Q3 2020 Discover Financial Services Earnings Call
[music].
Good morning. Good afternoon, My name is Maria and I'll be your conference operator today.
At this time I would like to welcome everyone to the third quarter 2020 discover financial services earnings Conference call.
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After the speakers remarks there.
Will be a question and answer session.
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Thank you I will now turn the call over to Mr., Craig Streem head of Investor Relations. Please go ahead.
Thank you Maria and good morning, everybody welcome to todays call we will.
We will begin this morning on slide two of our earnings presentation, which you can find in the financial section of our Investor Relations website Investor Relations Dot discover dot com.
Our discussion today contains certain forward looking statements that are subject to risks and uncertainties that may cause actual results to differ materially. Please refer to our notices regarding forward looking statements that appear in todays earnings press release and presentation. Our call. Today will include remarks from our CEO, Roger Hochschild and John Green, Our Chief financial.
Actual officer and after we conclude our formal formal comments there will be time for question and answer session. During the Q and a session. Please limit yourself to one question and if you have a follow up please queue back in so we can accommodate as many participants as possible now as always it's my pleasure to turn the call over to Roger.
Thanks, Craig and thanks to our listeners for joining today's call and these uniquely challenging times I'm pleased with discovers results how well our business model has performed in the third quarter, we earned $771 million after tax for $2.45 per share.
We clearly benefited from the actions we took in the first half of this year to protect employees managed credit risk and control costs, while preserving momentum on long term investments.
While significant uncertainty remains as to the extent and timing of a recovery.
We're pleased to see the return to year over year sales growth in September.
Managing credit remains a top priority we entered this recession from a strong credit position due to our traditionally conservative approach to underwriting as well as actions taken over the past few years to reduce our contingent liability and tightened credit at the margin we.
We quickly implemented changes to credit policy at the onset of the pandemic, including tightening criteria for new accounts in line increases and additional income verification.
While we saw very strong credit performance this quarter, we expect to see deterioration in the coming quarters as the prime consumer may be impacted by increasing permanent white collar unemployment.
That said, we believe we have taken the appropriate credit actions and don't see the need to make significant changes at this time.
The improvements in sales volume continued during the quarter with a return to growth in the month of September so.
Sales have improved across all categories with particular strength in online retail home improvement and everyday spend categories, partially offset by continued weakness in travel and entertainment spending.
Loan growth continues to be affected by the pandemic with total loans down 4% year over year, including card loans down, 6% and personal loans down 5%.
The drop in spending during the pandemic and our own credit tightening has impacted loan growth, but and.
But another driver has been significantly higher payment rate in our card and personal loan portfolios.
Consumers have had improved household cash flows due to reduced spending and government stimulus and have taken this opportunity to boost savings and make larger payments against their loans.
In our student loan business originations in the peak season were down year over year, reflecting the large number of students who chose not to enroll this fall.
Even in this challenging environment, our organic student loans were up 7%, reflecting innovative features like our multi year loan and our strong competitive position.
In terms of operating expenses, we remain on track to deliver $400 million of cost reductions this year.
While continuing to invest in core capabilities, such as advanced analytics to increase efficiency and drive long term value.
In conclusion this quarter, our business generates high returns as we remain focused on disciplined credit management profitable growth.
And an industry, leading customer experience supported by our 100% us based customer service the.
The economic environment remains uncertain, but our strong capital and liquidity and actions weve taken to strengthen the business position.
Allows us to continue to drive long term value for our shareholders I will now.
Ill now ask Jon to discuss key aspects of our financial results in more detail.
Thank you Roger and good morning, everyone. Thanks for joining us I'll walk through our results starting on slide four.
We earned $2.45 per share driven by solid credit performance of our portfolio and significantly lower operating expenses. While total revenue was down from last year, reflecting the slowdown in the economy. So.
Sales volume turned positive in September and net interest margin expanded nicely.
Net interest income was down 6% as the impact of lower market rates was partially offset by lower funding cost.
In addition average receivables were down 3% contributing to the decline in net interest income.
Noninterest income was down 10% driven by lower fee income, reflecting fewer late fee incidences and the impact of lower overall spending on cash advance fees.
The decrease in net discount and interchange revenue was driven by sales volume in the quarter.
The provision for credit losses improved by nearly 50 million from the prior year as a result of a decline in net charge offs and a lower reserve build.
Operating expenses were down 9% year over year, driven by marketing expenses and professional fees.
