Good morning, and welcome to Alliance Data's First Quarter 2020 Earnings Conference Call. It is now my pleasure to introduce your host, Ms. Vicky Nakhla of AdvisIRy Partners. Ma'am, the floor is yours.

Thank you, Carol. By now, you should have received a copy of the company's first quarter 2020 earnings release. If you haven't, please call AdvisIRy Partners at (212) 750-5800. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Alliance Data; and Tim King, Executive Vice President and Chief Financial Officer of Alliance Data. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Alliance Data has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP will be posted on the Investor Relations website at alliancedata.com. With that, I would like to turn the call over to Ralph Andretta. Ralph?

Thank you. Good morning. Thank you for joining this morning's call to discuss our first quarter results. We are in unprecedented times, but our organization has responded immediately and effectively to the pandemic challenge. We have moved swiftly during the month of March to activate business continuity plans and implement work-from-home protocols. I am proud of our associates and the global leadership team at Alliance Data who have completely risen to the challenge. We are fully operational and performing well throughout this crisis. Today, I will discuss our immediate response to COVID-19, review our first quarter results and update you on the steps we have taken to improve our operating model with an eye towards investing in our future. On Slide 4, you can see a summary of the actions we have taken to support our associates, card members and consumers, brand partners and clients, and of course our communities. First and foremost, we have taken a number of steps to protect the health and safety of our workforce. Currently, 95% of our associates worldwide are working from home. We have instituted paid leave where appropriate as well as other health and welfare accommodations to support our associates during this difficult time. For the small number of associates who must still come to the work site, we are paying bonuses, practicing social distancing and staggering shifts. For our card members and consumers, we proactively introduced a number of forbearance options, including the option of skipping the next payment without a late fee rather than enrolling in a formal hardship program. We are also waiving late fees where appropriate. For our brand partners and clients, we have maintained a regular dialogue to understand both their current and future needs and to support them as they, too, adjust their business operations. At Card Services, we are working with our brand partners to optimize their budgets and marketing support, shifting resources to areas that have become more relevant, like e-commerce. At AIR MILES, we have added merchandise reward options to increase engagement as collectors' interest shifts from aspirational items such as travel to more practical domestic merchandise and stay-at-home essentials. At BrandLoyalty, we are extending the length of certain short-term loyalty programs, allowing consumers a better opportunity to collect and redeem points prior to program expiration. The goal is to increase in-store traffic for our grocer clients. Additionally, we immediately responded to community emergency relief needs in virtually all of our key locations, including contributing to food banks and mental health services organizations for youth. We allowed collectors in our AIR MILES program to donate miles to charitable organizations for relief efforts. We also accelerated corporate charitable donations planned for later in the year to support immediate emergency relief efforts and continued to match our associates' charitable donations dollar for dollar. These actions exemplify Alliance Data's commitment to responsible business practices and demonstrate our sustainability strategy in action as we respond to the needs of our key stakeholders during this time. I am proud of these efforts and our culture of partnership, perseverance and resolve in navigating this difficult period. Now let me talk about the first quarter. It is best to break this down between the first two months and then March, when COVID-19 began to have the impact on our retail partners and customers. Our business was tracking well in January and February, with revenue up mid-single digits and profitability increasing by double digits as we benefited from higher yields, lower operating expenses and cost reductions made last year. As retail partners closed and travel slowed in March, we began to experience consumer spending declines, which continues today. In Card Services, our credit sales declined more than 50% as brick-and-mortar retail essentially stopped, partially offset by a shift to e-commerce. At LoyaltyOne, we saw a similar story with business holding strong through mid-March but falling off sharply as travel-related redemptions declined by 90%. The combination of strength in January and February and softness in March led to a 4% consolidated revenue growth for this quarter. Trends at the end of March for Card Services were similar to what we are experiencing today. Retail brick-and-mortar sales were down more than 80% while e-commerce was down in low single digits. Regarding first quarter profitability, we benefited from approximately $50 million of the $150 million of cost savings we expected for this year. Operating expenses