Synchrony Financial

Welcome to the Synchrony Financial Third Quarter 2021 Earnings Conference Call. My name is Vanessa, and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to your host, Catherine Miller, Senior Vice President of Investor Relations. You may begin.

Thank you and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the investor relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for, and does not edit or guarantee, the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. On the call this morning are Brian Doubles, Synchrony's President and Chief Executive Officer, and Brian Wentzel, Executive Vice President and Chief Financial Officer. I will now turn the call over to Brian Doubles.

Thanks, Catherine. Good morning, everyone. The power of Synchrony's model continued to show through in our third quarter financial results. We continued to reach and serve more partners and customers. New accounts grew 17% to 6.2 million, and average active accounts increased 5% to 67.2 million during the period. This is in large part attributable to the powerful combination of our data-driven insights, our seamless customer experiences, and our industry-leading product suite, which resonates deeply with customers. Synchrony's omni-channel capabilities enable our partners and customers to connect wherever and whenever they want to be met, and the variety of financing options and value propositions we offer empowers them with choice. As we continue to anticipate and deliver on the needs of our partners and customers, we drive more value and greater utilizations. This translated to an 11% increase in purchase volume per active account during the third quarter and 16% growth in total purchase volume compared to last year. Of course, this strength in purchase volume was largely offset by the persistently elevated payment rate trends resulting from government stimulus and industry-wide forbearance actions, leading to a 2% increase in loans, including loans held for sale. Net interest margin of 15.45% was 165 basis points higher than last year, primarily reflecting the reduction in excess liquidity. Operating expenses were down 10% compared to last year and down 7% year-to-date as our cost efficiency initiatives continue as planned. We remain on track to reduce about $210 million from our expense base by year-end, even as we continue to invest in our business. The efficiency ratio was 38.7% for the quarter, largely flat with last year. Credit continued to perform very well, Net charge-offs were 2.18% for the third quarter, down 224 basis points from last year. Net earnings were $1.1 billion, or $2 per diluted share, and included a 33-cent benefit from the reserve release related to the reclassification of the GAAP portfolio to hell for sale. Turning to our balance sheet, deposits were down 3 billion, or 5%, versus last year, reflecting retail deposit rate actions we took to manage our excess liquidity. Deposits represented 82% of our funding mix at quarter end, a slight increase versus last year due to the retirement of debt. During the quarter, we've returned $1.4 billion in capital through share repurchases of $1.3 billion and $124 million in common stock dividends. We also continue to reinvest in our business. As we highlighted during our recent Investor Day, our ability to remain nimble and adapt to the ever-changing consumer finance landscape has been driven by our continued investment in our product suite and our innovative digital capabilities. In fact, if you think about the last decade alone, the introduction of digital wallets, point of sale financing, and a greater variety of installment offerings, just to name a few, has demonstrated the importance of diversity, accessibility, and utility in both products and experience. And so Synchrony has continuously evolved, adding new financing options, enhancing our technology platform, and expanding our channels and distribution networks in order to reach and serve more partners and customers in sustainable ways that drive greater value for all. In addition to launching new products and partner programs, we are remaining focused on innovative ways to get scaled distribution of our product suite. Last week, we announced our expanded strategic partnership with Fiserv, through which small businesses will now be able to access synchrony products and services and accept private label credit card payments via the Clover point of sale and business management platform from Fiserv. This will enable accelerated growth for small businesses, empowering merchants to attract more customers and generate more revenue by offering their customers greater flexibility and choice in how they make purchases. We will also explore additional opportunities to cross-sell synchrony products to existing Clover merchants. Importantly, this strategic partnership also deepens Synchrony's ecosystem and reinforces our growth strategy to expand and accelerate innovative product offerings through additional distribution channels. It builds on our momentum to bring our products to merchants faster and leverages Synchrony's leadership in financing, analytics, and services. We're excited to utilize the point-of-sale innovations driven by Clover to continue to transform the way people purchase while helping merchants grow. Furthermore, as we and our partners endeavor to provide more comprehensive customer access to financial products and resources, we are excited to expand our partnership with PayPal. As announced in late September, Synchrony will be launching PayPal Savings, a new PayPal branded savings account. This unique opportunity will allow us to expand the distribution of our savings product to a unique set of customers with features and functionality inside the PayPal app, delivering an enhanced customer experience, while also further diversifying our deposit base at an attractively low cost to acquire. In addition to our ongoing efforts to expand both our product suite and distribution network, we also seek to enhance partner and customer engagement through customized value propositions and omnichannel capabilities. We recently launched two industry-first retail health and wellness credit cards, the MyWalgreens MasterCard and MyWalgreens Private Label Credit Card. which reward customers with savings on future health and wellness purchases. MyWalgreens credit card holders can earn 10% Walgreens cash rewards on eligible Walgreens branded products and 5% Walgreens cash rewards on other eligible brands and pharmacy purchases. MyWalgreens MasterCard holders can also earn 3% Walgreens cash rewards on eligible grocery and health and wellness purchases everywhere else, including healthcare providers. and 1% Walgreens cash rewards on eligible purchases anywhere MasterCard credit cards are accepted. In a world where consumers are increasingly responsible for a greater proportion of their health-related costs, we believe these value propositions will drive considerable value while also providing greater financing flexibility for health-related needs and enhancing loyalty over time. Furthermore, Synchrony's digital capabilities allow us to seamlessly engage with customers wherever they are. We have deep digital integration across the Walgreens web, mobile, and native app channels with the ability for customers to apply and instantly buy through all of these channels. We've launched frictionless customer experiences, leveraging technology capabilities like QR codes, quick screen, which is a real-time pre-screen of one, customer-initiated pre-qualification, a directed device in-store application process, card servicing integrated seamlessly into the Walgreens app, and API integration with the MyWalgreens loyalty program. And while it's still early, the initial data we're seeing indicates that both the value prop and dynamic customer experience we have achieved with Walgreens are resonating very well with cardholders and driving spend both inside and outside of Walgreens in categories such as grocery, health, and wellness. By empowering our partners and customers with best-in-class wallet optionality and compelling outcomes, Synchrony is increasingly well-positioned as the partner of choice. With more than 65 million active accounts, Synchrony has market-leading reach and deep, diverse lending insights that enable us to better anticipate the needs of customers and, therefore, which financing options will optimize utilization and drive lifetime value. So whether it comes in the form of our dual, co-branded, and private-label credit cards, our various set-pay installment products, or our Synchrony MasterCard, we deeply understand when, why, and how customers seek financing solutions for their day-to-day purchases. We're particularly excited about the opportunity we see for our Synchrony MasterCard, which allows us to tap into the $500 billion general purpose credit card market. We are taking a measured approach to growth. However, by leveraging our scale and underwriting expertise, we've been able to identify better performing customer segments, acquire more customers at lower CPAs, and fine tune our channel strategy over the last two years. Today, Synchrony MasterCard offers a variety of value propositions, which we use in combination with our pricing strategy to expand our customer reach and optimize conversion. And we have great digital utility through dApply and integration in Apple Wallet, as well as our mobile app. This allows customers to access their various bank products, their money market and high-yield savings accounts, as well as their credit card balances and transaction data. This value proposition and seamless digital experience resonates very well with our customer, leading to purchase volume growth of 36% versus the same period in 2019. We're also seeing higher levels of engagement around the product and brand as spend per active account is up 40% versus 2019. So we're very excited about our Synchrony MasterCard. It's an important offering within our product suite strategy. that we believe will enable us to capture a larger portion of customers' top-of-wallet spend and which should drive highly scalable growth and above-average returns to our business over the long term. And with that, I'll turn the call over to Brian.

