Q1 2020 Earnings Call

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Welcome to the Synchrony financial first quarter 2020 earnings Conference call. My name is Vanessa and I will be your operator for today's call. At this time all participants are no listen only mode. 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., Greg Getrag director of Investor Relations, Greg you may begin.

Thanks, operator, good morning, everyone and welcome to our quarterly earnings conference call. Thanks for joining us.

In addition to todays press release, we've provided the presentation that covers the topics we plan to address during our call. The press release detailed financial schedules and presentation are available on our website synchrony financial Dot com. This information can be accessed by going to the Investor Relations section of the website.

Before we get started I want to remind you that our comments today will include forward looking statements.

These statements are subject to risks and uncertainty and actual results could differ materially we list the factors that might cause actual results could differ materially and our FCC filings, which are available on our website.

During the call, we will refer to non-GAAP financial measures and discussing the company's performance.

You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call.

Finally, synchrony financial is not responsible for that does not at lower guarantee the accuracy of earnings teleconference transcripts provided by third parties.

Only authorized webcast are located on our website.

The call. This morning, our Margaret Keane, Brian ones go and Brian doubles, I'll now turn the call over to Margaret.

Thanks, Greg Good morning, everyone.

Today, our country Innerwear, all are facing an unprecedented level of pandemic.

I want to stock price curve cranking all of those working around the clock.

Especially our health care professionals and therapy found is on the front line as well as goes behind the scenes, including our dedicated employees, who are working to serve our customers and partner.

But all of us have been impacted in different ways and we may suffer from sadness. The law I'm also encouraged and inspired by the resolve of our society to come together in this crisis.

I've seen much goodness Southwest Act and community support it is certainly one of the things I Hope continue long. After this is Don I also connect to our employees our partner our customers and our community.

We will continue to do all we can support you.

Global Health crisis is challenging as individuals and as needed.

It is also challenging companies to execute in an extraordinarily difficult environment.

And one more word of thanks here the leaders in synchrony, who have stepped up in so many extraordinary ways through this incredibly difficult time. Thank you.

Our company was founded in a nice cdthirty as we begin financing we figure isn't that great depressing.

And synchrony has faced many other difficult period, most recently the great financial crisis in 2009.

The combination of our heritage strong culture, and our talented associates that will enable us to use our current navigate these uncertain time protect our employees and continue to deliver for our cardholders retailers, Merck and and provided.

Later in the call I will provide greater detail and our response to the coated 19 outbreak, but first let me share with you our results for the first quarter.

First quarter earnings were 286 million a 45 cents per diluted share. This included an increase in provision for credit losses. As a result of this diesel implementation in January.

The increase attributable to see thought was 101 million, where 76 million after tax which reduced EPS by 13 cents.

We generated solid growth in several key areas during the quarter.

On a core basis, which excludes Walmart Myanmar portfolio loan receivables grew 4%, which drove a 5% increase in interest and fees purchase volume increased 6% an average active accounts increased 4%.

The efficiency ratio was 32.7% for the quarter.

We grew deposits over 500 million, a 1% over last year and although we slowed the growth of deposits getting the excess liquidity from the Walmart portfolio sale. We did continue to grow low cost direct deposit at 3% rate over the prior year.

Our direct deposit platform remains an important funding source for our growth and we continue to invest in our bank to help attract new deposit and retain existing customer.

We extended an added partnership we renewed several key relationship and we added to our growing Carecredit network. We continue to be excited and are working closely with Verizon and Ben mouth to launch these new programs during 2020.

While the ultimate launch dates for the program will be dependent on how the current environment develop we anticipate a mid year long horizon and a loss in the second half for venmo.

We continue to remain highly focused on digital innovation accelerating our data analytics capabilities, and creating frictionless customer experiences, which are key the success of our program and winning new relationships.

Driving digital sales penetration is key to our success.

In retail card digital sales penetration was 41% in the first quarter and digital applications were 56% of our total application.

The mobile channel alone grew 34% compared to the same quarter last year, excluding Walmart.

During the quarter, we repurchased 1 billion affect any common stock and paid 135 million or 22 cents per share in common stock dividends.

We are pleased with the strength of our business. However, we did experience a significant reduction in purchase volume from coated 19 in the second half of Mark, which Brian will cover later in the call.

The ultimate impact on this crisis is very difficult to quantify right now with the duration and magnitude still largely unknown. However, we believe we have an advantageous position to navigate through this uncertain time.

Our portfolio is well positioned from a credit perspective, given changes we've made since the great financial crisis. In addition to some of the more surgical modifications. We've made in recent years.

Further our our assays have historically proven to be an effective buffer during times of stress.

We have a partner centric business model and a more nimble than ever giving us the ability to rapidly implementations and enhancements. We have also built a robust data lake that gives us access to information across the business at an unprecedented level combine that with our analytics capability and we have another powerful tool.

So to help our partners managed through this period.

The digital capabilities, we felt which have helped us win important digital partners are another crucial tool empowering our partners across the business to manage through this time by helping them to shift find to online and mobile channel.

Now I would like to spend some time focusing on the actions synchrony has taken for our employees partners and communities.

We have taken these actions in the spirit of assisting the communities in which we live and operate to assist in stemming the global health crisis, while still meeting the needs of our cardholders retailers merchants and provided.

Action, we have taken has been with empathy and consideration, but each constituency and we will continue to act as this crisis evolve.

Our employees are the strength of our company, we moved quickly and decisively to put actions in place that supports the health wellness and safety of our colleagues across the globe.

We are implementing a plan for 100% work from home structure in the U.S. employees from across our company from support functions through our front line contact Center Associates are all working from home. This has allowed us to stabilize our operation and service our customers, while keeping our employees state.

We are assisting our associates by covering the cost of co pay for virtual Doctor visits for any employee who wishes to consult a medical professional and enhancing our benefit to include expanded backup emergency care benefit so that our colleagues have the childcare or elder care support needed. We're also providing.

Financial planning and employee assessments, along with wellness program.

For our contact center associates, we provided a onetime special bonus to thank them for their essential role the airplane in assisting our customers every single day without missing a beat.

In addition, we're setting up an emergency fund to help our associates field was unexpected financial challenges, which may impact them. During this period.

For consumers that are experiencing financial hardship, we have the ability to assist these cardholders during this extremely difficult period.

We will raise fees and interest charges or we can extend promotional financing period.

We will also raise minimum payments on existing balances for certain qualifying accounts.

With those seeking the ability could sandler line unnecessary purchases, we will evaluate credit limits, if they meet our credit criteria.

Many of our partners have been with us for decades, and we have been married to help them grow their businesses. We are now here to help them protected.

We have taken an aggressive approach to ensure we continue to provide our partners and their customers with dependable service and product that they can use during this time of disruption.

Our investments in making all of our digital assets fast and easy to use our helping them to serve their customers and our relationship managers are actively helping them and there has been no disruption to their availability to our partners are agile structure is helping to foster real time solution and our dedicated teams are tire.

Our fleet working to support our partners and their customers.

Communities, where we live and work our such a core part of the fabric of synchronous culture. That's why we're committed $5 million to help local and national organization assist those areas of the country most affected by covert 19.

We will be sporting group by feeding America and yields on wheels in the U.S. as well as organizations in Puerto Rico, India and the Philippines.

Also our employees have contributed numerous hours to synchronize tariff initiative.

Employees have engaged in our communities to assist in making certain protective devices, such as facial using threed printing as well as for encountering math store network of cardholders, who are actively engaged in the so in community, where we have a number of partners who sell sewing machines.

We have also leveraged our cat credit network and synchrony is serving as a location in our communities where people can donate pp E items and we are engaging in the transfer of items as needs to various medical facilities.

We are facing an extraordinary and unprecedented time.

Lets synchrony has the shred the resources and the resolve to fight this global health crisis for our employees partners customers continues.

Having denim business for nearly a century, we have navigated various kinds of economic uncertainty by maintaining our focused on supporting our associates partners and their customers, but also continuing to invest in our businesses for the long term.

I am proud of what actions, we've taken for our constituents and I have confidence that through the strength of our business model and balance sheet. We will continue to navigate this crisis successfully.

While maintaining our focus on a significant opportunities in our business, our long term objective and strategic initiatives.

With that I'll turn the call over to Brian Wenzel to review some of the key business trends, we're seeing the financial performance for the quarter and views on a framework to help considers the impact of coated 19 on our key outlook drivers.

Thanks, Mark and good morning, everyone first let me Echo mortgage thanks for everyone, who is working to keep our communities safe and secure from our healthcare workers first responders to those in grocery stores or working on vaccines.

The selflessness and dedication of these workers is all inspiring and deeply appreciated.

In addition, I want to thank our employees around the world. We're all adjusting to new ways of working to continue to serve our partners and customers. Thank you.

Now turning to our financial results for the first quarter.

I'll start on slide four the presentation.

Before I move into the first quarter results I want to cover some of the early trends, we're seeing from the impact of co remain key.

Purchase volume perspective, as well as key aspects of our business and important to highlight given the current environment. We are now facing.

Slide four shows year over year purchase volume growth for the total company as well as for World sales from our dual and co branded cards for January February March.

Marches split between the first half of them on and then the second half where the impact related to covert 19 increased significantly.

Purchase volume growth was strong through mid March with double digit growth for both total company in world sales volumes.

In the second half in March as mandates increased at the federal and state levels travel Entertainment and had been activity were significantly curtailed and a high number of the non essential retail stores closed.

As a result purchase volume for both the total company and roll sales declined significantly decreasing by 26 and 27% respectively in the second half in March.

The trends are continuing into April.

Looking at the year over year growth rates of world sales by category during the pre travel restriction period defined as a month. The January and then the growth post travel restriction period through the end of the first quarter. We spent changes in spend categories similar to overall industry trends.

Grocery discount drug store span increased significantly post January while restaurant entertainment gas and especially travel declined significantly during the same period.

While restaurants entertainment gas and travel were significantly impacted only 27% in 2019 will sales incurred in these categories.

Obviously these are transitory impact our purchase volume and loan receivable growth going forward.

Yields and the impact is still uncertain given the duration and the magnitude of this pandemic is still largely unknown at this point.

Moving to slide five we highlight the higher quality asset base today versus our 2008 asset base going into the great financial crisis.

This is a direct result of our strategy to improve asset quality through disciplined underwriting and advanced we've made our underwriting processes that had been very effectively managing overall credit quality.

I'd like to highlight various aspects of our credit management program.

First we have a very experienced credit team and we're very disciplined in our approach to underwriting.

Second we control oil underwriting credit decisions and our programs and across our sales platforms. Our credit strategies are tailored to the partner industry, which we operate as unique by channel for origination and account management.

As shown on the left side of the page using Psycho as comparative measure 73% of the portfolio. The FICO score above 660 compared to 61% in 2008.

More importantly in the higher loss generating FICO range of 600, lower we've reduced our exposure to 9% of the portfolio compared to 90% in 2008.

This is a significant improvement in portfolio quality, we should the 12% of the portfolio from balances at or below 660, Psycho to above 660, Psycho with a 4% increase and balances with cycles that are 721 or higher.

As we exited the great financial crisis, we made the strategic decision to improve the credit quality to our portfolio and this is reflected in the quality, where new account origination mix since 2010.

Over 80% accounts, we originated since 2010 cycles above 660, with 45% accounts, having FICO 721 or higher.