Turning to loan growth on slide five.
Total loans were down 4% from the prior year driven by a 6% decrease in card receivables.
Lower card receivables were driven by three factors.
Higher payment rate as customers continue to be mindful of their debt obligations a.
A decline and promotional balances as a result of credit tightening, which will benefit net interest margin going forward and.
And third lower sales volume.
In the quarter sales were down just 1% on a year over year basis.
Sales to return to growth in September up 4% year over year with improvement in all categories grocery retail and home improvement, we're very strong the two.
The trend continued through the first half of October with sales up 7%.
In our other lending products organic student loans increased 7% from the prior year and personal loans decreased 5%.
Moving to slide six our net interest margin bottomed out in the second quarter and improved 38 basis points to 10.19% in the current quarter.
Relative to the second quarter, NIM increased primarily due to favorable consumer deposit pricing.
Since June Thirtyth, we have decreased our online savings rate 41 basis points down 2.60% approach.
Approximately two thirds of our consumer deposits are indeterminant maturity accounts, primarily savings, which has provided an immediate benefit from deposit rate decreases.
Average consumer deposits were up 22% year over year and up $2.7 billion from the second quarter.
Looking at slide seven you can see how our funding mix has changed over time.
We're also providing details on our funding maturities and corresponding rates over the next couple of years.
Given our current excess liquidity position, we expect to issue very little wholesale debt in the near term the majority of our new deposits have been in online savings and we would expect this trend to continue in the current low rate environment.
As we move towards our targeted 70, 80% of funding from consumer deposits, we expect to see continued benefits through net interest margin.
Turning to slide eight total operating expenses were down $102 million or 9% from the prior year.
Marketing and business development expense was down $90 million or 39%. The bulk of the reduction was in brand marketing and card acquisition.
Professional fees decreased $38 million or 20%, mainly driven by lower third party recovered fees related to court closure as well as favorable vendor pricing adjustments.
Employee compensation was up $32 million or 7% driven by staffing increases mainly in technology as well as higher average salaries and benefit cost.
To date, we've realized approximately 90% of the targeted $400 million of expense reductions we discussed over the past two quarters.
We're on track to deliver the remaining 10% in the fourth quarter and continue to review the business for efficiency opportunities.
Turning now to slide nine showing credit metrics.
Credit performance remained very strong in the third quarter.
Card net charge off dollars actually came down $7 million, while the rate increased 13 basis points.
Sequentially the card net charge off rate improved 45 basis points.
The 30, plus delinquency rate improved 59 basis points from last year, and 26 basis points from the prior quarter as credit performance of our card portfolio continued to be stable demonstrating the strength of our prime revolver customer base.
Our private student loan portfolio had another quarter of strong credit performance with net charge offs down one basis points compared to the prior year.
Excluding purchase loans, the 30, plus delinquency rate improved 37 basis points from the prior year and eight basis points sequentially.
Credit performance in our personal loan portfolio continued to be very strong this.
This quarter, reflecting our disciplined underwriting and the benefit of credit actions implemented over the past several years net.
Net charge offs improved 130 basis points and that 30, plus delinquency rate was down 39 basis points from the prior year.
While overall credit performance remained strong through the third quarter, we expect the economic environment to lead to deterioration in consumer credit with delinquency slightly increasing in 2021.
The timing of the rise in delinquency in subsequent losses could be impacted if there is the second government stimulus program or economic trends shift materially.
Slide 10 shows our allowance for credit losses.
In the quarter, we added $42 million to the loans driven by a $354 million increase in organic student loans.
Other loan products were generally flat from the prior quarter.
With that backdrop of uncertain, but improving macroeconomic environment, we modeled several different scenarios and maintained a conservative view in the quarter.
Our key macro assumptions, where an unemployment rate of 11% at the end of Twentytwenty and.
And slowly recovering over the next several years. We also considered the current trends in unemployment and the increasing number of Covance cases.
Moving to slide 11.
Our common equity tier one ratio increased 50 basis points sequentially, primarily due to the decline in loan balance.
In March we suspended our share buyback program in response to the economic environment at that time and it remains suspended.
We have continued to fund our quarterly dividend at 44 cents per share.
We are in the process of preparing our second stress test submission and we'll determine our share repurchase and dividend actions subject to the final stress capital buffer Greg.
Regulatory and rating agency expectations and board approval.
In summary.
