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Operator: Good morning and welcome to the Synchrony Financial second quarter 2026 earnings conference call. Please refer to the company's investor relations website for access to their earnings materials. Please be advised that today's conference is being recorded. Currently, all callers have been placed in a listen-only mode. The call will be opened up for your questions following the conclusion of management's prepared remarks. If at any time you should need operator assistance, please press star zero. If you wish to ask a question following the prepared remarks, please press star one. I will now turn the call over to Kathryn Miller, Senior Vice President of Investor Relations. Thank you. You may begin.
Kathryn Miller: Kathryn Miller Thank you and good morning, everyone. Welcome to our quarterly earnings conference call. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the investor relations section of the website. Before we get started, I wanted to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results can differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to 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: Thanks, Kathryn. Good morning, everyone. Synchrony's second quarter performance reflected strong momentum across our core business drivers. New accounts continued to grow and average active accounts inflected to growth. Customer engagement continued to be strong. leading to higher spend per account across each of our five sales platforms and 8% growth in purchase volume which reached an all-time high of almost $50 billion in the quarter. Growth was broad-based across all five of our sales platforms led by diversified in value. The broad utility and strong value offered by the partners in this vertical continue to resonate deeply with customers including our ongoing partner expansion and in combination with higher gas sales drove a 12% increase in purchase volume compared to last year. Spend across our digital platform grew 9%, primarily reflecting strong performance across partners with broad diversified offerings and highly engaged customers. Purchase volume in both our home and auto and lifestyle platforms increased by 6% compared to last year. Home and auto growth was driven by the performance of new programs. And in our lifestyle platform, higher spend was primarily driven by the performance of new programs and strength in the other apparel and goods category, as well as in the luxury category. Meanwhile, health and wellness purchase volume grew 2%, primarily reflecting growth in pet. Ninquity's co-branded cards, including our consumer and commercial dual cards, accounted for 52% of our total purchase volume in the second quarter and increased 23% versus last year. This trend was driven by the combination of new programs and product upgrades, as well as higher broad-based spend and enhanced utility across our card programs. Out-of-partner discretionary spend on our consumer co-branded products grew in line with non-discretionary, both up double digits despite elevated field prices in the second quarter. Particular strengths came from categories like entertainment, retail, and electronics. And as you can see in the charts at the bottom of slide three, the proportion of discretionary spend was consistent or higher across customer cohorts throughout the quarter, even as field prices rose significantly. Overall, we believe these trends reflect resilient consumer behavior, likely supported by some benefit from increased tax refunds and lower tax withholdings and strong demand for the value and utility our products deliver Synchrony is focused on providing the purchasing power customers need for each of life's moments that kind of financial flexibility depends on dynamic underwriting capabilities a diversified product suite and the industry expertise to reach and serve a broad range of both local and national businesses and providers To that end, we added or renewed more than 15 partners during the second quarter, ranging from Suzuki Motor to AmeriVet and Roto-Rooter. Our renewal with Suzuki Motor extends our 17-year partnership, continuing to deliver secured installment financing solutions through their more than 700 dealers nationwide. Meanwhile, our renewed relationship with Amerivet, which supports a network of over 200 locally-led veterinary clinics across 37 states, positions CareCredit as their exclusive financing partner through a seamless, single-application waterfall solution. Together, CareCredit and Amerivet are helping more pet parents access the care they need, ultimately enabling better outcomes and healthier pets. And Synchrony's multi-year agreement with Roto-Rooter Plumbing and Water Cleanup will enable us to expand how customers pay for essential home repairs and ongoing home care. We will deliver our multi-product capabilities with revolving installment financing options available side by side to enhance flexibility and choice as customers manage these often unplanned expenses. Inquity's partnerships typically span decades because we continue to evolve together as the consumer landscape changes and our customers' everyday needs and expectations shift. We recently refreshed our credit card program with Dick's Sporting Goods, building on our long-standing partnership of over 20 years. Our products now feature an everyday 10% back and scorecard rewards on qualifying Dick's purchases to drive greater value, financing flexibility, and convenience for consumers. In April, we completed our acquisition of the MyLowes Pro Rewards American Express Card Portfolio and became the issuer, delivering a cohesive customer experience with simpler applications, digital servicing, and more utility and value. The MyLowes Pro Rewards Card complements the existing MyLowes Pro Rewards Private Label Credit Card by extending pro-purchasing power and rewards, earning potential beyond Lowe's. So whether we are empowering small and medium-sized contractors to keep their businesses running smoothly, unlocking greater value and loyalty for hobby purchases, or enabling pet families to access the care their pets need, Synchrony is driving more meaningful customer and partner outcomes through the moments that matter. With that, I'll turn the call over to Brian to discuss our financial performance in greater detail.