Less than 1% of what we originated head fight those that were 600 or lower.

We're also using advanced underwriting techniques and managing the portfolio.

Some examples this or for account acquisition, we're utilizing up to 16 different data sources and more than 4000 attributes to value creditworthiness.

And within the key customer identity.

We are employing and multi algorithmic approach to target specific outcomes.

Credit fraud, synthetic ideas and other malicious behavior as well as leveraging clients using data to use customer engagement with our partners to sign more effective for airlines.

For account management, we're continuing to utilize internal and credit Bureau triggers to dynamically reevaluated customers credit worthiness to manage credit exposure as well as leveraging the latest technology to passively authenticate customers and more selectively target iris behavior.

This is evident in the proof purchase volume mix from the time, we deployed these underwriting techniques in 2016.

The chart in the right hand side of the page shows the proving the purchase volume mix from first quarter, 60, which shows 65% of the purchase volume mix being at a 721 plus FICO for the first quarter compared to 61% in the first quarter of 2016.

Finally, it should be knows our portfolio is well diversified may industry, and we've been growing payment solutions and care credit portfolios at a faster rate than retail card and we won't have any significant geographic concentrations.

In summary, we have substantially improve the asset quality of our portfolio compared to the portfolio had during the great financial crisis, we've developed better tools and capabilities and can deploy underwriting changes more quickly and with greater efficacy than ever before.

Slide six shows your longer term view on how we performed from a loss perspective dating back to a great financial crisis when loss rate for card issuers peaked in 2009.

The general perception is that private label credit cards.

Warm slightly worse than general purpose cards and periods are higher credit losses, but you can see the top chart that our credit performance was relatively in line with general purpose card issuers in the 10% to 11% loss range in 2009 on a managed basis.

One of the keys to the loss experience being similar is that the severity of losses lower brought us due to the average balance being generally lower than general purpose cards.

For the first quarter the average balance per active account was $1171, which is flat to last year.

If you look at this on a risk adjusted yield basis, we outperformed the general purpose court peers by a wide margin through the crisis with a risk adjusted yields running over 700 basis points higher than the peer group.

As we move beyond the cycle and losses have declined our risk adjusted yields outperformance compared to general purpose card issuers has remained over 600 basis points post crisis.

Rcs also provide a buffer this was evident in 2009 and again beginning 2016 through 2018 is credit costs increased as shown in the chart in the lower right hand corner of slide six.

While the driver the counter cyclical nature of our assays or credit related other factors also impact your assays such as program revenue expenses and mix in 2009, Rcs as a percentage of average receivables declined to 1.6%, 64% below the more normalized RC averaged four point.

For a 3% for 2013 through 2016.

The strong risk adjusted yields and counter cyclical nature of Rcs were important elements in our ability to remain profitable through the great financial crisis as both highlight the earnings resiliency of our business model.

The company generated around 1% return on assets at the height of the prices in 2009.

Given the items I've highlighted earlier, while we're not expecting level charge offs, resulting from the current situation to be similar to the great financial crisis. We felt it was important to give you some historical context on the key elements that sets our business apart from others in the industry.

Moving to the first quarter financial results on slide seven.

This morning, we reported first quarter earnings of $286 million for 45 cents per diluted share.

This included an increase in the provision for credit losses as result of the implementation of seasonal in January.

The increase was $101 million or $76 million after tax, which reduced EPS by 13 cents.

We generated solid year over year growth in several areas as noted on slide eight.

On a core basis, which excludes the Walmart in Yamaha portfolios loan receivables were up 4% and interest and fees on loan receivables were up 5% driven by growth in receivables.

On a core basis purchase volume was 6% and average active accounts increased 4% over last year.

On slide eight we've included dual and co branded card purchase volumes and loan receivable balances to drive the level diversification, we have to these products.

Julien co branded cards account for 38% a total purchase volume in the first quarter and grew 8% over prior year. They accounted for 24% of total loan receivables portfolio and grew 6% over the prior year.

Overall, we're pleased with the underlying growth, we generally across the business as I noted earlier the impact to covert 19 accelerated as we move through the quarter with mostly impacted during late in the quarter.

We are expecting a more substantial impact this quarter, but given the duration and the magnitude of still largely unknown. At this point is difficult to provide a more precise forecast of the impacts.

RSC decreased $28 million or 3% from last year.

Our assays as a percentage of average receivables were 4.4% for the quarter at the lower in the range. We expected in the first quarter due to higher credit loss reserve builds.

The provision for credit losses increased $818 million or 95% from last year.

The increase was primarily driven by the Walmart credit loss reserve reduction last year that totaled $522 million higher reserve build in the first quarter.

Partially offset by lower net charge offs accounted for the remaining increase.

The reserve build in the first quarter was $552 million and largely due to the projected impact of coded 19 related losses.

Other income increased $5 million.

Other expense was down $41 million or 4% due to cost reductions from Walmart, partially offset by higher operational losses and expenses related to the covert 19 response.

So overall the company continue to generate solid results in the first quarter outside of the impaction covert 19.

I will take a moment to highlight our platform results on slide nine.

In retail card core loan receivable growth was 3% with solid growth driven primarily by our digital partners.

Other metrics were down driven by the sell the Walmart portfolio.

Payment solutions liver to strong quarter with broad based growth across the sales platform and strengthen home furnishings and only specialty the resulted in core loan receivable growth of 7%.

Interest and fees on loans increased 3%, primarily driven by the loan receivable growth purchased Simon average active accounts increased 2%.

We signed a number of new partners and renewed key partnerships this quarter.

We continue to drive growth organically to our partnerships and card networks.

These networks, along with other initiatives such as driving higher card reuse, which now stands at approximately 30% or purchased by excluding oil and gas that helps us to drive solid results.

Care credit also delivered another strong quarter receivable growth of 7% was led by our dental and veterinary specialties.

Interest and fees on loans increased 9%, primarily driven by the loan receivable growth.

Purchase volume was up 2% energized accounts increased 5%.

We continue to expand our network and the utility record as we've added over 2000, new provider locations to our network during the quarter.

Network expansions helped to drive the reuse rate to 56% purchase volume in the first quarter.

We did start to see the effects of covert 19 on the platform results as Aquari progressed.

In retail card or store closing impacted results. We also saw strong growth in digital purchase volume that helped offset some of the coated 19 impact.

In payment solutions was store closings have less pronounced impact promotional offerings and the growth in areas such as home specialty.

Mitigate some of this impact.

For care credit, we continue to see good performance in areas, such as veterinary partially offset by reductions in elective procedures.

We do expect the effects will carry into the next quarter and be more pronounced as many of the store closings occurred during the latter part of March.

I'll move to slide 10, and cover our net interest income in margin trends.

Net interest income decreased 8% from last year, primarily driven by a 7% decrease in interest and fees on loan receivables due to sell the Walmart portfolio.

On a core basis interest and fees on loans increased 5%.

The net interest margin was 15.15% compared to last year's margin of 16.08%.

The main factors driving the margin performance where.

The decline in loan receivables mix as a percent of total earning assets.

The mix decline from 84.4%, 81.7% driven higher liquidity during the quarter than mainly resulted from the proceeds of the Walmart portfolio sale October of last year.

The 47 basis point decrease in loan receivables yields to 20.67%, primarily driven by the sale the Walmart portfolio.

Partially offset by a 14 basis point decrease in total interest bearing liabilities costs to 2.50%.

Generally driven by lower benchmark rates.

Next I'll cover our key credit trends on slide 11.

In terms of specific dynamics in the quarter I'll start with the delinquency trends.

The 30, plus delinquency rate was 4.24% compared to 4.92% last year and a 90 plus delinquency rate was 2.10% compared to 2.51% last year.

If you exclude the impact of the Walmart portfolio. The 30, plus delinquency rate was down approximately 15 basis points and the 90, plus delinquency rate was down approximately five basis points compared to last year.

Focusing on net charge off trends.

The net charge off rate was 5.36% compared to 6.06% last year.

The reduction net charge off rate was primarily driven by Walmart and improving credit trends.

Excluding the impact of Walmart portfolio net charge off rate was approximately 15 basis points lower than last year.

This was better than expectation around a 50 basis points increase in the fourth quarter net charge off rate of 5.15%.

The allowance for credit losses, as a percent of loan receivables was 11.13%.

Post Cecil implementation, which included a $3.02 billion day, one transition adjustment.

Excluding the effects of Cecil the allowance under the age of blow method would have been 7.34%.

The reserve build the first quarter was $552 million under Cecil.

$451 million under the age of blow method.

Overall reserve provisioning was higher than expected due the impacted Kogan 19, which accounted for most of the reserve build in the first quarter.

In summary, the first quarter credit trends were slightly better than our expectations, excluding the covert 19 impact.

We expect credit trends will be impacted by this as we move forward. The extended the impact is difficult to assess this point given the uncertainty around the duration in the magnitude of pandemic as well as a potential fits from the cures Act and our efforts providing leads to cardholders impacted by cobot 19.

Moving to slide 12, I'll cover expenses for the quarter.

Overall expenses came in at $1 billion down $41 million or 4% from last year.

The decline was driven by cost reductions from Walmart.

This was partially offset by higher expenses attributable to operational losses, and certain expenditures related to our response to covert 19.

The efficiency ratio for the quarter was 32.7% versus 31% last year.

Excluding the impact from operational losses, and the Kogan 18 related expenses efficiency ratio was flat compared to the prior year.

Moving to slide 13.

Over the last year, we've grown our deposits over $500 million or 1%.

This puts deposits at 79% refunding compared to 75% last year.

While we slowed the overall deposit growth in the first quarter, given the excess liquidity from the Walmart portfolio sale in the fourth quarter of last year, we do continue to grow our lower cost direct deposit and a slightly higher 3% pace over the prior year.

Total liquidity, including Undrawn credit facilities was $24.8 billion, which equated to over 25% of our total assets. This is up from 22% last year.

Before I provide detail on our capital liquidity position. It should be noted that we're electing to take the benefit of the transition rules issued by the joint Federal banking agencies in March which had two primary benefits.

First it delays the effects of the transition adjustment for an incremental two years and second allows for a portion of the current pure provisioning under ceases to be deferred and amortized with the transition adjustment.

With this framework we ended the first quarter at 14.3% CPP 100, Cecil transition rules near the same levels last year.

Sure when capital ratio was 50.2% under the Cecil transition rules compared to 14.5% last year, reflecting the preferred stock issuance last November.

The total capital ratio increased 70 basis points as well to 16.5% also reflecting the preferred issuance.

And a tier one capital ratio plus reserves ratio.

On a fully phased in basis increased to 24.1% a 280 basis point increase over the prior year, reflecting the increase in reserves as result of implementing Cecil and the preferred stock issuance.

During the quarter, we continue to execute on the capital plan, We announced last May we paid a common stock dividend 22 cents per share and repurchased $1 billion or 33.6 million shares of common stock during the first quarter.

At the end of the first quarter, we had 366 million of remaining share repurchase capacity of the $4 billion authorized plan for the current capital plan cycle.

Given the current economic uncertainty and being is prudent as possible. We've made the decision to halt further share repurchases honors plants, we have greater visibility of the depth and magnitude of the current environment.

Overall, we continue to execute on the strategy. We outlined previously we're committed to maintaining a very strong balance sheet with diversified funding sources and operating with strong capital and liquidity levels.

In closing, we normally provide updates to our outlook.