Solid record results in the third quarter the portfolio remains stable with improvements in overall delinquency levels.
Reserves were flat, except for those pertaining to student loans, where the balanced and commitment levels increased.
Net interest margin improved from the second quarter and is trending positively as a result of our aggressive deposit pricing and finally strong execution on our targeted expense reductions.
With that I will turn the call back to our operator Maria to open the line for QNX.
Thank you at this time.
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Our first question comes from on a Sunday for Connie of KBW.
Thanks, Good morning, and good quarter.
I appreciate all the color on reserves and provisions Roger.
Clearly, there's nothing that we see within the credit metrics that suggests a weakness outside of the headlines on potential white collar layoffs are there any specific signs that youre seeing inside the portfolio that lead you to be concerned and how significant a change in the environment to would there have to be for you guys to have to build reserves again.
So I'll, let John cover the part about reserves Sanjay, but in terms of the environment I think that the jobless claims numbers and we'll see with this week has but you know seven straight weeks over 800000, and more and more of that permanent unemployment and.
Why color is you know a reason for ongoing concern, but I think as you look at our portfolio I'm very pleased with the performance across all products and you can see that from the broadest metric we this.
Close the 30 day delinquency rate.
Yeah, and Sanjay in terms of reserving unit.
We.
Modeled a number of different.
Assumptions and took that Curt conservative approach or.
Across the board what we saw was actually as Roger said excellent underlying portfolio performance.
There is there is that level of concern in terms of jobless claims and and the impact on prime consumers.
But.
But today, we don't see anything that.
That's out there that would suggest that reserves.
Our our I'll say week or did strengthening at this point, we did model a second round of stimulus. We don't know if that's going to happen there's.
Some reason to be optimistic, but no one no one can tell on these sorts of things. These days so we'll.
We'll see but we'll we'll look at added through the quarter, the fourth quarter and make a call in terms of what's appropriate from a.
GAAP standpoint.
Thank you.
Our next question comes from the line of Rick Shane JP Morgan.
Thanks, guys and good morning.
Look we're entering.
What's historically the most important part of the year in terms of spending.
In consumer behavior.
Curious two things you're seeing an uptick in spending which is a good sign.
Curious how you will approach this from a marketing and rewards perspective will pull back a little bit.
To this point to manage expenses, but given.
Given the consumer seems to be rebounding, how will you be a little bit more aggressive on rewards or marketing as we head into the holiday season.
Yeah. Thanks, Rick.
In terms of marketing, while we did cut expenses in line with the economic environment, we continue to market across all of our products that have been very excited actually about the quality of new accounts, we're bringing on the card book as well as some of the costs were seeing as competitors pulled back more graft.
Aggressively now I do expect some of that to normalize over time, but again, we're going to continue marketing through the fourth quarter in terms of the rewards program. So our program is well suited to this environment consumers prefer cash over Myles I think a lot of the mylos programs I see in the marketplace our stock.
Troubling to add relevance and redemption options.
In particular, our strong partnerships with pay Pal an Amazon some of the programs, we're already putting in market with Amazon will serve us well in the fourth quarter.
Great. That's very helpful. Thank you guys.
Our next question comes from line of Thompson Vetting of Wells Fargo.
Hi, good morning.
Roger I mean.
These are the times, where you can potentially stepping in and gain share and be opportunistic.
We saw American express by cabbage.
Do you have any thoughts on your.
Your position of strength, how you could use that maybe on acquisitions are you going to just sort of hold tight given the uncertainty.
Yes.
You know I think we are leveraging that position of strength I believe we're gaining share both in terms of sales and loans in card and had a very strong.
Season for student loans.
Acquisitions are a little more challenging.
And so as we think about how we use capital the top priority is supporting organic growth next comes a mix of dividends and buybacks back.
Acquisitions tend to be a distant third our primary interest is in the payment space, but while valuations have come in a bit, especially where it cross border type company. There is still very high and so a lot of what we're seeing our opportunities for either investments partnerships. So we'll look at it.
But I think were probably more likely to be aggressive on the organic side subject to our conservative credit policy than than making acquisitions.
Okay, and just one quick clarification, what percentage of the portfolio is promo right now because it sounds like thats going to help on the card yield.
Going forward.
Yes, it's.
It's come down recently Weve.
We've been intentional about that in terms of.
Taking a look at promo balances as well as balance transfers.
So.