were down $90 million in the first quarter, adjusting for one-time benefits. Tim will discuss our savings in greater detail from the actions we took in 2019. Considering our adoption of CECL effective January 1 and the impact of COVID-19, we increased our loan loss reserve by $404 million, resulting in first quarter earnings before taxes of $25 million. Based on what we know today with April nearly over and our current economic assessment, we believe this is the appropriate level of reserves for the economic slowdown and related loan losses. It puts us at a reserve percentage of 12%. Of course, we continue to monitor the economic outlook, which remains fluid, and we'll adjust further if necessary. Looking at losses in the COVID-19 environment, we are likely to see increased pressure on loan losses in the back half of 2020 consistent with the reserve actions taken this quarter. We are also seeing increased delinquencies and requests for forbearance, which we would expect to continue, given the increasing unemployment. We do expect some mitigation from the government relief programs, including additional unemployment benefits and other stimulus programs. We also expect to see a benefit when the states begin to relax stay-at-home restrictions and begin a staged reopening. Given the uncertain climate and the limited visibility into the duration of this health crisis and its impact on the economy and consumer spending, and consistent with other companies, we are suspending our guidance for 2020. Our priorities are to protect our liquidity, to work proactively with our customers and partners, and to be ready for a phased reopening of the economy. We continue to proactively manage the business with an eye toward enhanced liquidity and competitive positioning. We are not taking our eye off the ball on strategic repositioning and continue to look for operational efficiencies and cost management improvement through the eyes of a fresh CEO. We are taking prudent steps today to strengthen our financial position and mitigate risk we may face during this next several months. To that end, we announced a reduction of our quarterly dividend to $0.21 from $0.63, which will reduce our annual dividend by approximately $80 million. Further, like many other publicly traded companies, we have suspended our share buyback program. We also have a number of other levers we can pull as needed to add to our liquidity and reduce our expense base. Tim will speak more fully regarding our liquidity, but I want to remind you of what I said last month. We have over $1 billion of liquidity at the parent level with no near-term maturities on our approximately $3 billion of debt. We continue to rigorously stress test the business, prudently using more aggressive cases than we modeled even a month ago. Based on our underlying assumptions of large reductions in GDP, increased unemployment, less disposable income and lower retail spend, the outcome is the same. We are cash flow- and EBIT-positive under some fairly dire economic scenarios. To navigate through the current period, we are focused on prudent credit and risk management, near-term expense reduction and strategically investing in our business. For credit and risk management, we have put our recession readiness plan into action and continue to move through its stages. Compared to 2009, we believe our portfolio is better positioned today as it is more diversified and we have enhanced our scoring model, which stratifies risk via dozens of different metrics. We also skewed towards a higher percentage of prime card members today. We have proactively implemented our forbearance programs, which are being actively embraced by our card members. Since the middle of March, nearly 3% of accounts and 4% of balances have engaged in this program. It's still early days, but we expect this program to continue to grow. As part of our recession readiness plan, we are managing towards higher credit scores and have tightened our customer credit. Consequently, our credit exposures are down by 25% from the start of the year. We also closed inactive accounts to further limit credit exposure. We have taken a disciplined approach to expense management and operations. Actions already have been taken, as evidenced by the $150 million of savings we expect for 2020, and we have identified and begun to execute on over $100 million of additional cost savings. These savings will come from adjustments in marketing spend, renegotiation of contracts and operating expenses, all while maintaining our service levels. Finally, as we focus on our future, we continue to explore strategic investments for our business. Areas of interest include digital and information management, new customer-facing products and services, and continuing to enhance our recession readiness capabilities. To sum up, we are pleased with the early progress made on repositioning Alliance Data and generating cost savings, which was evident in the strong performance we had in the first two months of this year. Our business continuity plan is functioning well. We have taken actions to further manage our risk, strengthen our liquidity to improve our resilience and identify additional opportunities to reduce our cost structure. Importantly, we continue to thoughtfully evaluate strategic investments that would enhance our business in a post-pandemic environment. Now I will turn the call over to Tim for a more detailed review of our financials. Tim?