Thanks, Brian, and good morning, everyone. 630's third quarter financial results reflected broad-based strength across our business, highlighted by a double-digit purchase volume increase and continued loan growth, a significant improvement in our net interest margin, historically low losses and delinquencies, and continued cost discipline. The combination of these results led to $1.1 billion in net earnings, or $2 per diluted share, a return on average assets of 4.9%, and a return on tangible common equity of 40.1%. These results are a true testament to the power of Synchrony's unique business model, which builds on our deep domain expertise in consumer lending and leverages dynamic digital capabilities delivered through our comprehensive multi-product suite to reach and serve a deep and diverse universe of partners and customers. Looking at our third quarter performance in greater detail, beginning with purchase volume, which grew 16% compared to last year and 16% compared to 2019, excluding Walmart, demonstrates clear, broad-based strength in consumer demand. This is also reflected in our purchase volume per account, which increased 11% compared to last year. Dual card and co-branded cards accounted for 40% of the purchase volume in the third quarter and increased 29% from the prior year. On a loan receivable basis, excluding the impact of the reclassification of the GAAP portfolio to held for sale, dual and co-branded cards accounted for 24% of the portfolio and increased 4% from the prior year. Average active accounts increased 5% compared to last year, and new accounts increased 17%, totaling more than 6 million new accounts in the third quarter and over 17.5 million new accounts year-to-date. In late August, we reached an agreement for the sale of the GAAP portfolio, which led to the reclassification of $3.5 billion of loan receivables to held for sale, and therefore reduced our ending loan receivables balance. Excluding the impact of the reclassification, loan receivables would have increased by 2% versus the prior year, as the period's strong purchase buying growth was largely offset by a persistently elevated payment rate. Payment rate for the third quarter was approximately 200 basis points higher when compared to last year. Interest and fees on loans increased 2% compared to last year, reflecting similar growth in average loan receivables. Net interest income was 6% higher than last year, primarily reflecting a decline in interest expense due to lower benchmark rates. RSAs were $1.3 billion in the third quarter and 6.38% of average receivables. The $367 million year-over-year increase primarily reflected the impact of the lower provision for credit losses and continued strong program performance, including growth and improvement in net interest income. To put this in context, Remember that our RSAs are designed to align interest between ourselves and each of our partners. This means driving growth and attractive risk-adjusted returns, enhancing program profitability. This allows each partner to share in the program's performance, so when profitability expands, our partners participate in that upside. So now when you think about the combined $1.4 billion year-over-year improvement in net interest income, net losses, and the reserve change, we shared $367 million of that through the RSA. Focusing on our credit performance, provision for losses was $25 million. Including this quarter's provision was reserve release of $407 million, which incorporated our continued strength in credit performance, a more optimistic macroeconomic environment, and the impact of reclassifying our GAAP portfolio loan receivables to help for sale. This resulted in a reserve reduction of approximately $247 million. Other income decreased $37 million, generally reflecting higher loyalty program costs from higher purchase volume during the quarter. Other expense decreased $106 million compared to the prior year. As you recall, last year we recognized an $89 million restructuring charge, and we continue to see favorability from lower operational losses. Moving to slide eight, our platform results. We saw a broad-based purchase volume growth across all five platforms, reflecting strong consumer demand. Our home and auto, diversified in value, digital, and health and wellness platforms each experienced double-digit year-over-year growth in purchase volume. The 10% year-over-year increase in home and auto was generally driven by strong retailer performance across almost all verticals, while purchase volume and diversified value increased 25%, reflecting the continued return to in-person retail experiences. In digital, the 21% increase was due to broad-based growth across our partners, coupled with growth in our new programs with Verizon and Venmo. In health and wellness, the 10% growth in purchase volume primarily reflected consumers being more comfortable with the environment and undergoing planned procedures. Meanwhile, purchase volume grew a more modest 2% in lifestyle, reflecting broad-based growth across the platform, but having a tough comparable to last year's strong growth in power sports. Loan receivable growth trends by platform generally reflected modest growth rates versus the prior year, as higher purchase volume was largely offset by elevated payment rates, the one exception being in our diversified value platform, which was impacted by store closures in 2020. Average active account trends ranged on a platform basis, up by as much as 10% in diversified value and 7% in digital, while home and auto and health and wellness average active accounts were generally flat. The active account growth and diversified value largely reflected the return to in-store retail experiences. Digital active accounts were up versus prior year due to greater engagement across our existing customer base, as well as the impact of recent program launches. Interest and fee trends were generally improved across the platform, with the exception of diversified value, which is down due to lower receivables. I'll move to slide 9 to discuss net interest income and margin trends. The accumulated savings by consumers resulting from stimulus, forbearance, and lower discretionary spending continue to impact the payment rates during the third quarter. Payment rates were approximately 260 basis points higher than our five-year historical average. That said, we've begun to see some signs of moderation in certain cohorts, as payment rate was about 200 basis points higher year-over-year compared to almost 300 basis points higher year-over-year comparison in the second quarter. We expect the payment rate to gradually normalize as consumer spending remains robust, excess savings have peaked, and widespread forbearance dissipates. Interest and fees were up approximately 2% in the third quarter, reflecting average loan receivable growth. Debt interest and income increased 