So and so we're not I think usually you guys are in the mid teens or somewhere in that range, yes, it's it's right around.
15 or so.
Okay, all right. Thanks, a trending.
Our next question comes from the line of Bill car catchy of Wolfe research.
Thank you good morning, Roger John encouraging to see positive operating leverage in this environment, that's consistent with what we.
What we've seen over the last decade, plus from you guys, but there had been some concern among investors. When you guys gave guidance earlier this year pre coded that discover may.
They had lost its expense discipline and that the reason that you guys had guided to negative operating leverage was due to years of chronic under investment Roger understanding that there will always be one off investments that need to be made but that aside can you speak to your confidence level in being able to continue to generate consistent positive operating leverage.
As we look to the other side of this.
Yeah. Thanks, Bill So first having been here for over 20 years I have to maybe disagree with the phrase chronic under investment I think our investments have been appropriate but at the beginning of the year, we saw an opportunity to invest more and so I would characterize it that way.
Clearly the year changed dramatically and hopefully you've seen very strong expense discipline in terms of the target we put out there and how well we're progressing against that target.
It's a little challenging just to look at operating leverage because that includes well coal sort of day to day corporate type expenses that were always trying to bring down but then also marketing investments that drive profitable growth in high returning accounts and so it's a blend of those two but again I think you can expect.
Back to see the continued expense discipline that I think has always been a hallmark year discover our overall lower cost operating model, but we will invest according to the opportunities we see in the market place and I guess I'd point you to the returns we're generating as an example.
Although the effectiveness of that business model, even through extremely challenging cycles.
Thank you.
Our next question comes from the line of Ryan Nash of Goldman Sachs.
Hey, good morning, guys.
When running Marni.
John on the net interest margin you saw some really nice expansion you talked about the benefits that you are seeing from lower promo activity can you maybe just talk about some of the puts and takes from here asset yields are obviously going to be improving and it seems like the funding tailwinds are sizable over the next couple of quarters. So.
If we had peaked out in the low to Fortys could we actually potentially see the margin somewhere in excess of that over the next few quarters.
Yes so.
You know we were mindful in terms of what what we included here in the in the presentation as well as in terms of the comment.
To provide frankly, an additional insight in terms of what's happening to the funding mix the maturity profile and the.
The cost of our debt stack and.
But what you can see there is based on the maturity profile and their cost we're seeing versus.
Online deposits that.
There will be an op.
An opportunity to expand.
Expand net interest margin now.
Thats subject to a lot of different things right. Obviously, there's one piece, which is the health of the portfolio.
And thats been strong.
Certainly the the mix of risk.
Revolvers and Transactors will also have an impact and typically impacts the fourth quarter a bit but.
But overall as you look at where we are this quarter.
I see some some upside from that from my vantage point today.
Got it and maybe if I can ask a follow up question from a topic that we send them before so John I think in your prepared remarks, you commented that you are.
You are looking for additional efficiencies maybe can you just help us understand and maybe.
Maybe Roger can hop in on this too no other than 90% of the 400 that you save how much of that is just investments that have been deferred versus.
Actual core efficiencies that you guys have identified and taken out and what can this mean for you know the trajectory of the cost base outside of marketing as we look into 2021. Thanks.
Yes, so thanks so.
I would characterize it this way as fee the fee.
The $400 million of cost savings from the previous guidance.
I wouldnt necessarily call that a deferral what I would say is we took a look at the economic environment and took $400 million of our planned spending now.
Now.
As I said in the in the Mark to remarks, which which.
Which you clearly picked up on Ryan was.
That the bulk of that has been on marketing and brand now as.
As we look through the balance of this year and some of the actions that we took we saw benefits across the host of.
Of opinion outlines expense line, specifically and we're going to we're going to use that frankly as has the duty as a new benchmark.
In order to really make make some determinations on what we need to spend and 2020 one to ensure that we continue to grow profitably I would say debts if.
If the economic environment continues to improve.
It's natural that we're going to spend more money on customer acquisition in order to drive profitable growth into the future.
But the other the other expense lines.
Professional fees information processing.
Other other miscellaneous expense, we're going to keep a.
A foot on those to ensure that we're disciplined about how we are spending the dollars.
Great. Thanks for all the color.
Our next question comes from the line of Moshe Orenbuch of Credit Suisse.
Great Great. Thanks, most of my questions have been asked and answered, but I guess.
