Synchrony Financial

good morning and welcome to the synchrony financial third quarter 2024 earnings conference call please refer to the company's investor relations website for access to their earnings materials please be advised that today's conference call is being recorded currently all callers have been placed in a listen-only mode and the call will be open for your questions following the conclusion of the management's prepared remarks if at any time you should need operator assistance please press star zero If you wish to ask a question following the prepared remarks, please press star 1. I will now turn the call over to Catherine Miller, Senior Vice President of Investor Relations. Thank you. You may begin.

Catherine Miller 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 can 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 gap 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.

Thanks, Kathryn, and good morning, everyone. Today, Synchrony reported strong third quarter results, including net earnings of $789 million, or $1.94 per diluted share, a return on average assets of 2.6 percent, and a return on tangible common equity of 24.3 percent. These results reflect Synchrony's commitment to driving value for our customers, partners, providers, small businesses, and our shareholders as the operating environment continues to evolve. During the quarter, we continued to deliver responsible access to credit through powerful omni-channel experiences. Our broad range of flexible financing solutions and compelling value propositions continued to resonate with customers as they engaged across our diversified portfolio. We added 4.7 million new accounts and generated $45 billion of purchase volume. Both new account and purchase volume growth continued to be impacted by a modest pullback in consumer spending as well as the credit actions that Synchrony has taken since the middle of 2023 to reinforce the credit trajectory of our portfolio in 2024 and beyond. Despite those actions, average active accounts remained stable versus last year and ending receivables grew 4%. Purchase volume and receivables at the platform level reflected a continuation of the trends we've discussed over the course of this year. Customers continue to be selective in how and where they spend, particularly as they manage their spend to navigate the effects of inflation on needs like groceries, utilities, and rent. Platform purchase volume growth ranged between down 3% and down 7% year over year, generally reflecting lower spend per account as customers moderated both bigger ticket and discretionary spend, particularly in categories like furniture, electronics, cosmetic, and vision, as well as the impact of synchronous credit actions. Receivables growth across the platforms ranged from 3% to 10% higher versus last year, primarily driven by payment rate moderation. Dual and co-branded cards accounted for 43% of total purchase volume for the quarter and decreased 2%, generally due to more selective consumer spend behavior and the impact of our credit actions. The trends we see in the out-of-partner spend on these products have generally remained consistent with those at the platform level. Our customers continue to be discerning in their discretionary purchases, particularly around larger ticket categories such as home furnishing, travel and entertainment, and are prioritizing non-discretionary spend like groceries and pharmacy. As we would generally expect, our customers across credit grades are spending less per transaction in most categories, with average transaction values declining 3% versus last year. More specifically, our non-prime customers reduced their average transaction values by about 5% versus last year, while prime transaction values moderated by 3%. Our super prime customers continued to drive more out-of-partner spend with transaction value declines of around 2% year over year. That said, customers across credit grades are transacting with relatively stable frequency compared to last year, which has partially offset the impact of lower transaction values. From a payment behavior perspective, we continue to see relative stability in our non-prime segment. Meanwhile, our prime and super prime customers have continued to gradually shift from above minimum payment to minimum payment. the proportion of less than minimum payments in our portfolio remains below the 2017 to 2019 average across all credit segments. When taken together, we believe the spend and payment trends we're observing across our portfolio reflect a consumer that is making healthy decisions that align with their respective priorities and budget. And as our customer needs and priorities continue to shift, Synchrony remains focused on delivering financial solutions with compelling value propositions and broad utility for wherever life takes them. This ability to evolve and enhance our offerings also allows us to deliver loyalty and resilient risk-adjusted returns for our partners, providers, and merchants, and strengthen synchronous position as a partner of choice. During the third quarter, we added or renewed more than 15 partners, including Dick's Sporting Goods and Gibson, and strategic partnerships like Albertson's. We're proud to extend our partnership with Dick's, which builds on our more than 20-year-long relationship. We will maintain our commitment to athletes through our Score Rewards credit card program by providing the ability to earn rewards twice as fast, exclusive member-only offers, and digital account management. Athletes will be able to continue using these cards online and in stores across the company's 800-plus retail locations, including Dick's Sporting Goods, House of Sport, Golf Galaxy, and Public Lands. Meanwhile, Synchrony's partnership with Gibson, the most iconic brand in the music industry, represents what we believe to be an industry first through gibson's launch of a direct consumer credit program which is available on gibson.com and at the gibson garage nashville flagship store gibson will also participate as part of our manufacturer oem sponsorship program to drive customer engagement with their dealer framework as well as the synchrony music and sound network Synchrony is also excited to launch a strategic partnership between CareCredit and Albertsons Companies, a leading food and drug retailer in our communities. This collaboration allows customers to use their CareCredit card to pay for select health and wellness items in nearly 2,200 Albertsons Company stores, which includes Albertsons, Safeway, Vons, Acme, Shaw's, and Jewel Osco. This adds to our expanding list of partners such as Sam's Club, Walgreens, and Walmart, where CareCredit is accepted for payment of select health and wellness products and services. And lastly, Synchrony is proud to launch a first-of-its-kind payment experience for pet parents with our patent-pending insurance reimbursement functionality that'll streamline the process for managing pet healthcare expenses. customers who have both a CareCredit and PetsBest insurance product will now be able to have their PetsBest insurance claims directly reimbursed to their CareCredit health and wellness credit card. This seamless new technology reflects Synchrony's focus on driving best-in-class experiences, and through our collaboration with Independence Pet Holdings, builds on our commitment to enable more pets to get the veterinary care they need. So whether it's through the delivery of scalable, innovative financial solutions that empower our customers, or the addition and renewal of partnerships that span most consumer spend categories, Synchrony is powering access, flexibility, and utility for our customers and partners alike. And in turn, we are driving greater long-term value for our stakeholders. With that, I'll turn the call over to Brian to discuss our financial performance in greater detail.

