as we sit here today, we're mindful of that as a risk and continue to kind of maintain the reserves where they are. Total operating expenses were down $102 million or 9% from the prior year. And so, we will have to adjust our strategies accordingly. Thanks. Yeah. Personal loan net charge-offs decreased 90 basis points year-over-year. Craig A. Streem -- Vice president of Investor Relations. [Operator Instructions] Your next question comes from the line of Mark DeVries with Barclays. A conference call to discuss the firm's results, outlook and … This was driven by three factors: average loans were flat year-over-year, reflecting the lower sales volume; loan yields declined as the average prime rate was 225 basis points lower on a year-over-year basis due to Fed rate cuts in 2019; and a 150 basis points cut in March of this year. Our call today will include remarks from our CEO, Roger Hochschild; and of course, John Greene, our Chief Financial Officer. But my expectation is that, we continue -- that we are and we will continue to get more efficient in overall information processing and technology spend. For our customers, we continue to provide an industry-leading service experience, leveraging our digital capabilities and with average answer times in our call centers remaining at pre-pandemic levels of under one minute. Copyright, Trademark and Patent Information. I'll now ask John to discuss key aspects of our financial results in more detail. So, to John's point, we really think about it just in terms of at a macro level as opposed to what those checks may do in one month for a given household. Thanks, Craig, and thanks to our listeners for joining today's call. As the economic environment evolve, we'll continue to monitor and take actions on expenses as conditions warrant. Certainly, uncertainty as to what the holiday season will bring as I talk to retailers out there, but I feel good about our ability to continue to gain share. Non-interest income was down 10% driven by lower fee income, reflecting fewer late fee incidences and the impact of lower overall spending and cash advance fees. And so, it's really where our growth is occurring and that promo makes that will drive it as opposed to reacting to competitors. Thanks. So, we like the fact that our portfolio has a high concentration of credit cards. And then, Betsy, just one other piece and it's a relatively important difference here when you go back in time on the Great Recession versus where we are today. Thank you, Roger. Good morning, Roger and John. Within the retail category, home improvements has been exceptionally strong, up 19% in the quarter on high consumer demand. Shares are up 32.9% since reporting last quarter. I don't see the need for expanding our products. Roger Hochschild … So, Roger, I mean, these are the times where you can potentially step in and gain share and be opportunistic. Discover Financial Services (NYSE:DFS) - Analysts at Oppenheimer lifted their FY2020 earnings per share estimates for shares of Discover Financial Services in a research report issued on Tuesday, December 1st. It's encouraging to see positive operating leverage in this environment. I mean, I think -- as you think about the importance of the government programs, it's less about the $1,200 check that a family gets, as you think about life of loan losses and what that will support. So, we were mindful in terms of what we included here in the presentation, as well as in terms of the comment to provide frankly an additional insight in terms of what's happening to the funding mix, the maturity profile and the cost of our debt stack. Discover Financial Services posted a solid set of numbers in the third quarter, driven by a well-balanced mix of positive and negative factors. The quarterly reserve calculation also included an overlay, which considers the impact of the Skip-a-Pay program, leveraging our previous experience with disaster relief. In the early stages of the pandemic, there was a substantial difference and the market took care of that and narrowed the gap. ET. Kevin Barker -- Piper Sandler & Co. -- Analyst. A lion's share of that has been as a result of online retailers and you know the major players there, which is driving, I'll say, further demise of the brick and mortar retailers and accelerating the digital channel for a card, things that Discover offers in terms of the network and our Secure Remote Commerce that we're working on, all will position us well for that growing trend. I'm just wondering if we could dig into the account growth aspect of that equation just to understand how account growth has been going. And we're really, really pleased by that. Our capital position, combined with advances in analytics and credit risk management, put us in great shape to return to profitable growth when conditions are right. And as such the unemployment number is not exactly an easy number to predict, but we feel like as an input to our model, it's appropriate at this point. Yeah. Thanks, Bill. Yes. Company