Synchrony Financial

NYSE:SYF

Earnings Call Transcript 2021-Q3

[Operator]

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

[Kathryn Miller, Investor Relations]

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. I will now turn the call over to Brian Doubles.

[Brian Doubles, Chief Executive Officer]

Thanks, Kathryn. And good morning, everyone.The power of Synchrony's model continued to show through in our third quarter financial results. We continue to reach and serve more partners and customers. New accounts grew 17% to 6.2 million, and average active accounts increased 5% to 67.2 million during the period. This is in large part attributable to the powerful combination of our data-driven insights, our seamless customer experiences, and our industry-leading product suite, which resonates deeply with customers. Synchrony's omnichannel capabilities enable our partners and customers to connect wherever and whenever they want to be met. And a variety of financing options and value propositions we offer, empowers them with choice.

As we continue to anticipate and deliver on the needs of our partners and customers. We drive more value and greater utilization. This translated to an 11% increase in purchase volume per active account during the third quarter, and 16% growth in total purchase volume compared to last year. Of course, this strength in purchase volume was largely offset by the persistently elevated payment rate trends resulting from government stimulus and industry-wide forbearance actions leading to a 2% increase in loans, including loans held for sale. Net interest margin of 15.45% was 165 basis points higher than last year, primarily reflecting the reduction in excess liquidity.

Operating expenses were down 10% compared to last year, and down 7% year-to-date as our cost efficiency initiatives continue as planned. We remain on track to reduce about 210 million from our expense base by year-end, even as we continue to invest in our business. The efficiency ratio was 38.7% for the quarter, largely flat with last year. Credit continued to perform very well. Net charge-offs were 2.18% for the third quarter, down 224 basis points from last year. Net earnings were 1.1 billion or $2 per diluted share and included a $0.33 benefit from the reserve release related to the reclassification of the GAAP portfolio to held-for-sale. Turning to our balance sheet, deposits were down 3 billion or 5% versus last year, reflecting retail deposit rate actions we took to manage our excess liquidity. Deposits represented 82% of our funding mix at quarter end, a slight increase versus last year due to the retirement of debt.

During the quarter, we returned 1.4 billion in capital through share repurchases of 1.3 billion and 124 million in common stock dividends. We also continued to reinvest in our business. As we highlighted during our recent investor day, our ability to remain nimble and adapt to the ever-changing consumer finance landscape has been driven by our continued investment in our product suite and our innovative digital capabilities. In fact, if you think about the last decade alone, the introduction of digital wallets, point-of-sale financing, and a greater variety of installment offerings, just to name a few, has demonstrated the importance of diversity, accessibility, and utility in both products and experience. And so Synchrony has continuously evolved, adding new financing options, enhancing our technology platform, and expanding our channels and distribution networks, in order to reach and serve more partners and customers in sustainable ways that drive greater value for all.

In addition to launching new products and partner programs, we're remaining focused on innovative ways to get scaled distribution of our product suite. Last week, we announced our expanded strategic partnership with Fiserv through which small businesses will now be able to access Synchrony products and services and accept private-label credit card payments via the Clover point-of-sale and business management platform from Fiserv. This will enable accelerated growth for small businesses, empowering merchants to attract more customers and generate more revenue by offering our customers greater flexibility and choice in how they make purchases. We will also explore additional opportunities to cross-sell Synchrony products to existing Clover merchants.

Importantly, this strategic partnership also deepen Synchrony's ecosystem and reinforces our growth strategy to expand and accelerate innovative product offerings through additional distribution channels. It builds on our momentum to bring our products to merchants faster and leverage as Synchrony's leadership in financing, analytics, and services.

We're excited to utilize the point-of-sale innovations driven by Clover to continue to transform the way people purchase while helping merchants grow. Furthermore, as we and our partners endeavor to provide more comprehensive customer access to financial products and resources, we are excited to expand our partnership with PayPal. As announced in late September, Synchrony will be launching PayPal Savings, a new PayPal branded savings account. This unique opportunity will allow us to expand the distribution of our savings product to a unique set of customers, with features and functionality inside the PayPal app delivering an enhanced customer experience, while also further diversifying our deposit base at an attractively low cost to acquire.

In addition to our ongoing effort to expand both our product suite and distribution network, we also see to enhance partner and customer engagement through customized value propositions and omni -channel capabilities. We recently launched two industry first retail health and wellness credit cards, the myWalgreens Mastercard, and myWalgreens private-label credit card, which reward customers with savings on future health and wellness purchases. myWalgreens credit card holders can earn 10% Walgreens cash rewards on eligible Walgreens-branded products, and 5% Walgreens cash rewards on other eligible brands and pharmacy purchases. myWalgreens Mastercard holders can also earn 3% Walgreens cash rewards on eligible grocery and health and wellness purchases everywhere else, including healthcare providers.