Thanks, Brian. And good morning, everyone. Synchrony delivered another quarter of strong financial results, demonstrating the resilience of our differentiated business model and our ability to execute across our key strategic priorities to deliver consistently compelling outcome for our stakeholders. Any loan receivables reached $102 million in the third quarter, reflecting growth of 4% compared to last year as the benefit of approximately 60 basis point decrease in payment rate more than offset the 4% decline in purchase volume. Net revenue grew 10% to $3.8 billion due to the combined impact of higher interest and fees, lower RSA, and higher other income. Net interest income increased 6% to $4.6 billion as interest and fees grew 7%, primarily reflecting growth in average loan receivables and a higher loan receivable yield. Our loan receivable yield grew 30 basis points. due to the combined impact of our product, pricing, and policy changes, or PPPCs, and lower payment rate, partially offset by higher reversals. Total interest-bearing liabilities cost was 4.78%, 44 basis points higher year-over-year due to higher benchmark rates. RSAs of $914 million were 3.57% of average loan receivables in the third quarter, and declined $65 million versus the prior year, primarily driven by higher net charge-offs. And other income increased to $118 million, primarily related to the impact of our PPPC-related fees, which were partially offset by the impact of our Petch Best disposition and venture investment gains and losses. Provision for credit losses increased to $1.6 billion, reflecting higher net charge-offs and a $47 million reserve bill. Other expenses grew 3% to $1.2 billion, which was driven by costs relating to the allied lending acquisition, technology investment, and preparatory expenses related to the late fee rule change, partially offset by lower operational losses. The preparatory expenses related to late fee rule change reflected $11 million of incremental costs related to both the execution of our PPPCs and the implementation costs of the rule itself should have become effective. Even with these incremental costs, the efficiency ratio was 31.2% for the third quarter, an improvement of approximately 200 basis points versus last year, reflecting Synchrony's continued cost discipline and commitment to driving operational leverage in our business. Taken together, Synchrony generated net earnings of $789 million, or $1.94 per diluted share. This produced a return on average assets of 2.6% and return on tangible common equity of 24.3%. Next, I'll cover our key credit trends on slide nine. At quarter end, our 30 plus delinquency rate was 4.78% versus 4.40% in the prior year and 16 basis points above our historical average from the third quarters of 2017 to 2019. Our 90-plus delinquency rate was 2.33% versus 2.06% in the prior year and 20 basis points above our historical average from the third quarters of 2017 to 2019. And our net charge-off rate was 6.06% in the third quarter versus 4.60% in the prior year and 97 basis points above our historical average from the third quarters of 2017 to 2019. Our allowance for credit losses as a percent of loan receivables was 10.79%, which was generally consistent with the second quarter coverage ratio of 10.74%. Actually, on slide 10, the credit actions we've taken from mid-2023 to early 2024 are improving our delinquency trajectory as the rate of year-over-year growth in both 30-plus and 90-plus delinquency rates continue to decelerate. We'll continue to closely monitor our portfolio performance, as well as credit trends for the broader industry, given our share consumer, and we'll take additional credit actions if necessary. While the actions we have taken since last year have reduced new account and purchase volume growth in the short term, we expect they will strengthen our portfolio's position as we exit 2024 and support our ability to deliver our targeted risk-adjusted returns over the long term. Turning to slide 11. Synchrony's funding, capital, and liquidity continue to provide a strong foundation for our business. During the third quarter, Synchrony grew our direct deposits by approximately $780 million, reduced our broker deposits by $1.5 billion, and issued $750 million of senior unsecured fixed-to-flowing-rate notes due in 2030. At quarter end, deposits represented 84% of our total funding, while secured and unsecured debt each representing 8% of our total funding, respectively. Total liquid assets and undrawn credit facilities were $22.4 billion, a $1.9 billion increase versus last year, and represented 18.8% of total assets, a 60 basis point increase from last year. Focusing on our capital ratios, as a reminder, we elected to take the benefit of the CECL transition rules issued by the joint federal banking agencies. Synchrony will make a final transition adjustment to our regulatory capital metrics of approximately 50 basis points in January, 2025. The impact of CECL has already been recognized in our income statement and balance sheet. Under the CECL transition rules, we ended third quarter with a CET1 ratio at 13.1%, 30 basis points higher than last year's 12.8%. Our Tier 1 capital ratio was 14.3%, 70 basis points above last year. Our total capital ratio increased 70 basis points to 16.4%. And our Tier 1 capital plus reserves ratio on a fully phased-in basis increased to 24.5% compared to 22.9% last year. We returned $399 million to shareholders during the third quarter. which consisted of $300 million in share purchases and 99 million in common stock dividends. As of quarter end, we had $700 million remaining in our share purchase authorization for the period ending June 30th, 2025. Thicker remains well positioned to return capital to shareholders as guided by our business performance, market conditions, regulatory restrictions, and subject to our capital plan. Turning to our outlook. Synchrony remains focused on executing our key strategic priorities and taking the appropriate actions to reinforce our business performance for years to come, particularly our ability to deliver our long-term financial targets on average over time. We have been closely monitoring our portfolio and believe that both our credit actions and the PPPCs are performing in line with our expectations. With the first quarter of our PPPCs in effect, we are experiencing slightly lower paper statement fee income than expected, but stronger enrollment in e-bill. We're also experiencing less customer attrition than expected, which is a testament to the value propositions of the products we offer. We will continue to track the financial and operational impact on our customers, partners, and portfolios to determine, alongside our partners, whether any refinements to our strategies are warranted to achieve our shared objectives of sustainable risk-adjusted growth and our targeted long-term returns. As a reminder, specifically related to the framework around the pending late fee rule change and our PPPCs, there continues to be uncertainty regarding the timing and outcome of late fee-related litigation that was filed in March, the potential changes in consumer behavior that could occur as a result of late fee rule change, and any potential changes in consumer behavior in response to the PPPCs we and the broader industry have implemented as a result of the new rule. Outcomes and actual performance related to any of these uncertainties could impact our outlook. With that framework, let's turn to our outlook for the remainder of 2024. We expect the consumer to continue to manage their spending, which, when combined with our credit actions, should result in low single-digit decline in purchase volume for the fourth quarter. we continue to expect payment rates to moderate, which when combined with the purchase volume expectations should contribute to low single digit growth and ending loan receivables compared to last year. Even if the late fee rule was not implemented on October 1st, as assumed in our previous outlook, and the continued uncertainty with regard to late fee litigation, we assume the late fee rule will not become effective in 2024. As a result, We expect net interest income to remain sequentially flat as the impacts of our PPPCs are offset by seasonally higher reversals. Other income is expected to remain consistent with the third quarter level. RSA will continue to align program and company performance and should decrease sequentially on a dollar basis and as a percentage of average loan receivables, reflecting the net impact of seasonally higher net charge-offs on flat revenue. Other expenses expect to increase sequentially with the seasonally higher growth. And from a credit perspective, we expect the delinquencies to follow seasonality in the fourth quarter. We also continue to expect the second half 2024 net charge-off rate will be lower than the first half. Lastly, we continue to expect our year-end 2024 reserve rate to be generally in line with the year-end 2023 rate. Given these assumptions, Symphony expects to deliver fully diluted earnings per share between $8.45 and $8.55 for the full year 2024. The approximate 80 cent improvement from the midpoint of our prior full year EPS outlook reflects a combination of factors. First, the removal or assumption that the late fee rule be implemented on October 1st, 2024, and therefore also the removal of the related benefit from the RSA offset. Second, the impact of our PPPCs and the increase in RSA associated with those changes. And finally, strong performance of our core business as we enter the fourth quarter. In summary, Synchrony has continued to deliver on key strategic priorities that matter most to our stakeholders. We remain confident in the measures we've taken thus far to strengthen our business in an evolving environment and believe we're well positioned to drive resilient, risk-adjusted returns over the long term. With that, I'll now turn the call back over to Brian for his closing thoughts.