I sort of am struck by the fact that the efficiency ratio in the quarter was was actually better than it was in 2019.
And your your kind of demonstrating certainly likely to be the best growth in spend volume in one of the benefits if not the best in and receivables source.
Smallest decline and.
And I guess I'm also struck by stuff, we see in the industry that there's there's continued more cashback mail from some of your big competitors, where that wasn't as big a focus and so.
Kind of maybe.
Hey, some of this has been discussed already but good and I'm sort of struck by that it seems like you have an opportunity and where does where can you direct that attention and how much.
How much do you have in kind of available.
Whether its spending on rewards or marketing like what are the what are the tools and how are you going to use them over the next few quarters, particularly now as we're going into the holiday season. Thanks.
Yes, Thanks Felicia.
We are using all the tools, we have available I would point out there still is a good amount of economic uncertainty and so we are not changing credit policy on the card side I think we want to see more and more signs of sustained recovery by.
Cash back program is resonating well as I said earlier and Theres always a lot of competition in cash rewards from major issuers. So I wouldnt measures settling characterize it as more intense than ever but it is a time where consumers are are we thinking which cars. They want you have to be willing.
I need another frequent flyer miles at this point and the other part is the only major issue with no fees.
On our any of our current products that no annual fee message resonates surprisingly well and then finally I point you were seeing great strength on the other side of the balance sheet on the deposit side, where we compete the same way right good value, but an outstanding customer experience. So we're really excited.
Yes, certainly uncertainty as to what the holiday season will bring as I talk to retailers out there, but I feel good about our ability to continue to gain share.
Okay.
Thanks, so much.
Our next question comes from the line of Kevin Barker of Piper Sandler.
Good morning, I, just like a follow up on some of the NIM comments on you're seeing some a little bit more resiliency on the asset yields in particular.
The personal loans and card card rates.
Could you talk about the competitive environment in both of those products and your expectations for those yields.
At least in the next couple of quarters just given.
The resiliency that we've seen in the near term.
Yeah.
Yes.
So we.
We look at the.
The card yield.
The bell overall be relatively stable stable subject to.
Kind of the mix of balance transfers and promos and as I as I said earlier, we're going to be mindful in terms of those sorts of decisions. If we can do that.
Do some promos or balance transfers safely and their credit environment, we'll do that because that would be high returning.
Hi, returning customers.
But you know the leverage that we're going to get in future quarters will come out of the funding base.
Yes, Kevin May one thing I'd add to it as we said pricing given how hard it is to reprice cards. After the card Act, we're not reacting to specific competitors in a given quarter, we're taking working closely with financially very disciplined through the cycle book and so it's really where our growth is occurring and that promo.
What makes that will drive it as opposed to reacting to competitors.
Got that all makes sense and then regarding the liability side.
The order of magnitude in the drop.
Liability costs over the last couple quarters are obviously very strong just given the rate environment I mean, how much more.
Room do you feel like you have to.
To bring deposit costs lower just given the current rate environment.
And the outsized amount liquidity on your balance sheet.
Yes.
So we continue to look at that and the deal.
The decision will be subject to two factors one the amount of liquidity.
We have on the balance sheet and right now we're in a situation, where we have excess liquidity and then the second the second piece of the equation is the competitive landscape and then third.
Third which is a consideration of that business is.
Certainly the customer relationships and ensuring that.
Our long term good quality customers aren't aren't aren't feeling like they are impacted in a way that's unfair now with all.
With all that said you know.
And I'm seeing a persistent low rate environment and with the persistent low rate environment I do believe that there is some some amount of room to to price.
Price downward, but but again it is caveated by by all those points.
Just mentioned.
Thank you very much.
Our next question comes from the line of Bob Napoli of William Blair.
Thank you and good morning.
Just a.
Wondered what youre built we've built into your reserves as far as the trajectory of charge offs.
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And I would expect I mean, I guess, you're not explicitly given where delinquencies are you not expecting to see charge offs.
Move up.
Much in the fourth quarter, and then you have more back half weighted to 2021.
Yes, so I would start up.
Bye.
By stating that the portfolio performance versus what we thought it potentially could be when we close the book in March has been extraordinarily strong and we're really really pleased.
Please be advised that in.
In terms of trajectory of both delinquencies and charge offs. Yes, we are seeing a certainly a push from 20 and 21.
And.
The absolute quantum of that will obviously depend on all the factors that we built into our reserve calculation GDP unemployment, new jobless claims stimulus.