And 1% Walgreens cash rewards on eligible purchases anywhere Mastercard credit cards are accepted. In a world where consumers are increasingly responsible for a greater proportion of their health-related costs, we believe these value propositions will drive considerable value while also providing greater financing flexibility for health-related needs and enhancing loyalty over time. Furthermore, Synchrony's digital capabilities allow us to seamlessly engage with customers wherever they are. We have deep digital integration across the Walgreens web, mobile, and native app channels, with the ability for customers to apply and instantly buy through all of these channels.

We've launched frictionless customer experiences, leveraging technology capabilities like QR codes, Quickscreen, which is a real-time pre -screen of one, customer initiated prequalification, a Direct to Device in-store application process, card servicing integrated seamlessly into the Walgreens app, and API integration with the myWalgreens loyalty program. And while it's still early, the initial data we're seeing indicates that both the value prop and dynamic customer experience we have achieved with Walgreens are resonating very well with cardholders in driving spend, both inside and outside of Walgreens, in categories such as grocery, health, and wellness.

By empowering our partners and customers with best-in-class wallet optionality and telling outcome, Synchrony is increasingly well-positioned as the partner of choice. With more than 65 million active accounts, Synchrony h as market-leading reach and deep diverse lending insights that enable us to better anticipate the needs of customers and therefore, which financing options will optimize utilization and drive lifetime value.

So whether it comes in the form of our dual, co-branded, and private label credit cards, our various SetPay Installment products for strengthening Mastercard. We deeply understand when, why and how customers financing solutions for the day-to-day purchases. We're particularly excited about the opportunity we see for our Synchrony MasterCard, which allows us to tap into the 500 billion general purpose credit card markets. We're taking a measured approach to growth. However, by leveraging our scale and underwriting expertise, we've been able to identify better performing customer segments, acquire more customers that lower CPA. We fine tune our channel strategy over the last few years.

Today, Synchrony MasterCard offers a variety of value prop between and in combination with our pricing strategies and our customer reach and optimize conversion. We have great digital utilities to be applied, and integration at Apple wallet, as well as our mobile app. This allows customers to access the various bank products, the money market, and high-yield savings account, as well as our credit card balances and transaction data. This value proposition in tune with digital experience, resonates very well with our customers bringing the purchase volume growth of 36% versus the same period in 2019.

We're also seeing higher levels of engagement around the products and brands is up 40% versus 2019, and we're very excited about. It's an important offering within our pricing strategies that we believe will enable us to capture a larger portion of customer and which will drive highly scalable growth and above average returns over the long term. And with that, I'll turn the call over to Brian.

Thanks, Brian. And good morning, everyone. Synchrony's third quarter financial results reflected broad-based strength across our business, highlighted by the double-digit purchase volume increase and continued loan growth, the significant improvement in our net interest mortgages, historically low losses and and continued cost discipline. The combination of these results led to $1.1 billion in net earnings for $2 per diluted share, a return on average assets of 4.9% and a return on tangible common equity of 40.1%. These results are a true testament to the powers of Synchrony's unique business model, which builds on our deep domain expertise in consumer lending and leverages dynamic digital capabilities.

with regards to our comprehensive multi-product suite to reach certain deep and diverse universal partners and customers. Looking at our third quarter performance in greater detail beginning with purchase volume, which grew 16% compared to last year and 16% percent compared to 2019 is fully It demonstrates clear, broad-based driven consumer demand.

This is also reflected in our purchase volume per account, which increased 11% compared to last year. Dual cards and co-branded cards accounted for 40% of the purchase volume in the third quarter and increased 29% from the prior year.

Basis. Exciting. We will reflect some non-GAAP to held-for-sale performance dueling co-brand creation. 44% of foreclosures and 4% prior year. Average active accounts increased 5% compared to last year 17% wholly totalling more than 6 million new accounts in the third quarter your to-date Reach an agreement for the that lead to the reclassification. And $3.5 billion in non receivables and after sale and therefore reduce our ending loan received excluding the impact of the re-class power, receiving a 2% a year as the period. More partners and largely offset by a persistently account of 17% to 6.2 million for the quarter was capturing 200% higher than last year million during the period.

Interest of the large part powerful combination of our data-driven similar growth in average loan were foreseeable, net interesting, don't release percent higher than last year, resonate primarily reflecting a decline in interest expanding proposal. And I don't want abilities enable our partners and customers to connect over 0.1 quarter and the variety of lands value across solutions we offer empower $367 million a year-over-year increase, primarily, AMEA passion deliver on vision for partners and customers and continued to drive more value or even greater utilize, including growth and.