Thanks, Brian. Synchrony is leveraging our proprietary data and analytics, our deep lending expertise, and our innovative digital capabilities to provide seamless customer experiences, compelling value propositions, and enhanced utility with each customer interaction we have. We are increasingly anywhere our customers want to be met with financial solutions that drive loyalty and sales for our partners, providers, and small businesses. and we are consistently deepening our leadership position while driving sustainable risk-adjusting growth and long-term value for our shareholders. With that, I'll turn the call back to Kathryn to open the Q&A.

Kathryn Mohrman- 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.

At this time, if you wish to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2. Again, please limit yourself to one question and one follow-up question. We will take our first question from Ryan Nash with Goldman Sachs. Please go ahead.

Hey, good morning, everyone. Hey, Ryan. Morning, Ryan. Brian, maybe you could unpack the NII guy for us a little bit. You know, I understand 4Q is seasonally lower from reversals, as you highlighted. But how did the PPPCs fit in, along with your liability-sensitive position, which I don't think you highlight in your comments? And then I guess just given forward curve expectations outside of seasonality, do you expect the NIM to have a continued upward bias over the next several quarters? Thanks.

Yeah, thanks, Ryan. So, when you think about NAI sequentially as you step into the fourth quarter, the first, when you think about the trends that are into delinquency and the units flowing into delinquency, dollars assessed on late fees should be down in 4Q versus 3Q. You combine that with higher reversals, that is essentially offsetting the positivity you should see and you will see on interest income. and the benefit that we see in interest expense. So it kind of washes out in the quarter more just a function of how the favorability from delinquencies impacting late fees. As you start to think out against the net interest margin for a second, you should continue to see the interest component relative to the PPPCs as well as the ROV rate as payment rates decline, increase and guide the NIM higher. And you should also see a benefit of interest expense. That will lag a little bit because of the reset of the debt stack, particularly in the CDs that happens over the first half of the year. So there's generally more tailwinds as you think about margin as you move into next year. But it's going to be a little bit lagged given the reset of CDs in the first half of the year, vocal, which happened in the second quarter.

Got it. And as my follow-up question, you know, your outlook for credit calls for delinquencies to follow seasonality, I guess first you expect losses to do the same. And then, you know, in terms of delinquencies following seasonality, like what does that mean for the trajectory of losses into 25? And if they do follow seasonality, can losses move back below 6% into next year? Thank you.