6% from last year, reflecting the year-over-year improvement in interest and fees, as well as lower interest expense for the period. The interest margin was 15.45% compared to last year's margin of 13.8%, a 165 basis point improvement year over year driven by the mix of interest earning assets and favorable interest bearing liabilities costs. More specifically, the mix of loan receivables as a percent of total earning assets increased by 550 basis points from 78.3% to 83.8% driven by lower liquidity held during the quarter. This accounted for a 106 basis point increase in our net interest margin. Interest-bearing liabilities costs were 1.31%, a year-over-year improvement of 59 basis points, primarily due to lower benchmark rates and funding mix. This provided a 51 basis point increase in our net interest margin. The loan receivables yield was 19.59%, a year-over-year improvement of 10 basis points. This resulted in an 8 basis point improvement in our net interest margin. Next, I'll cover our key credit trends on slide 10. First, let's discuss our delinquency trends, where higher payment trends have continued to drive year-over-year improvements. Our 30-plus delinquency rate was 2.42% compared to 2.67% last year. Our 90-plus delinquency rate was 1.05% compared to 1.24% last year. It should be noted that removing the impact of the GAAP program from the third quarters of this year and last year the 30-plus delinquency metric would have been down about 40 basis points versus 25 basis points, and the 90-plus metric would be down about 25 basis points instead of 19 basis points. And in terms of our portfolio's loss performance, our net charge-off rate was 2.18% compared to 4.42% last year. This year-over-year improvement was primarily driven by strong delinquency trends we've experienced. Our allowance for credit losses as a percent of loan receivables was 11.28%. Let's move to slide 11 and discuss expenses. Overall expenses were down $106 million, or 10% from last year, to $961 million, primarily reflecting the impact of the prior year's restructuring charge of $89 million and lower operational losses. The efficiency ratio for the third quarter was 38.7% compared to 39.7% last year. This metric remains elevated relative to our historical average due to lower revenue resulting from the impact of higher payment rate and lower average receivables. We continue to maintain our disciplined focus on cost containment while we make strategic investments in our business to deepen our competitive advantage and drive long-term value for shareholders. Moving to slide 12. Given the reduction in loan receivables in 2020 and early 2021, coupled with the strength of our deposit platform, we continue to carry a higher level of liquidity. While we believe it's prudent to maintain a higher liquidity level during uncertain and volatile periods, we continue to actively manage our funding profile to mitigate excess liquidity and optimize our funding profile. As a result of this strategy, there was a shift in our funding mix during the third quarter. Our deposits declined by $3.2 billion from last year, and our securitized and unsecured funding sources declined by $3 billion. This resulted in deposits being 82% of our funding compared to 80% last year, with securitized and unsecured funding each comprising 9% of our funding sources at quarter end. Total liquidity, including undrawn credit facilities, was $18.4 billion, which equated to 20% of our total assets, down from 28% last year. Before I provide detail on our capital position, it should be noted that we elected to take the benefit of the transition rules issued by the Joint Federal Banking Agencies, which has two primary benefits. First, it delays the effect of the CECL transition adjustment for an incremental two years. And second, it allows for a portion of the current period provisioning to be deferred and amortized with the transition adjustment. With this framework, we ended the quarter at 17.1% CET1 under the CECL transition rules, 130 basis points above last year's level of 15.8%. The Tier 1 capital ratio was 18% under the CECL transition rules compared to 16.7% last year. The total capital ratio increased 120 basis points to 19.3%. And the Tier 1 capital plus reserves ratio on a fully phased-in basis decreased to 26.6% compared to 27.3% last year. During the quarter, we returned $1.4 billion to shareholders which included $1.3 billion in share purchases and $124 million in common stock dividends. Our business generates strong returns and considerable capital, resulting from our commitment to drive growth and appropriate risk-adjusted returns, the scalability of our technology platform, and our ongoing cost discipline. We will continue to take the opportunistic approach to returning our excess capital to shareholders as our business performance and market conditions allow. subject to our capital plan and any regulatory restrictions. Finally, let me focus on our outlook for the fourth quarter, which is summarized on slide 13 of our presentation. While there are a number of external variables that are difficult to predict with precision, we generally expect the third quarter's key operating trends to be stable in the fourth quarter. Underpinning our forecast is a stable and improving macroeconomic environment, and the pandemic continues to be largely in control. We expect strong consumer demand through the holiday season to support continued strength in purchase volume. This strength, partially offset by continued elevation in payment rates, should lead to a modest growth in receivables. Our net interest margin will likely be consistent with 3Q21. Our provision for credit losses will continue to reflect the impact of asset growth, credit performance, and macroeconomic factors, as well as continued reserve reductions related to the GAAP portfolio. As credit losses begin to normalize, we expect the RSA as a percent of average loan receivables to begin to moderate. Lastly, turning to our operating expense, we expect the acceleration in purchase volume to contribute to a slight sequential increase in absolute dollars for the fourth quarter. That said, we continue to expect the full year operating expenses to be down compared to 2020. As we close out the year and look forward to the future, we're excited about the opportunities we see to continue to drive strong financial results and shareholder value. We are well-positioned to execute on the strategy we laid out during our investor day and drive sustainable growth and attractive risk-adjusted returns simply by continuing to leverage our inherent core strengths, the breadth and depth of our business model, the scalability of our innovative digital capabilities, and customer lifetime value expansion we drive through our diversified product suite and powerful value propositions. I'll now turn the call back over to Brian for his final thoughts.

