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Discover Financial Services (NYSE:DFS)
Q2 2020 Earnings Call
Jul 23, 2020, 8:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning. And my name is Crystal, and I will be your conference operator today. At this time, I would like to welcome everyone to the Second Quarter 2020 Discover Financial Services Earnings Conference Call. [Operator Instructions] Thank you.

I will now turn the call over to Mr. Craig Streem, Head of Investor Relations. Please go ahead.

Craig Streem -- Head of Investor Relations

Crystal, thank you very much, and welcome everybody to our call this morning. We will begin on Slide 2 of our earnings presentation, which you can find in the Financials 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 today will include remarks from our CEO, Roger Hochschild; and of course, John Greene, our Chief Financial Officer. And after we conclude our formal comments, there will be time for Q&A session, and we ask you, please to limit yourself to one question, and if you have a follow-up, we'd like you to queue back in toward the end and we'll try to accommodate as many participants as we can.

And now, it's my pleasure to turn the call over to Roger.

Roger C. Hochschild -- Director, Chief Executive Officer and President

Thanks, Craig, and thanks to our listeners for joining today's call. On last quarter's call, we discussed the impacts of the COVID-19 pandemic on our employees, customers and business. While I am pleased with our execution in the second quarter, we remain in a very challenging environment with considerable uncertainty as our country continues to struggle to stop the spread of COVID-19 and the impact on our economy remains very significant. Of course, the safety of our employees continues to be a top priority, all areas of the Firm, including our 100% US-based customer service team are operating effectively in a remote environment and we have informed employees they will not be required to return to our physical locations until after January 1, 2021, at the earliest. Our operating model supports our commitment to providing flexible work arrangements as long as necessary to ensure the safety of our staff and their families.

For our customers, we continue to provide an industry-leading service experience, leveraging our digital capabilities and with average answer times in our call centers remaining at pre-pandemic levels of under one minute. Our products are well positioned as consumers increasingly look for value in these challenging times. We are the only major bank with no annual fees on any of our credit cards and no fees on any of our deposit products. Our leadership position in cash rewards and flexible redemption options, including a point-of-sale with Amazon and PayPal are serving us well as consumers are increasingly shopping online and concerns over the safety of travel are limiting the appeal of airline miles.

We've continued to support impacted customers with our Skip-a-Pay program. Since we launched this program in mid-March, we have helped over 662,000 customers across all of our products, and in fact, about 60% of total loans enrolled have already exited the program. The Skip-a-Pay program was intended to be a short-term option, and we plan to end program enrollments in August. After that, we'll continue to offer assistance to those who qualify on a customer-by-customer basis.

Now, to our results for the quarter. We generated a net loss of $368 million, or $1.20 per share. The most significant driver of this was a $1.3 billion reserve build in recognition of further deterioration in the macroeconomic outlook subsequent to March 31. The credit performance in our portfolio has been stable and we believe that the actions we've taken over the past few years, including reducing our contingent liability and the additional credit actions we implemented in March, position us well. Nevertheless, the reserve build reflects our view that persistent long-term unemployment will increasingly impact prime consumer lending portfolios.

The pandemic continued to have a significant impact on sales volume, as well as loan growth through the quarter. We saw sales down 16% and 3% lower card loans, while down year-over-year both compared favorably versus other issuers, principally due to our greater concentration in every day and online spend categories, as opposed to T&E.

Operating expenses of $1.1 billion were flat to the prior year and included a $59 million one-time impairment charge to our Diners business, relates to the impacts of the slowdown in global T&E spending. Excluding this, operating expenses were down 6% year-over-year. We remain on track to deliver the $400 million of expense reductions we previously announced, even as we continue to invest in core capabilities, including analytics and data science. We expect these investments to strengthen our ability to achieve profitable growth and shareholder value through improved targeting and personalization, better underwriting decisions and enhanced collection strategies, just to name a few of the benefits.

We're also responding to shifts in consumer preferences with our investments in contactless and Secure Remote Commerce. Since the end of 2019, we have seen a 70% increase in contactless spending. I'm pleased to say we are on track to have most of our top 200 merchants enabled for contactless in 2020 and to have contactless cards issued to the majority of our card members by the end of the year. Consumers have also shifted to much more online spending, which makes our investments in Secure Remote Commerce and our partnership with the other major networks to implement Click-to-Pay even more significantly.