Okay. Thank you, Ralph, and good morning, everyone. Let's turn to Slide 5, where I'll start with an overview of our consolidated results. Revenue grew 4% in the first quarter driven by higher yields in our Card Services business and consistent with our expectations. We also saw increases in our LoyaltyOne segment when adjusted for currency fluctuations and the sale of Precima. We benefited from large expense savings across all areas of our business, including corporate, card, and LoyaltyOne. All the expense initiatives we undertook last year generated approximately $90 million in direct operating savings. As Ralph discussed, we made significant improvements in our payroll, facilities and marketing costs. However, income from continuing operations was down 83% year-over-year. The driver of this decline was our provision expense, up $404 million, as we stepped up our reserves considerably for potential future losses. Looking at the business pre-provision demonstrates that the underlying business benefited nicely from the revenue and decreased expenses. Pre-provision earnings before taxes was up $216 million or 46%. Net income and net income per diluted share were down 80% and 70%, respectively, consistent with our increase in provision expense. Let's turn to Slide 6, where I'll discuss LoyaltyOne. Revenue for this line of business was down 3% to $198 million and adjusted EBITDA, net, increased 5% to $58 million. Adjusting for Precima, which was sold in January of 2020, and the effects of the currency fluctuation, revenue increased 7% and adjusted EBITDA increased 6%. Breaking the results down further, AIR MILES revenue, excluding Precima, increased 1% on a constant currency basis, primarily due to an increase in brand revenue associated with strong issuance growth. AIR MILES issued increased 5% in the first quarter with strong increases in January and February prior to the slowing in March due to COVID-19. Brand royalties and revenue increased 11% on a constant currency basis due to a strong performance in our grocery clients. A strong start to 2020 was tepid in March, as clients reduced promotional efforts due to already strong store traffic and redirected focus on sourcing. Moving to Slide 7. I'll review the underlying card metrics. Credit sales were down 3% in the first quarter. As Ralph mentioned, heading into March, we were trending towards high single-digit growth. In the month of March, we saw a clear downward pressure on our sales. As we sit today, activity remains down almost 50% year-over-year. Normalized card receivables, which include held-for-sale receivables, were down 1% on the quarter to $18.6 billion. We saw pressure from the sales tail-off late in the quarter. Prior to this, we were trending towards low-digit growth. At the end of the period, our end-of-period receivables, $17.7 billion, were up 5% year-over-year as expected. This was due to the ramping up of our '19 vintage. Gross yield was 25.5%, up 140 basis points due to the slowing growth and the ramping up of new receivables. Operating expense as a percent of receivable, excluding mark-to-market adjustments, was 8.2%, down 130 basis points year-over-year, benefiting from the cost reductions we have discussed. Our principal loss rate was 7%, up 60 basis points and consistent with our expectations at the start of the year. Our delinquency rates of 6% was up 80 basis points. We do expect both our principal loss rate and our delinquency rate to increase as we are seeing deterioration owing to the effects of COVID-19 and the lower denominator due to lighter sales. We'd expect related charge-offs to be evident in the second half of the year. Finally, our ROE of 18% was down from 32% a year ago. This also is solely a function of the significant increase in allowance during the first quarter. Turning to Slide 8, I'll review Card Services' financial results. Card Services revenue increased 5%, but earnings before taxes and adjusted EBITDA were down 88% and 84%, respectively, entirely due to the increase in provision for loan losses. Our first quarter provision was $656 million, up 160% or $404 million from last year. This led to an adjusted EBITDA, net, of $47 million and earnings before taxes of $32 million. Operating expenses of $385 million were down 24% year-over-year. Embedded in the savings is the cost reduction from marketing, payroll, facilities and consulting expenses. Adjusting for the mark-to-market gain on sale, our operating expenses would have been $401 million, which would be $44 million or 10% better than last year. Moving to provision expense, there are a couple of callouts. First, as we expected, charge-offs were up year-over-year. However, the big increase in our provision expense was the allowance build. For the quarter, we added $336 million to our allowance to the P&L and another $644 million during the CECL adoption for a total increase in our allowance of $989. Our quarter-end allowance is now 184% of where it ended at the end of 2019. The last item worth noting on this page is our funding cost. There was a slight increase year-over-year of about 4%. This is driven by a modest increase in our cost of funds. Our cost of funds increased to 2.4% this quarter from 2.3% a year ago. Let's turn to Slide 9, and I'll give you an overview of our liquidity. Starting with the company. At the end of March, we had $1.1 million of available liquidity, which was a combination of $588 million of cash on hand and $500 million available on our revolver. In addition to the healthy liquidity position, out of abundance of caution, we have taken additional steps to strengthen our balance sheet. Consistent with others, we have suspended our share repurchase programs and we have reduced our dividend. As Ralph mentioned, we are looking at a number of other avenues to further reduce our costs, which would improve our income and cash positions. Turning to the banks. There, too, we are well positioned. Cash on the bank is $3.9 billion. They have $2.5 billion in equity, very strong capital ratios even after paying a $75 million dividend to the parent. We have not encountered any issues raising deposits where we have been active in both the retail and broker markets. We have also been successful in the securitization market, where we recently renewed a $2 billion capacity. To summarize, we feel the core businesses, while hurt by the pandemic, are still functioning well and making money. We have provided for a substantial increase in charge-off through our provision for loan losses. Our banks are well capitalized and have large cash positions. At the parent level, we have plenty of cash and liquidity. We've taken further steps to manage expenses and do not have any refinancing risk for almost 3 years. I'll now turn it back over to Ralph.