Brian Wenzel: Thanks, Brian, and good morning, everyone. Symphony's second quarter financial performance was highlighted by a positive inflection in average active account growth, all-time high purchase volume, and continued acceleration in ending loan receivable growth, all while maintaining our credit discipline and delivering a strong credit performance. As a result, we generated net earnings of $885 million, or $2.59 per diluted share, a return on average assets of 2.9%, A return on tangible common equity of 25.2% and an 8% increase in tangible book value per share. Turning to our performance in detail, purchase volume grew 8% versus last year and reached almost $50 billion. Ending loan receivables grew 2% to $102 billion, reflecting the impact of higher purchase volume, partially offset by the continued effects of elevated payment rates. The payment rate of 17% was approximately 70 basis points higher than last year and approximately 170 basis points above the pre-pandemic second quarter average, primarily reflecting the impacts of new portfolio seasoning, shifts in portfolio and product mix, and our previous credit actions. Net interest income increased 2% to $4.6 billion, primarily driven by the combination of higher interest and fees and lower interest expense. Interest and fees increased 1%, primarily driven by the growth in average loan receivables. Interest expense decreased 8%, primarily due to lower benchmark rates. Our second quarter net interest margin increased 30 basis points versus last year to 15.08%, reflecting two key drivers. A 39 basis point decline in our total interest bearing liabilities cost, which reflected the impact of lower benchmark rates and contributed approximately 29 basis points to our net interest margin. And two, a 131 basis point increase in the mix of loan receivables as a percent of interest earning assets versus last year, which contributed approximately 23 basis points to our net interest margin. These improvements were partially offset by two factors. One, a 68 basis point reduction in our liquidity portfolio yield, which reduced our net interest margin by 13 basis points. The decline was generally driven by lower benchmark rates. And two, an 11 basis point decrease in our loan receivables yield, which was primarily driven by lower benchmark rates and lower assessed late fees, partially offset by the continued impact of our PPP fees. This reduced our net interest margin by approximately nine basis points. On a sequential basis, net interest margin decreased 42 basis points primarily due to two drivers. One, the decline in our interest and fee yield, which reduced our net interest margin by approximately 31 basis points. This is primarily due to the lower assessed late fees as delinquency reaches seasonal low and as the efficacy of our credit actions and ongoing credit discipline support our fewer defaulting accounts. and two, the decline in the mixed and loan receivables as a percent of interest earning assets, which reduced our net interest margin by approximately 16 basis points. This was generally due to seasonal pre-funding ahead of our expected loan acceleration in the back half of the year. Turning to the remainder of our P&L, RSAs of $1 billion or 4% of average loan receivables in the second quarter and increased $35 million versus the prior year, primarily reflecting program performance and higher purchase volume. Provision for credit losses increased $55 million to $1.2 billion, primarily driven by the reserve release of $163 million versus a $265 million release in the prior year. Partially offset by a $47 million decrease in net charge-offs. Other income increased $19 million to $137 million, primarily reflecting the impact of a $30 million gain related to the exchange of our Visa B2 shares, partially offset by higher loyalty costs. Other expense increased 7% to $1.3 billion, primarily driven by higher operational losses and technology investments. The second quarter efficiency ratio was 35.8%, approximately 170 basis points higher than last year. This resulted from higher overall expenses and the impact of higher RSA. Turning to our portfolio credit trends on slide 8, both our 30-plus and 90-plus delinquency rates at the end of the second quarter were generally in line with the prior year. Our net chargeoff rate was 5.43%, reflecting a decrease of 27 basis points from 5.7% in the prior year. And our allowance for credit losses as a percent of loan receivables was 10.09%, a decrease of approximately 33 basis points from 10.42% in the first quarter, and a decrease of approximately 50 basis points from 10.59% last year. Slide 9 shows synchronous funding capital and equity ratios, which remain a core strength of our business. We grew our direct deposits by $2.9 billion versus last year and reduced broker deposits by $2.4 billion. At quarter end, deposits represented 83% of our total funding, with secured debt representing 9% and unsecured debt representing 8%. Total liquid assets decreased 9% to $19.8 billion and represented 16.2% of total assets, 186 basis points lower than last year. Turning to capital. During the second quarter, we issued $500 million of preferred stock with a final dividend of 7.25%, a full 100 basis points lower than our previous resettable preferred deal that was priced in February 2024. With this issuance, our capital stack is now fully developed. Synchrony remains focused on returning capital to shareholders and making further progress towards our CET1 target of 11%. At the end of the second quarter, we changed the presentation of our internal use capitalized software costs on our balance sheet and reclassified prior periods to conform to this presentation. This change is reflected in our capital ratios for both the current and prior year. Accordingly, Synchrony ended the quarter with a CET1 ratio of 13.2%, reflecting a 100 basis point reduction versus last year. A Tier 1 capital ratio of 14.9%, reflecting a 50 basis point reduction. A total capital ratio of 16.9%, reflecting a 60 basis point reduction. And a Tier 1 capital plus reserves ratio of 24.7%, reflecting a 100 basis point reduction versus last year. significantly returned $950 million to shareholders during the second quarter, which included $850 million in share purchases and $100 million in common stock dividends. At quarter end, we had approximately $5.7 billion remaining of our share purchase authorization. Finally, I'd like to discuss our outlook on slide 10. We continue to expect average active account acceleration and strong growth in purchase volume in the back half of this year while maintaining our credit discipline. This growth should more than offset the impact of elevated payment rate to deliver mid-single-digit growth in ending loan receivables by year-end. Net interest income is expected to grow in 2026 as a result of higher average loan receivables, the building impact of PPPCs, and lower funding liabilities compared to last year. These trends will be partially offset by the impacts of lower late fee incidents and new account growth accelerations. We continue to expect net charge-offs to be less than 5.5% for the full year, with delinquency and losses following seasonality. As strong program performance contributes to higher net interest income and lower losses compared to last year, RSAs should increase but remain within a long-term target range of 4% to 4.5% of average receivables. Lastly, we expect other expense dollars in the second half of this year to be relatively consistent with the first half, Thank you for joining us today. In summary, we're confident in our path forward as we execute our strategic imperatives. We remain focused on enhancing our resilient foundation and generating strong profitability to drive intrinsic value over both the short and long term, while also returning significant capital to shareholders. With that, I'll turn the call back to Brian.