Our disciplined approach to capital management and liquidity remains a top priority for us, particularly in the current environment. We've continued to see very strong demand for our consumer deposit products, even as we have been reducing rates. Consumer deposits are now nearly 60% of total funding and we have reduced our online savings rate 59 basis points since early March.

Discover has a very strong financial foundation, loyal customers and a proven business model, I am confident that we have taken the correct actions to strengthen the Discover franchise and we are well prepared to continue to drive long-term value to our shareholders and customers.

I'll now ask John to discuss key aspects of our financial results in more detail.

John T. Greene -- Executive Vice President, Chief Financial Officer

Thank you, Roger, and good morning, everyone. Taking a look at the quarter, we're pleased with our response to the rapidly shifting economic environment, including taking appropriate actions to manage expense, capital, credit and liquidity. Our capital position, combined with advances in analytics and credit risk management, put us in great shape to return to profitable growth when conditions are right.

Today, I'll recap the financial results for the quarter and provide details on our credit performance and loan provisions. Similar to last quarter, I won't review our standard slides on loan growth, payment volumes, or revenue and expense, but you can find our traditional disclosures on slides 11 to 16 in the appendix to this presentation.

On Slide 4 looking at key elements of the income statement. Revenue, net of interest expense decreased 7% in the second quarter, primarily driven by lower net interest income due to NIM compression and lower net discount and interchange revenue reflecting decreased sales volume. Net interest margin was 9.81% for the quarter, down 66 basis points from the prior year. This was driven by three factors: average loans were flat year-over-year, reflecting the lower sales volume; loan yields declined as the average prime rate was 225 basis points lower on a year-over-year basis due to Fed rate cuts in 2019; and a 150 basis points cut in March of this year. These were partially offset by lower funding costs. We moved aggressively to reduce our deposit rates.

Gross discount and interchange revenue decreased 18% driven by the decline in sales volume. This was partially offset by a 16% decrease in rewards costs.

Other income was up due to a $44 million gain on the sale of an equity investment.

The provision for credit losses was $2 billion and included net charge-offs of $767 million, which were up 7% from last year and a $1.3 billion increase in reserves, primarily due to further deterioration in the economic outlook. I'll provide additional comments on credit with the next slide.

Operating expenses were flat to the prior year, but down 6% excluding a one-time item.

Marketing and business development expense was 42% lower year-over-year as we responded to the significant slowdown in the US economy. The majority of the expense reduction was in brand marketing and card acquisition costs as we aligned marketing spend with the impacts of the economic environment and tightened credit criteria. Offsetting this, in our Diners Club International business, we booked a $59 million non-cash intangible asset impairment charge as a result of the slowdown in cross-border travel and entertainment spending.

Apart from the one-time impairment charge, we anticipate realizing $400 million of expense reductions from our previous guidance range. We made good progress on the expense front in the second quarter and we'll continue this momentum through the balance of the year. As the economic environment evolve, we'll continue to monitor and take actions on expenses as conditions warrant.

Turning now to Slide 5, showing credit metrics. Credit performance remained stable in the quarter. Card charge-offs increased 41 basis points from the prior year, mainly due to seasoning of loan growth. The credit card 30-plus delinquency rate was down 17 basis points from last year and down 45 basis points from the prior quarter. The lower delinquency rate reflects the overall stability of the card portfolio with a very modest impact from the Skip-a-Pay program.

Our private student loan portfolio reported strong credit metrics in the quarter with net charge-offs nearly flat to the prior year. The 30-plus delinquency rate was down 25 basis points from the prior year and 18 basis points lower than the prior quarter. Credit performance in this product continues to benefit from tight underwriting and a high percentage of cosigned loans.

Personal loan net charge-offs decreased 90 basis points year-over-year. The 30-plus delinquency rate was 42 basis points lower than the prior year and down 24 basis points from the prior quarter. These credit metrics benefit from disciplined underwriting and our strong customer service and collection efforts. While the overall portfolio performance has been stable through the second quarter, we do expect to see some deterioration in consumer credit in coming quarters.

Moving to Slide 6, which shows our allowance for credit losses. In the quarter, we had $1.3 billion to the allowance, primarily due to further deterioration in the macroeconomic outlook. As we considered the level of allowances needed, we modeled several different scenarios. This scenario to which we gave the greatest way [Phonetic] included a sharp increase in peak unemployment to a rate of 16% recovering to 11% at the end of 2020, followed by a slow recovery over the next few years. We assumed an annualized real GDP decline of 30% quarter-over-quarter, or down 10% on a year-over-year basis. The quarterly reserve calculation also included an overlay, which considers the impact of the Skip-a-Pay program, leveraging our previous experience with disaster relief. We also considered unemployment reports in June and July, which showed higher permanent unemployment and the impact of recent increases in COVID-19 cases.