Thank you, Tim. In closing, I started my tenure with Alliance Data halfway through the first quarter and approximately 1 month prior to the onset of COVID-19. I am immensely proud of the immediate and successful mobilization of our teams and the response efforts which continue. It is also not lost on me that, next to protecting the health and safety of our associates during this time, earning the trust of our valued investors and analysts is among my top priorities. As such, I have been and will continue to be committed to being accessible and communicating transparently and directly with this important stakeholder group. Alliance Data is moving forward on a path to reposition business consistent with our strategic review and to emerge from this crisis a more efficient competitor. At the same time, we are thoughtfully investing in the future. We are working hard to do all of this while continuing to support our key stakeholders in any way we can, and be the partner of choice. As I said on the March analyst call, because of prudent and proven actions to responsibly manage all aspects of our operations, Alliance Data has come through many tragic and economic events better positioned. I am confident this will be no different. We are managing through the COVID-19 environment. We are implementing a more efficient and effective operating model and thoughtfully investing in the future. Thank you. I would be happy to open up the line for some questions.

[Operator Instructions] Our first question this morning comes from Sanjay Sakhrani from KBW.

I wanted to ask about the reserve build assumptions first. If I'm doing my math correctly, based on sort of the day 1 assumptions you made for the CECL build, you're assuming about an 8% charge-off rate under the recessionary view that you have. Do you guys think that that's appropriate? Maybe you could just talk contextually about the macro assumptions you made and sort of where you expect the loss rate to pan out under the scenario. And I think if you hear some of the other issuers and banks that have reported, they've said the macro forecast has actually deteriorated since quarter end. So maybe you could just speak to what that might mean for you guys as we look into the second quarter.

Sanjay, thanks for the question. Actually, let me start with the end of your question and work my way backward. Which is we actually clearly do see the economy as we set that CECL later in the month than I think some of our competitors. So we did have a pretty good look into mid-April and thinking about all the economic environments. And of course, when we set the CECL, it's going to be a variety of economic indicators. But like a lot of our competitors, we've stressed that. We stressed it; we stressed GDP, we stressed unemployment. Pushed our unemployment rates in some of our stress scenarios north of 10%. Some of our GDP projections show a contraction of up to 30%, depending on the quarter. So we did stress it in a variety of different ways. We felt we had a pretty good look late in the quarter, late meaning the first couple of weeks of April to set that. We did not set a specific charge-off number. We looked at the economic overlays. We looked at where the delinquencies were to set our CECL level.

Okay. And then are you assuming a recovery inside your macro assumption?

Yes, we are. So we think that we should start coming out of this at a rolling basis at the end of Q2, starting to get back to some type of normality towards Q3. We did of course stress that to make sure that we're being conservative on the CECL side of that. But we did expect recovery by the latter half of the year.

Okay. All right. Great. And then I guess the second question for Ralph. I know you had embarked on a listening tour. And I know, unfortunately, we've thrown a wrench into sort of what you might have decided at the point that you finished it or concluded it. But you're pulling guidance, and obviously, a lot of structural change might occur over this situation unfolding. I'm just thinking, at a high level, how different ADS might look based on your preliminary review and what you might see unfolding, given you've been around in previous recessions.

Yes. Yes, Sanjay. I think a couple of things. I just want to take a step back. I joined ADS because it was a company that had really good bones and had a really good reputation that had been through a couple of bad years. My view was this was an organization that we could certainly move quickly without the bureaucracy of a larger organization, and I still believe and see that. So for me, obviously, my listening tour got cut a little short. But the way we responded to COVID-19 really gives me a lot of confidence that we can become a more efficient and effective organization going forward. We're able to pivot, reduce our operating costs and improve our margins as we go forward, but as importantly, really invest where we think we need to be. So digital and online investments are those that we'll continue to make. I think the evidence that they are even more important is clearly here, and we'll continue to invest there in customer-facing capabilities and continue to move to digital and mobile. So my thesis hasn't changed, and I think this has really put a spotlight on why our investments are important in the near term.

Our next question comes from Darrin Peller from Wolfe Research.

Maybe just to help us understand revisiting the structural opportunity versus risk for someone like yourselves in the sense that I think you guys have spent a lot of time and investment over the years on being able to help your clients or your merchants with, as you mentioned just a minute ago, omnichannel. And I'd be curious to hear the kind of demand you're getting right now from the end market for that upgrade, what you can do to help them out. And maybe on the other side of all this, maybe any type of new percentages or numbers that give us a sense of what part of your portfolio you think would be really able to survive and benefit from those trends around omnichannel, those technologies that you can help them with, versus those that really are relying on just physical brick-and-mortar without any type of on-demand or omnichannel capabilities.

Yes. It's Ralph. So we are in constant contact with our partners and ensuring that we are assessing what their needs are, assessing how they want to move forward. So the shift of our marketing resources to online was clearly evident in the continued switch to ensure that we have the right online capabilities as our focus going forward. No matter where the customer shops, whether it's in the mall or in their living room or on their phone, in their car, we're going to be there to provide the right capabilities for them to have bigger baskets and have that ability to get engaged with the brand. So for me, it's about helping our brand partners enhance their customers' experience with that brand. I view this as certainly an opportunity to enhance our digital capabilities. I think in terms of bricks and mortar, 25% of our sales or our portfolio is probably brick and mortar. But they're also coupled with -- each of those brick-and-mortar organizations certainly have online capabilities, and that's where we're helping our brand partners focus on now, which is online capabilities.