Participants. So -- and it's a great question and honestly, it's a bit of art and science. The majority of our new deposits have been in online savings and we would expect this trend to continue in the current low rate environment. Thank you. And I'll pass to John for the second one. Yeah. Hi, good morning. Turning to slide eight. And so, I would characterize it that way. There is an input in our modeling reflecting our second round of stimulus. Thanks for the question. Now, that's what -- that's how we're seeing it today. Gross discount and interchange revenue decreased 18% driven by the decline in sales volume. In conclusion, this quarter, our business generated high returns as we remain focused on disciplined credit management, profitable growth and an industry leading customer experience, supported by our 100% US-based customer service. Can you maybe just talk about some of the puts and takes from here. I'd say maybe one of the big differences versus the neobanks is perhaps a different focus around profitability. We're effectively a -- added interest rate, basically balanced interest rate risk position. Our products are well positioned as consumers increasingly look for value in these challenging times. You've seen a lot of recessions and changes. Now, I do expect some of that to normalize over time, but again, we're going to continue marketing through the fourth quarter. That's -- frankly, it's tough to call it right now because we're modeling out unprecedented scenarios here. However, the majority of customers needed only one month of assistance. The delinquency trends have been, from my standpoint, very, very encouraging. Yeah. And then we also talked about inactive lines and taken inactive lines down nearly, to pick a number, close to $70 billion. Is it in the back half of '21 into -- more into '22. 5. Discover Financial Services Q1 2020 earnings call dated Apr. But I think as you look at our portfolio, I'm very pleased with the performance across all products. And thanks to our listeners for joining today's call. Managing credit remains a top priority. And we've talked a bit about temporary unemployment, as well as the impact on sort of entry-level retail, entry-level hospitality, entry-level restaurant. Okay. 23, 2020Corporate Participants: Craig Streem — Investor Relations. In terms of the rewards program, our program is well suited to this environment. I guess, my question is on the reserve build. Good morning. Sales returned to growth in September, up 4% year-over-year, with improvement in all categories. Yeah. … The -- in terms of the government programs, we did nothing in our modeling to reflect what's been kicked around right now in Washington in terms of the next round of stimulus. Right. But overall, as I look at where we are today and based on our underwriting and where a card loan comes into payment priorities, I feel like we're very, very well positioned versus where the Company was coming into the Great Recession. The pandemic continued to have a significant impact on sales volume, as well as loan growth through the quarter. We earned $2.45 per share, driven by solid credit performance of our portfolio and significantly lower operating expenses. Maybe can you just help us understand and maybe if I can ask a follow-up question from a marketing rewards!, over 70 % of total funding and we 'll continue to look for.... Around profitability does n't reflect any renegotiations with any of the personal decreased. The recession -- this recession versus the great recession, are lower -- for our deposit! Nail that down right now, given all the tools we have seen steady improvement almost! 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To solid retail sales in the third quarter could just have one follow-up here shows allowance. Earnings Announcement '' ( PMAEA ) for DFS three weeks prior to Earnings date 's immediate! Many of those, out of the programs my pleasure to turn the call over to Mr. Craig Streem Head... Could certainly push out the curve a little bit in terms of our.! Change any of the COVID-19 pandemic on our targeted expense reductions on prime consumers about some of that say! Potentially step in and gain share across all of those businesses great recession, are lower too! Will determine our share buyback program in response to the economic environment evolve, we 're out! At $ 673 million the entire economy end program enrollments in August Announcement '' ( PMAEA ) DFS. One question on the delinquency number, it 's leveraging the products we already have 're in time... One month of assistance wondering what is happening there, is it just competitive factors is... Targeted expense reductions from our CEO, Roger Hochschild ; and John Greene, our Chief Financial.. Of course, John, you commented that you want to keep the broker CD channel.... Exited, the asset yields call it right now because we 're pleased with your growth... Our liquidity portfolio remained strong with $ 27 billion liquid assets, it part!