Given the number of uncertainties that exists regarding the severity in the duration of the covert 19 pandemic and the countering impacts of actions such as the cares Act came in assistance for customers and ever government and regulatory actions may have is very difficult to assess fields been impacted this time.

As a result, our expectations have changed versus the outlook. We provided in January that guidance should no longer be relied upon.

Since the duration and managed to the current environment is uncertain, we can't provide any ranges around the key outlook drivers for 2020, but I want to provide a framework to help consider the impacts on our key out with drivers.

Regarding loan receivable growth.

Covert 19 has significant impact on the purchased I am, particularly late in the first quarter.

We anticipate continued deterioration of purchase volume on a year over year basis until the situation improves presumably later this year.

What may help mitigate some of this impact is growth in digital and we're well positioned for this through our digital partners as well as leveraging our expertise to help other partners and providers.

The overall net deterioration purchase volume will ultimately impact our receivable growth rate.

When considering net interest margin, we will be impacted by the reduction in prime rates, resulting from the fed rate cuts a.

A reduction in the investment income from our liquidity portfolio as well as a potential impact of forbearance in terms of interest and fee waivers for a temporary period of time.

Partially offsetting the margin compression is expected higher interest income generated from an increase in the number of accounts are evolving in the loan receivable portfolio and lower interest expense as benchmark rates are lower.

Well I should be noted we also share the impacted revenues and funding costs should the our assai.

Regarding our assays. In addition to sharing interest income it backs, we'll also see a more pronounced impact from higher credit costs as we move through the year.

Also as noted in January the impact to see sonar assays will be more fully realized in the second half of the year.

While we expect an increase in net charge off rate as the year progresses. It should be noted the overall portfolio quality credit trends as we entered this pandemic are strong and the tools and capabilities that we have are more bands in the great financial crisis, which were highlighted earlier in the call.

Finally, we also believe higher recoveries will ultimately materialize, partially mitigated the impact the higher losses.

Similar revenue, we also show the impact to higher credit costs through the ourselves.

While we expect reserve builds to be higher than original expectations until we gain more visibility into duration. The severity of the current pandemic, we cannot provide more specific guidance.

Once we have greater visibility will be to better position to define the expected charge off and reserve build expectations going forward.

Regarding the efficiency ratio activity levels will impact revenue and expense levels and we look to mitigate some of this impact through expense reduction opportunities.

We will continue to assess the situation and provide guidance when we had greater visibility into the effects of the current environment.

Fundamentally the business remains strong and is resilient and we go into the situation with the strong balance sheet capital and liquidity position.

With that I'll turn the call back over to Margaret.

Thanks, Brian I'll provide a quick wrap up and then we'll open the call for Kenny.

We continue to believe that the strengthen our business model and the resiliency of our associates will help us navigate this global how crisis.

We are focused on continuing to execute far retailers, Martin and provided and support our core deposit with empathy during this difficult period.

We are focused on execution today, but our focus on continuing to make strategic investments in our business to delve on archives to deliver products and services our track record that beyond that period.

Thank you for participating on the call today and I want to we're hearing your families are very that as we continue to be allocated very difficult situation.

I'll now turn the call back to crack to open up Mckenna.

That concludes our comments on the quarter, we will now begin the QNX session. So that we can accommodate as many of you as possible I'd like to after the testaments to please limit yourself to one primary and will follow up question.

If you have additional questions the investor relations team will be available after the call operator, please start cumulate session.

Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone.

If you wish to be removed from the Q. Please press the pound fine or the hash key.

If you're using a speaker phone you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on your Touchtone phone. Our first question comes from John Hecht with Jefferies.

Morning, guys and thanks very much for the comments.

In the call when John I'm, just I'm just wondering Brian.

You guys cited your volume and sales down about 25, 26% in the second half of March just trying to think about modeling through the near term quarters.

Is that the type of contraction seen thus far through April and how do we think about kind of what you've seen thus far in April.

Yes, Thanks, John and good morning.

From from the back half of March which was down again about 26%. It accelerated slightly so we're we're running in the range down 30% to 35% pretty consistently.

For the first part of for the first part April again, when you think about the will spend categories. We highlighted in the earnings chart, they're very similar with regard to being down and travel gas and entertainment and little stronger in grocery drug store et cetera, but again thats just on the dual card, but the strength of the digital assets, we do have some re.

Retailers that are that are deemed essential that are open and clearly did the digital and E. Commerce is continue to drive it. So it's pretty steady net net low 30% decline year over year.

Okay, great. Thanks, very helpful and second question, just trying to think about.

The context of this versus the great recession you were.

What in your economic models that have driven youre you'd be allowance rentals.

What level of kind of unemployment are you contemplating at this point time or how do we think about the economic.

The economic assumptions relative to your 2009 period.

Yes, sure John Let me, let me kind of go through how we think about how we thought about this quarter and building the CEO reserve.

As you know the economic assumptions very pretty widely across many of the institutions that provide that we don't come up with their own assumptions, we use it external assumptions.

So so given the variation that we saw across many many institutions, we model several different scenarios and look to several different scenarios in how they would perform relative to our book and then we settled in on a set of assumptions from from one.

One place that really looked at a unemployment rate approaching 10% for the second quarters kind of the peak.

And then a second half recovery, where unemployment goes down to around 7% and then it very kind of more gradual decline in 21 and gets back to probably about a 4.5% unemployment.

As you think about in 22.

With that bankruptcies rising about 50% and staying elevator for the next couple of years.

It was also very key assumption in that and then a a significant contraction in.

In.

And GDP for the second quarter again, with the second half recovery, but but obviously being down for the for the full year. So.

Thats kind of how we thought about it now.

When you take that and go back to the great financial crisis, very very different set of scenarios where.

The consumer there was stressed you had unemployment lag you do not have the timing and the amount of the stimulus coming through to the consumer so it's pretty it's a pretty different scenario to try to compare back to it and then if you really go back and look at the portfolio John the portfolio is fundamentally different.

Mostly walmarts John.

Amount of assets that we have above 660.

Shifted significantly.

The amount of in Mount we've invested in our advanced underwriting tools and technology is very very different so so we feel comfortable.

As we kind of sit here today that the debt the portfolios in very good credit quality.

Up until mid March, we actually saw credit quality, improving or continuing to improve year over year, which was.

Positive to us so the consumer came in a great strength, we have this kind of economic situation really coming out of the pandemic and then we have a ton a stimulus flowing through so so very very different from our perspective.

That bigger very helpful. Thanks, very much guys.

Thanks, I have a good day.

We have our next question from Moshe Orenbuch with credit Suisse.

Great.

Was hoping that you could kind of just give a little bit of little more kind of detail around.

What you would like to achieve with the deferments and how it's going to work.

In any kind of granularity about what people are asking for what are you, giving and what do you see as the.

Percentage of a portfolio that is likely to be in that bucket.

At some future going say in second quarter.

Sure. Good morning, Moshe So so let me break down the forbearance that we're providing two to our to our customers. So so the first thing that we're doing is if a customer calls and then it's been impacted.

If they are asking for a waiver of late fee or interest charges, we are waving those.

For qualifying counts, we also will leave.

The main payments so if actually to further been deferred the men payment on the account for up to three months.

I think kind of hold them in their do stage of your current bring to back. If you are two due to current so.

So really give them the opportunity to kind of get to get their.

A situation.

I'm a little bit more in a word we also in the promotional book.

Our extending for periods of up to 90 days deferral of the expiration of the promo.

So those are the the primary forms of relief that we're providing to those people. So if you look at how many people have taken advantage of that have that for us.

It's about 800000 accounts to date and about $1.6 billion in balances. So so if you think about it.

Small percentage yet has taken advantage of the program.

And we have not seen tremendous amount of people.

Needing that them in pay deferral at this point, but but again, we will continue to offer that to help our cardholders through this through this time.

Got you.

Thanks for that and maybe just can you talk a little bit to either Brian you are Margaret.

Just the discussions you're having with few retail partners now what what it is they're asking for you.

Yes, Ben.

Yes, I'd say right out of the gate, probably the biggest thing was really stabilization of the operation.

Obviously, one of the things we worked hard to data, which was pretty miraculous actually was again arm in place all work from home, including our call Center. So we're pretty close to 100% work at home right now so from a servicing level, where meeting and making sure we're exceeding.

The service levels for our customers I think that was really important we kind of have a mix back here because we have retailers who are opening and servicing customers. We have very big online partners, who are servicing our customers and then we have retailers who.

You know I've actually closed so I would say all our teams are highly focus on both our retail partners and our providers are having on the relationship management connecting with them.

Obviously.

There they want to make sure that were reacting in the right way from there and consumer and doing the right things both from an item.

Our parents perspective, but also from a credit perspective and were in daily dialogues with them I would say.

And now we feel pretty.

Pretty good about where we are we got a pretty nice now from one of our partners who is really fell to see how we've been able to service our customers to NSL highly engaged we're not sitting back we're having those conversations and making sure that we have clear dialogue along the way.

Great. Thanks best of breed.

Thank you every day.

We have our next question from Don Fandetti with Wells Fargo.

Hi, good morning.

Brian I was wondering if you could talk a little bit you'd mentioned the unemployment assumption you habits around 10%.

I assume that's higher in April.

Can you sort of flush that out.

If you look at your allowance at around 11% over to assume that needs to go higher can you talk about the reserve build with trading Q2 versus Q1.

I would be helpful. Thank you.

Yes. Thank you Don so so as you think about it.

Really under the Cecil methodology in Hcl, you know, we obviously used a set of assumptions at the point in time, which we make the estimate for the reserve.

As we stepped into April.

Again, there's a pretty wide disparity among.

People with regard to peak unemployment that will happen in the second quarter, but again a lot of it you know the one of the most important parts is what is the recovery period look like and from that peak as you move down how quickly does it move down and how does it move down. So so most certainly the development of the retail landscape the development of how.

The consumer in the stimulus bridges people through this period of time is going to be critical.

You know if you've kind of follow through and say, yes. There is a a deterioration in the assumptions on the unemployment, peaking that recovery period and the effects of the stimulus that there would be higher reserve posts.

Coming in the second quarter, but we're only 20 days into the into the quarter at this point on so I really can't give you all with clarity the exact reserve Bose, we would we would see we need to see how those assumptions really develop here in the second quarter.

As we move through and again that recovery period, and the effects of the stimulus or are really important.

Attributes.

Okay. Thank you.

Thank you have good day.

And we have our next question from Ryan carry with Bank of America.

Good morning, Hope, you're well and thank you for taking my question.

Given all the moving pieces will be to provide a little more insight into how you're seeing that piece of charge offs ramping well I understand determining the magnitude itself is hard to predict with and forbearance plans and government support programs all else equal is it fair to assume that charge offs would be pushed out further than they would otherwise and how you think about potential impact assuming unemployment is elevated for a couple of quarters versus.

Couple months.

Yes, yes, good morning, Ryan and thank you for your your wishes. So so as we think about it today, obviously, the forbearance which isn't.

Hasn't been that much for us on could delay potential net charge offs again, I think the stimulus package will help bridge some some.

Consumers here for a period of time, we would expect begin to expect.

That you would see charge offs really begin to elevate.

In the latter part of the third quarter, probably the fourth quarter and into into 2021 again the magnitude of that we think we've we've covered in our our Hcl reserve here at the end of the first quarter, but.