Okay. All right. No, that's helpful. So I mean, look, segmenting the portfolio for us, we're all trying to figure out. I think most investors are kind of looking through the second quarter right now and probably even 2020 to some degree. You mentioned your liquidity is in sound position to take advantage and weather the storm. So we're trying to figure out structurally, how -- a, what size someone like ADS can be on the other side of all this? And then structurally, if you're going to be able to win in market share by helping these merchants or maybe others out?

Yes. I mean, good times or bad, we're always in conversations with our merchants to enhance their sales, enhance their market share. Now it's a matter of talking to them to plan their emergence from this, how they're going to emerge on this, when -- making sure we're coordinated with the timing, making sure we're there when they need us most. And right now, where they need us most is the capabilities are online. But we are working with them on a pretty regular basis to talk about staged reopening during the course of this year.

Yes. All right. And just last question. I know Sanjay touched on this, but with regard to credit quality. Look, I mean, you mentioned in the prior cycles, I remember also just seeing peak charge-offs at around 10%. I'd be curious, what's the dynamic in this environment that would give you confidence? And what kind of rate should we be thinking about? I mean, is it potentially something that could be 12% to 14%? Or any thought process on that?

So if I just think going forward, we've stressed our business to the last recession. And I think that's a good barometer for us. And through every stress test, through every dire scenario, we are cash flow positive and EBIT positive as we exit 2020. That said, there are certain things that are available to our consumers now that weren't available during the Great Recession. The economic stimulus to the consumer wasn't available during the Great Recession; it's available now. And early days, but we've seen some good pickup when those stimulus checks came out in terms of our customers and cardmembers reaching out proactively to make payments. So it gave us a bit of confidence. And early days, but certainly, people are certainly meeting their obligations.

Our next question comes from Andrew Jeffrey from SunTrust.

Hey Andrew, you're breaking up on us. Hey, Vicky, go to the next question. We'll see if we can't get Andrew back in.

Next today is Bob Napoli from William Blair.

If I recall, going back to the last recession, with charge-offs peaking at 10%, I think the market grossly underestimated the profitability at higher charge-off levels. And I think that the company was able to stay profitable at even materially higher charge-offs. What is the maximum charge-off rate that this company can withstand for, say, a period of a year without having significant losses and liquidity challenges?

Yes. Look, so clearly, we test our banks at a variety of different stress tests. It's going to depend on how long. We tested it back to the last recession, and we remained profitable and cash flow positive. It's going to be a combination of both that charge-off rate as well as what happened with our receivables for liquidity and cash positions. But we tested it for a variety of different scenarios, including the peak charge-off we saw in the recession, decreases in receivables, receivables staying flat. In all those cases, we stayed cash flow and income positive.

Okay. What are you seeing so far in April from a payments perspective? What should we expect out of the payment rate? Or I mean, have you seen -- I mean, you have due dates throughout the month. I mean, have you seen any significant -- what type of change have you seen in payment rates, delinquencies as we've gone through April?

This is Ralph. So in terms of payment rates, if I look at payment rates year-over-year, our payment rates have not gone down. So payment rates are essentially stable. We're seeing people proactively reach out to us to make payments. Now people are proactively also looking at forbearance programs. But that said, the forbearance programs people are taking advantage of are shorter in duration, 30 or 60 days, as opposed to a 12-month forbearance program. So we're seeing people actively want to get a little relief but also engage in terms of paying their obligations.

That's helpful. And the 50% decline in spend volume that you've seen in April, has that -- I mean, what percentage of your spend is currently e-commerce and online? And have you seen -- did that trend -- is it continuing to decelerate? Or has it bottomed out?

Well, I talked about in my opening comments, we've seen a 50% decline in bricks and mortar, but we -- in the beginning, we did see an uptick in e-commerce. Our e-commerce spend is about 30% to 40%. That's where we see -- that's where we pretty much land on e-commerce spend. Now that will fluctuate, but we've seen that increase a bit during the crisis.

And then I guess, again, through the month of April, that -- so the 50% was bricks and mortar? So it's a combination; e-commerce. So overall blended, you're down 40-ish. And again, can you give any color on the trend over the month?

Yes. So what we've been seeing is similar to the end of March. We've seen our collective sales down 50%. Bricks-and-mortar are down almost to nothing, 10%, 20% -- I mean, 90%. I mean, 10%, 20%, and we're making the rest of that up on our e-commerce group. And our e-commerce is actually down slightly, but doing pretty well.

Okay. And I guess last question, just -- and just a follow-up, I guess, on the customer base. What is your confidence that -- I mean, obviously, this is an unprecedented environment that your customer base -- I mean, what percent of your customer base do you think is at risk? So I mean, is this company 30% smaller coming out of -- and potentially, like in a worst-case scenario, a 30% smaller company coming out of this before you -- and you have to grow on top of that? Or just any feel for what percentage of your customer base is at risk? Is it more than 30%?