Yeah. So, Ryan, we'll be back in January to talk really, really about next year. But I think here's a couple of things I would think about credit as a whole. First, there's probably four points that I'd raise. Number one, the delinquency trends themselves. We're seeing strong entry rate, which is better than the pre-pandemic period, which is continuing to benefit the flow into delinquency. We're seeing early stage delinquency really being stable as far as its performance month on month. And then we're seeing some improvement the last several months in late-stage collections, which are positive. So I think delinquency trends are doing fairly well. When you think about that relative to seasonality, the last several months we've actually been low to mid-single digits better than seasonality when you look at 17th and 19th period. So, that's a favorable trend that continues to go back, continue to go back the last several months. Again, I think I've highlighted publicly the vintage performance both of the second half of 23 and the first half of 24, albeit very early, is trending better than the 18 vintages. And again, I think you can see both in the purchase volume and the new account, origination, most certainly the credit actions are having some effect there, which I think bolsters credit as we move back through. Our underwriting is designed to give us that 5.5% to 6%. So the intention would be that we would get back to that point. Again, we're moving down. I can see in the slides that the year-over-year growth in delinquencies, both 30-plus and 90-plus, continue to decline. So, again, tracking to our expectations as we move through the remaining part of 24. Thanks, Brian. Thanks, Brian.

Have a good day.

Thank you. We'll take our next question from Terry Maul with Barclays. Please go ahead.

Hey, thank you. Good morning. So you called out a 30 basis point year-over-year increase in loan yields from PPPCs, lower payment rates, and offset by interest reversals. Any way you can kind of quantify each of those components and maybe just help us think about how that PPPC component kind of grows into next year?

Yeah, you know, Terry, we're not going to break out the individual components of the PPPCs by the line items, but most certainly the benefit is flowing through on the interest interest yield line, number one. It is mapped a little bit when you think sequentially given the gain in the second quarter on the Visa shares, but clearly it's showing up another income. Again, this is the first full quarter that we have the first phase of the CITs in. We continue to expect that to build into next year. I think when we come back in January, we'll try to provide a little bit more view on that i think when you take a step back terry the important thing and i highlighted my prepared remarks is the the actions we've taken have generally been in line with our expectations you know there's a positivity in the fact that um you know customer attrition is not as been high as our expectations now again that would have had a reserve release so it's negative from financial perspective but it's really better from a customer standpoint as they recognize the value propositions of our cards You know, we did highlight paper statements were a little bit lower than expectations, you know, partially due to softeners, partially due to our accounts being a little bit lower than expectations, but all in all good. Adoption of eBill and our customers' willingness to change behavior and do that has been positive. So when we look at that, generally speaking, it aligns. So even though there's a little bit less customer attrition, that generally means the core is performing a little bit better. So, you know, as we sit here today, you know, we are, where we are feeling good about where we are, but we'll continue to watch customer behavior, and we'll certainly watch the market. A lot of issuers have already started to implement changes as this rule comes effective.

Got it. That's helpful. And then just to follow up on credit, it seems credit performance is more or less performing in line with your expectations. But as I look at the charge-off rate for this year, it's running somewhat north of 6%. I don't want to tie it to your initial guide. It may be just Talk about how credit performance has evolved relative to kind of what you expected coming into this year.

Yeah, you know, the way I think about it, Terry, is we took some actions really in the late first quarter, early second quarter, again, to try to set up and protect ourselves against any deterioration that could happen late this year into next year. So we took those actions. Most certainly, I think you've seen some of the purchase volume, which is slightly lower than our expectations. That, you know, unfortunately has an impact on the denominator, which brings the rate a little bit higher than what you think about. But again, I think that the fact that we're not taking broad-based actions today gives us some credit, you know, some confidence in credit. And most certainly, you've heard my points with Ryan a little bit earlier around the four things that we looked at to say, hey, listen, we feel good about where we are as we enter into the fourth quarter. Great. Thank you. Thanks, Terry. Have a good day.

Thank you. We'll take our next question from Don Fendetti with Wells Fargo. Please go ahead.

Hi. Good morning. Brian, you mentioned some improvement over the last few months in late-stage collections. I was wondering if you could talk a little bit about that, if that's just kind of mix, catch-up. And, you know, generally speaking, is it harder, you know, to execute on collections today versus prior?

Yes. Thank you. Good morning, Don. You know, let me start with the latter part of your question. Is it harder to collect today? Most certainly, I think if you look at this versus a number of years ago, most certainly making customer contacts a little bit tougher. But that's where we've expanded. And through the pandemic, investing in digital collections, investing in other forms and other channels in which we can connect with the customer in order to kind of get those collections done, such as texts. and things like that. So it is a little bit tougher. I think it's a game where you have to deploy more products than you do have to do just get more collectors on the phone. And most certainly the rules have evolved where the number of collections you can make to someone have declined. But I think we've adapted to that. I think when you think about the late stage for a second, When your early stage has deteriorated quite a bit, what flows into the back potentially has the ability to be slightly better and able to collect. So while I look at the late stage, it is still performing worse than 2019. In the pre-pandemic period, it has started to improve more recently, which we take as optimistic. with regard to performance. But again, it is worse than what it was. And you would expect a little bit of that. If you have very positive entry rate into delinquency, what flows in is a little bit tougher to collect. So we would have anticipated both early stage and late stage to be worse. But right now in the last, you know, I'd say several months, we've seen a little bit of improvement in late stage collections.

Got it. My follow-up, just, you know, I know there's a lot of concern around the low end. it seems like, you know, your customers on the loan are kind of managing, changing behavior, continuing to change behavior, but it doesn't seem like it's sort of accelerating in terms of a pressure point. Is that fair?

