Synchrony Financial (SYF) — Q3 2024 Earnings Call Transcript

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 Wenzel, 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%, and a return on tangible common equity of 24.3%. 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 continue to resonate with customers, as they engage 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 continue 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 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, cosmetics, and vision, as well as the impact of Synchrony’s 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 continue 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 segments. 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 consumers making healthy decisions that align with their respective priorities and budgets. 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 Synchrony’s 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 Albertsons. 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-to-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 2200 Albertsons company stores, which includes Albertsons, Safeway, Bonds, 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 last, Synchrony is proud to launch a first of its kind payment experience for pet parents with our patent pending insurance reimbursement functionality that will streamline the process for managing pet health care expenses. Customers who have both a CareCredit and Pets Best Insurance product will now be able to have their Pets Best 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. 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 outcomes for our stakeholders. Ending loan receivables reached $102 million in the third quarter, reflecting growth of 4% compared to last year, as the benefit of approximately a 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. Other income increased to $119 million, primarily related to the impact of our PPPC related fees, which were partially offset by the impact of our Pets 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 build. Other expenses grew 3% to $1.2 billion, which was driven by costs related to the Ally Lending acquisition, technology investments, and preparatory expenses related to the late fee rule change, partially offset by lower operational losses. The preparatory expenses related to the late fee rule change reflected $11 million of incremental costs related to both the execution of our PPPCs and implementation costs of the rule itself should 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 a return on tangible common equity of 24.3%. Next, I'll cover our key credit trends. 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 quarter 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 quarter 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 quarter 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%. As shown on Slide 10, the credit actions we've taken for mid-2023 through 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 will 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 it 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 our funding, capital, and liquidity continue to provide a strong foundation for our business. During the third quarter, Symphony 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-floating 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 the third quarter with a CET1 ratio of 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. Since we returned $399 million to shareholders during the third quarter, which consisted of $300 million in share repurchases and $99 million in common stock dividends. As of quarter end, we had $700 million remaining in our share repurchase authorization for the period ending June 30, 2025. Synchrony 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 target 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 with stronger enrollment in e-bill. We're also experiencing less customer attrition than expected, which is a testament to the value proposition 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 objectives of sustainable risk-adjusted growth at 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, and any potential changes in consumer behavior in response to the PPPCs 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 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 in ending loan receivables compared to last year. Given that the late fee rule was not implemented on October 1, 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 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, Synchrony expects to deliver fully diluted earnings per share between $8.45 and $8.55 for the full year 2024. The approximate $0.80 improvement from the midpoint of our prior full year EPS outlook reflects a combination of factors. First, the assumption that the late fee rule will be implemented on October 1, 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-adjusted growth and long-term value for our shareholders. With that, I'll turn the call back to Kathryn 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.

Hi, good morning everyone.

Hi, Ryan.

Good morning Ryan.

Brian, maybe you could unpack the NII guide for us a little bit. 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 highlighted 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.

Yes. Thanks, Ryan. So when you think about NII sequentially just step into the fourth quarter, first, when you think about the trends that are into delinquency and units flowing in 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 impacts 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 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 are 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, both of which happened in the second quarter.

Got it. And then as my follow-up question, your outlook for credit calls for delinquencies to follow seasonality. I guess, first do you expect losses to do the same? And then 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.

Yes, Ryan, we will return in January to discuss the upcoming year in detail. There are a few key points to consider regarding credit overall. First, I would highlight four main aspects. The first is the delinquency trends; we are observing a strong entry rate that exceeds pre-pandemic levels, which positively impacts the flow into delinquency. Early-stage delinquencies are stable in terms of month-over-month performance, and we've seen improvements in late-stage collections over the past few months, which is encouraging. Overall, the delinquency trends appear to be performing well. When considering seasonality over the past few months, we have actually performed better, by low to mid-single digits, compared to the 2017 to 2019 period. This is a positive trend that has persisted in recent months. I also want to point out that the performance of our vintages in the second half of 2023 and the first half of 2024, although it's still early, is looking better than the 2018 vintages. You can observe that both in the purchase volume and new account origination, indicating that our credit actions are making a positive impact as we progress. Our underwriting aims for a 5.5% to 6% range, and we intend to reach that target. We are noticing a reduction in year-over-year growth rates for delinquencies, both 30-plus and 90-plus days, which continue to decline. Everything is aligning with our expectations as we advance through the rest of 2024.