Brian Doubles: Thanks, Brian. Before I turn the call over to Q&A, I'd like to leave you with three key takeaways from today's discussion. First, demand remains strong. Synchrony delivers everyday value and utility for millions of consumers and compelling outcomes for hundreds of thousands of small and mid-sized businesses and providers across the country. Second, Synchrony continues to raise the bar. Through consistent investment in our innovation and evolution, we are driving outcomes that position Synchrony at the heart of what matters to customers and partners alike. And third, The power of our differentiated business model is evident through our financial performance. Synchrony is growing while maintaining our credit discipline, generating strong returns, and building significant long-term value for our stakeholders. With that, I'll turn the call back to Kathryn to open the Q&A.
Kathryn Miller: 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: At this time, if you wish to ask a question, please press star 1 on your telephone keypad. You may remove yourself from the queue by pressing star 2. Please limit yourself to one question and one follow-up question. Our first question comes from Ryan Nash with Goldman Sachs. Please go ahead. Your line is open.
Ryan Nash: Hey, good morning, everyone. Hey, Ryan. Good morning, Ryan. So, Brian, if I look at the EPS in the second half relative to street expectations, it implies some downsides. I know that there's color on some of the moving pieces of guidance on slide 10, but maybe just walk us through some of the things that are embedded for the second half in NII and credit, and where do you think expectations may be off from here? Thank you, and I have a follow-up.
Brian Wenzel: Yeah, thanks for the question, Ryan. I think when you look externally at what people have modeled, When you think about the reserve coverage ratio, I think the ending point, how they got there was a little bit more peanut butter to cross quarters. So when you look at the first half for us, the rate came down, even though we had growth and offset the provisions against that growth. I think as you start thinking about the back half of the year, The reserve rate probably doesn't really moderate from here. Over the medium term, it probably can. But you're going to see more growth-driven provisions in the back half. So I think you get to the ending point. It's just how people model the quarter is number one. I think when you think about the EPS guide, net interest margin was really at the lowest point here in the second quarter. That's going to begin to build. And again, what we try to say to folks is, number one, as much as you have Thank you for joining us. Number one, the effects of late fees are kind of coming from the better charge-off position. And two, you kind of have to get the reserve trends probably right over the quarters as it kind of builds with growth. The last thing I'd leave you with, and we try to be clear with this, is put aside the operational losses. Operating expenses are down, or down year over year versus our expectations. And again, that's something we're dealing with and dealt with in the first half of the year. But that's really going to be consistent. I think people still model a little bit higher, I'm sorry, a little bit lower op-ex because they're using efficiency ratio. Again, we're trying to help you with dollars. So those are the bigger pieces, I think, Ryan, as you think about the back half. It's just how you got there quarter by quarter versus the full year number.
Ryan Nash: Gotcha. I appreciate the color. And, you know, Brian, you had flagged that the margin could be lower in the quarter, and that came through. And I know that you just noted the margin began to build from here. But maybe just talk about some of the drivers and the key assumptions embedded in that. And do these elevated payment rates, you know, they're going to impede your ability to expand the margin further over time? Thank you.
Brian Wenzel: Let me start with where you ended, Ryan. I know there's probably a lot of questions with regard to the 73 basis point increase from the first quarter to the second quarter of the payment rate. 85% of that, or 62 basis points, were really driven by two factors. Number one, new portfolios were accounted for probably half that miss. which related to not only Walmart, but you have Bob's, you've got some other portfolios that kind of come through. So the amalgamation of a bunch of new programs drove a significant increase in the payment rate quarter on quarter. And then second, promo mix contributed a factor as well that's in there. So those two combined were 85% of the mix. So payment rate was relatively stable quarter on quarter. As you think about it, as you think about the net interest margin as you move to the back half of the year, you should see, you know, as a framework to think about it, you are going to get a benefit on ALR as you step out, you know, and that builds between the third quarter and the fourth quarter. You know, late fees probably have hit, you know, what I'd say is a trough to some degree. So you won't see as much, you know, impact really as you kind of move into the back half of the year. So that headwind that you experienced You know, being 19 basis points this quarter, that kind of abates and swings quarter on quarter. So those are probably some of the bigger pieces. And again, that late fee component is overwhelming the benefit that we got from the PPPCs. So I think as you kind of try to model through the late fee impact and the new account impact on them, again, that stems a little bit in the back half of the year.