The timing of that's really going to depend again on this peak in how the recovery begins to come out.

You know as we develop here in the in the second quarter to be honest with you.

Okay, and I was hoping you could spend some time on their discussions you're having to retailers around signing new programs or renewing partnerships I know you called it a couple during the quarter, but how does the current environment impact. The prospect pipeline. You can you discuss the impacts of the pace of new business deals both in 2020 and beyond.

Yeah, I really believe it or not there are deals in high fine and we are having conversations and we are bidding on deals I would say.

Thanks.

Conversations may have slowed a little bit just as people have been trying to deal with all the the challenges facing but we felt pretty good about the pipeline. That's now we've been able to be I think and going to be very discriminatory on the things. We do look at to make sure they fit where we want to go with the business.

But I would say.

In all three platforms, we've had good activity and look I think continue to have that good activity.

Well have to see us as the rest the progressive but right now.

We do have a decent pipeline.

What I'd add Ryan to that as we think about these relations moderate moderate really highlighted when your target them. When we go to think about the economics with them clearly we've always price through.

Deterioration economic van whenever you think about a seven year deal or tenure deal.

We as a as the enterprise think about through the cycle clearly as we would look at this scenario. The cycle is at the beginning of that potential relationship in the depth of it. So we are probably a little bit more conservative.

And really we'll we'll do that deal I'm only if it meets a it will we view as a.

Risk adjusted return that we think is conservative at this point.

Great. Thank you for taking my questions.

Thanks, Ryan every day.

We have our next question from Betsy Graseck with Morgan Stanley.

Good morning.

Investing.

Two questions first on the Rs I think Brian mentioned in his prepared remarks.

The RC impact will.

Related to diesel day to would be coming in the back half of the year, maybe could you give us some of the puts and takes there and degree of magnitude that you're looking for.

Yes, Thank you and good morning. So so as you think about it in a world kind of change from from January a little bit.

First I just want to make sure that that too that we have a perspective on the reserve provision for the quarter and difference between Cecil and the Triple though if you think about the total reserve build for the quarter being $551 million.

515, Im sorry, five an $11 million of that is really related to covert 19 at $40 million. So so less than our expectations. As we entered the quarter kind of came from the core book, which really.

Reflected the higher credit quality that we experienced in the vast majority of the quarter.

As you think about it the whole 551 is Cecil. So we are we highlighted if we did a triple though.

Before 51, if we did see solid 551, but as you think about the 551 that ultimately is what's going to pass through to the extent that that is subject to the our say we'll pass through the our say so we would expect.

What I would say a sequential dollar per.

A lowering dollars of the our assays, we stepped through the year and obviously as a percent avail A.O. lar, so you'll see that that into the second quarter, and then really more into the second half of the year.

Okay, and so that is the reason it's moving into the second half is a function of the revenue recognition on the part of your.

Retailer clients I'm assuming.

No. It Betsy it's as we as we implemented Cecil in and through the our essays again, we do not change the economic sharing is just really the mechanics of how a pass from us through the our say.

And that just had a slight lag to it. So so there is no difference as you think you bastard the our assai in in 2020, where its cecil or a tip of the reserve itself.

Just tom's on a slight lag so you'll begin to feel that more in the second half and is more more than just the mechanics. Our works through the program agreements with our retail partners in.

Then their revenue recognition or or some other type of change the economics. It just was more mechanics on it on.

And how it works in the program agreement.

But again, we expect a sequential benefit as we move throughout the year.

Right got it and then just the follow up question Margaret for you is given the changes that we've had here over the last couple of months.

How are you thinking about opportunities to either expand your functionality or what you can deliver to your retail partners or your.

You know Carecredit partners I'm, just wondering if there's opportunities for picking up technology or other types of.

Systems are functionality that could enhance here your offerings.

I'd say I'd say two things one.

Before the pandemic, we were starting to get a little bit of opportunities out there that we're starting to park. Our interest we've kept those warm I think right now you got to really wait to see how valuations play out so we're not going to jump into anything to quickly, but there are things that are out that are certainly of interest to us on the second piece I think the other thing.

That we've done as.

We have actually we lost our strategic initiatives for Twentytwenty and have realigned our teams a little bit to focus and accelerate some of the digital things that we were working on our planning today.

We stop some things that we think we can hold off till 2021 and took those agile teams and our putting them again more digital capability for the company and I think thats going to help us as we come out of that I'll go through this and we gave our partner than the and consumers more digital capability.

Lastly, our certainly winning on the digital side in terms of our online penetration in our volume coming through there. So we noticed that are really critical. Thanks, so even not only the opportunities externally, but I think we have and have already.

The teams and kicked it off and driving it for it I don't know Brian doubles, if you'd add anything there.

Yeah, I know the only thing maybe I would add is Margaret said, we did move very quickly and we actually went through every strategic project in the business and there were things that we're obvious things that are partners were asking us to accelerate for them to help them get through this difficult time. So we redeployed agile in there and then there were some things that.

We did around special promotions for some of our partners that still have stores open and are still very active online.

And then as Margaret said, some things that we paused were just things that in this environment doesn't make sense. So we had some card reissues.

Dual card upgrade things like that that we repositioned or delayed and move to kind of the back half of the year when things become a little more stable.

Okay. Thanks.

Great. Thanks Betty.

Our next question is from David Scharf JMP Securities.

Hi, good morning, and [noise].

Thanks, Thanks for taking my question and thanks for providing as much color is.

As I guess reasonably can be expected given all the circumstances.

Hey wanted to follow up just just quickly on the previous question.

Forbearance.

The relatively modest number of accounts in balances you highlighted.

I'm just curious as to the most people been through a billing cycle limited.

In the sense that.

You get a sense that they're aware of.

What potential releases available to them just trying to get a sense for how we should think about.

The number account balances.

Maybe go month from now take advantage of these policies.

Great. Thanks, Thanks for the question so.

We have used our assets or digital assets social media channels.

Et cetera to get out to our cardholders the benefits that are available for them it they've been impacted by.

Mike Koban 18, so we have this outreach program will certainly we are still taking a large number of costs through our call Center.

So we're talking to the consumers about when that they need you to part of it when you think about the dollars different than than some of our other.

Our other peers.

Our average balances is much smaller than there is given the percentage of private label, but again.

Given our retail dual cards are more low end growth strategy. So so again, 2% of the the balances. We should we think is pretty reasonable, but everyone has been through a billing cycle.

And again I think part of it is.

As they go through this.

We put this plan in place in I think on March 11th.

We will begin to see the effects I mean, obviously certain people have had continue to work for a period of time or may be on it for bear furlough plan, but they may be just starting to to realize that they need assistance and we'll continue to provide that assistance.

As we move forward, so that number will grow.

But again, we are using our assets to make sure that customers, who do you need.

You know forbearance, we're helping them.

Got it got it and.

Just just a follow up on the retail partners side and I appreciate the color on purchase volume trends in April to date.

Yes.

Ignoring for the moment, the fact that digital.

It is somewhat of a mitigating that group I'm wondering.

Just within within retail card and within well actually all three products segments.

Are you able to provide sort of a percentage of.

Number of partners that are accrue that are physically closed.

Obviously, you've benefited from having exposure to discount clubs home improvement places that are staying open deem to be essential services, just trying to get a.

Little bit of us yes.

We've been monitoring that but I would say most most on the retail card side why they they may be actually close they all have some digital presence so that a little bit of what we're seeing it gets a little more complicated on the payment solution side, where we have over.

That's a 200000 merchants to really no, which one of them are actually close fully aren't doing some online. Obviously there are certain things that I think our our some of our progress don't have online capability and then obviously in credit.

Really what we're seeing various two things emergency dental is still happening emergency that still happening.

I believe it or not we seen a little spike trials, you lap young kids out that we've seen a middle spike in orthopedics.

People are hurting themselves either comment on their bikes and things like that.

So you know I, it's a little hard to give you a number.

I would say what we're trying to do as wherever there's a digital capability were very focused with those partners to make sure when delevering.

But you know it and it also varies by region as you now.

We have some states that are still out and where the stores are open.

So a little hard to give you a percentage or a number because it's such an ex.

Got it appreciate it thank you very much.

And thank you. Our next question is from Vincent Caintic with Stephens.

Hey, Thanks, Good morning service for taking my question.

Just two quick ones so.

Understood and thinking about the.

Just volume decline, so maybe assets surface rights on the funding side of that how are you speaking about.

Deposits and pricing deposits are you.

How are you willing to price deposits to rightsize keys.

Sure.

Yes. Thanks for the question Vincent So so the way we think about the funding side of the stack clearly.

In the economic environment. We're in you know our view is using the unsecured and secured market is not as cost effective so deposits for us which are 79% of the.

The debt stack at the end of the first quarter, we'll continue to grow that probably as a percent of the overall funding stack, so look to lean a little bit more there.

For us it's going to be.

We have a couple of primary.

Primary competitors in that market and we look to stay competitive there. So this way we don't have to invest as much in marketing things like thats on a rate basis, we actually have moved down.

This year.

With regard to two high yield savings were down 30 basis points.

On the high yield savings we were also down.

At least 30 on on our certificate of deposit movements on top of what we already moved down in 2018. So we'll continue to evaluate that market, but that would be one of our primary sources.

Relative to that so so our view is hopefully we'll be able to trend that down or continue to trend that down throughout the throughout 2020.

Okay. Thank you Andy a follow up quick follow up question our assays.

When I look on slide six of your deck and see the say the charger. It cost ratio was 11% in 2009 in your assays or when the half percent does that still a.

Appropriate.

Listeners are in with some of them.

Yeah, you know clearly.

What I'd tell you have incentives is.

You are assays will move.

You know and provide that countercyclical buffer.

So as charge offs do come through you will see a reduction.

In the R&D say percentages you are the exact correlation of the percentage to charge off rate again as I indicated.

Earlier on this call you know the fact that we don't have Walmart the fact that.

You have very different economic scenario between the brief financial crisis and now.

You know I don't want to draw the direct correlation, but you will see similar shape today did occur when the benefit as the is it comes through.

Great. Thanks, very much in BC.

Thank you Sir.

Our next question is from Dominic Gabriel with Oppenheimer.

Thanks, So much for taking my question I really do also appreciate all the detail you provided.

What do you think about the reserve builds from Cecil versus growth for growth versus.

Changes in your unemployment expectations.

Given the reduction in year over year purchase volume.

And the potential contraction of the loan book would not provide a cushion as far as reserve releases and create some really big quarter over quarter variability. So do you think about how do you think about those two pieces and do you think about them over the full year instead of quarter to quarter and.

It looks like to me that perhaps the reserve build could be.

Basically zero given the for the full year, given the reduction possibility and the actual loans.

Yes.

The first thing first thank thank you for your question I think we have to be or little bit careful here on data points right. We gave you a snapshot to try to be transparent about what happened between March 15th in March 30, Onest and purchase volume being down 26% and then you know for the first couple of weeks of April.

Being down around 30% to 35%.

Tom.

What's really unclear is when the mandates lift.

Right and retail comes back online what that retail landscape will look like and the shape of that curve. So so I'm not necessarily sure. If I were you I'd be thinking about we're going to have a 30% decline in retail purchase volume or purchase vying for the company for the remainder of the year. That's that's number one number two.

You also have to remember in this period of time, when you're going through a economic environment that we are.