Turning to Slide 7, which details sales trend by category through mid-July. Total card sales volume decreased 16% in the second quarter. The greatest weekly decline was in mid-April when total sales were down 33% for the week ending April 18. Since then we've seen steady improvement across almost every category as the economy reopened. Sales were down just 3% through the first half of July. Since then we have seen steady improvement across almost every category as the economy reopened.

We've continued to see positive trends in retail, which were up 7% in the second quarter and 15% in the first half of July. Within the retail category, home improvements has been exceptionally strong, up 19% in the quarter on high consumer demand. We also benefited from adding Home Depot to our 5% rewards category. Strong online spending growth also contributed to solid retail sales in the quarter. Travel, restaurants and gas continue to be the most negatively impacted categories.

Slide 8 highlights enrollment trends in our Skip-a-Pay program, which offers relief to customers experiencing financial stress due to the pandemic. We saw the peak in the cards program during the first week of April at $673 million. First-time enrollments have steadily decreased since then. In the week of July 12, enrollments decreased to just $35 million. To date, we enrolled a total of $3.4 billion of card loans. However, the majority of customers needed only one month of assistance. And as of July 13, over 70% of card loans were no longer enrolled. Of those, out of the program, approximately 80% have returned to making payments.

Moving to Slide 9. Our common equity Tier 1 ratio increased 40 basis points sequentially, mainly due to decline in loan balances. In March, we suspended our share buyback program in response to the economic environment at the time, and it remains suspended to date. We've continued to fund our quarterly dividend at $0.44 per share of common stock in line with requirements provided by our regulators and approved by our Board of Directors. Our preliminary stress capital buffer was set at 3.5% with the final SCB expected toward the end of the third quarter. We will determine our share repurchase and dividend actions subject to the final stress capital buffer, any other regulatory limitations and Board approval.

Our liquidity portfolio remained strong with $27 billion liquid assets, it has increased over $7 billion from March 31. Since the onset of the pandemic, we have been a leader in reducing rates on our consumer deposit products. Nevertheless, we've continued to see strong demand with average consumer deposits increasing 22% year-over-year and now making up 60% of total funding. We'll continue to look for opportunities to reduce deposit costs.

To summarize the quarter, we're pleased with our results given the extremely challenging environment. We took swift action on expenses and are continuing to invest in core capabilities so we're prepared for the recovery when it comes. Outside of a one-time item, operating expenses were down as we started to benefit from our expense reduction programs. Credit performance remains stable but some deterioration is expected in the coming quarters. We took a conservative reserving approach and added $1.3 billion to the allowance for credit losses. And finally, capital and liquidity both remained strong. While we remain conservative given the continued level of economic uncertainty, we feel good about the actions we've taken today and the strength of the Discover franchise.

Before we open up the call for Q&A, I wanted to announce that after a career in consumer finance, including many years at Discover, Craig Streem has informed us of his desire to retire. I am sure most, if not all of you, have interacted with Craig over that time and enjoyed a great relationship with him. He has been an important partner to Roger, our leadership team and for me. He has been a wonderful team member and a terrific help with my transition into the Company. Craig is going to continue to lead the IR team until a successor has been named and is in place. So you will have plenty of opportunity to wish him well, as we all do.

That concludes our formal remarks, so I'll turn the turn the call back to our operator to open the phone lines for Q&A.

Questions and Answers:

Operator

[Operator Instructions] We will take our first question from Sanjay Sakhrani with KBW.

Sanjay Sakhrani -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Thank you. Good morning. I'm glad you guys are doing well and congratulations, Craig. I guess, my question is on the reserve build. I'm curious, if you feel like with this reserve build that you're pretty much done provided, there is no significant change to the macro outlook. And then, I know, John, you mentioned the forbearance or the Skip-a-Pay has positively impacted delinquencies by a modest amount. But maybe you could just talk about what will drive the impacts that you're expecting in the next few quarters in credit quality? Thanks.