Operator: Thank you.
Brian Wenzel: Thanks Ryan.
Operator: We will move next with Sanjay Sakrani with KPW. Please go ahead. Your line is open.
Brian Wenzel: Thank you, good morning. Just building on what Ryan was talking to you about, Brian Wenzel, as I think about the RSAs, those also came in sort of at the low end of the range that you guys are targeting. As we think about the second half of the year, do those then elevate? I'm just trying to think about where we land in that wide range that you have for the RSAs. Yeah, thanks. Good morning, Ryan. Thank you for the question. So RSAs, you know, there's a number of things that factor through there. I think when you take a step back and look at the relative percent relative to PPR minus net charge-offs exclusive RSA, it's generally in line with prior quarters, so it's not significantly different. The one thing I'd say, though, Sanjay, in this particular quarter, As well as some effects in the first quarter, the way in which operational losses sometimes flow through is they go directly through RSA versus being an offset. It's a chargeback through operational losses. So when I think about that piece of it for a second, A good bulk, I want to say 70 plus percent of the operational losses are covered by RSA and in particular over $20 million this quarter was covered directly through the RSA and not through that offset on the operational losses line. So as I take a step back, again, some of the idiosyncratic things that we saw in operational losses and some of the things maybe caused by part of the modifications that had an unintended impact, that hopefully is behind us. Now, again, we're coming off of historic lows relative to operational losses in 2025. So while we expect it to elevate, we think that the acceleration here should flatten out in the back half of the year. But we'll certainly mix and I'd say that item drove a little bit of the RSA movement and you'll see RSAs generally move up a little bit from here but stay within the range. Okay. And then maybe if we pull up a little bit more just thinking about the business model because a lot has changed over the course of the late fees and then Walmart. Obviously, you guys have moved the mix to, I think, a higher credit quality consumer. Maybe this is the question for Brian Doubles. When we think about the ROA of the business and the portfolio, is that still intact at like 2.5% or so? I'm just trying to think about the overall implications of all the different moves and means for the ROA.
Brian Doubles: Yeah, I'll start on that. Look, I think to your point, a lot has changed in the last five years. I think we've brought in new partners. Obviously, we've renewed a number of our top 10 partners. But the one thing that, you know, the lens we look at all of those things through is the long-term guidance of 2.5% plus ROA. and so I think when you do all the puts and takes everything we brought on you know even smaller programs that we've exited because they were below our return threshold is they all kind of they all kind of steer you back to that same that same range in terms of return okay great thank you yep thanks Sandra thanks Sanjay thank you our next question comes from Terry Ma with Barclays please go ahead your line is open
Terry Ma: Hey, thank you. Good morning. So you called out some of the impact on the overall consolidated yield for the book. But if I look at kind of platform results, it looks like digital and diversified in value showed the most market decline in yields year over year. So any color on kind of what's going on with those two segments? Is it just more kind of promo usage or is it more late fees there? Like any color on that, please.
Brian Wenzel: Yeah, thanks for the question, Terry. When you think about those two particular platforms, obviously diversified value has seen really strong growth. That's across all the partners. When you think about some of the value orientation you have there, whether it's a TJX or a SAMS, but clearly the deal gets impacted when you begin to introduce a new program like the Walmart OnePay program that's in there that Thank you for joining us. Thank you for joining us. including in the net interest margin as you have these new accounts. That begins to subside as you have a more consistent growth rate stepping out of 2026. So again, it's really a factor of the growth whether it be a new partner or really a value prop that's resonating with consumers.
Terry Ma: Got it. That's helpful. Thank you. And then maybe just talking about home and auto, it looks like Lowe's was in there this quarter. Maybe just talk about the underlying trends that you're seeing, X lows. I think you called out some green shoots last quarter. Thank you.
Brian Wenzel: Yeah, you know, we're actually encouraged by home and auto. You think about that business. There were green shoots that we saw in the quarter. Furniture was up nicely in the quarter. Home specialty was up mid-single digits, which had been more of a challenge for us as consumers wanted to maybe hold back on larger tickets. type purchases. So real bright spots that are in there that we feel good about. And obviously we're excited about expanding the relationship with Lowe's and bringing that commercial co-branded portfolio in. It does have a very different type of Payment and Volume turned to it. But again, we're excited about expanding that relationship. And what we haven't really talked about is when you add that co-brand relationship on top of what was our private label relationship, all the accounts that maybe apply for co-brand that would get nothing now will get offered at least a private label card. So hopefully it should expand growth as we move forward. So again, we're encouraged by some of the trends that are in there. The team's doing a very nice job, particularly in the home specialty and furniture area, which again goes back to the consumers being a little bit more resilient and willing to spend on certain discretionary items. Thanks, Terry.
Operator: Thank you. We will move next with Darren Teller with Wolf Research. Please go ahead.
Darren Teller: Darren Teller Hey, guys. Thanks. You know, with much of the recent increase in expense from tech investments and just some early operational losses as you enlarge your large de novo programs, Bill, can you just give us some color on your expectation for similar second half expense dollars versus first half?