Or lack thereof, so we will.
We're going to run a monitor the portfolio but.
Just to kind of netted or for you and the other folks on the call.
20 looks super solid 21 level of uncertainty and we expect the bubble to push through into.
Certainly.
Beginning may be in the mid point of the year into the second half of 21.
Thank you and then follow up it takes that jobless claims 787000. This morning at big improvement that ridiculous behind.
Right, but yes, I mean direct direct bank.
Your physician Roger has a direct bank.
It gives and I think it's the right strategy for the long term are there new products or services or.
That you're planning to build through that direct bank and we have obviously a lot of these neo banks that are delivering different products and maybe to a different demographic than in discover focuses on that but where do you see opportunities to leverage off of your direct bank strategy.
So in terms of positioning ourselves as the leading digital bank I think we're in great shape and it's leveraging the products. We already have I don't see the need for expanding our products. If you look at the bratsk from home equity to a broad range of deposit products.
Including checking or debit accounts great. So.
Great strength of course on the card side personal loans. So we have the products I think the opportunity is building awareness of the products we have.
And that can drive a lot of growth. So I'm very excited about where we're positioned I'd say, maybe one of the big differences versus the neo banks is perhaps a different focus around profitability. So.
So we'll see how that plays out over the long term, but but I couldn't be more excited about where we're positioned.
Thank you appreciate it.
Our next question comes from the line of Mihir Bhatia with Bank of America.
Okay.
Good morning.
Thank you for taking my question hopefully just wanted to clarify did I hear correctly. You said you has more being the second on the stimulus in your.
Modeling for credit.
Yes, we did there is an output in our modeling, reflecting a second round of stimulus.
Okay, and then just one quick one on the I was hoping to get a little bit of an update on the network business.
Specifically I was looking at it looks like your volumes grew pretty nicely both both the network.
But yet you have could you did the revenue decline the both of those businesses. Just wondering what is happening there is it just the embedded this vaccine has the mix issue just hoping to get a little multilevel. Thank you.
Yes. Thanks, Thanks for the question so.
No. It was actually a combination of two things so.
There was a bit of a mix shift to.
Some products with lower fees in rates.
There was also.
Some higher incentives that came through based on the on the mix that.
We enjoyed in the quarter.
I would say that in terms of overall volume.
Was up 16% year over year at least for pulse and certainly we are happy about that we are continuing to look at the mix and incentives to ensure we're driving property level of profitability for the investments were making there in that area and the payments business.
Okay. Thank you.
Our next question comes from the line of Betsy Graseck of Morgan Stanley.
Hi, good morning.
Good morning Betsy.
A couple of questions just first off on.
The outlook for growth I know typically it's a function of account growth and.
Balances per account and obviously you've had some shrinkage recently because of the spend levels that we all know about I was just wondering if we could dig into the account growth aspect of that equation just understand how account growth has been going.
What.
Cove it hasn't into account growth, how you flex and do you see any opportunity to accelerate account growth from here as we go into them.
Back half of the year and 21.
Yes, so just one thing on the receivables growth.
A higher payment rate is a big factor as well.
So good news on what its doing on the deposit side of our business, but that is having a significant impact on loan growth for both card and personal loans in terms of new accounts, while we don't disclosed.
I'd number on that what I would say is that we think we've probably sustain new account marketing more than a lot of competitors as I look at industry metrics and so we feel good about that man.
And kept our marketing spend sort of appropriate for the environment and four are somewhat narrowed credit box with the changes we made earlier in the year, So I would not exceed.
I would not expect dramatic changes until we get more certainty in terms of the pace of recovery, but we've continued to market across all of our products.
Okay. So you've been pleased with your account.
Gross profit.
Generated over the past couple of quarters, that's what I'm hearing from me Roger is that right.
Yes, and in particular, I think we called out on the last call. Some of the cost per account that we were seeing in different channels as competitors pull back more.
Right.
Okay, and then just separately on credit in the outlook for credit here.
One of the questions is around stimulus and if you don't get it how much did that impact you know.
Potential changes in the reserve and then the other piece is on the mortgage.
The mortgage forbearance I think I believe a majority of your customers have mortgages and I'm wondering if you know.
Yes through credit data check.
How many of those people are benefiting today from the mortgage forbearance and does that feed into your reserve analysis as well. Thanks.
Okay, yes so.