Yeah, I think it's absolutely fair. I mean, you know, we look at it, Don, a couple of different ways. When you look at payment rating, people making payments, when we look at the trends by credit rate, which if you say that that somewhat aligns with income decile. You're seeing more of the movement in the prime, so that 660 to 780 range, you're seeing a little bit more movement there into min pays. You're not really seeing as much movement of the non-prime in there. I want to say the movement into min pay is about a point difference on the prime, and it was half of that in the non-prime. So we're not seeing stress when it comes to payment You know, I think when you look at the K-shaped recovery, clearly affordability has impacted some of the lower-end consumer, and they pull back spending, and they're managing fairly well. So I think when we look at those two combined, we don't see stress in the consumer. We see them actually... doing somewhat rational things right now so it's more normalization but again when you still look back against you know the the prime customers they are paying your rates still above the 2019 level so we don't we don't necessarily see signs of stress uh in the low end today thanks thanks don't have a good day thank you we'll take our next question from moshe urnbook with pd callan please go ahead great so um

Brian, I was wondering if you could talk a little bit about the slowdown in spending volume and sort of separate it between the impacts of kind of your own tightening, consumer preferences, and then perhaps also the policy changes. One of the questions we've gotten is, do you think, I know you said that attrition wasn't affected by that, but what about spending volume? So those three factors. Thanks.

Yeah, first of all, good morning, Moshe. Thanks for the question. So let me start where you ended. When you look at the actions in which we took in the portfolio with regards to pricing changes in the leg, The positive news is that we were able to have a control group in which we tested against that. So when we look at volume changes between the people who received CITs and those who didn't receive the CITs, there's not a material difference. So we somewhat have a base to say that the actions haven't either created silent attrition that we're not aware of. So, that's one, I think, the latter part of your question. I think when you look at the purchase volume in and of itself, what you see is, most certainly across the board, almost transaction values coming down. So, the consumer is trading down a bit. We see that, and I use the examples, mattresses, where the frequency maybe hasn't moved down as much, but the average transaction value has moved down. Consumers say, listen, I'm willing to purchase a mattress, but then again, I'm not willing to spend $4,000. I'm going to go down to something at $2,500. And we've seen that across the board of retailers. And I think you see it, generally speaking, across the board. I mean, in discretionary items, even in our health and wellness business, you see it in cosmetics and Lasix, things that can be deferred. Now, that's a short-term impact. Most certainly, that will create a tailwind at some point because those types of procedures don't go away. And you're right, you know, some of the actions we took, you know, we had a modest impact on purchase volume, a more meaningful impact on new accounts in order to make sure that the origination of the books are at risk-adjusted returns that are attractive to us.

Maybe to kind of at a high level for either, Brian, you know, as you think about, you know, the underlying economic environment, you know, we've been in a period where, you know, wage growth has exceeded the Inflation, although the consumer still feels pressured and is still in that process, as you pointed out, of trading down. When you think about the sort of things that you are looking for to try and jumpstart or reverse some of those tightenings, what are the things that you'd be looking for from a macro standpoint? Maybe talk a little bit about that. Thank you.

Yeah, Moshe, maybe I'll start on this one. Look, I think to Brian's point, the consumer is still in pretty good shape. The trends that we're seeing are pretty similar across the industry. Inflation is having an impact, but I think to your point, the strong labor market is definitely helping to offset some of that pressure. And consumers are slowing spend, but they're doing it in a very kind of rational, disciplined way. You know, we actually like the fact that we can see that they're managing to a budget, they're navigating the higher cost of goods. You know, this isn't a new trend. You know, we started to see it earlier this year. You're seeing it a little bit more broad-based right now, but not in a concerning way. I think from a credit perspective, this is exactly what we wanted to see. Some of that is pullback on behalf of the consumer, And some of that is just the actions that we took. But again, I think similar to credit, you're just seeing spend kind of move back to a normalized level. I think when credit levels off and you start to see some stability, there's still a lot of uncertainty out there. And I think when those clouds start to clear, then you start to get back to what we would consider more normal growth in the business, driving new accounts back to levels that would be similar to prior to this year. Thanks very much.

Thanks, Moshe. Have a good day.

Thank you. We'll take our next question from Sanjay Sekharani with KBW. Please go ahead.

Thanks. Good morning. Maybe just to close the loop on credit, Brian Lenzel, maybe just talk about the reserve rate trend line. how we should think about the direction into next year. I know you're not giving guidance for next year. I don't know if you're giving guidance by year end, but like just to think about when we migrate back to some normalized levels of reserve rate.

Yeah, thank you. Good morning, Sanjay. You know, I think the guides we kind of give you is that the reserve rate at the end of this year will generally be in line with reserve rate at the end of last year, which was, you know, 10.26 or 10.3%. um you know i know people probably focusing on the term generally obviously you know when you look at a year-end number and that's a big seasonal factor it's just really how the receivable develops and how it plays out i think most certainly you know i've given you someone's delinquency trends that builds into the quantitative model and again i think we've seen you know while while it's been a little bit choppy the macroeconomic environment being a little bit more stable we're pleased that the federal reserve did lower rates so so again i think as we exit out um of this year you know you generally align with last year i think you kind of have some indication how you think about uh the lost trajectory and most certainly i i don't think we see anything today that says to us we're not going to continue to march back towards that day one c so most certainly as you see um the delinquency levels which are slightly above where we were in um in the pre-pandemic period, right, when you compare it back for 30-plus and 90-plus, as that moves back towards normal, we would expect the reserve rate to continue to flow down after midships.

Okay, great. And maybe on the CFPB LACI rule, I guess Brian Wendley talked a lot about sort of the behavior of the consumer, but has anything changed in terms of when you expect to fully mitigate the impact to the extent it goes in sometime next year? And then maybe if it doesn't happen, how should we think about the game plan if it doesn't go into effect? Do you claw back some of the changes that you've made or do you do other things? I'm just trying to think through the implications there.