Brian Wenzel: Good morning, Darren, and thanks. As we think about it, our expectation is that operational losses here, again, flatten out the trend downward as you think about it. The tech investment will kind of continue at the same pace, but I think we're showing discipline relative to employee costs and other things. When you think about it, the back end generally has more Thank you for joining us. Thank you for joining us.
Darren Teller: Okay, thanks, Brian. Just for a quick follow-up, you know, the chart we saw on slide three, we found that really helpful. It just shows, at least among your co-branded cards, there appears to be pretty little discretionary spend impacts despite higher gas prices, I suppose. I mean, is this the case from what you're seeing? Is it more the seasoning of the new programs or anything else you just touch on in terms of the drivers? Thanks.
Brian Wenzel: Yeah, you know, when you look at the consumer, again, people are expecting, you know, higher gasoline prices, which have abated recently, but hit a peak here in May, as well as the accelerated inflation would cause that consumer to pull back and Thank you for joining us. We saw green shoots across the portfolio when it comes to discretionary. If you go out to health and wellness, dental had been a little bit of a headwind when people think about some of the discretionary procedures there. That turned positive during the quarter. Cosmetic continues to be a little bit under pressure in that segment. But you go down to, you know, Thank you for joining us. Just, you know, tremendous opportunities for consumers to spend. So, again, the consumer is showing tremendous discipline. And then you combine that, Darren, with the charge-off, you know, perspective where, you know, entry rates are still as strong as or better than 2019. Late stage is stable to improving and a little bit of pressure on to-do, but really solid credit rating. So the consumer is being very disciplined with regard to how they manage their own balance sheet, but they're willing to step in and spend in certain areas. It's good to hear. Thanks, Mark. Great. Thanks, Darren.
Operator: Thank you. Our next question comes from Rick Shane with JP Morgan. Please go ahead.
Rick Shane: Hey, guys. Thanks for taking my question. I'd like to talk about something a little bit more strategic in terms of your AI strategy and investment. you know we're sort of now through this period of you know rapid deployment and probably not an enormous amount of focus on token costs etc. I'm curious as you look at the opportunity now how you are managing compute expense and more importantly as you move forward how you implement strategies to balance or give at a managerial level the decision of tokens versus employees?
Brian Doubles: Yeah, Rick, I'll start on this one. I think, look, this is obviously a huge opportunity for us as it is with every company. We are investing. I think, you know, it's going to transform how we work. It's going to transform every function, every platform in the business. It's a big opportunity to increase capacity, deliver productivity. We're seeing nice efficiency gains already. Speed to market is improving. So I'm really bullish on it. I'm very excited about it. 90% of our exempt employees are actively using the tools. I think that's fantastic. So we've done this in a way where we're in the stage of just encouraging as much usage as possible. Now with that said, obviously we're going to be disciplined around the costs associated with that. But if we've got a good use case that drives productivity, drives speed to market, better answer for our partners and our customers, we're going to invest there. We've got great use cases across our tech teams, contact centers, collections, fraud, credit. It really is comprehensive. And, you know, those, I don't even think of those as costs. Those are investments. We're going to make sure that we're getting a good return on those costs. But this is an area where we're going to invest. I don't know, Brian, if you want to add anything to that.
Brian Wenzel: Go ahead, Brian. Sorry. That's okay, Rick. Just to unpack that a little bit more, when you ask about the token costs, the token costs are not material to us, and it's not something that we spend a lot of money trying to control at this point. What I'd say is we have a framework around looking at the cost of AI, whether it's the license cost, the token or credits, and how those kind of come in and how they're consumed. We have a whole FinOps team that has been part of how we manage the cloud costs that are managing this. So right now we're trying to get to adoption and figure out the right levels. I think where we think about it is probably longer term, Rick. You have a lot of these companies that are investing in Billions of dollars in technology and how that cost is going to get if it's going to get passed through back through all the end users here whether it's the license fees or token costs that's what we're also trying to consider and work with people to understand the trajectory but but again it's not something that's driving our results today and most certainly I want to be really clear it's not driving the the technology costs here this is really more investments in some of the core things like pay later and and other initiatives that we have in technology and product. Understood. That's actually really helpful.
Rick Shane: I'm just curious, at some point, do you think we get to a world where we look at token costs the same way we look at T&E, where there are budgets and it's constrained? It feels right now like it's sort of, to your point, encourage 90% of your employees to use it as aggressively as possible. And I think that's very much the norm. But I do wonder at some point if That transforms to the way we look at other forms of expense and ROIC on that.
Brian Wenzel: I think you're going to look at it differently inside the company. I think if you go into our technology group, there's most certainly going to be a different way in which we look at the engineers. and how they deploy the tools and token utilization there than you'd say someone that sits in a support function like finance or even resources. So there will be a different model. I think we've developed through RSAs an activity-based costing system. I think we have to think about how we look at that in certain processes. So you may say, hey, I'm going to use AI to run a process today. Well, you understand what that cost is, right, when you think about the human capital and any... and the other direct dollars. We're going to have to figure out if you do AI, what's that token consumption and what's the cost of that process moving forward. That's something that's going to develop, I'd say, very early innings there for everyone. But that is something we're going to have to build a framework around as we step out and it becomes more
Brian Doubles: and more utilized throughout the company. Rick, I think it becomes just how you look at return on investment just like how we look at it today. We've got a very rigorous process where you're putting together a budget for a new product and that includes all the expenses, people, maybe consultants, T&E, that kind of stuff. This will be one of those costs that goes into the overall investment. and we're very disciplined around the return that we expect to get on that investment and measuring it going forward.