I'll talk about the credit outlook and then handle the mortgage question on the back end so in terms of those stimulus.
That we modeled it is one of many inputs.
And we'll we'll look at.
What happens in the fourth quarter and see how the roll rates are progressing in in the portfolio through the quarter to get to.
I'll say, a bottoms up view of actually.
The impact there so.
No specific information on that other than to say that.
Under.
Underlying roll rates are far more positive than we thought they would be at this time and.
And if another round of stimulus doesnt come in.
I think thats going to be tough for a number of people that have been impacted by the pandemic and progressive later it will stop.
Start to impact the prime revolver base and that's why we're conservative in terms of our reserve outlook here for the third quarter.
But.
Overall.
We're again, we're pleased with our positioning now.
Now in terms of the mortgage forbearance.
That said, we really don't have any data on that what we are what we are seeing is.
Our home equity business continues to.
It's open for business, we are underwriting standards.
At Titan mildly through this and.
And its position.
Pretty well and open for business.
Okay. Thanks, Tom appreciate color.
You're welcome.
Our next question comes from the line and then Joel.
Got you bank.
Great. Good morning, Thanks for taking my call.
I wanted to take a look at capital trends and by that and I know that you guys are in the midst of preparing the second stress test submission, but I was wondering in terms of timing as to when you would get a better sense of the economy in order to profit possibly.
Can execute the buybacks warmer time it did in the back half with 21 into more into 22, just any thoughts on when you guys feel you'd have more clarity in terms of the economy in order to reinstate that buyback program. Thank you.
Great. Thanks, Thanks for the question so.
We're submitting our second to second round of stress test in November and.
Included in their number of judgments on I am not going to get into the details to be premature on that.
I would say as you take a look at the capital trends for the business.
They're they're super solid our capital levels are higher than our targeted levels and.
And Roger Roger the specific in terms of our team.
Tiering of capital allocation priorities, so theres no.
There is no change to that and we're going to we're going to work through kind of the details with with the fed.
Other regulators rating agency and then report.
Sorry, I can't be more specific than that at this point.
Rio next question.
Our next question comes from like a market the freeze of Barclays.
Yes, Thanks, just wanted to drill down a little bit further on the funding tailwinds.
Could you give us.
A better sense of kind of what mix, you're targeting between the DTC and affinity deposits and brokered.
Is there a minimum level broker that you want to maintain and also kind of whats the funding difference.
But between those two just to give us a sense of how much your deposit funding on average could compress yeah.
Yes, so we want to keep the broker CD channel opened so we'll.
We will continue to.
And a test that the the relative change or difference between that direct to consumer and the brokered deposits narrowed narrowed significantly on the early stages of pandemic. There was a substantial difference and the market took care of that and narrowed the gap.
We do we do enjoy a slightly better pricing if it's drew.
Direct relationship services.
Through a broker so that what that will be our focus in terms of overall.
Kind of mix of those.
I would expect the broker channel to continue to contract a bit.
And the.
In the direct channel.
Expand.
Okay and in the <unk>.
With such low funding on the ABS.
Why why not maintain that are expanded or they are like liquidity concerns of having assets unencumbered, but you're managing to or is there something else I'm not thinking about node b.
The cost there on the ABS that's reflected as.
Net net of the hedge impact so fortunately we.
We hedged we hedge those and have a nice benefit coming through over over the next couple of years.
The actual the actual I'll say contract rate on those ABS transactions.
Quite a bit higher than that so that would frankly that was.
The rates were enjoying there's just good work on the part of our Treasury team do to hedge that so.
Well, we will continue to.
Ensure that.
The ABS channel is there and present and available to us.
But.
It will certainly come down.
As maturities.
Profile indicates.
Okay got it thank you.
Our next question comes from the line as dominant rally of Oppenheimer.
Hey, good morning, Thanks, so much for taking my question.
I just wanted to see if we could kind of square the circle around unemployment and where on the unemployment rate is and the kind of liquidity that the consumer is being given up in sort of this day and it sounds like we are we at least we both agree that delinquencies powerfully given this liquidity don't even start rising and so the.
First of the year and so when you think about your expectation for unemployment and 11 by year end and where we are and the idea of a white collar rush of unemployment.
That would be quite the rush of white collar unemployment versus the amount of people.
That are unemployed now versus a steady state and so can you just talk about where.