Thanks, Brian. I'm really proud of the results that we as a team continue to deliver for Synchrony's partners, customers, and stakeholders. We have a truly unique understanding of the wide range of needs that our partners and customers seek to address at any given time. And our differentiated approach to addressing those needs enables us to deliver solutions and experiences that deeply resonate. Whether it's through the optionality embedded within our diverse product suite and customized value propositions, or the many ways in which we power the connection between our partners and customers, Synchrony continues to reach, engage, and serve more customers and drive greater, more sustainable outcomes for our stakeholders. With that, I'll turn the call back to Catherine to open the Q&A.

That concludes our prepared remarks. We will now begin the Q&A session. So that we can accommodate as many of you as possible, I'd like to ask the participants to please limit yourself to one primary and one follow-up question. If you have additional questions, the investor relations team will be available after the call. Operator, please start the Q&A session.

Thank you. We will now begin the question and answer session. If you have a question, please press star, then one on your touch-tone phone. If you wish to be removed from the queue, please press the pound sign or the hash key. If you're using a speakerphone, you may need to pick up the handset first before pressing the numbers. Once again, if you have a question... Please press star then one on your touchtone phone. We have our first question from Betsy Grasick with Morgan Stanley.

Hey, good morning.

Morning, Betsy. Morning, Betsy.

I just had a couple of questions. Wanted to understand what you're thinking about with regard to the purchase volume and the spend volume that you've been generating so far. I know it's been accelerating. It feels like it's a little bit light of some of the general purpose card activity that we've seen out there and would want to get your thoughts on that.

Yeah. Let me start and then Brian can jump in if he has other comments, Betsy. What I would say is in comparison to general purpose cards, they had a larger dip and larger exposures to some T&E and some other purchases that we did not drop as much as them last year. So I think when we look at the purchase volume, first of all, it's broad-based across all our platforms. We have seen really solid performance, the exception being lifestyle, which, again, had a very difficult comp last year with regard to power sports and outdoor power equipment. But when we looked at it through the quarter, it was actually incredibly consistent from the first week of the quarter and each week as we move throughout the quarter, and that's really extended in here through the first couple weeks of October. So we are very pleased about the activity level on the card It's very broad-based. Even the little exposure that we had to with travel and entertainment, we saw that pop up with our travel being up 75% on our either co-branded card or the Synchrony MasterCard. Restaurants were up 44%. So we're seeing that growth, but our business is very consistent, and we think that's really strength as we kind of move through here into the fourth quarter.