You are going to see the payment rate decline. So so you'll you'll see an upward bias in theory on the asset rate. So you have those two things moving against each other it will then really look to what what for us from our reserving perspective will be as we think about the portfolio at that point in time what is the the.

And so so I am not necessarily show I'd say, okay. Your portfolio is going to decline and therefore, you will be a zero. There are several factors that are moving in different directions inside of that again, if you see deterioration in the.

Macroeconomic assumptions that Weve used for March you do see retail come back online then I do believe you're going to see provisions for credit losses.

You know as as we move forward.

Great. Thanks appreciate the clarification, there and then your consumer installment loan yields actually had a nice little jump or what do you think the trajectory on those yields are over you know is that because of kind of the the expectation for added risk and so you you up the yield or.

What are you thinking on the go forward trajectory there is that sustainable.

That is that is really being driven by the disposition of the I'm on the first quarter.

Okay, great. Thanks, so much I really appreciate it thank you.

[noise] given us in a way of time for one more question.

And thank you our last question comes from Sanjay Sakhrani with KBW.

Thank you good morning, and I Hope you got the thing healthy unsafe I guess.

Margaret you mentioned, the venmo and horizon product launches are on track when we think and you mentioned that sort of subject to the evolving macro landscape I guess, when we think about.

Any commitments you had made to grow the portfolio. So how should we think about that and then.

Maybe I'll take that my second question related to that as we think about some of the investments Ben. Thank you that that you guys were embarking on and other broad investment spend how can we think about the flexibility of those expenses in this backdrop. Thanks.

Sure. So let me ask answer the first one so you know clearly we were we were really excited when we won authorize an event and those are two I think very strategic programs process. We can continue to really build out our digital capability. So those agile teams that have been focused on the launch of those two programs a full speed ahead.

And we havent reduced any focus if anything were even maybe accelerating some things. There. So were really excited about being able to launch them. Obviously the launches will be dependent upon the environment.

We believe that mid year for horizon in the second half a for that now so.

Side about those in the teams are really are working hard in terms of the other investments is a little bit of lot. Brian Thomas said, we actually took a step back and let me step back you don't want one step further what we did ask the leadership team.

I mean, despite off Uh huh.

Negative things that are happening around 10 active theres also opportunities right and so what we really tried to do to step back and say I would take part of our leadership team to focus on the operation and get the operation stabilize we have not accrue that are working on what what do we look like coming out of this and how quick do we come out in one of the initiatives we have to have in place.

To come out and then three one of the long term opportunities and implications for the company and so we've kind of organized ourselves that way, we have a seven work streams that that Brian as leading to really kind of set aside for the future subprime I don't know if you want to comment a little more on our flexibility and some of that.

Thanks, we've been doing.

Yes, I know I think thats right. So we went as I said earlier through every strategic project in the business, we kind of looked at that through the weapons of the current realities that we're facing and we said okay. So many things we need to move faster on based on what our partners are trying to achieve as they go through the crisis.

And some things frankly, just don't make sense to do right now we're going to push those out delay pause etcetera and then some things we'll just continue.

And Verizon and Venmo are examples of things that will continue as Margaret said, a little bit uncertain.

But then we also said okay, we need to be thinking beyond 2020, we need to be thinking you know coming out of this how can we best position ourselves for the future and we said look there are we came up with seven or eight different work streams that are really all encompassing and we said.

Forget about whether this is a V or U shaped we know that.

Every aspect of our business is going to change in some degree coming out of that so our customers are going to use our products differently.

We know that theyre going to shop differently, they they're going to spend differently, they're going to pay differently.

We know our partners are going to come out of this looking differently and they'll have different strategies that we need to flex too and we know that the way that we work together as a team is going to change as well and so we looked and really those three broad buckets and we said, okay. We need to have a really good strategic plan in a vision around each one of those to that we emerged from this as strong as possible.

Thank you know as we kind of move through that work will obviously share more in the future.

And I guess that the equal.

It's a conclusion that the cost base might not make need to be realigned the little bit lower given some of the calendar the retailers might have.

Now that we will definitely have to realign our cost base I think we just we are trying to see what this we want to get a little more feeling for how this comes out but one thing that we and we just we did that with the the departure Walmart. We now have adjusted cost base, we froze jobs. So we're not hiring anybody right now we've done.

In all those kinds of actions already out of the gate.

Obviously, where we're saving on some other things like travel and things like that but we if we have to reset the cost base of the business as they come out of nasty costs.

Were smaller we will do that Tim and we have high on our part that's a little better some of the Workstreams, Brian even half.

Honestly, so it's sounds it isn't Brian with let me, let me just kind of put a bow out where you started right. So your first question on horizon of them, though.

The timing really hasnt shifted that much when you think about the costs associated with those two and I know, we highlighted b 20 cents a share for the year the marketing research costs. The launch costs the development costs to develop all the the INAP capabilities for let's say venmo.

I'd also asked with her rate the shifting of other programs and the reserves, which was a component of that cost isn't that significant now as Margaret said, we'll see how the current.

Environment, and whether or not there is a more material shift in that and we'll obviously provide transparency as we get to our call in July. So so with regard to deal we just started.

There isn't really a change from I think the guidance that we provided earlier in the year of your second a you'll just just to highlight our mortgage said, obviously development of the retail landscape. The development in the consumer once we have more transparency to that obviously, we'll look to maintain the same type efficiency and we'll work through that as obviously there are large pool.

Versions that are variable, but obviously, we maybe take action on the fixed cost part of the business in order to to rightsize itself.

So I would think about it.

Perfect I'm, sorry, one last question because I am being asked a question quite a bit capital ratios dividend sustainability for how are you guys thinking about it obviously brine when will you talked about the balance sheet shrinking how should we think about capital freed up to the extent that were even to occur does that qualify as sort of excess.

Capital and therefore, it provides a cushion or maybe get as walk through the discussions you're having with regulators. Thanks.

Yes, sure. So so with a capital position capital is is something that we've we've come out as from our separation from GE as a SREP.

We came out with a higher capital ratio cetone capital ratio than than than we probably needed, but we need to demonstrate our ability to stand up as a separate public company.

And withstand events like this so so our ultimate goal was really to migrate our capital ratios down to that of appears that has not changed through this.

We feel as we start into this.

Economic period that we have a.

A significant amount of capital to weather the storm, obviously, the Cecil transition helps.

As well, but we'll continue to migrate that that capital on down to dance appear levels over time with regard to your second question around the dividend.

Obviously, the dividends important to us as we think about the business and really the PPNR resiliency the business.

We believe that we can continue to generate capital as we think about our priorities for the use of capital is really the growth of our existing programs.

Number one the second really is the dividend as we sit here today and we believe we're going to continue to pay that dividend based upon the current environment and based upon our forecast that we have the financial strength the capital liquidity to continue to do that and that's a high priority for US and then then as you move through you know obviously than it would be.

Share repurchases, and then down the road, whereas portfolio acquisitions, or M&A, but but from a dividend perspective again, given the current environment, our assessment, where we're committed to pay that dividend.

Thank you that.

Thanks, Andre anchor Sunday.

Right.

Thanks, everyone for joining us this morning, the Investor Relations team will be available to answer any further questions you may have.

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

[music].

In.

[noise] [noise] in.

[noise] Andy.

[music] Andy.

[music].

[music].

Welcome to the Synchrony financial first quarter 2020, <unk> earnings Conference call. My name is Vanessa and I will be your operator for today's call.

At this time all participants are no listen only mode. 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., Greg Getrag director of Investor Relations, Greg you may begin.

Thanks, operator, good morning, everyone and welcome to our quarterly earnings conference call. Thanks for joining us.

In addition to todays press release, so we've provided the presentation that covers the topics we plan to across during our call.

A press release, a detailed financial schedules.

Sure available on our website synchrony financial Dot com.

[laughter] formation can be accessed by going to the Investor Relations section of the website.

Before we get started I want to remind you that her comments today will include forward looking statements.

These statements are subject to risks and uncertainty and actual results could differ materially we lost the factors that might cause actual results could differ materially dinner I see filings, which are available on our website.

During the call will hurt your non-GAAP financial measures and discussing the company's performance.

And find a reconciliation of these measures to GAAP financial measures.

Materials for today's call.

Finally, synchrony financial was not responsible for and does not yet nor guarantee the accuracy of earnings teleconference transcript provided by third parties.

The only authorize webcasts are located on our website.

On the call. This morning are Margaret Keane bridal is the one Brian doubles I will now turn the call over to Margaret.

Thanks, Greg Good morning, everyone.

Today, our country in the world are facing an unprecedented level pandemic.

I want to stock price perfecting all of those working around the clock.

Definitely our health care professionals at first we saw this on the front line as well as those behind the scenes, including our dedicated employees, who are working to serve our customers a partner.

But all of us have been impacted in different ways and we may suffer from sadness. The law I am also incurred and inspired by the resolve of our society to come together and that's correct.

I see lots goodness Selfless act a community support.

Certainly one of the thing I Hope continue long. After this is Don I also look network deployed our partner our customers and our community.

We will continue to do all we can support you.

Global Health crisis. This town to have an individual an athlete it.

It is all tilting companies to execute in an extraordinarily difficult environment.

One more word of thanks here, the leaders and synchrony, what stepped up and so many extraordinary ways to this incredibly difficult time. Thank you.

Oh company was founded in the nice thing 30, as we begin financing we fit right in the great Depression.

And synchrony have faced many other difficult period, most recently the great financial crisis in 2009.

It's a combination of our heritage strong culture, and our talented associates that will enable us to use our current navigate these uncertain time protect our employees and continued to deliver for our cardholders retailers work and provided.

Later in the call I will provide greater detail in our response to the covert Nike outbreak, but first let me share with you.

So for the first quarter.

First quarter earnings were 286 million a 45 cents per diluted share. This included an increase in provision for credit losses. As a result of this diesel implementation in January.

The increase attributable to see thought was 101 million or 76 million after that.

We do Ats by 13 cents.

We generated solid growth in several key areas during the quarter.

On a core basis, which excludes Walmart me I'll hop portfolio loan receivables grew 4%, which drove a 5% increase in interest as Peter purchase volume increased 6% and average active accounts increased 4%.

The efficiency ratio was 32.7% for the quarter.

We grew deposits over 500 million, a 1% over last year and although we slowed the growth in the process getting any excess liquidity and the Walmart portfolios out we did continue to grow low cost direct deposit at threeq or separate over the prior year.

Our direct deposit platform remains an important funding support for our growth and we continue to invest in our bank the help attract new deposit and retain existing customer.

We extended an added partnership we renewed several key relationships and we added to our growing Carecredit network. We continue to be excited and working closely with Verizon band mouth, along with these new programs barring 2020.

While the ultimate loss data for the program will be dependent on how the current environment to Bell, we anticipate in mid year long horizon and a loss in the second half event, though.

We continue to remain highly focused on digital innovation accelerating our data analytics capabilities and creating frictionless customer experiences, which are you the success of our program and whenever they since that.

So I think digital sales penetration, it's Peter wise.

In retail card digital sales penetration was 41% in the fourth quarter and digital applications for 56% of our total application.

The mobile channel alone for 34% impact to the same quarter last year it wouldn't Walmart.

During the quarter, we repurchased 1 billion affected common stock and paid 135 million or 22 cents per share in common stock dividends.

We are pleased with the strength of our business. However, we did experience a significant reduction in Kirkwood bogs Palkovic Nike in the second half of Mark, which Brian will cover later in the call.