Where the perhaps the the job losses come from and why such a large magnitude of white collar versus still unemployed college blue collar that we saw in now and how thats influencing your your your outlook for the 11% unemployment rate. Thanks.
Yes. Thanks.
Thanks, Thanks, Dominic so.
You touched on a lot there and and I would sum it up by saying there is a level of uncertainty around what actually will happen on unemployment now the 11% does does feel at this point like that.
I'll call it a robust number but.
What we what we.
What were trying to get a good clarity on is as as as the service workers, who initially were impacted by the pandemic containment activity.
When Tom.
Went to the unemployment ranks some of those have returned.
We certainly have seen some some indications across the economy that.
Across the nation and frankly the world that.
It could be a tough winter here from a coded standpoint.
So.
So thats going to further impact not only serve.
Service industry, but the entire economy and so as we as we sit here today, we're mindful of that as a risk and.
And continue to.
Kind of maintain the reserves, where they are so we don't expect there to be a rush of white collar unemployment, but what.
What will be clear and we've seen some of this already is his businesses are sizing so.
Both their professional staff and and the.
Blue collar staff for the business at hand, and and there's enough indications today that there could be some contraction.
And.
And as such.
The unemployment numbers not exactly an easy number to predict but we feel like as an input to our model is appropriate at this point.
Great. Thank you and if I if I could just have one follow up here I really appreciate that and.
If you look at the other expenses on the expense base.
It looks like the acceptance incentives came down as well as fraud, even though were kind of in this more online environment could you talk about what you're doing on the fraud side and and how that was and did you renegotiate and the the global acceptance or is that a function of just volume and mix year over year versus the third quarter of 19 on.
How your expense base and other expense came down thanks, so much I really appreciate it.
Yes, so in terms of fraud, it doesn't really reflect.
Reflect any renegotiations.
With any of our merchant partners in fraud is one of the areas, where we're deploying advanced analytics and next generation modeling.
And leveraging additional information sources, so I'm really excited about the progress the team is making there and it's part of why we're so committed to continuing to build out our analytics capability.
Yes, and then I would just add.
In terms of the other expense line so.
So we did see lower global acceptance.
Expense in the quarter and.
Thats a function of two things.
Little bit on the on the economy and and.
The liability associated with.
Some of our partners executing on.
At terms associated with previous incentive agreements and then frankly, just the level of uncertainty that's.
Caused us to be cautious on us.
I will say.
Signing up new rich incentive deals now, we're still doing that where where it makes sense, but in terms of timing.
Little bit cautious on that one, but we've we've seen actually great.
Great effectiveness from our procurement team drive.
Driving year over year savings on on the entire indirect cost base and.
And we're still as we say.
As we said in the remarks.
Investing in advanced analytics, and some digital capabilities that.
Driving up information processing, but my expectation is that.
We continue that we are and we will continue to.
But to get more efficient and overall information processing and technology spend.
Great Thanks, and congrats on the quarter.
Thank you.
Our next question comes from the line of Bill Katachi from Wolfe Research.
Thank you as a quick follow up on credit.
A lot of consternation around booming credit headwinds in the TDR portfolio can you discuss how that's been performing.
Yes.
So thanks for the question Phil So.
You folks don't don't have the PDR to disclosures, but they'll come out or come out.
Well come out in the Q, when it's published and what you'll see there is ready.
Relative to the first quarter.
TDR volumes will will be substantially down.
But.
There's also the impact of revenue.
The carriers to act with regulatory exclusion for certain modifications that.
That.
Bank, such as ours make so if you put those two together and compare where we are in the third quarter versus where we were in the first quarter and call. The first quarter pre pandemic relatively stable so.
So.
The point there is that.
You know, there's not an abundance of activities or a massive jump in any sorts of activities there that impacting delinquencies. We do these programs to improve.
The cash flows of the company and ensure that.
When there is a temporary issue with a customer that they can manage through it and return to paying their bills. So.
You know from a credit standpoint, TDR standpoint, theres been good.
Good execution.
From our our customer service teams.
Thanks, guys.
Ladies and gentlemen that was our final question I'd like to turn the floor back over to Craig Streem for any additional or closing remarks. Thank you Maria thanks, everybody for your interest in joining the conversation.
Excuse me this morning, and we're available for any follow up questions that you may have thanks have a good day. Thank you everyone.
Thank you ladies and gentlemen, this does conclude today's conference call you may now disconnect.
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Hello.
Adam.
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No.
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Yes.
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