Yes. So are you referring to our retail partners or consumers on the card? The retail partners?

Yes, retail partners.

Yes. Good question. We're obviously watching that very closely. It's tough for us to tell at this point because we don't know what type of government support any of our retailer partners will get, what type of forbearance on their rent payments. Certainly, we expect it to be smaller. We've run some stress tests, but just -- it's too early for us to tell because we just don't know how it's going to affect our retailers, I mean, post the type of help they're going to get from the government and some of their forbearance programs, debt, rent, et cetera.

And you can -- under a smaller business, you can maintain -- you can hit targeted returns? Obviously, you have work to do on the organization.

Sure. Yes. The one thing, clearly Ralph and I have a very sharp focus on is going to be the expenses and making sure we have the expenses. Luckily, this doesn't snap overnight. So when they start seeing the sales start dropping, our receivables start dropping. If that were to ever happen, we can adjust our cost base to do that. So relatively low fixed overhead. It's going to be the variable associated with the attrition we might have to have in the call center, natural attrition to match if the receivables drop. But a smaller base, yes, we could be profitable and we would be profitable.

Our next question comes from Andrew Jeffrey from SunTrust.

Is this better, guys? I'll try again.

Andrew, much better.

Much better.

Okay. Excellent. I appreciate your patience with me. I wonder, Ralph, if you could elaborate a little bit on underwriting standards. I know you mentioned curtailing some credit lines. And this is a dynamic environment. You've heard at least one credit bureau this week talk about the challenges of trying to ascertain employment and income, given furloughs and compensation cuts and things like that. I know historically, Alliance hasn't used FICO scores necessarily to underwrite. Are there specific changes in assumptions you're making in your underwriting criteria that try to account for sort of the dynamic environment today, where people may be out of work for a little while and come back and have variable incomes and things like that? How are you going to think about risk management in that kind of world?

Yes. So I'll just talk about our underwriting strategy and how it's evolved. Today, our card members look much different than they did in the past, and we believe our portfolio is more resilient than it was during the recession. The changes have been driven by both product diversification that we started several years ago and underwriting changes we started making about a year ago, which indicated potential economic slowdown. So we constantly look. It's not that we have a knee-jerk reaction to what happened. We constantly look to enhance our models, our scoring models, by upgrading to a newer version of tri-bureau score and continuing to find add-on scores focused on fraud prevention, synthetic identities and credit file customers and other elements. In 2009, our underwriting changes were focused on finalizing scoring enhancements, raising minimum due scores for new applicants and reducing contingent liability by closing inactive accounts or scaling back. That said, we're certainly very diligent on -- we've tightened our underwriting criteria. But also we're responsible lenders. We're not going to go out there and offer credit lines or products to those that do not have the capacity to pay.

Okay. Well, good to hear you're proactive. I think that was good foresight. And then with regard to forbearance, and I know it's early days, and encouraging perhaps that you're not seeing some of your borrowers really want to stretch out to 12 months, for example. I'm just thinking back to the experience with Harvey and the sort of bubble it created in delinquencies. It lasted, I think, a lot longer than maybe you expected at the time, recognizing you weren't at the company. Is there a risk that we're still talking about COVID-19 elevated delinquencies and/or losses a year from now, 18 months from now, I guess? How do you probability-weight the outcome of this just dragging on for a protracted period?

Yes. Again, nobody could predict what's going to happen over a protracted period, particularly with something we've never really faced before. But my view is there are more resources today than there have been with past crises. Whether it was hurricanes or other economic crises, the assistance to the general public, our ability to react quickly, offering programs that are more flexible than they've been before, I think, will certainly curtail that bubble long term.

Our next question comes from Ryan Cary from Bank of America.

I hope you're all well. I just wanted to build on Andrew's question a little bit. I think on the update call, you mentioned a majority of your customers applying for forbearance. Up to that point, had opted for shorter-term programs and that these customers are more likely to end up current on their loan. And so how has that changed since late March? And if it has, how do you think about the inferences as a result from that and the impact on the business?

It hasn't changed. So we're seeing customers proactively want a shorter forbearance program and in fact wanting to just skip a month payment rather than go into a forbearance program. So that's what we're seeing. It's early days. These programs are just getting up and running. As I said, right now, they're in the low single digits, but we expect them to probably settle in the low double digits as we move forward. And so it really hasn't changed yet. A little bit too early to tell. What we're seeing though in the month of March, our payment rates are holding to what we had predicted. And we're seeing, based on the first wave of stimulus checks, customers have a willingness to make payments.