Thanks. Yeah, let me start in and see if Brian has any additional comments. To your first part of your question, Sanjay, it doesn't really impact the point of neutrality, right? It really goes from the starting point to the neutrality point. What's the trough level, depending upon when the late fee rule kind of comes in place. So I don't think it's necessarily one where we look back and say, you know, the early performance we've seen changes that exit rate of neutrality based upon our analysis. So I think that piece of it remains in place. With regard to when the rule may become effective, we'll probably do that sometime either in the fourth quarter or January if we have more information, when we have a better assumption with regard to when that rule does go in place. We are operating as a company, and most certainly the administration has taken the view that they want to let the rule in, and we're planning as if it's going to go in. It's just the point of entry of when it goes in. So your question really around, you know, is there a, you know, clawback, you know, people use the term rollback. You know, as a company, we haven't spent any real time thinking about that. Again, we view it's going to come into effect in some way. And if it doesn't, then we have to have a high degree of certainty that it wouldn't go back into play. And then it's really a conversation, you know, for those that share the economic impact of this. and then for our properties we'd have to do that assessment but again we haven't spent a lot of time in this we believe the rule will go in effect and we're planning as a company to uh to execute that i know brian do you have any further comments you want to yeah no i think look we had to plan as if there was going to be an eight dollar late fee because it takes time for these offsets to bleed in we work with our partners on that

You know, it's hard to speculate on, you know, whether $8 actually goes into effect or they were moved to safe harbor. There's a lot of different ways that this could play out. But we're prepared for all of those events. And in terms of rolling anything back, I think, like Brian said, that's a discussion that we have with our partners, just like when we rolled out the initial pricing actions. And, you know, we operate very transparently with them. And we did when we rolled out the pricing changes, and we'll do that depending on the eventual outcome of the late fee. Again, our goal hasn't changed here. We're trying to protect our partners and continue to approve the same customers that we do today.

Thank you. Great, Sanjay. Have a good day.

Thank you. We'll take our next question from Mahir Bhatia with Bank of America. Please go ahead.

Hi, thank you for taking my question. Maybe to start, I just wanted to turn to net interest margins for a little bit. How do you expect them to perform in a declining rate environment? And I ask because your portfolio is a little different than some of your large peers, you know, with a little bit more fixed rate in it. So just maybe if you could walk us through that.

Yeah, good morning, I'm Aaron. Thanks for your question. So I think when you think about a framework for net interest margin, I'm going to put aside a little bit of the ALR mix and I'll come back to that at the end. I think when you first think about the interest in field, interest in feed component yield piece of this, you should be getting a little bit of a benefit as the impact of prime rate movements for that portion of the business for that portion of the business to flow through, right, because prime lags the way which we bill it. So hopefully we get a benefit on the floating rate component of it. Most certainly as payment rate continues to come down, the revolve rate component should rise. So those two should create tailwinds inside the interest and fee side of the NIM component. I think when you think about the funding side of the component, both the investment portfolio as well as the interest expense, you know, obviously, you know, we're at the follow market. Traditionally, we've lagged the market a little bit from a digital banking perspective. I think what you've seen here in the third quarter is that digital banks have been a little bit more proactive at lowering rates, you know, earlier than normal given their probably funding needs, so we followed them down. So, I think that creates an additional tailwind. When you think about that for a second, you have to break it out between the high-yield savings component, which has a more immediate impact. But again, it's probably 40% of our retail deposits. And then you have the 60% of CDs, a bulk of which will reprice in the first half and will certainly more than I want to say 75% repriced entirely during next year, but a bulk of it really repriced in the first half of the year, a lot of which is in the second quarter, given the way in which we originated certificates this year. So, again, that lags a little bit on some of the earlier Fed movements, but should be able to capture that rate movement down as we move back in. And the last thing I bring in is ALR is a little bit of a wild card when it comes to them. You know, I look at it today. If we're paying someone 4.3% on a high-yield savings, getting 4.9% from the Fed, it's a positive economic position for the company. So I'm not necessarily sure I want to take liquidity down at that point because we're going to need it as we begin to exit and grow here from this period of time. So, again, if that turns more negative or flat, then we'll rethink how much liquor we carry. So those are the moving pieces, I think, here to kind of give you some sense on how you should think about them.

Okay, no, that's very helpful. Thank you. And then maybe switching back to purchase volume and just following up on, I think, Moshe's questions. Just wanted to make sure I understand, what gives you confidence that purchase volume declines, I guess, or purchase volumes are stabilized here at this down low single digit level? And relatedly, are there certain platforms which you look at which are leading indicators of where purchase volumes are going or consumer financial health? Thanks.

Yeah, you know, obviously we look at the trends daily and we watch daily sales and see where they flow and watch what I would call a calendar-adjusted year-over-year view and a kind of daily year-over-year view. So I think we try to gain insight to see whether or not we see trends. And I think we see stability where we are. Brian mentioned earlier, you know, again, we started to see a decline. really in the second quarter and accelerated into the third quarter, but now it's somewhat stabilized. Again, holiday is always an interesting period of time, how promotional it will be and which retailers win or lose there. So that's a little bit of a wild card, but I think generally speaking, when we look at the spending behavior patterns, broadly speaking, the aggregate, we don't see things that are continuing to I think when we further break that down by what I would call the credit grade pieces of it, it's been fairly consistent where your higher credit grades continue to be higher than your lower credit grades with regard to what they're consuming. So I think we look at that and say, okay, there is some stability heading into the holiday season. I think, to your point, is there a platform that leads your client? I think you have to look at it and say, is there platforms that are much more discretionary, or are there ones that aren't? So, I think you're going to see ones that have more discretionary spend maybe a little bit more down than others. You still see strength in certain parts of the portfolio inside of the platform. So, for example, vets performing better than other pieces inside health and wellness, that should continue.