Roger C. Hochschild -- Director, Chief Executive Officer and President

Hey, Sanjay, it's Roger. I'll cover the first part and then pass it to John. So, in the reserve, we, I think, took a conservative approach and used an economic outlook that was considerably worse than the end of Q1. Under CECL, as you know, right, that is reserves for the life of loan for the loans we have on our balance sheet. And so, further reserve increases would mean that we had further deterioration in the economic environment or would be based on the growth of the balance sheet as we look ahead.

And I'll pass to John for the second one.

John T. Greene -- Executive Vice President, Chief Financial Officer

Yeah. So -- yeah. So, Sanjay, just to echo those comments, we feel very good about the overall reserve and the conservative approach we took, especially given when you look at the overall portfolio performance that we've seen to date and actions we've taken back as far as 2017 on the personal loans business. So, overall, we feel very comfortable with our reserve today, and as the economic conditions unfold, that will have an impact, either plus or minus on the overall reserve.

The forbearance programs have acted exactly as we had hoped, they've helped some customers manage through the pandemic. And as I said in my prepared remarks, most -- the high majority of the people who entered the card program have exited and are repaying. So very, very mild impact to delinquency reporting as well.

Sanjay Sakhrani -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Sounds good. Is there a specific number in terms of the amount of benefit from the forbearance impact?

John T. Greene -- Executive Vice President, Chief Financial Officer

Yeah. So, it's actually relatively small, the -- on the delinquency number, it's somewhere between 5 and 10 basis points.

Sanjay Sakhrani -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Okay. Great. Thank you.

Operator

Your next question comes from the line of Bob Napoli with William Blair.

Robert Napoli -- William Blair -- Analyst

Thank you, and good morning. Craig, it's been a long time. Congratulations, and I hope you have some great plans. We've been talking for a long time.

Craig Streem -- Head of Investor Relations

Thanks, Bob. Yeah. Thank you.

Robert Napoli -- William Blair -- Analyst

Roger, so you've been with Discover long time. You've seen a lot of recessions and changes. I just wanted to -- I was hoping you could give some thoughts on what you feel are going to be permanent changes to the industry. And maybe just -- I mean, if you could get, John, some -- if you could give us some color on how much of your spend today is online and what it was prior to the pandemic?

Roger C. Hochschild -- Director, Chief Executive Officer and President

Sure. So, I was going to say, in my 20-plus years at Discover, I've seen a lot of things but I've never seen anything like this, in terms of the speed and magnitude of impact of pandemic has had on the economy. I don't think any of us in business has seen this. Nevertheless, I feel like we were very, very well positioned for this going in. I think over the long-term, what you've seen is really an acceleration of some trends that were already there. So, the migration out of branch to digital channels, which again as always been part of our business model. Consumers shifting from physical to digital purchases, and there, I think our advantage of having our proprietary network and the work we're doing with other major networks on SRC will be helpful. For physical purchases, the shift to contactless. So, those are really some trends that have been there, but have accelerated in a very significant way as a result of the COVID pandemic.

John T. Greene -- Executive Vice President, Chief Financial Officer

Okay. And Bob, in terms of the sales trends, we haven't broken it out between brick and mortar and online. But what I can point you to is retail, in my prepared comments in terms of the growth we've seen there. A lion's share of that has been as a result of online retailers and you know the major players there, which is driving, I'll say, further demise of the brick and mortar retailers and accelerating the digital channel for a card, things that Discover offers in terms of the network and our Secure Remote Commerce that we're working on, all will position us well for that growing trend.

Robert Napoli -- William Blair -- Analyst

Thank you.

Operator

Your next question comes from the line of Don Fandetti with Wells Fargo.

Donald Fandetti -- Wells Fargo Securities LLC -- Analyst

Hi, good morning. Kind of a short-term question. If you could talk a little bit about the NIM outlook in the near-term? And then, Roger, longer-term, coming out of the credit crisis, if I recall, you guys came out and took share and we're positioned pretty well. I know we're in the midst of this, but how are you thinking about the other side of this that consumer is going to have a fair amount of savings? And do you look at these types of opportunities as market share gain or is that too premature to be thinking about that?

John T. Greene -- Executive Vice President, Chief Financial Officer

Okay. So, why don't I start with the NIM question. So, in the first quarter, our NIM was 10.21% and then in the second quarter, it came down to 9.81%. I'm not going to give a bunch of detail here, but what I can say is, we look at the second quarter as likely the trough on NIM overall. What we've been able to do is execute pretty well in terms of deposit pricing. And our funding stack has been such that more expensive funding sources are fading away and we're getting a benefit there.