Rick Shane: Got it. Very helpful, guys. Thank you so much.
Brian Doubles: Thanks, Rick. Have a good day, Rick.
Operator: Thank you. We will move next with Rob Wildhack with Autonomous Research. Please go ahead.
Brian Wenzel: Good morning, guys. I wanted to go back to slide three and zoom in on June a little bit. You know, you have purchase volume in June spiking to 11% growth, which is great. I think loan growth in June, though, was still a little slower than seasonality. So I guess first for the drivers, anything to call out on June volume growth? And then second, you know, appreciate all the color on payment rate. And in light of that commentary, like what are the purchase volume assumptions that kind of underpin the loan growth guide from here? Yeah, thanks Rob for the question. As you think about the quarter, most certainly you have an impact of some of the new programs that kind of came in that accelerated in the back half of that. You know, whenever you go through a portfolio conversion, there's a little bit of lag time with regard to when new accounts start up and really, you know, people activating and using a new product versus a product that has gone away. And then most certainly you have Building levels, right? You think about Bob's that came on in the middle part of the quarter. Walmart continues to grow as well as a program we launched, I think, late first quarter, Chico's and things like that. So a lot of it's new program oriented in advance of that. Again, as you think about payment rates, it's going to remain elevated. Again, we try to help people here in the second quarter think about it relative to net interest margin. It's going to remain elevated as you go through the back half of the year, but again, margins should expand. You know, what that's left us with, with a higher payment rate, you are going to have a slightly higher turn, most certainly in the mix of the portfolio when you think about new programs and the commercial program that's come in. You would see a little bit of elevation, but the historical turn will be a little bit higher as you think about the back half of the year. Okay. Thank you. Thanks, Rob.
Operator: Thank you. We will move next with Mahir Bhatia with Bank of America. Please go ahead.
Terry Ma: Good morning. Thank you for taking my question. First question I wanted to ask is just about capital. Can you talk a little bit more about the change in presentation for the internal used capitalized software? What happened there? What's driving the change? And then just more generally on capital levels and CP1 targets now that the capital stack is, I think, a little bit more built out. Is the current buyback cadence of 850-900 million sustainable given the growth outlook you have for the next few quarters?
Brian Wenzel: Yeah, thanks for the question, Mihir. And let me start a little bit where you ended. I mean, we have significant amounts of capital, both surplus capital and, again, I think one of the strengths of the business model is that we generate large amounts of capital each quarter. So I think that's a real strength. And that allows us to Grow RWAs as well as return capital to shareholders. We don't really comment on cadence by quarters, but again, you can look at history and what we've historically have done. So capital is a real strength of the company. It's something that we want to continue to leverage as we move forward, including the 13% dividend increase that we announced earlier this morning that takes effect this quarter. If you think you step back, your initial question with regard to the treatment around the internally developed software, you know, there was a new counting standard that happened last year. And as part of that, you know, we go back and we evaluate that standard, why that didn't have anything to do with it. We also did benchmarking with how we treated that software cost, those capitalized costs relative to our peer set. and we realized that we had a difference in presentation relative to others. So we obviously had discussions both with our external accountants as well as regulators and we decided to reclassify and many more. So, again, it just gives us more room to operate whether we want to expand RWAs or, again, have it available as we think about our capital return strategy.
Terry Ma: All right. Thank you. And then just switching gears a little bit, lately we were back in the news a few weeks ago. I guess just wanted to check in with you all. Just any incremental read you have on that situation, what's going on there, and the potential for that to come back. I guess what does the toolkit look like if people start talking about that again? and implementing it.
Brian Doubles: Yeah, I mean, not a lot that we can add. I mean, nothing's been formalized at this point, so it's a little tough to speculate. You know, I would just reiterate that, you know, as you said in the past, it's a very competitive industry. I think price controls generally are bad, you know, whether it's fees or APRs, you have serious unintended consequences. I also think late fees are an important incentive for customers to pay on time. And I think if you take that ability for the industry to price for the risk that they're taking, you will have unintended consequences. You're going to restrict credit, the industry is going to close accounts. I think that's not good for the consumer, obviously not good for the economy. We're staying very close to it. In terms of the toolkit, obviously there are things that the industry and we would potentially do, but we're clearly not there yet. This is very early. We don't know the intent of any potential RFI, but we're obviously staying very close to it. Thank you. Thanks.
Brian Wenzel: Thanks, Peter. Have a good day.
Operator: Thank you. We will move next with John Hecht with Jefferies. Please go ahead.
John Hecht: Good morning, guys. Thanks for taking my questions. Hey, John. Good morning. Hey, last year I think you guys had a really strong year of customer acquisition. How is that looking thus far this year, and where are customers coming from, and are there any kind of notable trends there?