Got it. Okay. And it sounded like before, you were expecting to see pent-up demand and a potential bounce-back once the COVID situation was under control. And I would feel like there's a little bit more wait-and-see. Is this just due to the duration and severity of the slowdown? Or have you seen anything else change over the past month that would lead you to think the recovery might take a little longer?

No. I think people are optimistically looking at the recovery as May 1. But as you can tell, publicly, the recovery is going to be a staged recovery over a period of months. So it's going to be a ramp-up rather than a big bang. And certainly, we've stressed our business model for that. Under those scenarios, our business model is still EBIT and cash positive for the year.

Got it. And just to make sure, just a clarifying question on that. I know before, you were talking about the stress scenarios as retail sales down kind of 25% extended for 12 months. Is that still the same ZIP code in these most recent stressed examples?

Yes. We've stressed it down 25% for the year to go. So that's actually more like 33 -- excuse me, 25% on the full year, which is more like 33% on the year to go. So that was one of the stress scenarios we ran.

Our next question comes from Dan Perlin from RBC Capital Markets.

Can you guys just remind us a little bit about the customer concentration risk that's embedded in the current portfolio today? I mean, we're really just trying to handicap what is going to happen to the extent that we have more retail failures. And so maybe you can just walk through the puts and takes that we need to be thinking about modeling in that environment.

Yes. So I'll do it in terms of high-level, in terms of percentage of receivables. I think our portfolio has changed since the Great Recession. If you recall, probably during that time, we were 95% private label. We've evolved to something less than that. So 50% of our portfolio is retail goods and private label, 25% of our portfolio is big-ticket items where you tend to get better credit quality, and then 25% of our portfolio is co-brands, where you tend to get better credit quality and general-purpose plastic. That's how I'd dimensionalize the portfolio now. So certainly stronger than we were in the Great Recession and a bit more diversified than we were.

Okay. That's helpful. And then to the extent that we have to brace for additional failures for your retail partners, over the coming months and quarters, can you just talk through the puts and takes that we need to be thinking about in the model? I know you're talking about these stress tests, but what are the actual outcomes or optics that we need to be thinking about? And how long of duration are you able to kind of extend off those?

Yes. So I'll use the most egregious, the worst scenario. If we get a private label retail partner who files for Chapter 7, goes out of business, it takes, call it, 6 to 9 months for you to get half of those receivables, and then you continue with that type of half-life. So recall, we go to the consumer, not the retailer. What happens is, of course, we stop getting new sales from that retailer if they go out of business. And it takes -- and then we of course make a lot of money as they unwind and we just start losing the receivables. We lose about half of it, 6 to 9 months, then lose another half 6 to 9 months. And so it quickly attrites away. After 2 to 3 years, we don't have that receivable. So our real risk is that we make less money on a volume basis. We make a higher percent on those receivables. And then of course, it's up to us as an organization to replace those receivables with a new partnership.

Okay. That's super helpful. There's one other one if I could sneak it in. Just on the cadence of the provision expense. I know -- I mean, you had this huge reserve build. I'm just trying to think about what are we jumping off into in kind of the second quarter as you are framing it from a plus or minus range for the provision expense in that quarter?

Yes. So obviously, we'll take into consideration everything we know. At the time we set that provision expense, we clearly were able to do that as we saw April unfold in the first couple of weeks of April. There's always risk that the economy continues to deteriorate or people don't come back as quickly as we'd expect. But at this point, we looked at it, and we felt very good that we'd factored everything. We took a nice, solid, conservative look at the balance sheet and what we needed for reserves at the end of Q1.

Our next question comes from Eric Wasserstrom from UBS.

Can you hear me all right?

Yes. We can.

Okay. Great. So thank you for going through some details about the liquidity and capital position. I think in my recent experience with the stock, I think that is in fact probably the more overwhelming concern even relative to credit quality in the current environment. So could you just maybe talk about how you're thinking about the overall company's leverage position at this point and whether these circumstances has caused any rethinking about that relative to, let's say, even a month or 2 ago?

Sure. Obviously, the leverage ratio, when you take that big equity hit to set up CECL, it's going to cause the leverage ratio to go up. And you'll see that we also took a drawdown on our line of credit. Having said that, we are concerned about the leverage ratio. We are not tossing and turning about it. We have enough cash flow to cover that. We are comfortable with that. It's clearly something Ralph and I will need to adjust -- address, excuse me, long term. But at this point, the leverage ratio from our perspective is, first and foremost, we feel comfortable that we can pay our debt service, and we feel very comfortable that we can.

Great. And just to follow-up on the -- in terms of the subsidiary bank position, do you think that -- do you anticipate any challenge to continuing to upstream dividends to the holdco based on the near-term operating outlook at the subsidiary level?