Thanks Brian.

Thanks Ryan. Have a good day.

Hi, 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?

Yes, Terry, we won't break out the individual components of the PPPCs by line items, but we can say that the benefit is evident in the interest yield line. It's somewhat matched when considering the gain in the second quarter from the Visa shares. However, it is clearly reflected in other income. This is the first full quarter with the first phase of the CITs, and we expect that to grow into next year. When we reconvene in January, we'll aim to provide more insights on that. It's important to note, as I mentioned in my prepared remarks, that our actions have generally aligned with our expectations. There's a positive aspect in that customer attrition has not been as high as we anticipated. While this is a negative from a financial perspective due to a reserve release, it's actually better from a customer standpoint as they see the value in our cards. We did notice that paper statements were somewhat lower than expected, partly due to softeners and partly because our accounts were lower than anticipated, but overall it's good. The adoption of e-bill and our customers' willingness to change their behavior has been positive. Overall, even with slightly lower customer attrition, it suggests that our core is performing a bit better. As of now, we feel optimistic about our position, but we will keep monitoring customer behavior and the market, as many issuers have already begun implementing changes with the new rule taking effect.

Got it. That's helpful. And then just a 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, but maybe just talk about how credit performance has evolved relative to kind of what you expected coming into this year?

Yes. I believe we took some actions in late first quarter and early second quarter to prepare for any potential downturns that could occur later this year into next year. We implemented these measures, and as you've noticed, our purchase volume is slightly below expectations. This unfortunately impacts the overall calculation and raises the rate a bit more than anticipated. However, the fact that we are not making widespread changes right now gives us some confidence in our credit position. As I mentioned earlier, there are several factors we reviewed to assure ourselves that we feel good about our current status as we head into the fourth quarter.

Great. Thank you.

Thanks Terry. Have a good day.

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 generally speaking, is it harder to execute on collection today versus prior?

Yes. Thank you. Good morning Don. 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, we're 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 to other channels in which we can connect with the customer in order to kind of get those collections done such as text and things like that. So it is a little bit tougher. I think it is 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 and 2020, 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, I'd say, several months we've seen a little bit of improvement in that late-stage collections.

Got it. And my follow-up is that I know there is a lot of concern around the low end. It seems like your customers and the loans are managing to adapt to changing behavior, but it doesn't appear to be accelerating as a pressure point. Is that fair?

Yes. I think that's absolutely fair. I mean we look at it on a couple of different ways. When you look at payment rate, people making payments when we look at the trends by credit rate, which if you say that somewhat aligns with income decile you are seeing more of the movement in the prime so that you’re seeing some movement into mid-days among the prime. So we're not seeing stress when it comes to payment. I think, when you look at the K-shaped recovery, clearly affordability has impacted some of the lower-end consumers, and they pulled back spending, and they are 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 a normalization. But again, when you still look back against the prime customers, they are paying a rate still above on 2019 level. So we don't necessarily see signs of stress in the low-end today. Thanks Don. Have a good day.

Great. Brian, could you discuss the slowdown in spending volume and break it down into the effects of your tightening consumer preferences and any policy changes? One question we've received is whether you believe attrition was impacted by that, but what about spending volume? So those three factors. Thanks.

Yes. 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 and the like. The positive news is that we are 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 is not a material difference. So we somewhat have a base to say that the actions haven't either created solid attrition that we are not aware of. So that's one, I think, the latter part of your question. I think when you look at the purchase in of itself, what you see is we'll certainly across the board, almost transaction values coming down, so the consumer is trading down a bit. We see that and I use the example, mattresses, where the frequency maybe hasn't moved down as much, but the average transaction value has moved down as 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 in discretionary items, even in our health and wellness business, you see it in cosmetics and LASIK, things that can be deferred, 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, some of the actions we took, 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. As you think about the underlying economic environment, we've been in a period where wage growth has exceeded inflation, although the consumer still feels kind of 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 jump start or reverse some of those tightening, what are the things that you'd be looking for kind of from a macro standpoint? And maybe talk a little bit about that. Thank you.