So, since the pandemic, just to give you some details, we decreased our online savings by about 60 basis points. That's an immediate benefit to net interest margin in the Company. And then through the balance of the year we're going to continue to look for opportunities. So, some of that will be based on the funding of our balance sheet and some of it will be based on the competitive environment that we're dealing with.

Roger C. Hochschild -- Director, Chief Executive Officer and President

Yeah. And in terms of gaining share, I think it's never too early to think about that. It feels like we're gaining share in the card business in terms of loans and sales this quarter from what I've seen from competitors' reporting. And that's within the significantly tightened credit box that we have. One of the capabilities we've been working on is just the ability to react more quickly and that helped us react very quickly to the pandemic, in terms of tightening credit across all our products, but that should also help when job losses abate and it becomes time to widen the credit box as well. So, we feel good about our capabilities and our ability to gain share across all of our products.

Donald Fandetti -- Wells Fargo Securities LLC -- Analyst

Thank you.

Operator

Your next question comes from the line of Moshe Orenbuch with Credit Suisse.

Moshe Orenbuch -- Credit Suisse -- Analyst

Great, thanks. I guess, I was hoping you could talk a little bit about the performance that you've seen with respect to borrowers that are exiting forbearance, and the fact that you're assuming kind of 11% unemployment at year-end. So, as we think about the likelihood of either needing more or less reserving, like -- how do you think about the information that we're going to get over the next several months in terms of how we think about reserving levels as we go forward?

John T. Greene -- Executive Vice President, Chief Financial Officer

Moshe, thanks for the question. So -- and it's a great question and honestly, it's a bit of art and science. So, what we have seen in terms of customers exiting is a -- about 80% of those customers are making payments and close to 80% of those are making full payments. So, we're feeling very good about the customers coming out of the programs. Now, to be honest, those segments inherently are likely to be a little bit more risky. So, we continue to watch the differentiation on customers who elected to enter into one of the Skip-a-Pay programs to see if there is any potential issue. But as you step back from it, the overall size of the portfolio versus the customers who have elected to go into Skip-a-Pay program, relatively small, right?

Moshe Orenbuch -- Credit Suisse -- Analyst

Right.

John T. Greene -- Executive Vice President, Chief Financial Officer

So, we're looking at the impacts as very, very mild. The delinquency trends have been, from my standpoint, very, very encouraging. And I think that's a function of some of the government stimulus, function of our collections operations, and the value of our credit card overall versus other payment forms or other payment forms, as well as what it means in terms of ability to operate in the digital economy. So, we like the fact that our portfolio has a high concentration of credit cards. And we also think that we'll come near the top on the payment prioritization through even a tough, tough downturn.

Operator

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Betsy Graseck -- Morgan Stanley -- Analyst

Hi. Good morning.

Roger C. Hochschild -- Director, Chief Executive Officer and President

Good morning.

Betsy Graseck -- Morgan Stanley -- Analyst

Craig, I'm going to miss you.

Craig Streem -- Head of Investor Relations

Likewise, Betsy. Thank you. Appreciate that. Thanks.

Betsy Graseck -- Morgan Stanley -- Analyst

Okay. So, back to work. The question I have is just around the reserving level. I know you already addressed one question on that earlier in the Q&A. But I've been getting some investor questions regarding how to think about the reserves that you're building today versus the loss experience you had during the Great Financial Crisis. Now granted, it's very different environment, but the unemployment rate is relatively high and a little bit higher than what we had during the GFC. So, I thought I'd take the opportunity to ask you how you would answer that question? How should I think about what the right reserving level is for today's book versus the losses that you had during the '08 crisis? Thanks.

Roger C. Hochschild -- Director, Chief Executive Officer and President

So let me start by talking a bit about the unemployment rate, and then I'll pass it to John to talk on the reserves. I think the unemployment rate we're seeing now is very different. And we've talked a bit about temporary unemployment, as well as the impact on sort of entry-level retail, entry-level hospitality, entry-level restaurant. And so, you can't map total unemployment to losses in a prime card base, the way that you saw that pattern in last downturn. And so, things like permanent unemployment, there -- you need to adjust to that. And so, we're not just looking at the raw unemployment numbers as we do our modeling.

I'll pass to John to talk a bit about the reserve, yes.