The ultimate impact from this crisis is very difficult to quantify right now.

Duration and magnitude the largely I don't know however, we believe we have an advantageous position to navigate good it's uncertain time.

Our portfolio well positioned from a credit perspective, given changes we have made since the great financial crisis. In addition to some of the more surgical market since we've made in recent years.

Further our assays have historically proven to be an effective buffer during times of crap.

We have a partner centric business model and a more nimble than ever getting out the ability to rapidly implement changes and enhancements.

We have also built a robust data lake that gives us access to information across the business at an unprecedented level.

Hi, Matt with our analytics capability and we have another powerful tool to help our partner Atlantic City. This period.

The digital capabilities, we've dealt with have helped us win important digital partner or another crucial cool empowering our progress across the business to manage to this time by helping them to shift by two online and mobile channel.

Now I would like to spend some time focusing on the accent decorating has taken for employees partners and entities.

We have taken these access in the spirit of insisting that communities and which we live in operate who assist and stemming the global health crisis, while still meeting the needs of our cardholders retailers Merck has provided.

Action, we have taken at them with empathy and consideration, but each constituency and we will continue to accept this crisis a ball.

Our employees others breadth of our company, we moved quickly and decisively to put actions in place that support the health wellness and safety of our colleagues across the globe.

We are implementing a plan for hunker part that work from home soccer in U.S. employees from across our company.

Support function, where our front line contact center associates are all working from home. This has allowed us to stabilize our operation and service aircraft Smith, while keeping our employees thing.

We are assisting our associates by covering the cost of co pays for personal doctor visits for any employee who assist to consult a medical professional and enhancing our benefit to include expanded backed up emergency care benefit so that our colleagues have the childcare or Elvis pair support needed. We're also providing.

Financial planning and employee assistance, along with wellness program.

For our contact center associates, we provided a onetime special bonus to thank them for their essential role there plant in assisting aircraft with every single day without missing a beat.

In addition, we're setting up an emergency fund to help our associates field with unexpected financial talented which may impact them. During this period.

What consumers that are experiencing financial hardship, we have the ability to assist these cardholder during this extremely difficult period.

We will waive fees and interest charges or we can extend promotional financing period.

We will always minimum payments on existing balances for certain qualifying account.

With those peak in the ability to expand my line unnecessary Percocet, we will evaluate credit limits, if they need our credit criteria.

Many of our partners have been with us for decades, and we have been there to help them grow their businesses. We are now here to help them protected.

We have taken an aggressive approach to ensure we continue to provide our partners and their customer with dependable service and product that they can you. During this time of disruption.

Our investment in making all of our digital assets fascinated view are helping them to start their customer.

And our relationship managers are actively helping them and there has been notice reference to their availability to our partner.

That's all structure is helping to foster real time solution and our dedicated teams are tirelessly working to support our partners and their customers.

The communities, where we live and work that's a core part of the fabric of Synchrony culture. That's why we're committed $5 million to help local and national organization assist those areas of the country most affected by October 19th.

We will be sporting group like feeding America and yields on wheels in the U.S. as well as organizations in Puerto Rico, India and the Philippines.

Also our employees have contributed numerous hours to synchronize gear up initiative.

Employees have engaged in our communities to death, and making certain protect the site, but that's just based field using threed printing as well as playing golf and outdoor network of cardholders or actively engaged in the so in community. What we have a number of apartments itself Boeing machine.

We have also leveraged our Pat credit network and synchrony, if starting at the location in our communities where people can donate P. P. E item and we are gauging in the transfer of items of need to various medical facilities.

We are facing an extraordinary an unprecedented the Todd.

Synchrony has the stress the resources and the resolve to fight this global health crisis for our employees partners customers and you need.

Having been a business for nearly a century, we have navigated various times that economic uncertainty by maintaining all focused on supporting our associates partners and their customers, but also continuing to invest in our businesses over the long term.

I am proud of what actions, we've taken for our constituents and I have confidence that through the strength of our business model and balance sheet. We will continue to navigate this crisis successfully while maintaining our focus on a significant opportunities in our business, our long term objective and strategic initiative with.

That I'll turn the call over to Brian Wenzel to review some of the tea business trends, we're seeing the financial performance for the corridor and views on a framework to help considers the impact of cold in 19 on our key outlook driver.

Thanks, Mark and good morning, everyone first let me Echo mortgage thanks for everyone, who is working to keep our communities safe and secure from our healthcare workers first responders to those in grocery stores or working on vaccines.

The selflessness and dedication that these workers is a lot inspiring and deeply appreciate it.

In addition, I want to thank our employees around the world. We're all adjusting to new ways you working to continue to serve our partners and customers. Thank you.

Now turning to our financial results for the first quarter.

I'll start on slide four the presentation.

Before I move into the first quarter results I want to cover some of the early trends, we're seeing from the impact to cope with 19 from purchase volume perspective, as well as key aspects of our business that are important to highlight given the current environment. We're now facing.

Slide four shows year over year purchase volume growth for the total company as well as for wealth sales from our dual and co branded card for January February March.

Marcher split between the first half of them on and then the second half where the impact related to cold 19 increased significantly.

Purchase volume growth was strong through mid March with double digit growth for both total company and world sales volumes.

The second half a march as mandates increase at the federal and state levels travel Entertainment and had been activity were significantly curtailed.

The high number of the non essential retail stores closed.

As a result purchased slide for both the total company and we're also declined significantly decreasing by 26, and 27% respectively and the second half the March.

The trends are continuing as April.

Looking at the year over year growth rate of world sales by category during the pre travel restriction period defined in the month of January and then the growth post travel restriction period through the end of the first quarter, which that changes and spend categories similar to overall industry trends.

Roastery discount drug store spend increase significantly post January while restaurant entertainment gas and especially travel declined significantly during the same period.

While restaurants entertainment gas and travel were significantly impacted.

27% in 2019 will sales incurred in these categories.

Obviously these are trends that will impact our purchase volume and loan wish you the growth going forward.

Ultimately impact is still uncertain given the duration of the magnitude at this pandemic is still largely unknown at this point.

Moving to slide five we highlight the higher quality asset base today versus our 2008 asset base going into the great financial crisis.

This is a direct result of our strategy to improve asset quality, who discipline underwriting and advanced we've made our underwriting processes that had been very effectively managing overall credit quality.

I'd like to highlight various aspects of our credit management program.

First we have a very experienced credit team and we're very disciplined in our approach to underwriting.

Second we control all underwriting credit decisions and our programs and across ourselves platforms.

Our credit strategies are tailored to the partner industry in which we operate.

As unique by channel for origination and account management.

As shown on the left side of the page using psycho as comparative measure 73% of portfolio. The FICO score above 660.

And 61% in 2008.

More importantly in the higher loss generating FICO range of 600, lower we've reduced our exposure to 9% of the portfolio compared to 90% in 2008.

This is a significant improvement in portfolio quality, we ship the 12% of the portfolio from balances at or below 660, Psycho to above 660, Psycho with a 4% increase and balances will fight those that are 721 were higher.

As we exited the great financial crisis, we made the strategic decision to improve the credit quality to our portfolio and this is reflected in the quality, where new account origination mix that's 2010.

Over 80% accounts, we originated since 2010, ficos above 660, with 45% accounts, having like those 721 or a higher.

Less than 1% of what we originated at Pike, those that were 600 or lower.

We're also using advanced underwriting techniques and managing the portfolio.

For example, this or per account acquisition, we're utilizing up to 16 different data sources and more than 4000 attributes to value credit worthiness.

And with indicate customer identity.

We are employing a multi algorithmic approach to target specific outcomes.

Credit fraud, synthetic ideas and other malicious behavior as well as leveraging client specific data to use customer engagement with our partners to sign more effective credit lines.

For account management, we're continuing to utilize internal and credit Bureau triggers to dynamically reevaluated customers credit worthiness to manage credit exposure as well as leveraging the latest technology to passively authenticate customers and more selectively target iris behavior.

This is evident in the to purchase volume mix when the time, we deploy these underwriting techniques in 2016.

The chart in the right hand side of the page shows proving the purchase volume mix from first quarter, 16, which shows 65% of the purchase volume mix being at a 721 plus spike built for the first quarter compared to 61% in the first quarter of 2016.

Finally, it should be knows our portfolio as well diversified they industry and we've been growing payment solutions and care credit portfolios at a faster rate than retail card and we don't have any significant geographic concentrations.

In summary, we have substantially improve the asset quality of our portfolio compared to the portfolio had during the great financial crisis, we've developed better tools and capabilities and can deploy underwriting changes more quickly and with greater efficacy than ever before.

Slide six shows you longer term, how we performed from a loss perspective dating back to the great financial crisis when loss rate for card issuers peaked in 2009.

The general perception is that private label credit cards.

Former slightly worse than general purpose carts and periods are higher credit losses.

But you can see the top chart that are credit performance. She is relatively in line with general purpose card issuers in the 10% to 11% loss range in 2009 on a managed basis.

One of the key loss experience being similar is that the severity of losses lower bras due to the average balance being generally lower than general purpose guards.

For the first quarter the average balance per active account was $1171, which is flat to last year.

If you look at this on a risk adjusted yield basis, we outperformed the general purpose court peers by a wide margin through the crisis with a risk adjusted yields running over 700 basis points higher than peer group.

As we move beyond the cycle and losses have declined our risk adjusted yields outperformance compared to general purpose card issuers has remained over 600 basis points post crisis.

Our saves also provide a buffer this was evident in 2009 and again beginning 2016 through 2018 as credit costs increased as shown on the chart in the lower right hand corner of slide six.

While the driver the counter cyclical nature of our assays or credit related other factors awfully impact your assays, such as program revenue expenses and mix.

In 2009, aristide's as a percentage of average receivables declined to 1.6%.

64% below the more normalized RC averaged 4.43% for 2013 through 2016.

The strong risk adjusted yields and counter cyclical nature of our assays were important elements in our ability to remain profitable during the great financial crisis as both highlight the earnings resiliency of our business model.

The company generated around 1% return on assets at the height of the prices in 2009.

Given the items I've highlighted earlier, while we're not expecting level of charge offs, resulting from the current situation to be similar to the great financial crisis. We felt it was important to give you some historical context on a key elements that sets our business apart from others in the industry.

Moving to the first quarter financial results on slide seven.

This morning, we reported first quarter earnings of $286 million or 45 cents per diluted share.

This included an increase in the provision for credit losses as result of the implementation of Cecil in January.

Increase was $101 million or $76 million after tax, which reduced EPS by 13 cents.

We generated solid year over year growth in several areas as loading on slide eight.

On a core basis, which excludes the Walmart and Yamaha portfolios loan receivables were up 4% and interest at these on loan receivables were up 5% driven by growth in receivables.

On a core basis purchase volume was 6% and average active accounts increased 4% over the last year.

On slide eight we've included dual in co branded card purchase volumes and loan receivable balances to provide the level diversification. We after these products.

Do you want Cobranded cards account for 38% a total purchase volume in the first quarter and grew 8% over prior year. They accounted for 24% of total loan receivables portfolio and grew 6% over the prior year.

Overall, we're pleased with the underlying growth, we generally across the business as I noted earlier the impact because the 19 accelerated as we move through the quarter with most of the impact occurring late in the quarter.