Brian Wenzel: Yeah, good morning, John. You listen, I think we have seen really strong new account growth. I think if you look at the second quarter, we generated over 5.1 million new accounts during the quarter and probably just under 10 million, I think between nine and a half and 10 million new accounts for the first half of the year, which is strong. We view it and to be honest with you, obviously some benefit from new programs, but it's going to be across the board. Again, when you have products that resonate and value propositions that are compelling for people, you're going to see that growth. And again, a lot of our partners are in very attractive segments when you think about a TJX or a SAMS. When you think about lows, you know, when the housing market's a little bit soft, you know, you have things like that that are in there. So, you know, the diversity we have in the verticals and sales platform really kind of drives that growth. I mean, there are a lot of people who like to say, you know, I generated between nine and a half and 10 million new accounts for the first half of the year. So, again, a little bit broader base, but we feel good about the acquisition, the accounts kind of coming in. and I think you know again goes back to years where we were putting on 20 million new accounts a year we're on that trajectory.
Brian Doubles: John, you know this about our business. We've got big commercial teams that sit every day with our partners, and they work the marketing calendar. They work promotions and offers to drive that new account flow. So that's so embedded in our DNA throughout the company. That's a big, important metric for us. And our partners, obviously, are very aligned to the deal structure in our study to help us drive those new accounts. It's good for them. It's good for the program. Obviously, it's good for us as well.
John Hecht: Okay. That's helpful. And then Any comments on how the latest Walmart program is ramping and anything you've noticed about the behavior of that customer versus the book you had before?
Brian Doubles: Yeah, so look, we continue to be really excited about the trends that we're seeing on the Walmart program. It's our fastest growing program. I've mentioned this before in our history across multiple metrics. It's definitely a leading edge program from a tech perspective. So it's different in a lot of ways from what we did in the past with Walmart. Everything runs through the OnePay app. They've been a great partner to us. It has a very strong value prop, both if you're a Walmart Plus member, but even if you're not. And so that loyalty program is much stronger in this program than it's been in the past. So there's just a lot of reasons to be excited about this. This will be a top five program for us, I'm certain of that. And Walmart has been incredibly supportive in terms of the digital placement and how they're supporting the program.
Brian Wenzel: Yeah, the one thing I'd add, John, Brian just highlighted the value proposition, particularly Walmart Plus, that was not around back in 2018 and 2019 and over. Half our accounts are Walmart Plus, which are highly engaged with the brand. They're buying multiple SKUs. So those are people that are really engaged with the retailer. So those are the kind of folks that, again, you'd expect early adopters of because they're so connected to the retailer. Wonderful. Thank you, guys. Thanks, John. Thanks, John. Have a good day.
Operator: Thank you. Our next question comes from Mark DeVries with Deutsche Bank. Please go ahead. Mark, your line is open.
Brian Wenzel: Can you hear me? You can hear me now, Mark.
Sanjay Sakrani: Good morning. Thanks. Good morning. One question from Brian Doubles. Brian, can you just talk about where you see the best kind of longer-term growth opportunities, whether it's existing customers, more organic kind of TAM expansion through retailers or providers that haven't provided financing or inorganic? As you think about that broader opportunity set up, just talk about your confidence and getting back to longer-term growth aspirations.
Brian Doubles: I'll highlight a couple things. First, our strategy is largely going to be an organic growth strategy. We're pretty disciplined around M&A. I think we've demonstrated that over the last decade or so. One of the big areas where we're investing heavily is in our product suite and our capabilities. We've got a very comprehensive set of products now, I think more than anybody else in the industry. We've got starter products like secured cards, set pay, and that allows us to graduate customers into the more traditional products revolving PLCC, co-brand, etc. And I feel like that strategy is winning. So, if you think about The partner base, they are highly engaged in offering that multi-product set. It allows us to serve more of their customers, drive sales, drive loyalty, etc. I think that's one big pillar I would highlight. The other one, frankly, customer experience has never been more important than it is today. Customers have a lot of choices these days in terms of how they pay, how they finance for purchases. and it's got to be a great experience through that life cycle you know making it easy for our customers to apply for credit use them immediately you have to be you have to be everywhere that customer wants to be so we've been you know investing and integrating into ISVs and software platforms and payment providers you know those are you know I think about the future that that's a big part of it so then you know we call them kind of non-traditional partners because they're not they're not a merchant they're not a provider uh they're allowing us to serve many merchants many providers by integrating once into a software platform or an ISP I think that is a bit that'll be a big wave of the future for us and we're we're well ahead on that strategy you know particularly in our health and wellness business were integrated in more ICs than anybody. And I think that is going to be really helpful as we look to drive growth into the future. It allows us to connect once and immediately get some scale. And, you know, if you go back a decade, that was always a little bit of a challenge, is you'd connect and integrate once with one partner, and now you're able to do that at scale. So very excited about that as well. And the last thing I'll just touch on quickly, I think our proprietary underwriting platform, PRISM, is a competitive advantage. We're out there competing for new business. We've made big investments there. I think we do this better than anybody. And we're hearing that feedback from prospects. We're hearing it in renewal discussions. And so that's just a third area that I would highlight in terms of excitement going forward.