Movement in Natus translated to an 11% increase in purchase volume account. Remember that are designed to decline and drank grown ourselves. Purchase time for last year. This means driving growth quarters, strengthen risk, adjust volume, largely off enhancing program profitability, elevated payment rates. This allows each order to Sherman for performance in industry-wide for Berry expands. Loans, including loans Now when you think about the combined one net margin, year-over-year 5%. Interesting 'cause a 106 basis points higher than last challenge. We fairly $67 million of liquidity RSA.

Operating expenses, trend percent for losses and down 75 million on a date as our costs, this quarter, vision and reserve items, a $407 million remain on track about trending from states by year optimistic macroeconomic, running our business and the impact of reclassified ratio will more large rseveral eally flash resulted in a reserve reduction of approximately continues to perform very well. Net charge-offs other income was $8.37, nearly 120 basis points from last year costs, from higher purchase net earnings were 1.1 billion or $2 per diluted share.

Other expense decreased 33% compared from the release related to, as you Last year, we held out restructuring charge and we can turning to our balance ability from low margins were down a billion or 5% versus last year, moving to Slide 85 deposit rate actions we saw purchase right, growth across all five platforms represented a strong demand toward or in our home and auto increase Riverside value, the retirement of. So and health and wellness platforms during the quarter, we returned year-over-year below the share The 10% year-over-year increase stock dividend was generally driven by strong retailer performance across their respective business while purchase highlighted during this value increased 25% and affect and adapt to the ever changing consumer client experiences.

And has been driven by our continued in 21% increase due to broad based growth across capabilities coupled with growth. And in fact, if you think about the last decade alone, the introduction of digital wallet, point of sale growth in purchases volume just to name a few. Another importance of diversity, accessibility, and utility in both product and experience. And so Synchrony has continuously evolved.

Of all the platform in new financing Atabak comparable technology. Our sports and expanding our channels, loan, grow network by plant orders generally each like more partners and customers to the prior-year interval ways. That's higher, Bakers is largely offset by elevated, distant, or launching new products. And Part one exception being in our diversified value, innovative weight impacted by EOR, our product suite. Last one characterize range FiServ up advice malls, 10% Synchrony's digital, and 7 private-label credit card shipments average.

They only flat and business management platform from Fiserv account growth in diversified value, that's all enabled by accelerated term in lower retail experiences and powering merchants to attract Asit Umer announced we're up for generates more revenue, but I'll reiterate. Quieter place ability and we're base and choice one macro recent program launches. will also explore additional opportunities. And generally improved across the ones with the exception of DuraSorb, strategic, reducing earnings ecosystem, and reinforces discussed Nanostim, betas, product offerings accumulated by consumers and channels from stimulus that build on our momentum lower margins faster due to impact leverage, rethink Earnings leader. First-quarter financing analysts were approximately 260 basis ideas. Five-year l. innovative averages.

And by Clover, that said you to transform the way some signs of moderation, open Merkel world as pain, racism, walk 200 partners endeavor year-on-year points higher year-on-year and resources in the second quarter excited to expand our partnership. Tim rates gradually normalize as KAZ announcement late September, Synchrony will be launching. And why did it ready for. This unique opportunistic, roughly approximately 2% of our quarters product reflecting the average loan receivable growth with future value.

Driver said pal last year reflected delivering. Good morning, gentlemen. Fees, while also as well as lower in joining our deposit at an attractive with gross margin was 50.45%. Addition to our ongoing margin. And distributed 165 B also through unmanned your customer engagement by the mix of countries, value propositions, and favorable liabilities costs. We recently launched two industry firsts of loan receivables as a percent of total earning assets increased by 550 basis points from 78.3% to 83.8% driven by lower liquidity held during the quarter. This accounted for 106 basis point increase in our net interest margin. Interest-bearing liabilities costs were 1.31%, a year-over-year improvement of 59 basis points, primarily due to lower benchmark rates and funding mix.

This provided a 51 basis point increase in our net interest margin. The loan receivables yield was 19.59%, a year-over-year improvement of 10 basis points. This resulted in a 8 basis point improvement in our net interest margin. Next, I'll cover our key credit trends on Slide 10. First, let's discuss our delinquency trends where higher payment trends have continued to drive year-over-year improvements. Our 30 plus delinquency rate was 2.42% compared to 2.67% last year. Our 90 plus delinquency rate was 1.05% compared to 1.24% last year. It should be noted that removing the impact of the GAAP program from the third quarters of this year and last year, the 30+ delinquency metric would have been down about 40 basis points versus 25 basis points. And the 90+ metric would be down about 25 basis points instead of 19 basis points.

And in terms of our portfolio's loss performance, our net charge-off rate was 2.18% compared to 4.42% last year. This year-over-year improvement was primarily driven by strong delinquency trends we've experienced. Our allowance for credit losses as a percent of loan receivables was 11.28%. Let's move to Slide 11 and discuss expenses. Overall, expenses were down $106 million, or 10%, from last year to $961 million, primarily reflecting the impact of the prior year's restructuring charge of $89 million and lower operational losses. The efficiency ratio for the third quarter was 38.7% compared to 39.7% last year. This metric remains elevated relative to our historical average due to lower revenue resulting from the impact of higher payment rate and lower average receivables.