We are expecting a more substantial impact this quarter, but given the duration and the magnitude is still largely unknown at this point is difficult to provide a more precise forecast of the impact.

RSC decreased $28 million or 3% from last year.

Our assays as a percentage of average receivables were 4.4% for the quarter at the lower end the range, we expected in the first quarter due to higher credit loss reserve build.

The provision for credit losses increased $818 million or 95% from last year.

The increase was primarily driven by the Walmart credit loss reserve reduction last year that totaled $522 million higher reserve build in the first quarter.

Partially offset by lower net charge offs accounted for the remaining increase.

The reserve build in the first quarter was $552 million and largely due to the projected impact of coated 19 related losses.

Other income increased $5 million.

Expense was down $41 million or 4%.

The cost reductions from Walmart, partially offset by higher operational losses and expenses related to the coated 19 response.

Overall, the company continues to generate solid results in the first quarter outside of the impaction covert 19.

I will take a moment to highlight our platform results on slide nine.

In retail card core loan receivable growth was 3% with solid growth driven primarily by our digital partners.

Other metrics were down driven by the sell the Walmart portfolio.

Payment solutions delivered a strong quarter with broad based growth across the sales platform and strength in home furnishings, and only specialties and resulted in core loan receivable growth of 7%.

Interest and fees on loans increased 3%, primarily driven by the loan receivable growth purchase volume in average active accounts increased 2%.

Signed a number of new partners and we need key partnerships this quarter.

We continue to drive growth organically to our partnerships and card networks.

These networks, along with other initiatives such as driving higher card reuse, which now stands at approximately 30% or purchased by excluding oil and gas that helps us that drive solid results.

Care credit also delivered another strong quarter.

Stable growth of 7% was led by our dental and veterinary specialties.

Interest and fees on loans increased 9%, primarily driven by the loan receivable growth.

Purchase volume was up 2% at average active accounts increased 5%.

We continue to expand our network and the utility record as we've added over 2000, new provider locations to our network during the quarter.

Network expansion itself the driver the reuse rate is 56% purchase volume in the first quarter.

We did start to see the effects of covert 19 on the platform results as a quarter progressed.

And retail card or store closing impacted results. We also saw strong growth in digital purchase volume that helped offset some of the cold in 19 impact.

In payment solutions, while store closings have less pronounced impact promotional offerings and the growth in areas such as home specialty.

Mitigate some of this impact.

For care credit, we continue to see good performance in areas, such as veterinary partially offset by reductions in elective procedures.

We do expect the effects will carry into the next quarter and be more pronounced as many of the store closings occurred during the latter part of March.

I'll move to slide 10, and cover our net interest income and margin trends.

Net interest income decreased 8% from last year, primarily driven by a 7% decrease in interest and fees on loan receivables due the sale of the Walmart portfolio.

On a core basis interest and fees on loans increased 5%.

The net interest margin was 15.15% compare to last year's margin of 16.08%.

The main factors driving the margin performance were.

A decline in loan receivables mix as a percent of total earning assets.

The mix declined from 84.4%, 81.7% driven higher liquidity during the quarter, mainly resulted from the proceeds of the Walmart portfolio sale October of last year.

47 basis point decrease in loan receivables yield to 20.67%, primarily driven by the sale the Walmart portfolio.

Partially offset by a 14 basis point decrease in total interest bearing liabilities cost at 2.50%.

I'm really driven by lower benchmark rates.

Next I'll cover our key credit trends on slide 11.

In terms of specific dynamics in the quarter I'll start with the delinquency trends.

The 30, plus delinquency rate was 4.24% compared to 4.92% last year and a 90 plus delinquency rate was 2.10% compared to 2.51% last year.

If you exclude the impact of the Walmart portfolio. The 30, plus delinquency rate was down approximately 15 basis points and the 90, plus delinquency rate was down approximately five basis points compared to last year.

Focusing on net charge off trends.

The net charge off rate was 5.36% compared to 6.6% last year.

The reduction net charge off rate was primarily driven by Walmart and improving credit trends.

And the impact of the Walmart portfolio net charge off rate was approximately 15 basis points lower than last year.

This was better than expectation around a 50 basis points increase for the fourth quarter net charge off rate of 5.15%.

The allowance for credit losses, as a percent of loan receivables was 11.13%.

Postseason implementation, which included a $3 billion day, one transition adjustment.

Excluding the effects of Cecil the allowance under the age Triple method would have been 7.34%.

The reserve build in the first quarter was $552 million undersea so.

$451 million under the age of low method.

Overall reserve provisioning was higher than expected due to the impacted Kogan 19, which accounted for most of the reserve build in the first quarter.

In summary, the first quarter credit trends were slightly better than our expectations, excluding Nicole good 19 impact.

We expect credit trends will be impacted by this as we move forward. The extended the impact is difficult to assess this point given the uncertainty around the duration of the magnitude of the pandemic as well as a potential thats from the Cures Act and our efforts providing will lead to cardholders impacted by Cobot 19.

Moving to slide 12, I'll cover expenses for the quarter.

Overall expenses came in at $1 billion down $41 million or 4% from last year.

The decline was driven by cost reductions from Walmart.

This was partially offset by higher expenses attributable to operational losses, and certain expenditures related to our response to covert 19.

The efficiency ratio for the quarter was 32.7% versus 31% last year.

Excluding the impact from operational losses, and the coven 18 related expenses efficiency ratio was flat compared to the prior year.

Moving to slide 13.

Over the last year, we've got our deposits over $500 million or 1%.

This puts deposits at 79% refunding compared to 75% last year.

While we slowed the overall deposit growth in the first quarter, given the excess liquidity for the Walmart portfolio sale in the fourth quarter last year, we did continue to grow our lower costs direct deposit and a slightly higher 3% pace over the prior year.

Total liquidity, including Undrawn credit facilities was $24.8 billion, which equated to over 25% of our total assets. This is up from 22% last year.

Before I provide detail on our capital liquidity position. It should be noted that we're electing to take the benefit of the transition rules issued by the joint Federal banking agencies in March which had two primary benefits.

First it delays the effects of the transition adjustment for an incremental two years and second allows for a portion of the current pure provisioning undersea still to be deferred and amortized with the transition adjustment.

With this framework we ended the first quarter at 14.3% CPP 100, Cecil transition rules near the same levels last year.

One capital ratio was 50.2% under the Cecil transition rules compared to 14.5% last year, reflecting the preferred stock issuance last November.

The total capital ratio increased 70 basis points as well the 16.5% also reflecting the preferred issuance.

And the tier one capital ratio plus reserve ratio.

On a fully phased in basis increased to 24.1% a 280 basis point increase over the prior year.

Affecting the increasing reserves as result of implementing Cecil and the preferred stock issuance.

During the quarter, we continue to execute on the capital plan, we announced last may.

We paid a common stock dividend 22 cents per share and repurchased $1 billion or 33.6 million shares of common stock during the first quarter.

At the end of the first quarter, we had 366 million of remaining share repurchase capacity of the $4 billion authorized plan for the current capital plan cycle.

Given the current economic uncertainty and being as prudent as possible. We've made the decision to halt further share repurchases honors plants, we have greater visibility of the depth and magnitude of the current environment.

Overall, we continue to execute on the strategy we outlined previously.

We're committed to maintaining a very strong balance sheet with diversified funding sources and operating with strong capital on liquidity levels.

In closing, we normally provide updates to our outlook.

Given the number of uncertainties that exists regarding the severity in the duration of the co the 19 pandemic.

And the countering impacts of the actions such as the cares Zack.

I mean assistance for our customers never government and regulatory actions may have is very difficult to assess the ultimate impact of this time as a result, our expectations have changed versus the outlook. We provided in January that guidance should no longer be relied upon.

Since the duration and led to the current environment is uncertain, we can't provide any ranges around the key outlook drivers for 2020, but I want to provide a framework to help considered the impacts on our key out with drivers.

Regarding loan receivable growth.

So with 19 has significant impact on the purchased I am, particularly late in the first quarter.

We anticipate continued deterioration of purchase volume on a year over year basis until the situation improves presumably later this year.

What may help mitigate some of this impact is growth in digital and we're well positioned for this to our digital partners as well as leveraging our expertise to help other partners and providers.

Overall net deterioration purchase volume ultimately impact our receivable growth rate.

When considering net interest margin, we will be impacted by the reduction in prime rates, resulting from the fed rate cuts a.

A reduction in investment income from our liquidity portfolio as well as a potential impact of forbearance in terms of interest and fee waivers for a temporary period of time.

Partially offsetting the margin compression is expected higher interest income generated from an increase in the number of accounts are involved in the loan receivable portfolio and lower interest expense as benchmark rates are lower.

Well I should be noted we also share the impacted revenues and funding costs should the our assai.

Regarding our assays. In addition to sharing interest income it backs, we'll also see a more pronounced impact from higher credit cost as we move through the year.

So as we noted January the impact to see sonar assays will be more fully realized in the second half of the year.

While we expect an increase in net charge off rate as the year progressive it should be no. The overall portfolio quality credit trends as we entered this pandemic are strong and tools and capabilities that we have are more advancing the great financial crisis, which were highlighted earlier in the call.

Finally, we also believe higher recoveries will ultimately materialize, partially mitigating the impact to higher losses.

Similar revenue, we also show the impact to higher credit costs through the our say.

While we expect reserve builds to be higher than original expectations until we gain more visibility into duration. The severity of the current pandemic, we cannot provide more specific guidance.

Once we have greater visibility will be to better position to define the expected charge off and reserve build expectations going forward.

Regarding the efficiency ratio activity levels will impact revenue and expense levels and we look to mitigate some of this impact through expense reduction opportunities.

We will continue to assess the situation and provide guidance when we had greater visibility into the effects of the current environment.

Fundamentally the business remains strong and is resilient and we got into the situation with the strong balance sheet capital and liquidity position.

With that I'll turn the call back over to Margaret.

Thanks, Brian I'll provide a quick wrapped up and then we'll open the call today.

We continue to believe that that strengthen our business model and the resiliency of our associates will help us navigate this global health crisis.

We are focused on continuing to execute par retailers, Martin and provided and support our core deposit with empathy during this difficult period.

We are focused on execution today, but also focused on continuing to make strategic investments in our business to build on our friends to deliver the product and service that our customers will expect beyond that period.

Thank you for participating on the call today, and I want to with you and your family's other very that as we continue to deal with its very difficult situation.

Ill now turn the call back to Greg to open up the QNX.

That concludes our Carlos on the quarter, we will now begin the culinary session. So that we can accommodate as many of you as possible.

They asked to participants the please limit yourself to one primary and one follow up question.

If you have additional questions the investor relations team will be available after the call operator, please start cumulate session.

Thank you we will now begin the question and answer session. If you have a question. Please press Star then one on your Touchtone phone if you wish to be removed from the Q. Please press the pound fine or the hash key.

If you're using a speaker phone you may need to pick up the handset first before pressing the numbers. Once again if you have a question. Please press Star then one on your Touchtone phone. Our first question comes from John Hecht with Jefferies.

Morning, guys and thanks very much for the comments.

In the call when John I'm, just I'm just wondering Brian.

You guys cited your volume sales down about 25, 26% in that second half of March just trying to think about modeling for the near term quarters.

Is that the type of contraction, thus far through April and how do we think about kind of what you've seen thus far in April.

Yes, yes, thanks, John good morning.

From from the back half of March which was down.