Sanjay Sakrani: Okay, great. And just as you think about all those opportunities, just discuss your confidence in kind of getting back to the longer-term growth aspirations.
Brian Doubles: Yeah, look, I'm confident that we'll get there. I'm confident we'll get there. I think you have to remember that a little bit of the damping and growth was intentional. We had a credit-restricted posture, and frankly, I think our credit team did a great job. If you think about drifting above the long-term target, quickly bringing it back down below the lower end of our long-term target, and dialing in and putting us in a position where we can open up a little bit to hopefully get back in that 5.5% to 6% range longer term, I think as you do that, you'll see the growth come back to where it's been historically.
Sanjay Sakrani: Okay, great. Thank you. Thanks. Thanks, Mark. Have a good day.
Operator: Thank you. We will move next with John Fancari with Evercore. Please go ahead.
Darren Teller: Morning. Just given the time, I'll just ask one question here. Just on the I appreciate the color around the margin and the drivers of the pressure this quarter and then it bottomed and you expect improvement from here. Any way to help us kind of frame that pace of improvement and possibly think of what a 4Q exit NIM could look like as we take a look at 27 and how should we think about the pace of managers' income growth that goes along with that when you consider the mid-single digital receivable expectation. Thanks.
Brian Wenzel: I'll try to help you again with the framework, John. We're not providing specific guidance on most certainly any quarter, but again, I would expect your net interest margin to build off of the second quarter 15.08. Again, the drivers behind it, you're going to see seasonal nature of ALR rates. We're at peak liquidity now. That abates in the third quarter, in the fourth quarter, more in the fourth than the third. The late fees, which effectively, if you have peak charges up, you'll see a little bit of pressure, but again, it should build off here and not necessarily be a drag both in the third quarter and the fourth quarter. You'll see a little bit of continued build on the PPPCs as you move in the back half. That should factor in. So you should see rising net interest margins sequentially as we move through the back half of the year. As we step through again, that assumes no changes in Fed funds rates or interest rates as we move in the back half of the year. Thanks, Brian. You're going to go for it. It was a good try, but I'm sure you'll have an opportunity to talk with Kathryn and the IR team later today, and you can continue your efforts. Have a good day. I appreciate it. Thank you.
Operator: Thank you. Our last question comes from Moshe Orenbock with TD Cowen. Please go ahead.
Moshe Orenbock: Moshe Orenbock Great. Maybe just another shot at a similar idea, not in terms of a forecast, but Brian Wenzel, you did talk about the impact of You know, lower late fees in the first half of this year. But as we go into next year, will that still be a factor? And can you also talk about the impact of what you've had in terms of in 26 from the accelerating account growth and that impact on the loan yield? And will that be something that moderates in 27 and gives you better growth in net interest income versus the loan balances and other metrics?
Brian Wenzel: Yeah, good morning, Moshe, and a great question. I think if you think about 26, right, we are targeting to underrate to a charge-off rate between 5.5 and 7, the entry of the cycle. Sometimes you may be lower than 5.5. I'm sorry, 5.5 to 6. I don't want to get anyone nervous. I scared myself, Moshe. I scared myself. But anyway. and that five after six. So again, where you see it below five and a half, we would expect it to migrate back up. When that migrates back up, you should see a tailwind when it comes to late fees that comes through the net interest margin, right? Historically. So that's what I would generally expect. I think the challenge, and you probably know this as well as anyone else, right? Whenever you shift the trajectory, most certainly under Well, certainly under CECI when you think about the reserve, but when you just think about the yield side of the equation, when you shift the trajectory of growth upwards or downwards, there are effects that happen on NII and net interest margin. We're going from a year before where assets went down, we're now going to a growth trajectory. Thank you for joining us. Thank you for joining us.
Moshe Orenbock: Great, thanks. And maybe a follow-up for Brian Doubles. You did say that the key driver of growth will be kind of internal growth. But we have seen a number of your major competitors kind of pulling back in terms of their approach and their desire to expand in private label. Do you think there could be opportunities for larger portfolios, either De Novo or taking one over? and another player.
Brian Doubles: Yeah, absolutely, Moshe. I mean, that's a big, like when I think of, you know, organic, that's all part of the engine. So we're actively, we're always looking at, you know, portfolios that come to market. You know, we're the biggest in this space. So we pretty much every RFP comes across our desk. We take a look at it. You know, we're obviously very disciplined around how we price those opportunities and the terms that we seek. But that's been a big part of our growth strategy over the years and will continue to be. So, you know, when I made my reference to M&A, that was more, you know, traditional M&A, you know, buying a company as opposed to a portfolio. The engine that we have that's actively out there in the market looking at new opportunities, de novos, but also looking at bringing on existing portfolios. It's a very active team and we've got a really good pipeline at the moment.
Brian Wenzel: Thanks very much.
Brian Doubles: Thanks, Moshe. Great, Moshe. Have a good day.
Operator: Thank you. This concludes Synchrony's earnings conference call. You may disconnect your line at this time and have a wonderful day. Thank you.