We continue to maintain our disciplined focus on cost containment while we make strategic investments in our business to deepen our competitive advantage and drive long-term value for shareholders. Moving to Slide 12. Given the reduction in loan receivables in 2020 and early 2021, coupled with the strength of our deposit platform, we continue to carry a higher level of liquidity. While we believe it's prudent to maintain a higher liquidity level during uncertain and volatile periods, we continue to actively manage our funding profile to mitigate excess liquidity and optimize our funding profile. As a result of this strategy, there was a shift in our funding mix during the third quarter. Our deposits declined by $3.2 billion from last year, and our securitized and unsecured funding sources declined by $3 billion.

This resulted in deposits being 82% of our funding, compared to 80% last year, was securitized and unsecured funding each comprising 9% of our funding sources at quarter-end. Total liquidity, including undrawn credit facilities, was 18.4 billion, which equated to 20% of our total assets down from 28% last year. Before I provide detail on our capital position, it should be noted that we elected to take the benefit of the transition rules issued by the joint federal banking agencies, which has two primary benefits. First, it delays the effect of the CECL transition adjustment for an incremental two years. And second, it allows for a portion of the current period provisioning to be deferred and amortized with the transition adjustment. With this framework, we ended the quarter at 17.1% CET1 under the CECL transition rules, 130 basis points above last year's level of 15.8%. The Tier 1 capital ratio was 18% of the seasonal transition rules compared to 16.7% last year.

The total capital ratio increased 120 basis points to 19.3%. And the Tier 1 capital plus reserves ratio, on a fully phased-in basis decreased to 26.6% compared to 27.3% last year. During the quarter, we returned $1.4 billion to shareholders, which included $1.3 billion in share of purchases and $124 million in common stock dividends. Our business generates strong returns and considerable capital resulting from our commitment to drive growth at appropriate risk-adjusted returns, the scalability of our technology platform, and our ongoing cost discipline. We will continue to take the opportunistic approach to returning our excess capital to shareholders as our business performance and market conditions allow, subject to our capital plan and any regulatory restrictions. Finally, let me focus on our outlook for the fourth quarter, which is summarized on slide 13 of our presentation.

Well, there are a number of external variables that are difficult to predict with precision, we generally expect the third quarter's key operating trends to be stable in the fourth quarter. Underpinning our forecast is a stable and improving macroeconomic environment and the pandemic continue to be largely in control. We expect strong consumer demand through the holiday season to support continued strength in purchase volume. This strength, partially offset by continued elevation of payment rates, should lead to a modest growth in receivables. Our net interest margin will likely be consistent with 3Q '21. Our provision for credit losses will continue to reflect the impact of asset growth, credit performance, and macroeconomic factors, as well continued reserve reductions related to the GAAP portfolio.

As credit losses begin to normalize, we expect the RSA as a percent of average loan receivables to begin to moderate. Lastly, turning to operating expense, we expect the acceleration in purchase volume to contribute to a slight sequential increase in absolute dollars for the fourth quarter. That said, we continue to expect the full-year operating expenses to be down compared to 2020. As we close out the year and look forward to the future, we're excited about the opportunities we see to continue to drive strong financial results and shareholder value. We are well-positioned to execute on the strategy we laid out during our Investor Day and drive sustainable growth at attractive risk-adjusted returns simply by continuing to leverage our inherent core strengths, the breadth and depth of our business model, the scalability of our innovative digital capabilities, and customer lifetime value expansion we drive through our diversified product suite and powerful value propositions. I now turn the call back over to Brian for his final thoughts.

Thanks, Brian. I'm really proud of the results that we as a team continued to deliver for Synchrony's partners, customers, and stakeholders. We have a truly unique understanding of the wide range of needs that our partners and customers seek to address at any given time. And our differentiated approach to addressing those needs enables us to deliver solutions and experiences that deeply resonate.

Whether it's through the optionality embedded within our diverse product suite and customized value propositions or the many ways in which we power the connection between our partners and customers, Synchrony continues to reach, engage, and serve more customers to drive greater, more sustainable outcomes for our stakeholders. With that, I'll turn the call back to Kathryn to open the Q&A.

[Kathryn Miller, Investor Relations]

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.

[Operator]

Thank you. We will now begin the question-and-answer session. [Operator Instructions]. We have our first question from Betsy Graseck with Morgan Stanley.

[Betsy Graseck, Morgan Stanley]

Hey, good morning.

[Brian Doubles, Chief Executive Officer]

Good morning, Betsy.

[Brian Wenzel, Chief Financial Officer]

Good morning, Betsy.