I think the only thing I would add, Betsy, is we're also seeing really good growth on new accounts. And so that's really seeding what we think is going to be strong purchase growth as we move into 22. So new accounts, we're up 17%. When you adjust for Walmart, up 37%. So really good growth on new accounts, which is really a good indicator, I think, for quarters to come.

Yeah. No, I got that. That was definitely impressive. And then when I'm thinking about the outlook here, I know there's a lot of verbiage around, you know, moderately, you know, up and down and things like that. I just wanted to hone in on the RSA and understand how we should be thinking about that, realize that the profitability of the programs is up this quarter given the strength in NIM and given the, you know, strength in credit. I guess I'm wondering as I think forward, you know, how to think about that RSA trajectory because, you know, the rate of change in those two categories obviously starts to come down and credit starts to build. But then at the same time, you know, there's marketing and other types of expenses that come into that, you know, RSA. And I'm wondering how I should think through the degree to which what's the new level you think we should be angling to? Yeah.

Yeah, so, Betsy, and I just want to go back and continue to ground home the fact that the RSAs are working as they're designed, right, where the profitability of the company, as it expands, we're going to share more in the RSA. So that is by design. It's the buffer we all want when the downside is, but we prefer the upside. So right now we're just going to pay more. So I think as you think about the trajectory as you move forward, right, it's going to move more – in line with the NIM of the business and the net charge-offs, right? So we would expect, you know, charge-offs here, you know, probably at a trough and would be able to go up. So as the charge-offs begin to increase, that's going to go directly through, and there's not really a lag effect when it comes to charge-offs through the RSA. And I think as you think about the margin of the business and the revenue side of the business, as delinquencies begin to rise, your revenue goes up, so that will flow through. And then once you start to get the write-offs come through, then we'll come down a little bit. So I think it's going to move hopefully in parallel. The only lag effect is on the change in reserves, but it should move with the business. And, again, we think we're probably at the trough on delinquencies now, but we'll see how it develops. But we're pleased with the performance. We're pleased with how the RSA actually moved because it moved in line with the business results.

Yep. Thanks.

Thank you, Betsy.

And thank you. We have our next question from John Hecht with Jefferies.

Hey, guys. Good morning. Thanks for taking my questions. New accounts up 17%. I'm wondering, can you give us an idea of how many of that's coming from the new channels like Verizon and Venmo versus just deeper penetration and some of the more seasoned partnerships?

Yeah, you know, John, the way I would frame it is the new programs, while they are performing with our expectation with regard to account performance, that's not really going to be large enough to be a driver in our business given the scale. So we really see it in some of the traditional retailers that have opened up and returned to that in-store retail experience, as well as the continued expansion inside the digital programs and platforms that we have. So it's really fairly broad-based. We have not seen any areas where lag behind. I think as people have really started to engage kind of post-pandemic, if I call it that, in shopping experiences. And I think it goes back to the multi-products that we have. It goes back to the compelling value propositions we have, and it's broad-based. So, you know, we expect that to continue into the fourth quarter and into the holiday season.

Yeah, John, I would say it's obviously a combination of you've got Venmo, you've got Verizon, you've got Walgreens. a very attractive new value prop at Sam's Club. But I also attribute a large portion to the digital investments that we've been making. So we have made it so much easier to apply, whether you're in-store, on your phone, online. You can really do it in a matter of seconds now. You just put in a couple fields. You do it right on your phone, even if you're in-store by scanning a QR code. So just making it easier to apply. I think all the All the macro tailwinds are certainly there in terms of what we're experiencing in the business, but this is where the digital investments that we've been making over the past five years are really starting to pay off.

Okay, that's helpful. Thanks. And then second question is, can you just give us what's the remaining reserve release for the gap?

Yes, so John, I would say the overall provision was around $400 million, so you've got about $150 million more over the next couple of quarters to come through. The exact timing of that and the cadence will really depend upon the performance of the portfolio as we move through, but obviously the first piece is always the biggest in the hell for sale accounting.

Okay, great. Thanks, guys. Thanks, John. Thanks, John.

Our next question is from Rick Fane with J.P. Morgan.

Thanks, everybody, and good morning. I'd like to talk a little bit about the online sales metric that you posted, which is 40%. And I'm curious where you think that is versus the peer average on general purpose and how it compares to your general purpose. Because as we think about the resumption of spend as the economy reopens, I'm wondering if there's leverage there because you do more in person than some of your peers.

Yeah, look, I think that's a metric that obviously we believe we over-index in terms of online and mobile sales. Just look at our partner set with Amazon and PayPal and Verizon and others. I think that they're certainly leveraged there. If you look at the portfolio mix, and we broke this out a little bit at Investor Day in terms of where we see a lot of the growth coming longer term. inside the company, it's clearly going to be over-indexed in terms of online sales. That's speaking kind of particularly to our digital partners as they become a larger share of the overall business. But I will say that for some of the more traditional partners that we have, we have been, I believe, instrumental in helping them transform their footprints to be more digital. So that has been a big part of what we've tried to do, particularly over the last couple years in response to the pandemic. Many of our partners had to close stores. They moved a lot of their sales online. And we're a big part of how they were able to meet that need and transform their businesses. So certainly leverage going forward.

Thank you, Brian. Great. Thank you.

And thank you. Our next question is from Don Fandetti with Wells Fargo.