Again about 26% it accelerated slightly so we're running in the range it down 30% to 35% pretty consistently.

For the first part of for the first part April again, when you think about the will spend categories. We highlighted in the earnings chart, they're very similar with regard to being down in travel gas and entertainment and little stronger in grocery drug store et cetera, but again thats just on the dual card, but the strength of the digital assets, we do have some reid.

Sellers that are that are deemed essential that are open and clearly the digital and E. Commerce is continue to drive it so it's pretty steady in that.

Low 30% decline year over year.

Okay. Great. Thanks, that's very helpful and second question just trying to think about.

The context of this versus the great recession.

Where I guess what in your economic models that have driven youre you'd be allowance levels.

What level of kind of unemployment are you contemplating at this point time or how do we think about the economics.

The economic assumptions relative to your 2009 period.

Sure John Let me, let me kind of go through how we think about how we thought about this quarter and building the CEO reserve.

As you know the economic assumptions very pretty widely across many of the institutions that provide that we don't come up with their own assumptions, we use to external assumptions.

So so given the variation that we saw across many many institutions, we model several different scenarios and look to several different scenarios in how they would perform relative to our book and then we settled in on a set of assumptions from from one.

One place that really looked at a unemployment rate approaching 10% for the second quarter is kind of the peak.

And then a second half recovery, where unemployment goes down to around 7% and then a very kind of more gradual decline in 21 and gets back to probably about a 4.5% unemployment.

You think about in 22.

With that bankruptcies rising about 50% and staying elevator for the next couple of years.

It was also very key assumption in that and then a a significant contraction in.

And.

And GDP for the second quarter again, with the second half recovery, but but obviously being down for the for the full year. So.

Thats kind of how we thought about it now.

When you take that and go back to the great financial crisis, very very different set of scenarios where.

You had a consumer that was stressed you had unemployment lag you do not have the timing and the amount of the stimulus coming through to the consumers. So it's pretty it's a pretty different scenario to try to compare back to it and then if you really go back and look at the portfolio John the portfolio is fundamentally differ.

It obviously walmarts John the amount of assets that we have above 660.

Shifted significantly.

The amount of and Mount we've invested in our advanced underwriting the tools and technology is very very different so so we feel comfortable.

As we kind of sit here today that the debt the portfolios in a very good credit quality.

Up until mid March, we actually saw credit quality, improving or continuing to improve year over year, which was.

Positive to us so the consumer came integrate strategy. We have this kind of economic situation really coming out of the pandemic and then we have a ton of stimulus long through so so very very different from our perspective.

That's very helpful. Thanks, very much guys.

Thanks, I have a good day.

We have our next question from Moshe Orenbuch with credit Suisse.

Great I was hoping that you could kind of just give a little bit of little more.

Detail around.

What you would like to achieve with the deferments and how it's going to work like.

Any kind of granularity about.

What people are asking for what are you, giving and what do you see is there.

And your portfolio thats likely to be in that bucket.

At some future going say in second quarter.

Sure. Good morning, Moshe. So so please let me break down the forbearance that we're providing two to our to our customers. So the first thing that we're doing.

As if a customer calls and that's been impacted.

If they are asking for a waiver of late fee or interest charges, we are waving those.

For qualifying counts, we also will wave.

The main payment so if actually to further been deferred the men payment on the account for up to three months.

I think kind of hold them in their do stage of your current bring that back. If you are two due to current so.

So really give them the opportunity to kind of get to get their.

Situation.

I'm a little bit more in a water. We also in the promotional book.

Our extending for periods of up to 90 days, the deferral of the expiration of the promo.

So those are the the primary forms of relief that we're providing to those people. So if you look at how many people have taken advantage of that that for us.

It's about 800000 accounts to date and about $1.6 billion and balances. So so if you think about it.

Small percentage it has taken advantage of the program.

And we have not seen tremendous amount of people.

Needing that men pay deferral at this point, but but again, we'll continue to offer that to help our cardholders through this through this time.

Gotcha.

Thanks for that and maybe just can you talk a little bit to either Brian you are Margaret so.

Just the discussions you're having with few retail partners now and what what it is they're asking for you what are you asking them.

Yes, so I'd say right out of the gate, probably the biggest thing was really stabilization of the operation.

Obviously, one of the things we worked hard to data, which was pretty miraculous actually was to get our employees all work from home, including I'll call Center. So we're pretty close to 100% work at home right now so from a servicing level.

Our meeting and making sure we're exceeding.

The service levels for our customers I think that was really important we kind of have a mix back here because we have retailers who are opening and servicing customers. We have very big online partners, who are servicing their customers and then we have retailers who.

You know have actually close so I would say all our teams are highly focus on both our retail partners and our providers, having a relationship manager has connecting with them.

Obviously.

There they want to make sure that were reacting in the right way from there and consumer and doing the right. Thanks, both from a forbearance perspective, but also from a credit perspective and were in daily dialogues with them I would say.

You know we feel.

Pretty good about where we are we got a pretty nice now from one of our partners who is really fell to see how we've been able to service our customers to that so highly engaged we're not sitting back we're having those conversations and making sure that we have cleared eyelock along the way.

Great, Thanks, and best of breed.

Thank you have good day.

We have our next question from Don Fandetti with Wells Fargo.

Hi, Good morning, Brent I was wondering if you could talk a little bit you'd mentioned be unemployment assumption you habits around 10%.

I assume that's higher in April.

Can you sort of flush that out.

If you look at your allowance at around 11% I would assume that needs to go higher can you talk about the reserve build with freight in Q2 versus Q1.

I would be helpful. Thank you.

Yes. Thank you Don so so as you think about it.

Really under the Cecil methodology and Hcl you know, we obviously use a set of assumptions at the point in time, which we make the estimate for the reserve.

As we stepped into April.

Again, theres, a pretty wide disparity among.

People with regard to peak unemployment that will happen in the second quarter, but again a lot of it.

The most important part is what is the recovery period look like and from that peak as you move down how quickly does it move down and how does it move down. So so most certainly the development of the retail landscape the development of how the consumer in the stimulus bridges people through this period of time is going to be critical.

You know if you've kind of follow through and say, yes. There is a a deterioration in the assumptions on the unemployment, peaking that recovery period and the effects of the stimulus that there would be higher reserve posts.

Coming in the second quarter, but we're only 20 days into the into the quarter at this point on so I really can't give you all with clarity. The exact reserve boasts we would we would see we need to see how those assumptions really developed here in the second quarter.

As we move through and again that recovery period, and the effects of the stimulus or are really important.

Attributes.

Okay. Thank you.

Thank you have good day.

And we have our next question from Ryan carry with Bank of America.

Good morning, I Hope you all well and thanks for taking my question.

Given all the moving pieces will be provide a little more insight and how you're seeing that piece of charge offs ramping well I understand determining the magnitude itself is hard to predict with an forbearance plans and government support programs all else equal is it fair to assume that charge offs would be pushed out further than they would otherwise and how you think about potential impact assuming unemployment is elevated for a couple of quarters versus.

Four months.

Yes, yes, good morning, Ryan and thank you for your your wishes. So so as we think about it today, obviously, the forbearance which is in.

Hasn't been that much for us.

Could delay potential net charge offs again, I think the stimulus package will help bridge some some.

Consumers here for a period of time, we would expect begin to expect.

That you would see charge offs really began to elevate.

In the latter part of the third quarter, probably the fourth quarter and into into 2021 again the magnitude of that we think we've we've covered in our our Hcl reserve here at the end of the first quarter, but.

The timing of that's really going to depend again on this peak in how the recovery begins to come out.

You know as we develop here in the in the second quarter to be honest with you.

Okay, and I was hoping you could spend some time on their discussions you're having with retailers around signing new programs or renewing partnerships I know you called out a couple during the quarter, but how does the current environment impact. The prospect pipeline. You can you discuss the impact of the pace of new business deals both in 2020 and beyond.

Yeah, I really believe it or not there are deals in the pipeline and we are having conversations and we are bidding on deals I would say.

Thanks.

Conversations may have slowed a little bit just as people have been trying to deal with all the the challenges facing but we felt pretty good about the pipeline. That's there we've been able to be I think and going to be very discriminatory on the things. We do look out to make sure they fit where we want to go with the business.

But I would say.

In all three platforms, we've had good activity and look I think continue to have that good activity.

Well, we'll have to see us as the rest of your progress, but right now.

Do have a decent pipeline.

What I'd add Ryan to that is as we think about these relationships and word martyr rate really.

Got it when you target them when we go to think about the economics with them clearly we've always price through.

Deterioration economic van whenever you think about a seven year deal or tenure deal.

We as a as the enterprise think about through the cycle clearly as we would look at this scenario. The cycle is at the beginning of that potential relationship in the depth of it. So we are probably a little bit more conservative and really we'll do that deal.

Only if it meets a it will we view as a.

Risk adjusted return that we think is conservative at this point.

Great. Thank you for taking my questions.

Thanks, Ryan have good day.

We have our next question from Betsy Graseck with Morgan Stanley.

Good morning.

Good morning Betsy.

Two questions first on the Rs say I think Brian mentioned in his prepared remarks that the RC impact will related to diesel day to would be coming in the back half of the year, maybe just give us some of the puts and takes there and degree of magnitude that you're looking for.

Yes, Thank you and good morning, so so as you think about it and the world's kind of change from from January a little bit.

First I just want to make sure that that you that we have a perspective on the reserve provision for the quarter and difference between Cecil and H. up though if you think about the total reserve build for the quarter being $551 million.

515, Im sorry, if I have an $11 million of that is really related to covert 19 at $40 million. So so less than our expectations. As we entered the quarter kind of came from the core book, which really.

Reflected the higher credit quality that we experienced in the vast majority of the quarter.

As you think about it the whole 551 is Cecil. So we are we highlighted if we did a triple though to be for 51, if we did see solid 551, but as you think about the 551 that ultimately is what's going to pass through to the extent that that is subject to the our say we'll pass through the our say so we would expect.

What I would say a sequential dollar or.

A lowering dollars of the RF say as we step through the year. It obviously as a percent avail A.O. lower so you'll see that that into the second quarter, and then really more into the second half of the year.

Okay, and so that is the reason it's moving into the second half is a function of see revenue recognition on the part of your retailer clients I'm assuming.

No. It that's it's as we as we implemented Cecil in and through the our essays again, we did not change the economic sharing is just really the mechanics of how a pass from us really the our assai.

And that just had a slight lag to it. So so there is no difference as you think about through the RF say in in 2020, where its cecil or age above the reserve itself.

Just tom's on a slight lag so you'll begin to feel that more in the second half and is more more the just mechanics, our works through that program agreements with our retail partners and.

Than their revenue recognition or or some other type of change the economics. It just was more mechanics on it on a on how it works in the program agreement, but again, we expect a sequential benefit as we move throughout the year.

Right got it and then just the follow up question Margaret for you is given.

The changes that we've had here over the last couple of months, how are you thinking about opportunities to either expand your functionality or what you can deliver to your retail partners or your.

Carecredit partners I'm, just wondering if there's opportunities for picking up technology or other types of systems are functionality that could enhance your your offerings.

Yeah, I'd say I'd say two things one even before that the pandemic, we were starting to get a little bit of opportunities out there that we're starting to park our interest we've kept those Uh huh.

Thank right now you've got a really wait to see how valuations play out so we're not going to.

Okay.