[Betsy Graseck, Morgan Stanley]

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

[Brian Doubles, Chief Executive Officer]

Let me start and then Brian can jump in if he has other comments, Betsy. What I would say is in comparison to general purpose cards, they had a larger dip and larger exposures to some T&E and some other purchases that we did not drop as much as them last year. So I think when we look at the purchase volume, first of all, it's broad-based across all our platforms. We have seen really solid performance. The exception being lifestyle, which again, had a very difficult comp last year with regard to power sports and outdoor power equipment.

But when we looked at it through the quarter, it was actually incredibly consistent from the first week of the quarter and each week as we moved throughout the quarter, and that's really extended in here through the first couple of weeks of October. So we are very pleased about the activity level on the card. It's very broad-based. Even the little exposure that we had too with travel and entertainment. We saw that pop up with our travel being up 75% on our either co-branded card or the Synchrony MasterCard, restaurants were up 44%. We're seeing that growth, but our business is very consistent and we think that's really strength as we move through here into the fourth quarter.

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

[Betsy Graseck, Morgan Stanley]

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

[Brian Doubles, Chief Executive Officer]

So Betsy -- and I just want to go back and continue to ground home the fact that the RSA s are working as they're designed, where the profitability of the Company as it expands were to share more on the RSA. So that is by design. It's the buffer we all want went into downside is but we prefer the upside.

So right now, we're just going to -- we're going to pay more. So I think you just think about the trajectory as you move forward. It's going to move more in line with the NIM of the business and the net charge-offs. So we would expect charge-offs here probably at a trough and we'd be able to go up. So as the charge-offs begin to

increase, that's going to go directly through and there's not really a lag effect when it comes to charge-offs through the RSA. And I think as you think about the margin of the business and the revenue side of the business, as delinquencies begin to rise, your revenue goes up, so that will flow through. And then when it just start to get the write-offs come through, the NIM will come down a little bit. So I think it's going to move hopefully in parallel. The only lag effect is on the change in reserves. But it should move with the business. And again, we think we're probably at the trough on delinquencies now, but we'll see how it develops. But we're pleased with the performance. We're pleased with how the RSA actually moved because it moved in line with the business results.

[Betsy Graseck, Morgan Stanley]

Yes. Thanks.

[Brian Doubles, Chief Executive Officer]

Thank you, Betsy.

[Operator]

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

[John Hecht, Jefferies]

Hey, guys, good morning. Thanks for taking my question.

[Brian Doubles, Chief Executive Officer]

Hey, John.

[John Hecht, Jefferies]

New accounts up 17%, I'm wondering can you give us an idea of how many of that's coming from the new channels like Verizon and Venmo versus just deeper penetration into some of the more seasoned partnerships.

[Brian Doubles, Chief Executive Officer]

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

[Brian Wenzel, Chief Financial Officer]

John, I would say it's obviously a combination of Venmo, you got Verizon, you got Walgreens, very attractive new value profit at Sam's Club. But I also attribute a large portion to it the digital investments that we've been making. So we have made it so much easier to apply whether your in-store, on your phone, online, you can really do it in a matter of seconds now you just put in a couple of fields. You do it right on your phone, even if you're in store by scanning a QR code. So just making it easier to apply, I think all the, all the macro tailwinds are certainly there in terms of what we're experiencing the business. But this is where the digital investments that we've been making over the past 5 years are really starting to pay off.

[John Hecht, Jefferies]

Okay. That's helpful. Thanks. Second question is, can you just give us what the remaining reserve release for the GAAP?

[Brian Doubles, Chief Executive Officer]

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

[John Hecht, Jefferies]

Yeah. Okay. Great. Thanks, guys.

[Brian Wenzel, Chief Financial Officer]

Thanks, John.

[Brian Doubles, Chief Executive Officer]

Thanks, John.

[Operator]

Our next question is from Rick Shane with JP Morgan.

[Rick Shane, JP Morgan]

Thanks, everybody, and good morning.

[Brian Doubles, Chief Executive Officer]

Good morning.

[Rick Shane, JP Morgan]

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

[Brian Doubles, Chief Executive Officer]

Look, I think that's a metric that obviously we believe we over-index in terms of online and mobile sales. Just look at our partner set with Amazon and PayPal and Verizon, and others. I think that there's certainly leverage there if you look at the portfolio mix. And we broke this out a little bit at Investor Day in terms of where we see a lot of the growth coming in longer-term inside the Company. It's clearly going to be over-indexed in terms of online sales. That's speaking kind of particularly to our digital partners as they become a larger share of the overall business.

But I will say that for some of the more traditional partners that we have, we have been, I believe, instrumental in helping them transform their footprints to be more digital. So that has been a big part of what we've tried to do, particularly over the last couple of years in response to the pandemic. Many of our partners had to close stores. They moved a lot of their sales online. And we're a big part of how they were able to meet that need and transform their businesses. So certainly leverage going forward right for sure.