Hi, Brian. I was wondering if you could talk a little bit. I mean, it seems like 30-day, plus-day delinquencies have sort of troughed here. And as you look forward, we're going to normalize. When do you think they'll start turning positive year over year? Is that like a mid-next-year type event? Can you talk about that normalization process?

Yeah, Don, good morning. So I think if I were to lay out for you two cases on delinquency, the first being a little bit more conservative, which says you have a more sharper rise in delinquency that would begin starting here in the fourth quarter, would peak third quarter next year and result in that charge-off peak in the first quarter of 23. So that's a more conservative case. And the basis for that case becomes one where, as you have individuals coming off of, consumers coming off of forbearance, government assistance, renter forbearance, that they have not been able to sustain enough savings in order to avoid that. So that's a sharper case, a more conservative case. A more optimistic case is, would say you would see a slower rise in delinquencies as you move through 22 into 23. And then really your loss rate comes back in line end of 23 into 24. And I say in line being back to the mean, it caught 5.5%. So it's a much more gradual rise. And that premises on the fact that the consumers were able to build up enough savings so that when the financial obligations come back online for them, they're able to to continue to pay their bills immediately. So those are kind of the bookends that I would think about.

Got it. That's actually really helpful. Thank you, Brian. You know, anything on the acquisition side, whether it's bolt-on fintechs or portfolios, anything that you're looking at that could be good candidates here?

Yeah, Don, I would say, look, we have a very active M&A pipeline. The team's out there screening for opportunities. every day. I will tell you that the one thing we were hoping to see in the pandemic was valuations coming back down to earth a bit. In fact, we saw the opposite. So things are still really expensive out there, both in terms of, you know, capabilities as well as businesses. So, you know, we're certainly looking at a number of things. I'd say, you know, existing businesses where we can leverage our scale to grow those businesses. I think Allegro Credit is a great example of that. Pets Best, a great example of that where, you know, we're able to leverage our scaling in care credit and health and wellness and buy those businesses and really grow them well, which, you know, we shared a little bit at Investor Day around how we did that. But, you know, we're going to be disciplined. You know, we're looking for acquisitions that are not only strategic but accretive. And so we stay pretty disciplined on that, but, you know, the team is very active on that front. Thank you. Okay. Yep.

And thank you. Our next question is from Sanjay Sakrani with KBW.

Thanks. Good morning. I have one question for Brian Wenzel and one for Brian Doubles. Brian Wenzel, on the guidance, If we look at the net interest margin expectation, I guess you guys are assuming there's going to be an acceleration in loan growth, and we should have higher delinquency. Shouldn't that help the NIM? So shouldn't the NIM actually be better as we move into next quarter, or are there other factors sort of weighing against it?

Well, first of all, good morning, Sanjay. You know, a couple of factors. You are going to see the loan growth, which obviously goes into denominator, and actually pushes the NIM down. And then when you think about it, you will get a little bit of offset as you see some of the charge-offs and delinquency rise. You will see a little bit of the write-off reversal that goes back through. So it's not necessarily out of line with, I think, past years if you look back a couple years ago. So it should be in line with that. But again, we're very pleased with the NIM being up in the 15-plus percent range that I know a lot of people focused on when we were you know, 165 basis points lower than where we are today. So we're obviously pleased with its performance.

Absolutely. No, it was a good sequential move, clearly. And then Brian Doubles, you know, obviously you guys have done a number of, or made a number of moves just in this last quarter, the pay-in-for product announcement, this embedded finance relationship with PayPal and and the Clover partnership. And you talked in the press release about positioning for a diverse universe of partners. I was just curious sort of how we should think about other, like the product pipeline going forward. Are there other deals like that where you're going to be an embedded partner from a financial standpoint for other technology players? And then just how does it play into the business model, like the revenues and expenses on a go-forward basis? Does the complexion of those revenues change or how should we think about it? Thanks.

Yeah, I would, Sanjay, I'd take a step back and think about our strategy really in two big pieces. One is very focused on products. And, you know, we spent a lot of time on this at Investor Day. You know, we believe we have the most comprehensive product suite out there, whether it's private label, dual, co-brand cards, buy now, pay later, short and long-term installments. And so we feel like that is obviously really important given the diversity of our partner set and what they want from us. The other really important part of the strategy is really around distribution of those financial products. So, you know, this is think about integration into the merchants and providers, making it easier to apply for those products and really getting that scale. So it's one thing to have the products, but you've got to have the distribution channels as well. And so if you go back over time, you know, we do a lot in terms of direct partner integration. So that's leveraging our APIs, synchrony plugin, et cetera. But in some cases, we're looking to expand distribution through, you know, practice management systems like Epic. Anytime we can build a solution once and reach thousands of merchants, we absolutely want to do that. And that's really what Clover does for us. With the development of a single app, we can reach thousands of merchants. We can tap into their roughly $180 billion of GPV. So we think this is a big opportunity and allows us to do something once and get immediate scale. And so we're actively looking at other opportunities to do that for our products. But this is really, think about it as really a two-pronged approach. You've got to have the product set, but then you've got to have a distribution channel or a set of distribution channels that allow you to scale quickly and get those products made available to our merchants and their customers.

Okay. Great. Thank you. Thanks, Sanjay.