John T. Greene -- Executive Vice President, Chief Financial Officer

And then, Betsy, just one other piece and it's a relatively important difference here when you go back in time on the Great Recession versus where we are today. So, the -- overall the industry, the quality of the originations is much better today than it was at the Great Recession or prior to that. In general, higher FICOs across every single form of lending product. Delinquency levels coming into the recession -- this recession versus the Great Recession, are lower. Consumer financial obligation load is significantly lower today than it was coming into the Great Recession and debt service load was also -- it's also lower today. So, the consumer is stronger coming into this recession than coming into the Great Recession.

The traditional links between unemployment and delinquency and charge-offs, we're trying to model that. It's really hard to nail that down right now, given all the government stimulus. But overall, as I look at where we are today and based on our underwriting and where a card loan comes into payment priorities, I feel like we're very, very well positioned versus where the Company was coming into the Great Recession.

And then we also talked about inactive lines and taken inactive lines down nearly, to pick a number, close to $70 billion. So, we're prepared for the worst, but I feel like we're in a better position.

Betsy Graseck -- Morgan Stanley -- Analyst

And you've got this really high savings rate going on right now. I mean, do you use that in your analysis as a kind of bridge to lower unemployment rate as you're thinking about reserving?

John T. Greene -- Executive Vice President, Chief Financial Officer

Yeah. We didn't actually quantify that, but as we were making determinations on economic scenarios, and frankly, the overall quantum of reserves and reserve coverage, it was one -- it was a point that helped us get to where we arrived.

Betsy Graseck -- Morgan Stanley -- Analyst

Got it. Okay. Thanks so much.

Operator

[Operator Instructions] Your next question comes from the line of Mark DeVries with Barclays.

Mark DeVries -- Barclays Capital -- Analyst

Yeah, thanks. Could you give us a little more color about what we should expect from delinquency and charge-off formation in the coming quarters? And how if at all those expectations and your reserve levels are impacted by your expectations for benefits from different forms of government stimulus and different forms of lender forbearance across your customers' different financial obligations?

John T. Greene -- Executive Vice President, Chief Financial Officer

Okay. So, the tricky question. So I'll start with how we're expecting delinquencies and charge-offs to roll in. So, as I said earlier, the books held up really, really well, delinquency levels have come down. We do think some of that is as a result of stimulus. We also, like our teams are doing a great job in terms of interacting with our customer base to help the customers get through tough times, those that are experiencing some trouble.

The trajectory of charge-offs based on what we're seeing right now, looks like we would expect elevated charge-offs starting more in the fourth quarter and then coming into 2021. That's -- frankly, it's tough to call it right now because we're modeling out unprecedented scenarios here. But I think a good way to think about it is charge-offs elevating in '21, perhaps peaking in the later part of '21 depending on the economic scenario that we're dealing with and then starting to tail off in '22. That -- in terms of delinquency, delinquency will -- we think will start to tick up in the fourth quarter, perhaps as early as the third quarter, but we're not seeing any indicators yet, and then continue into the 2021.

The -- in terms of the government programs, we did nothing in our modeling to reflect what's been kicked around right now in Washington in terms of the next round of stimulus. So, that -- I think that could certainly push out the curve a little bit in terms of both delinquency and charge-offs.

Roger C. Hochschild -- Director, Chief Executive Officer and President

Yeah. I mean, I think -- as you think about the importance of the government programs, it's less about the $1,200 check that a family gets, as you think about life of loan losses and what that will support. It's really the impact of those on the overall economy and keeping the trough from being too deep. So, to John's point, we really think about it just in terms of at a macro level as opposed to what those checks may do in one month for a given household.

Mark DeVries -- Barclays Capital -- Analyst

Okay. Got it. Thank you.

Operator

[Operator Instructions] Your next question comes from the line of Meng Jiao with Deutsche Bank.

Meng Jiao -- Deutsche Bank -- Analyst

Hi. Good morning, guys. Quick question, I guess, on the average balance sheet. I saw that average cash and securities were up materially this quarter. Just trying to get a sense on how you guys are thinking about the securities portfolio and whether or not you would extend duration to pick up some yield given the NIM at a trough in 2Q? Thanks.