[Rick Shane, JP Morgan]

Great. Thank you.

[Operator]

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

[Don Fandetti, Wells Fargo]

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

[Brian Doubles, Chief Executive Officer]

Yeah, Don, good morning. So I think if I were to lay out for you two cases on delinquency, the first being a little bit more conservative, which says you have a more sharper rise in delinquency that would begin starting here in the fourth quarter, would peak third quarter next year and result in that charge-off peak in the first quarter of '23. So that's a more conservative case. And the basis for that case becomes one where as you have individuals coming off of -- consumers coming off of forbearance, government assistance, renter forbearance that they have not been able to sustain enough savings in order to avoid that.

So that's a sharper case, a more conservative case. A more optimistic case would say you would see a slower rise in delinquencies as you move through '22 into '23. And then really, your loss rate comes back in line end of '23 into '24. And I say in line being back to the mean and call 5.5%. So it's a much more gradual rise. And that premises on the fact that the consumers were able to build up enough savings so that when the financial obligations come back online for them, they are able to continue to pay their bills and meet it. So those are kind of the bookends that I would think about.

[Don Fandetti, Wells Fargo]

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

[Brian Doubles, Chief Executive Officer]

Yes. Don, I would say -- look, we have a very active M&A pipeline. The teams out there screening for opportunities every day. I will tell you that the one thing we're hoping to see in the pandemic was valuations coming back down to earth a bit. In fact, we saw the opposite. So things are still really expensive out there, both in terms of capabilities as well as businesses. So we're certainly looking at a number of things. I'd say existing businesses where we can leverage our scale to grow those businesses.

I think Allegro Credit is great example of that, Pet's Best a great example of that where we're able to leverage our scaling in CareCredit and Health and Wellness and buy those businesses and really grow them well, which we shared a little bit at Investor Day around how we did that. But we're going to be disciplined. We're looking for acquisitions that are not only strategic, but accretive. And so we stay pretty disciplined on that, but the team is very active on that front.

[Don Fandetti, Wells Fargo]

Thank you.

[Brian Doubles, Chief Executive Officer]

Yes.

[Operator]

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

[Sanjay Sakhrani, KBW]

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

[Brian Wenzel, Chief Financial Officer]

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

[Sanjay Sakhrani, KBW]

Absolutely. No. It was a good sequential move, clearly. And then Brian Doubles, obviously, you've guys have done a number of -- or made a number of moves just in this last quarter: the Pay in 4 product announcement, this embedded finance relationship with PayPal, and the Clover partnership. And you talked in the press release about positioning for diverse universe of partners. I was just curious sort of how we should think about

[Sanjay Sakhrani, KBW]

other -- like the product pipeline going forward. Are there other deals like that where you're going to be an embedded partner from a financial standpoint for other technology players. And then just how does it play into the business model, like the revenues and expenses on a go-forward basis? Does the complexion of those revenues change or how should we think about it? Thanks.

[Brian Doubles, Chief Executive Officer]

Yeah, I would, Sanjay. I'd take a step back and think about our strategy really in two big pieces. One is very focused on products. And we spent a lot of time on this in Investor Day. We believe we have the most comprehensive product suite out there, whether it's private label, dual, co-brand cards, buy now pay later, short and long-term installment. And so we feel like that is obviously really important, given the diversity of our partners at and what they want from us.

The other really important part of the strategy is really around distribution of those financial products. So this is -- think about integration into the merchants and providers making it easier to apply for those products, and really getting that scale. So it's one thing to have the products but you've got to have the distribution channels as well. And so if you go back over time, we do a lot in terms of direct partner

[Brian Wenzel, Chief Financial Officer]

integrations. So that's leveraging our APIs, Synchrony plug-in, etc. But in some cases we're looking to expand distribution through practice management systems like Aptec. Any time we can build a solution once and reach thousands of merchants, we absolutely want to do that, and that's really what Clover does for us. With the development of a single app, we can reach thousands of merchants. We can tap into their roughly 180 billion of GPV.

[Brian Doubles, Chief Executive Officer]

So we think this is a big opportunity and allows us to do something once and get immediate scale. We're actively looking at other opportunities to do that for our products. But this is really, think about it as really a two-pronged approach. You've got to have the product set, but then you've got to have a distribution channel or a set of distribution channels that allow you to scale quickly and get those products made available to our merchants and their customers.

[Sanjay Sakhrani, KBW]

Okay. Great, thank you.

[Brian Doubles, Chief Executive Officer]

Thanks, Sanjay.

[Kathryn Miller, Investor Relations]

And we have our next question from Bill Carcache with Wolfe Research.