We have our next question from Bill Karkachi with Wolf Research.

Thank you. Good morning. I wanted to ask a follow-up on credit. As we look ahead to NCO rates normalizing higher off these low levels, there's been some concern that this could lead to reserve building headwinds. But since your reserve rate is still well above your day one level of just under 10%, is it reasonable to expect that that reserve rate is going to continue to drift lower from here, even as NCO rates normalize higher, such that that credit normalization process does not necessarily lead to reserve building headwinds? just some high level commentary around that, those dynamics would be super helpful.

Yeah, thanks, and good morning, Bill. You know, the way I think about charge-offs and the reserve build, you know, our reserve build will still really be driven by asset builds and the macroeconomic assumptions. You are correct, we're operating now at, you know, just under 11.3%. You know, our CECL day one was 10%, and we expect that migration to happen over time. Now, again, Cecil day one was 10%. We never actually had a normal quarter under Cecil. But if you use that as a guidepost, that's where we would expect to move back towards. So you're right, there will be some rate. But again, asset builds will dominate. So the reserve provisioning, there may be reserve builds that come that are partially offset by more normal rate reductions as you move closer, depending upon how, again, how credit performs and how the macroeconomic looks. But it won't avoid reserve builds if you're in an asset-increasing environment.

Understood. That's very helpful. If I could squeeze in one last one on buy now, pay later. Have your pay-in-for and other long-term installment product options been rolled out across your entire merchant base? And I know it's still early, but are you seeing any evidence of cannibalization from existing synchrony customers with traditional synchrony revolving credit product? that have signed up for paying for that paying for option? Or is the customer just signing up for paying for it, typically somebody who might not even have qualified for credit, and they're just using paying for it to turn their debit card into a credit card? Would appreciate your thoughts there.

Yeah, so why don't we just take a step back, though? I think, and I'll break buy now, pay later into a couple categories, because I think, you know, right now everything is getting lumped into credit. to buy now, pay later. And as we've indicated in the past, we do about $15 billion of installment, both short and long term. We offer those products in about 70,000 locations today. And I really think about it in two buckets. First, you've got what we call closed end installment or buy now, pay later. That's growing really well for us. So that is just a closed end loan, very simple, a number of different durations. And if you look over the past three years from 2017 to 2020, the purchase volume on those closed-end products has grown at about 46% a year. So we're definitely seeing really good traction there. We have buy now, pay later in market today with partners like Tulo, American Signature, Electronics Express. That's branded as SEPPAY. And then we talked at Investor Day that starting in October, we will have our pay-in-for product available for partners. So we're in discussions with them right now and talking about integration plans and getting that in market. I will tell you, to your point, they are focused on exactly what you said, which is how does this product compete with the products that they currently offer? And at Investor Day, we talked a lot about the economic equation for our partners. And I can tell you that is something that, you know, I think six to nine months ago, they weren't all that focused on, but right now they're very focused on it. So they're looking at the trade-offs between a traditional product where, you know, they might earn an RSA and how does that compare to a short or long-term installment product of paying for where they're paying a merchant discount. And so I think the way this is going to play out there's going to be a lot of kind of testing and learning and seeing how these products kind of work together, what the customer uptake is, and then at the end of the day, what the economic equation is back to the partner. So that's one big bucket of, you know, what we call, you know, installment, closed end, buy now, pay later. The other thing that we talked about is the buy now, pay later option or installment option that we offer on our carts, so on a revolving account. And this is where we continue to see a lot of really strong interest from our partners. And part of what they like about that is you can actually do multiple installment loans or buy now, pay later loans without an additional credit check or application process. It also gives the customer the ability to to when they want to, just make a regular purchase, not on an installment basis, and take advantage of the value prop. So save 5%, for instance, at Amazon. And what we've seen is customers really like to have that optionality. So for some purchases, they want to put it on a six-month or a 12-month equal pay, buy now, pay later product. In some cases, they want to take advantage of the value prop. And what's nice about that product is it allows you to do both and really gives the customer that choice at the end of the day. The partners on their side, they really like that because it allows them to do more lifecycle marketing, right? So they can push out offers and promotions around holiday and things like that. So they like that lifecycle relationship that they're able to maintain with the customer. So, look, at the end of the day, I think every one of our partners is looking at this a little bit differently. They're looking at the interplay between these products or looking at the economic equation. I think the good news is if you take a step back and you see how we're positioned, We have a very comprehensive suite of products. We can sit down with a partner, and they can basically choose from a menu in terms of what they want to offer, and we can lay out for them the economic equation, what we think it's going to do to their sales, et cetera. So I feel like we're very well positioned. We've got the product suite. We've got the ability to integrate quickly with our partners, and we think over time the multi-product strategy is the winning one.

That's super helpful. Thank you for taking my questions.

Thanks, Bill. Thanks, Bill.

Our next question is from John Pancari with Evercore.

Morning. I want to see if you can elaborate a little bit more on your payment rate expectations. I know you expect the payment rate to gradually normalize. If you could maybe help size that up, similar to the third quarter decline, and also are you seeing any incremental evidence of accounts that typically revolve starting to carry balances again, if maybe you can give us a little bit of granularity there.

