Discover Financial Services

Good morning. My name is Maria, and I'll be your conference operator today. At this time, I would like to welcome everyone to the first quarter 2020 Discover Financial Services earnings conference call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks, there will be a question and answer session. If you would like to ask a question at that time, please press star 1 on your touchtone phone. If you should need operator assistance, please press star 0. Thank you. I will now turn the call over to Mr. Craig Stream, Head of Investor Relations. Please go ahead.

Sure. Thanks a lot, Maria. Good morning, everybody, and welcome to our call. We'll begin on slide two of our earnings presentation, which you can find, as always, in the financial section of our Investor Relations website, InvestorRelations.Discover.com. Our discussion this morning 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 today's earnings press release and presentation. Our call this morning will include remarks from our CEO, Roger Hochschild, and from John Green, our Chief Financial Officer. And after we conclude our formal comments, there will be time, as Maria said, for a question-and-answer session. During the Q&A session, we'd appreciate it if you'd limit yourself initially to one question. If you have a follow-up, maybe cue back in so we can be sure to accommodate as many participants as possible. And now it's my pleasure to turn the call over to Roger.

Thanks, Greg, and thanks to our listeners for joining today's call. I hope all of you and your families are staying healthy and safe during these very challenging times. I'd also like to take a moment to acknowledge and thank the healthcare workers, first responders, grocery store workers, and many others who've been working so hard and often a great personal sacrifice for the benefit of our community. communities and country will be a bit different than our traditional earnings calls. After my opening remarks, John will discuss our first quarter results with a particular focus on the reserve bills. I'll then come back and provide additional information as to what we have been seeing since the end of the first quarter. Here at Discover, our top priority has been the health and safety of our employees. Our headquarters functions moved to work from home on March 16th with minimal disruption. And our technology team and field leadership did an incredible job getting nearly all of our 8,000 Discover Call Center team members working from the safety of their homes within two weeks. Our robust business continuity plans, digital business model, and 100% U.S.-based customer service helped ensure our representatives were ready even as we faced an unprecedented increase in call volumes from concerned customers impacted by the coronavirus. Early on in the crisis, we answered 95% of calls in less than five minutes. And for April, as our team got more comfortable working from home, average hold times have been under one minute. We are providing significant support to our customers across every product to help them through this crisis. We've expanded payment plans across our credit card, student and personal loan, and home equity products, and waived fees on CD early withdrawals for customers who need emergency access to their funds. Our strong capital position and balanced funding model are also a source of strength. John will provide additional detail, but I'm especially pleased with the strong demand we are seeing for our deposit products. Some of the early impacts of the pandemic can be seen in our first quarter results, specifically in sales volume and card loan growth. For the company overall, we generated a net loss of $61 million, or 25 cents per share, as the benefits of solid growth in average loans were more than offset by higher provision expense. As we adopted the CECL reserve methodology on January 1st, the reserve billed this quarter reflected the life of loan view as well as an outlook for a weaker economy and higher unemployment. Actions we have taken since the crisis began include significant tightening of underwriting for new card and personal loan accounts with additional employment verification. And we've pulled back on balance transfer offers and line increases. As I've mentioned on prior calls, for the last 18 months, we have been tightening credit at the margin, as we have felt for some time that we are in late credit cycle. But given the present environment, we are adopting a significantly more cautious view. To give you a sense for how our card portfolio compares today with how it looked at the end of 2007, our contingent liability, meaning the total open to buy for our card products, has been reduced from roughly 5.7 times loans to around 2.7 times. and the percentage of the portfolio below a FICO score of 660 has gone from 26% at that time down to 19% at the end of 2019. So while we are not immune from the impacts of deterioration in the economy, our portfolio is significantly better positioned than it was ahead of the last financial crisis. In addition to our credit actions, we are taking a hard look at operating expenses to ensure investments align with the economic environment. We are implementing approximately $400 million of cost reductions over the remaining three quarters of 2020, and we'll continue to review expense levels as the economic environment evolves. I'll now ask John to discuss key aspects of our financial results in more detail, then I'll come back to discuss the current environment.