Yes, 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 are doing it in a very rational, disciplined way. We actually like the fact that we can see that they are managing to a budget. They're navigating the higher cost of goods. This isn't a new trend. We started to see it early 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 pulled back 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 is 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.

Thanks good morning. Maybe just to close the loop on credit, Brian Wenzel. Maybe just talk about the reserve rate trend line, maybe how we should think about the direction into next year? I know you're not giving guidance for next year. I know you're not giving guidance by year-end. But like just to think about when we migrate back to some normalized level of reserve rate.

Thank you, good morning, Sanjay. The guidance I can provide is that we expect the reserve rate at the end of this year to be generally in line with the reserve rate from the end of last year, which was approximately 10.26% or 10.3%. I understand that the term "generally" may raise some questions. When analyzing a year-end figure, there are significant seasonal factors that influence how the receivables develop. I've shared some delinquency trends that are incorporated into our client data model. Although there have been some fluctuations, the macroeconomic environment has shown more stability. We appreciate the Federal Reserve's decision to lower rates. As we approach the end of this year, we believe our outlook aligns with last year, providing some insight into the expected loss trajectory. Currently, we do not see any indicators suggesting we won't continue to move back towards the Day 1 CECL. While delinquency levels are slightly above what they were before the pandemic, particularly for 30-plus and 90-plus days, as these levels normalize, we anticipate that the reserve rate will continue to decrease as the mix shifts.

Okay. Great. On the CFPB late fee rules, Brian, you've discussed consumer behavior extensively. Has there been any change in your expectations regarding when you'll fully mitigate the impact if it rolls out next year? If it doesn't happen, how should we approach the situation? Will you reverse some of the changes made, or consider other options? I'm just trying to understand the potential implications. Thanks.

Yes. Let me start and see if Brian has any additional comments. Regarding your first question, Sanjay, it doesn't really affect the point of neutrality. It transitions from the starting point to the neutrality point, depending on when the late fee rule is implemented. I don't think we should look back and say that the early performance changes our exit rate of neutrality according to our analysis. That part remains unchanged. As for when the rule may become effective, we might implement it either in the fourth quarter or in January, depending on when we have more information regarding its enactment. We are operating as a company with the understanding that the administration wants the late fee rule to be in effect, and we are planning accordingly. Your question about a clawback or rollback – we haven't dedicated time to considering that. We anticipate that the rule will take effect in some form. If it doesn’t, we need to be very certain that it won't come back into play. Any decisions on that would be a discussion for those impacted economically. We also need to assess it for our properties. However, we haven't spent much time on this. We believe the rule will be enacted, and as a company, we are preparing to proceed with it. Brian, do you have any further comments?

Yes. I think we had to plan as though there would be an $8 late fee because it takes time for these offsets to take effect. We are working with our partners on this. It's difficult to predict whether the $8 fee will actually be implemented since they were moved to safe harbor. There are many possible outcomes, but we are ready for all scenarios. Regarding any rollback, that's a conversation we will have with our partners, just like we did when we first introduced the pricing changes. We operate transparently with them, and we will continue to do so based on the eventual outcome of the late fee. Our goal remains the same: to protect our partners and keep improving the experience for our existing customers.

Thank you.

Great, Sanjay. Have a good day.

Hi, thank you for taking my questions. 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? I ask because your portfolio is a little different than some of your large peers with a little bit more fixed rate in it. So just maybe if you could walk through the moving pieces there and also any deposit beta assumptions you'll be willing to share?