Sure. Obviously, one of the things we're going to watch very carefully is the banks and their capital position, I've said before, and I know Ralph and I have had the conversation. First and foremost, we want to make sure we have very robust balance sheets for both the parent and the bank, the bank being part of that, a part of, of course, the reason we called out the total leverage ratio at the bank of that 16.7%. The banks have been profitable. They were profitable throughout the recession. We expect them to continue to be profitable. Then the question becomes a growth versus the income. If this recession plays out one way that we might see it, which is decreased sales lead to decreased receivables, that actually allows us to dividend up more capital, meaning that we don't have as much receivables we have to hold capital against. Again, we're going to be very prudent and make sure our banks are very well positioned, very heavily capital-intensive, so that they can withstand shocks like this. So there's a variety of different scenarios we run. In most cases, we feel the banks would be able to upstream some cash to the parent.

And just one last one on this topic. I know that, obviously, we're in -- you think you are, understandably, in sort of crisis-mitigation mode. But over the longer term, Ralph, I'd love to understand your philosophy about earnings growth versus tangible book value accretion and how you think there -- if you think that tangible book value accretion is an important role of value creation for ADS.

Yes. I think a couple of things. So let me just say this, the safety and soundness of our banks influences every decision we make. And I think even through the crisis here, where we've taken prudent measures to enhance our capital position, cut expenses, I think those are clearly important actions we've taken to ensure the safety and soundness of our institutions. I think from my perspective, predictable, sustained, good growth on top line and bottom line is what we're looking for long term, and I think that will sustain our safety and soundness and assets in the bank.

Our next question comes from Ashish Sabadra from Deutsche Bank.

Just a quick question on the March data. Was there any benefit from the forbearance program on the delinquencies and the charge-off? Is there a way to quantify that?

Yes. It's very early. I will tell you, but what we have seen, as I think I mentioned it earlier, the payment rates, if I compare them to last year are virtually the same. We're seeing our roll rates are where they thought they would be, probably a little bit better. And we saw a -- when the first stimulus checks came out, we did see incremental phone calls and incremental payments come in during that period of time. Now that does not make a trend, we're still managing it very closely. But we did see some improved activity or increased activity.

That's helpful. And maybe just as we think about, again, the charge-off and charge-off trend going through the year, Ralph, as you mentioned, charge-off could potentially go up in the back half as more consumers come out of the forbearance and also, as we see a higher unemployment rate. But is there a way to think about all the puts and takes and potentially some impact from any potential retailer bankruptcy? But as we think about going into the back half, is there a way to think about where that could head to, and all the puts and takes going into the back half of the year?

Yes. I think as I think about the back end, half of the year, we traditionally see loss rates come down. We're going to, I believe, see elevated loss rates. I think what we've -- the actions we've taken in the first quarter to reserve, I think, are appropriate for what we are projecting in the balance of the year. That said, it's a very fluid environment. And if things change, we will certainly adjust accordingly.

Our next question comes from Tim Willi from Wells Fargo.

Just had one question, if we could talk about e-commerce a bit. I understand that probably a fair amount of your retailers are probably in the discretionary bucket, which is going to obviously impact their overall volume. But we're obviously seeing from some retailers, stories of exceptionally strong e-commerce and digital, et cetera. Is there any way that you could just sort of comment or discuss where you think your retailers are with their digital commerce plans? And are they punching at their weights? Or do you think that some of these retailers are still reacting and there's still better experiences and better volume to come from them as they really reposition their businesses for more digital and e-commerce than maybe they otherwise would have expected 6 months ago or a year ago?

Yes. I would categorize it probably as a mixed bag. I think we have some good partners out there that have really good retail -- really good sites. Look at a site like Sephora, for example. But there are -- certainly, this has been an opportunity for them to rethink their strategy and ensure that they have a robust e-commerce channel, which plays right into the investments we've been making and the investments we're going to continue to make to be even more relevant in e-commerce for our partners and our customers.

And if I could just ask one quick follow-up. I guess there are some stories and chatter out there about the Victoria's Secret transaction and whether or not that will occur. Is there anything that we should be aware of or think about relative to that deal closing or not closing as it might impact anything with ADS?

It's difficult for me to comment on what was in the news over the last couple of days. Victoria's Secret has been a partner for a very long time. I think it will continue to be a partner down the road. I think we'll work with them. And we were set to work with them in their current capacity; we were set to work with them in their future capacity, and we'll continue to be a supportive partner.

This concludes the question-and-answer portion of our call. I would like to turn it back to Ralph for final comments.

Well, thank you all for participating this morning. I know this is very difficult circumstances, and we are in many different locations as opposed to Tim and I being in the same room. Thank you for your time. And as I said, this is an important stakeholder constituency group for me, and I intend to be available and certainly transparent as we communicate going forward. Everybody, have a good day, and thanks again.

Ladies and gentlemen, this concludes today's conference call. Thank you once more for participating. You may now disconnect.