Well, I think the other thing is if you just go back and think about the two years prior to this, we're coming off of record levels of consumer spend, not just in our business, but across the industry. And I think we all knew at some point inflation was going to catch up to the consumer, particularly at the lower income levels, and we're starting to see that. So a slowdown is not necessarily a bad thing in this environment.

Thank you for taking my question. Thanks, Mayor. Have a good day.

Thank you. We'll take our next question from Mark Beveridge with Deutsche Bank. Please go ahead.

Yeah, thanks. You mentioned earlier that you started to see others implement changes. Just interested in your thoughts on kind of what you've learned from that, whether, you know, you've decided you need to recalibrate to remain competitive. It doesn't really sound like it, just given the low attrition. Or, alternatively, whether you kind of missed an opportunity to change terms with some borrowers. you know, that you viewed as more marginal.

Yeah, thank you. Good morning. So, again, we maintain a competitive screen of those people who are in the partnership-based business. You know, you don't necessarily look at broad-based general purpose cards who have a different competitive dynamic relative to their value propositions. But we look at people who have implemented changes in the partnership side, you know, from a competitive standpoint. They generally have done similar types of things relative to APRs. Some have done things with paper statement fees. So I think we look at that landscape and I think we feel comfortable with the actions that we've taken. And again, we look more so to how our portfolio performs, our relationships with our merchants, and the value proposition we have with our customers. Clearly, the pricing of a credit product has to resonate with the value proposition that they get. If those two are out of equilibrium, you're going to have a situation where the consumer is not going to want your product. So, it's more we're focused on ourselves. I think when we look at the competitive screen, I think we think about it as being in line with and we're not necessarily an outlier relative to our peers.

Okay, got it. Thanks. And then on the guidance for reserve coverage at the end of the year, it implies a bigger kind of step down seasonally than we saw the last couple of years. Could you just talk about what's driving that?

You know, most certainly, I think when you think about the reserve coverage rate, it's generally a forward-looking view on how you think losses will be over a reasonable period of time, number one. And two, are there other things that aren't in your quantitative model that you need to account for, macroeconomic being one? I think as we think about the end of the year and think about the lost content through the delinquency we see today and how we feel about the macro, I think we feel comfortably it's generally going to be in line with what we had at the end of last year.

Okay. Thank you.

Thank you. Have a good day.

Thank you. We'll take our next question from John Hecht with Jefferies. Please go ahead.

Good morning, guys. Thanks very much for taking my questions. Most have been asked and answered. I'm wondering, you know, the health and wellness segments have always been a good contributor to growth. And I'm just wondering, are you seeing similar kind of spend trends from a discretionary, non-discretionary perspective in that category? And is there anything else to call out there that might be, you know, different from the kind of the rest of the portfolio?

Yeah, John, let me start on this and then hand it to Brian. I think, look, the health and wellness segment has been a big area of focus for us over the last couple of years, we think. We've got the right to win in that space. It's a huge market, $400 billion roughly. We've seen a little bit of a pullback recently, but if you look over a little bit longer period of time, we've definitely been able to accelerate the growth there. We think we've got a great value proposition. We've got a well-recognized brand. Actually, we get the best customer NPS and customer satisfaction scores with those products. We feel great about how we're positioned in health and wellness. Not surprisingly, you've seen some pullback more broadly across the business has been in bigger ticket, discretionary purchases, and you're seeing some of that in the care credit space. Again, nothing concerning from our perspective. You're still seeing largely better growth there than you are in the rest of the business just based on the investments that we've made to date.

Yeah, just maybe to add a little bit more color, I think when you look inside the health and wellness sales platform and think about the diversity, again, I highlighted pet, you know, pets up 4% year over year. So there are pieces of that portfolio that are doing well. Cosmetics down 6%. You see some things, and we talked about the consumer being discretionary. Some of your high-ticket dental, which is more of a deferrable expense for some, that's down. So I think you look at that. The positive news we take out of that platform, again, the reuse on the card is up to 65%. which is up 500 basis points from last year. So again, Brian highlights that the net promoter score and the likability of this product, you know, the value proposition and the brand of this product resonates with those consumers. So again, we continue to see the use and will certainly continue It's an area where I think when people start to lean back into some of the more discretionary type procedures that are non-medical, that we'll begin to see that lift. And again, having 10% loan growth year over year is still a very strong part of the portfolio and part of our company strategy.

Okay, great. Thanks. And then I know you guys are preparing for a variety of outcomes with the late fee backdrop. I'm wondering, you know, can you give us just sort of an update on where it stands on litigation? Is there anything on the docket or on the calendar that we should be looking to that might represent, you know, an event that could give us a little bit more color about what's going to happen there?

Yeah, John, what I'd say is there was a hearing that was held at the end of August. Most certainly right now we're waiting for the – and the plaintiffs are waiting for the decision with regard to the motion that's in front of the court, which is both about venue and the standing of one of the plaintiffs in the case. There's not a timetable for that district court to respond to that motion, so we're waiting for that. You then go into whether or not one of the parties, whoever's on the other side of that, whether or not they would take action with the Fifth Circuit to appeal it or whether or not the next motion would be around the injunction itself and whether or not the injunction itself should be lifted from there. So, again, I think we're in a waiting game. I think it's fair to say that anyone who's tried to predict this has been wrong. So we're not in the prediction business today. So we continue to operate the business as if the late fee rule will go in and And we'll obviously await what the court says about the litigation. But obviously, you know, we feel good that the merits of the litigation there, but really it's inherently uncertain.