Thanks. Sure. Thanks, and good morning, John. So, you know, obviously in the deck we showed you the elevated level that we saw in the third quarter, and as we move into the fourth quarter again, that rate is going to continue to be elevated. I'd point you to a couple of things as we think about payment rate and the trends. We've done a lot of analysis to try to make sure that as we look at it, that we believe it's going to revert back to the mean. And everything we have seen still leads us to that conclusion that there is a reversion back to the mean. There are a couple of what I would call underlying data points that I would try to point you to. Number one, as we look at the savings rates for consumers, they are drifting down to a more normalized level in pre-pandemic. And we look at that both as the big money-centered banks as well as the digitally-oriented banks. And what we see with regard to movement in our savings rates savings accounts. So one, savings is coming down, savings rate is coming down, which again, part of that's going to be the high purchase volume. The second, we start to look at cohorts inside of our portfolio. We do see very slight movements down. So for instance, if you looked at a product level, our dual card price, you know, sequentially second quarter to third quarter had a slight decline in the payment rate on a product level. That's a higher FICO customer that is beginning to migrate back down. When you look at it with regard to accounts that either pay full pay between full pay or statement balance and min pay, and then statement balances or less than statement balances, across all those categories, we've seen slight reduction in that payment rate. So if you think about the people who paid statement balances, that is slightly lower third quarter versus second. The people who are playing between statement balance and min balance, that is lower third in the third quarter than the second quarter, and then the min pay is up slightly, third quarter versus second, and then the people paying less than the min pay is up slightly. So I think as we start seeing very slight movements, those are movements that would tell us that the payment rate is going to move back towards the mean that we experienced pre-pandemic, or we're starting to see a little bit of signs there.

Got it. No, thank you, Brian. That's helpful. And then secondly, on the NIM, I appreciate the color you gave earlier in terms of some of the moving parts for the link quarter expectation. Is there a critical opportunity around funding that you can continue to optimize the funding stack here to support the NIM further out that we can possibly dial in? Thanks.

Yeah, you know, in our funding stack today, we have 82%. that is funded with retail deposits. You know, we have not been an active issuer in the market either in 19, I'm sorry, in 20 or 21. I would expect us to access the market. First, I think it's good for the liquidity of the company. So, you know, we would expect to see a little bit of activity because we have not replaced some of that expiring debt. But I would imagine that our deposit funding rate will remain elevated versus the 70 to 75% that we historically have guided to. I think also, you know, there's an opportunity with our PayPal savings product to continue to broaden the reach to customers in retail. So we're excited about that when it comes out in the coming months. So we're going to continue to focus on I'm trying to optimize the cost, but we also want to maintain access to the deep markets, whether that's secured, unsecured. As we begin to get the capital stack in order, we would probably access additional preferreds to build out the capital stack of the company and get down to our target level. So we intend to be an active issue over time and do it in a way that optimizes the cost.

Got it. Thanks, Brian. Appreciate you taking my questions. Thank you.

Thank you, Operator. I think we have time for one more question.

Thank you. Our question comes from Mark DeVries with Barclays.

Yeah, thanks. Made a lot of progress in the quarter against your repurchase authorization. Could you just discuss kind of the cadence of buybacks going forward and whether we should expect anything incremental as you sell the GAAP portfolio?

Yeah, so thanks, Mark. So the way the GAAP capital releases, obviously we've had you know, a portion of the reserve release that's a smaller portion that flowed back through capital this quarter. The bulk of the reserve release will happen in the second quarter next year when we intend to convey that portfolio. So that will probably be included in our next capital plan. We have $1.2 billion remaining under the existing authorization that we have as we enter the quarter. So, you know, we're pleased with, you know, how we repurchased shares during the third quarter. As we said before, we'll be aggressive but prudent as we move forward here. And as always, we'll continue to run our internal stress test model, evaluate the performance of the business and the income profile. And to the extent that we believe it's prudent, we'll engage in discussions with our board about potentially increasing the authorization. But right now, we have $1.2 billion ahead of us. And again, we want to be aggressive but prudent as we you know, continue to reduce the capital level of the company towards closer to our long-term target.

Got it. That's helpful. And a separate question. Could you just discuss expectations for go-forward OPEX as you weigh, you know, the different cross-currents of your kind of ongoing cost containment initiatives and the runoff of the GAAP partnership, you know, against the need to continue to invest in the platform? Sure.

Yeah, you know, our first priority from Brian and Margaret and the board is to continue to maintain the long-term investments that we have in the business and the strategic initiatives. So we do almost everything to protect that because that's in the best interest of our shareholders, that long-term value. Around that, you know, we've maintained a cost discipline. We've reduced, you know, a lot of costs. We're on target for our $210 million this year. But we've made some moves to invest back in certain aspects of our business. That includes going to $20 an hour for our non-exempt workforce and investing back into the business. I think as you look at the fourth quarter, there's going to be a slight increase as you think about some marketing and some things that are going to happen in a quarter. But, again, we would expect as you move forward, as revenue comes back in line, our progression back towards an efficiency level back in the low 30s And discipline, if you think about it, on a dollar basis as we sequentially move through 22. Okay, great.

Thank you.

Thanks, Mark.

And thank you, ladies and gentlemen. This concludes our earnings call. Thank you for your participation. You may now disconnect.