Yes. Good morning Mihir and 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 field, interest in the 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 build it. So hopefully, we get a benefit on the floating rate component of it. Well, 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. Obviously, we're at the follow market. Traditionally, we 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 lowering rates earlier than normal, given there are 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 we'll 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'm bringing is ALR is a little bit of a wildcard when it comes to NIM. I look at it today, if we're paying someone 4.3% on a high-yield savings, getting 4.9% from the Fed, it is 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, we'll rethink how much liquidity we carry. So those are the moving pieces, I think, are here to kind of give you some sense on how you should think about NIM.

Okay. No, that's very helpful. Thank you. And then maybe switching back to the purchase volume and just following up on, I think that is Moshe's questions. Just wanted to make sure I understand. What gives you confidence that purchase volume decline, I guess more purchase volumes have stabilized here, is 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.

Yes, we monitor trends on a daily basis, tracking sales and analyzing year-over-year comparisons as well as daily changes. We aim to derive insights on trends, and we observe a sense of stability in our current position. As Brian pointed out, we noticed a decline starting in the second quarter which continued into the third quarter, but it has now somewhat stabilized. The holiday season poses an interesting challenge in terms of promotions and the performance of different retailers, which makes it somewhat unpredictable. Overall, looking at consumer spending patterns, we don't see a consistent slowdown. Further examining the data by credit rates shows that higher credit rates remain more robust than lower ones in terms of consumption. This indicates some stability as we approach the holiday season. Regarding your question about leading platforms, it's important to distinguish between discretionary and non-discretionary spending. Platforms with more discretionary spending may experience a slight decline, while certain segments of our portfolio, such as pets, are performing stronger than others in health and wellness, which is expected to 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 the slowdown is not necessarily a bad thing in this environment.

All right. Thank you for taking my questions.

Thanks Mihir. Have a good day.

Yeah, thanks. You mentioned earlier that you started to see others implement changes. Just interested to get your thoughts on kind of what you've learned from that, whether 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 that you viewed as more marginal.

Yes. Thank you. Good morning. So again, we maintain a competitive screen of those people who are in the partnership base business. You don't necessarily look at broad-based general purpose cards who have a different competitive dynamic relative to their value propositions. But when we look at people who have implemented changes in the partnership side from a competitive standpoint, they generally have done similar types of things relative to APRs. Some have done things with APR 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 are going to have a situation where the consumer is not going to want your products. 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 are 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 in the last couple of years. Could you just talk about what's driving that?

Well, certainly, I think when you think about the reserve coverage rate, it is certainly 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 loss content through the delinquency we see today and how we feel about the macro I think we feel comfortable 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.

Good morning guys. Thanks very much for taking my questions. Most have been asked and answered. I'm wondering, the health and wellness segment has 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? Is there anything else to call out there that might be different from the kind of the rest of the portfolio?

Yes, 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 is 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. So we feel great about how we're positioned in health and wellness. Not surprisingly, where you've seen some pullback more broadly across the business has been in bigger ticket discretionary purchases, and you are seeing some of that in the CareCredit space. Again, nothing concerning from our perspective, you're still seeing largely better growth there than you are in the rest of the business based on the investments that we've made to date.

Yes. To provide further insight, within the health and wellness sales platform, the data shows diversity, especially with pet products increasing by 4% year-over-year. Certain segments, such as cosmetics, have seen a decline of 6%. This reflects the discretionary nature of consumer spending, with high-ticket dental items being viewed as deferrable expenses, resulting in a decrease. On a positive note, the platform has led to a 65% increase in card usage, an improvement of 500 basis points from last year. Brian has noted the elevated Net Promoter Score and consumer affinity for this product, highlighting its strong value proposition and brand appeal. As consumers begin to resume spending on discretionary non-medical procedures, we anticipate seeing growth in that area. Additionally, achieving a 10% loan growth year-over-year remains a key strength in our portfolio and aligns with 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, can you give us a 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 an event that could give us a little bit more color about what's going to happen there?