I mean, John, if you think about it, we're prepared and our entire plan was enacted to offset what is a worst case, which was $8 by October 1st. Obviously that has come and gone. it is difficult to speculate on when this is actually going to become effective but if you think about it as you know all the pricing actions that we rolled out policy changes etc were done assuming an october 1st implementation date and eight dollars and so you know as we kind of buy time that's that's helpful from that perspective but again we we weren't uh we didn't have the luxury of waiting you know we acted very quickly here and rolled out the the pricing changes and, you know, they're performing as expected.

Great. I appreciate that, guys. Thanks very much.

Great, Jen.

Have a good day.

Thank you. We'll take our next question from Jeff Edelson with Morgan Stanley. Please go ahead.

Hey, good morning. Thanks for taking my questions, Des. I just wanted to circle back on the loan growth outlook and some of the credit actions you've taken. It sounds like if I'm hearing it right, you maybe have slowed the intensity of these credit actions you took earlier in the year. So just, you know, assuming you keep that stance in place today, does that mean this slowing trend you're looking for exiting the year kind of at a slow single digit growth rate maybe can reverse itself in the next year? Or, you know, what would it take for that to reaccelerate? And how should we think eventually about the timeline to getting back to that, you know, high single digit kind of long term growth rate you look for?

Yeah, thanks, Jeff, for the question, and good morning. You know, the first thing I just want to clarify, when we take action, a lot of it's, you know, strategy actions that aren't necessarily a single point in time. So, for instance, some of the action we took around debt consolidation loans or student loans, to some degree, if that strategy trips today, you know, an action happens. So, you know, they're ongoing. They're not new actions. They're the same actions, just whether an account is applicable to that action. So, again, the actions that we are taking today are more idiosyncratic based upon a partner channel or product performance relative to the risk-adjusted return. I think when you think about how credit actions play out and how the consumer plays out, Brian highlighted earlier, most certainly we're in a period of time that's a little bit more transitory, right? So, you have affordability issues for some of the lower-end, lower-income consumers. hopefully with interest rates coming down and inflation coming down, that abates a bit and takes some of that pressure off. Remember, a lot of the pressure on credit today stems not necessarily from economics of the consumer, but more that the fact that too much credit has been put in the system in the 21 to early 23 years, that has to work its way through the system. I think as that begins to recede, which I think you're seeing in certain issuers across the industry, That gives us a little bit of a tailwind, which says that we can begin to unwind some of the restricted credit actions that we took over the past two years, potentially in the latter part of 2025. But again, that's going to be based upon performance. So I don't think this is a long-term trend on growth. It's probably a good thing in this period where the credit's a little bit more uncertain. But obviously, our long-term framework and our models are built to deliver 7% to 10%.

And as my follow-up, I know you're not advising the PPC drivers and the lines, but could you maybe talk about how you feel you're tracking versus that initial 650 to 700 million you were talking about earlier in the year? And just maybe remind us of any of the PPC changes you're holding off on at this point until the late year comes through, or if it comes through, rather.

Yeah. The way I think about it, Jeff, it's generally in line with, as I talk about customer attrition being lower, that's a swing between BAU bucket and this bucket. So, again, I'd sit back and say, if you were to take a step back and go to 10,000 feet, I think you'd say the PPC actions generally are in line with and of course probably performing a little bit better. But again, the point I brought up earlier, the point of neutrality as we look at the analysis hasn't changed for us. It's really just the trough. So when does the rule come effective and our trajectory to there? But the point hasn't pushed out. I know we haven't really talked about that because we want to be able to understand when that rule goes in place. And as soon as it does, we will certainly provide that neutrality point. But again, things are performing generally in line, and the core has performed a little bit better than our expectations, which I think is reflected in the outlook on page 12.

Thank you.

Thank you. And we are at our allotted time for questions. We will have time for one more. We'll take our final question from Rick Shane with JP Morgan. Please go ahead.

Hey, guys. Thanks for taking my question. I was afraid Jeff was going to run out the clock on me. Look, I realize that CECL reserve is a thought exercise, and I realize that guidance on your reserve rates is a thought exercise on a thought exercise. um i'm curious though if we look at the third quarter reserve rate it's basically at a cyclical high and you're guiding for the fourth quarter back to 23 levels You basically have 16 days of incremental information and it feels like you've gone from a very cautious outlook to a more or less cautious outlook. What's changed or what mechanically is driving the sort of decline that Mark DeVries had pointed out as well?

Yeah, good morning, Rick. I'm glad that we run the clock out on you. You got to answer, ask your question. Simply put, it really goes back to denominator. Your lost content. right now is big, right? I mean, you can most certainly in your model rule what the fourth quarter loss number should look like and what the first quarter dollar losses should look like. It really just becomes the denominator. So I don't view it as saying that we're trying to be any more cautious or guide to something that says we fundamentally see a different credit trajectory. More so, it's just more the mechanics of the calculation of taking your reserve over a and end-of-period loan number. Got it. Okay. Thank you very much, guys. Thanks, Rick. Have a good day.

Thank you. And this does conclude Tinkerny's earnings conference call. You may disconnect your line at this time and have a wonderful day.