[Bill Carcache, Wolfe Research]

Thank you. Good morning. I wanted to ask a follow-up on credit. As we look ahead to NCO rates normalizing higher off these low levels, there's been some concern that this could lead to reserve building headwinds, but since your reserve rate is still well above your Day 1 level of just under 10%; is it reasonable to expect that that reserve rate is going to continue to drift lower from here, even as NCL rates normalize higher, such that that credit normalization process does not necessarily lead to reserve building headwinds? Just some high level commentary around that -- those dynamics would be super helpful.

[Brian Doubles, Chief Executive Officer]

Yeah. Thanks, and good morning, Bill. The way I think about charge-offs and the reserve build, our reserve build will still really be driven by asset builds in the macroeconomic assumptions. You are correct, we're operating now just under 11.3%. Our CECL day 1 was 10% and we expect that migration to happen over time. Again, CECL day 1 was 10%. We never actually had a normal quarter under CECL. But if you use that as a guidepost, that's where we would expect to move back towards. So you're right, there will be some rate.

But again, asset builds will dominate. So the reserve provisioning, there maybe reserve builds that come that are partially offset by more normal rate reductions as you move closer, depending upon how, again, how credit performs and how the macroeconomic looks.But it won't avoid reserve builds if you're in an asset increasing environment.

[Bill Carcache, Wolfe Research]

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

[Brian Doubles, Chief Executive Officer]

Yeah. So why don't we just take a step back. And I'll break buy now pay later into a couple of categories because I think right now everything is getting lumped into buy now pay later. And as we've indicated in the past, we do about 15 billion of installment, both short and long term. We offer those products in about 70,000 locations today. And I really think about it in two buckets. First you've got what we call closed-end installment or buy now, pay later. That's growing really well for us. So that is just a closed-end

[Brian Wenzel, Chief Financial Officer]

loan, very simple. A number of different durations. And if you look over the past three years from 2017 to 2020, the purchase volume on those closed-end products has grown at about 46% a year. So we're definitely seeing really good traction there. We have buy now pay later in market today with partners like T oo Low, American Signature, Electronics Express. That's branded as SetPay. And then we talked at Investor Day that starting in October, we will have our PM4 product available for partners.So we are in discussions with them right now and talking about integration plans and getting that

[Brian Wenzel, Chief Financial Officer]

in-market. I will tell you to your point, they're focused on exactly what you said, which is how does this product compete with the products that they currently offer? And at Investor Day, we talked a lot about the economic equation for our partners. And I can tell you that is something that I think 6 to 9 months ago, they weren't all that focused on, but right now they are very focused on it. So they're looking at the trade-offs between a traditional product where they might earn an RSA, and how does that compare to a short or long-term installment product they are paying forward or paying a merchant discount.

And so I think the way this is going to play out is there's going to be a lot of testing and learning and seeing how these products work together, what the customer uptake is, and then at the end of the day, what the economic equation is back to the partner. That's one big bucket of what we call installment closed -in, Buy Now Pay Later. The other thing that we talked about is the Buy Now Pay Later option or Installment option that we offer on our cards; on a revolving account. And this is where we continue to see a lot of really strong interest from our partners. And part of what they like about that is you can actually do multiple installment loans or Buy Now Pay Later loans without an additional credit check or application process.

It also gives the customer the ability to, when they want to, just make a regular purchase, not on an installment basis, and take advantage of the value prop, so save 5%, for instance, on Amazon. And what we've seen is customers really like to have that optionality. So for some purchases they want to put it on a 6 months or a 12-month equal pay Buy Now, Pay Later product. In some cases, they want to take advantage of the value prop. And what's nice about that product is it allows you to do both and really gives the customer that choice at the end of the day. The partners on their side, they really like that because it allows them to do more life cycle marketing, right? So they can push out offers and promotions around holiday and things like

[Brian Wenzel, Chief Financial Officer]

that. So they like that lifecycle relationship that they're able to maintain with the customer. So like at the end of the day, I think every one of our partners is looking at this a little bit differently. They're looking at the interplay between these products. They're looking at the economic equation. I think the good news is if you take a step back and you see how we're positioned, we have a very comprehensive suite of products. We can sit down with a partner and they can basically choose from a menu in terms of what they want to offer, and we can lay out for them an economic equation, what we think it's going to do to their sales, et cetera. So I feel like we're very well-positioned. We've got the product suite, we've got the ability to integrate quickly with our partners, and we think over time, the multi-product strategy is the winning one.

[Bill Carcache, Wolfe Research]

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

[Brian Wenzel, Chief Financial Officer]

Thanks, Bill.

[Brian Doubles, Chief Executive Officer]

Thanks, Bill.

[Operator]

Our next question is from John Pancari with Evercore.