Roger C. Hochschild -- Director, Chief Executive Officer and President

Yeah. So, we've been pleased with how -- actually how the balance sheet has come together. Certainly, the asset side has been strong as we talked about in the prepared comments. On the liability side, we've seen great appetite on our -- for our deposit products, which is positive. We have also been able to avoid wholesale funding. We're not looking to substantially change any of the duration of any of the liabilities that we see on the balance sheet. We're effectively a -- added interest rate, basically balanced interest rate risk position. So, we're feeling good about that.

Craig Streem -- Head of Investor Relations

Crystal?

Operator

Okay. Your last question comes from the line of Kevin Barker with Piper Sandler.

Kevin Barker -- Piper Sandler & Co. -- Analyst

Good morning. So, we've seen a lot of controversy around the dividend on with several competitors or even some other banks. And I was just wondering how much -- how you think about the dividend going forward and how much of a priority is to maintain it, given some shareholders look at it as an important or just maybe how you think about it given the trajectory of your earnings?

Roger C. Hochschild -- Director, Chief Executive Officer and President

Yeah. So, I would guide you to sort of looking back over the last 10 years where you've seen a very clear strategy from Discover, given the high returns we generate from our business, an important part of how we manage capital is returning it to shareholders in the form of a dividend and we've had historically a measured increase to those dividends, as well as buying back stock. And we're very disciplined and, to a lesser extent, involved in M&A. So, that's what we like to do.

I would say, until the environment improves, it's quite safe to expect continued heavy regulatory focus on return of capital. And so, we will have to adjust our strategies accordingly. Certainly, if they keep going with the four quarters rule, that's something that -- again, it will depend going forward, but that's something that we've looked at. But I think we're going to watch and work with our regulators on this. But management's intent is unchanged. And so, we'll have to see how it goes.

Kevin Barker -- Piper Sandler & Co. -- Analyst

Okay. And then regarding your comments on the charge-off rate peaking into late '21. I mean, I think we would have expected a little bit more of a big bulge coming out of the deferral periods and the expiring of a lot of the stimulus. Could you just talk about how the -- what the cycle is going to look like or how you envision it playing out with charge-offs playing out in the early '21 and then what it looks like in the back half?

John T. Greene -- Executive Vice President, Chief Financial Officer

Yeah. So, we're seeing that the portfolio continues to be really, really stable as I said. The payment programs, we saw, obviously, the disclosed level of entries into the programs and then a surprisingly high number from our perspective exiting after one payment, which to me was a good sign. As they exited, the payment percentage or payment rate of those customers has held up very, very strong. So we're comfortable with that.

So, if you just look at where we are as of June 30, and then just do a kind of straight rule, model it out, it's hard to see any massive increases in charge-offs for the balance of the year, even if things deteriorate from the consumer standpoint. So, that means what we're likely to see is, charge-offs grow through the year slowly. And then, I wouldn't call it a bulge but a higher level of overall charge-offs in the middle to second half of '21. Now, that's what -- that's how we're seeing it today. I certainly would caveat that and say that consumer behavior is really difficult to predict here in a time such as this.

Kevin Barker -- Piper Sandler & Co. -- Analyst

Okay. Thank you very much.

John T. Greene -- Executive Vice President, Chief Financial Officer

So, sorry, I can't be -- yeah. Sorry, I can't be more specific on that.

Kevin Barker -- Piper Sandler & Co. -- Analyst

Yeah. It's very uncertain time. I understand. Thank you.

Operator

I will now turn the floor back over to Craig Streem for any additional or closing remarks.

Craig Streem -- Head of Investor Relations

Thanks, Crystal. Just thank you everybody for your interest. As always, we're available, get back to us if you need any follow-up. Thanks. Have a good day.

Roger C. Hochschild -- Director, Chief Executive Officer and President

Thank you.

Operator

[Operator Closing Remarks]

Duration: 45 minutes

Call participants:

Craig Streem -- Head of Investor Relations

Roger C. Hochschild -- Director, Chief Executive Officer and President

John T. Greene -- Executive Vice President, Chief Financial Officer

Sanjay Sakhrani -- Keefe, Bruyette, & Woods, Inc. -- Analyst

Robert Napoli -- William Blair -- Analyst

Donald Fandetti -- Wells Fargo Securities LLC -- Analyst

Moshe Orenbuch -- Credit Suisse -- Analyst

Betsy Graseck -- Morgan Stanley -- Analyst

Mark DeVries -- Barclays Capital -- Analyst

Meng Jiao -- Deutsche Bank -- Analyst

Kevin Barker -- Piper Sandler & Co. -- Analyst

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