Yes, John, what I'd say is there was a hearing that was held at the end of August. Most certainly, right now, we are waiting for the and the plants are waiting for the decision with regard to the motion that's in front of the core, which is both about venue and the standing on one of the plaintiffs in the case. There is not a timetable for that district court to respond to that motion. So we are waiting for that. You then go into whether or not one of the parties who levers 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 are in a waiting game. I think it's fair to say that anyone who's trying to predict this has been wrong. So we are not in the prediction business today. So we continue to operate the business as if the late fee rule will go in. And we'll obviously wait what the court says about the litigation. But obviously we feel good that the merits of litigation, but really, it is inherently uncertain.

John, if you consider it, we have prepared thoroughly and our entire strategy was designed to address the worst-case scenario, which was $8 by October 1. That date has passed, and it's hard to predict when this will actually take effect. However, all the pricing adjustments and policy changes we implemented were based on an October 1 rollout and the $8 figure. As we buy time, that is beneficial from this standpoint. Nonetheless, we did not have the option to delay; we acted swiftly to implement the pricing changes, and they are meeting our expectations.

Great. I appreciate that. Thanks very much.

Great. John, have a good day.

Hi, good morning. Thanks for taking my question guys. 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 assuming you keep that stance in place today, does that mean the slowing trend you are looking for exiting the year kind of at this low single-digit growth rate, maybe you can reverse itself into next year? Or what would it take for that to reaccelerate? And how should we think eventually about the timelines you are getting back to that high single-digit kind of long-term growth rate that you look for?

Thank you for the question, Jeff. Good morning. I want to clarify that when we make changes, many of our strategic actions are not just specific to one moment in time. For example, some measures we took regarding debt consolidation loans and student loans are strategies that continue to unfold. These actions aren't newly initiated; they depend on whether certain accounts qualify. The actions we are implementing now are tailored to specific partner channels or product performance in relation to risk-adjusted returns. As Brian mentioned earlier, we’re currently in a transitional period. There are affordability challenges for some lower-income consumers. We hope that as interest rates and inflation decrease, this pressure will ease. It's important to note that the current credit pressures don't solely arise from consumer economics but also from the excess credit that was provided during the period from 2021 to early 2023, which now needs to be absorbed by the system. As this situation improves, which is already being observed with some issuers in the industry, we might find ourselves in a position to ease some of the restrictive credit measures we've implemented over the past couple of years, possibly toward the end of 2025. However, this will depend on performance. I don't view this as a long-term growth trend. It may be beneficial during a time of credit uncertainty, but our long-term strategies and projections are designed for growth rates between 7% and 10%.

As a follow-up, I understand you are not currently sizing the PPPC driver, but could you discuss how you track it in relation to the initial $650 million to $700 million estimate you mentioned earlier this year? Also, could you remind us of any PPPC changes you are currently holding off on until the late fee rule is implemented, if it does come through?

Yes. My perspective, Jeff, aligns with the observation that customer attrition is lower, indicating a shift within the business-as-usual segment. Overall, if you look at the bigger picture, it seems that the PPPC actions are generally on track and performing slightly better than expected. However, the point of neutrality we've analyzed remains unchanged for us. It truly signifies a low point, leading us to consider when the new rule will take effect and our progress towards that point. The timeline hasn't been extended. We haven't discussed this much because we want to assess when the rule will go into effect, and as soon as it does, we will provide the neutrality point. That said, overall performance is generally in line, and the core has exceeded our expectations, which is reflected in our outlook.

Okay, great. Thank you.

Hi guys. Thanks for taking my questions. I was afraid Jeff was going to run out the clock on me. Look, I realized that CECL reserve as a thought exercise, and I realize that guidance on your reserve rate is a thought exercise on the thought exercise. I'm curious, though if we look at the third quarter reserve rate, it is basically at a cyclical high. And you are 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 changed or what mechanically is driving the sort of decline that Mark DeVries pointed out as well?

Yes. Good morning. Rick, I'm glad that we run the clock out. I know you got to ask your question. Simply put it really goes back to the denominator. Your loss content right now is big, right? I mean you can 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 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 is just more the mechanics of the calculation of taking your reserve over an end-of-period loan number.

Got it, okay. Thank you very much guys.

Thanks Rick.

Thanks Rick, have a good day.