[John Pancari, Evercore]

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

[Brian Doubles, Chief Executive Officer]

Sure. Thanks. And good morning, John. So obviously, in the deck, we showed you the elevated level that we saw in the third quarter. And as we move into the fourth quarter, again, that rate is going to continue to be elevated. I pointed a couple of things as we think about payment rate and the trends. We've done a lot of analysis to try to make sure that we -- as we look at it, that we believe it's going to revert back to the mean and everything we have seen still leaves us to that conclusion, that there is a reversion back to the mean. There are a couple, I'll call underlying data points that I would try to point you to. Number 1, as we look at the savings rates for consumers, they are drifting down to more normalized level in pre -pandemic. And we look at that both as the big money center banks

as well as the digitally oriented banks. Now what we see with regard to movement in our savings accounts, so one, savings is coming down -- savings rate is coming down which again, part of that is going to be the high purchase volume. The second, we start to look at cohorts inside of our portfolio. We do see very slight movements down.

So for instance, if you looked at a product level, our Dual Card price sequentially, second quarter, the third quarter had a slight decline in the payment rate on a product level. That's a higher cycle customer that is beginning to migrate back down.

When you look at it with regard to accounts that either pay full-pay, between full-pay, or statement balance and mean pay, and then statement balances or less than statement balances across all those categories, we've seen slight reduction in that paying rate. So if you think about the people who paid stated balances, that is slightly lower third quarter versus second. The people who are paying between statement balance and min balance that is lower in the third quarter than the second quarter.

And then the min pay is up slightly third quarter versus second. And then the people paying less than the min pay is up slightly. So I think as we start seeing very slight movements, those are movements that would tell us that the payment rate is going to move back towards the mean that we experienced pre -pandemic, or we're starting to see a little bit of signs there.

[John Pancari, Evercore]

Got it. Now, thank you, Brian. That's helpful. And then secondly, on the NIM, I appreciate the color you gave earlier in terms of some of the moving parts for the linked-quarter expectation. Is there an incremental opportunity around funding that you can continue to optimize the funding stack here to support the NIM further out that we can possibly dial in. Thanks.

[Brian Doubles, Chief Executive Officer]

In our funding stack today, we have 82% that is funded with retail deposits. We have not been in an active issuer in the market, either in '19 -- I'm sorry, in '20 or '21. I would expect this to access the market. First, I think it's good for the liquidity of the Company. So we would expect to see a little bit of activity because we have not replaced some of that expiring debt, but I would imagine that our deposit funding rate will remain elevated versus a 70%, 75% that we historically have guided to. I think, also, there's an opportunity with our PayPal Savings product to continue to broaden the reach to customers in retail, so we're excited about that when it comes out in the coming months.

So we're going to continue to focus on trying to optimize the costs, but we also want to maintain access to the deep markets where that's secured, unsecured. As we begin to get the capital stack and water, we would probably access additional preferreds to build out the capital stack of the Company and get down to our target level. So we intend to be an active issue over time and do it in a way that optimizes the cost.

[John Pancari, Evercore]

Got it. Thanks, Brian. I appreciate taking my questions.

[Brian Wenzel, Chief Financial Officer]

Thank you.

[Kathryn Miller, Investor Relations]

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

[Operator]

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

[Mark De Vries]

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

[Brian Doubles, Chief Executive Officer]

Yes. Thanks, Mark. So the way the GAAP capital releases, obviously we've had a portion of the reserve release that's a smaller portion that flows back through capital this quarter. The bulk of the reserve release will happen in the second quarter next year when we intend to convey that portfolio. So that will probably be included in our next capital plan. We have $1.2 billion remaining under the existing authorization that we have as we entered the quarter. So we're pleased with how we repurchase shares during the third quarter.

As we said before, we will be aggressive, but prudent as we move forward here. And as always, we'll continue to run our internal stress test model, evaluate the performance of the business and the income profile and to the extent that we believe it's prudent. We'll engage discussions with our board about potentially increasing the authorization. But right now, we have $1.2 billion ahead of us. And again, we want to be aggressive but prudent as we continue to reduce the capital level of Company towards closer to our long-term target.

[Mark De Vries]

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

[Brian Doubles, Chief Executive Officer]

Our first priority from Brian and Margaret in the board is to continue to maintain the long-term investments that we have in the business in the strategic initiatives So we do almost everything to protect that because that's in the best interest of our shareholders, that long-term value. Around that, we've maintained a cost discipline. We've reduced a lot of costs. We had -- we're on target for our $210 million this year. But we've made some moves to invest back in certain aspects of our business that includes going at $20 an hour for our non-exempt workforce and investing back into the business.

I think as you look at the fourth quarter, there's going to be a slight increase as you think about some marketing and some things that are going to happen in the quarter. But again, we would expect, as you move forward, that as revenue comes back in line, our progression back towards an efficiency level back in the low 30s and if you think about on a dollar basis as we sequentially move through '22.

[Mark De Vries]

Okay. Great. Thank you.

[Brian Doubles, Chief Executive Officer]

Thanks, Mark.

[Operator]

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