Operator Good morning. 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 Thank you.

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 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 value.

The broad utility and strong value offered by the partners in this vertical continued 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.

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.

Synchrony'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 fuel prices in the second quarter.

Particular strengths came from categories like entertainment, retail, and electronics. 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 fuel 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. Synchrony's multi-year agreement with Roto-Rooter Plumbing & 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. Synchrony'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 longstanding partnership of over 20 years. Our products now feature an everyday 10% back in 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 MyLowe's 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 MyLowe's Pro Rewards card complements the existing MyLowe's Pro Rewards private label credit card by extending pro purchasing power and rewards earning potential beyond Lowe's.

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. Synchrony'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 asset 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. One, 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.

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.

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 fewer defaulting accounts. Two, the decline in the mix in 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 a 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 to $19 million to $137 million, primarily reflecting the impact of a $30 million gain related to the exchange of our Visa B-2 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 eight. Our net charge-off rate was 5.43%, reflecting a decrease of 27 basis points from 5.7% in the prior year.

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 nine shows Synchrony's funding, capital, and liquidity 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 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 100 basis point reduction versus last year.

Synchrony returned $950 million to shareholders during the second quarter, which included $850 million in share repurchases and $100 million in common stock dividends. At quarter end, we had approximately $5.7 billion remaining of our share repurchase 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 PPP fees, and lower funding liabilities compared to last year.

These trends will be partially offset by the impacts of lower late-fee incidence and new account growth acceleration. 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 our long-term target range of 4%-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 as we maintain our focus on driving operating leverage while also investing in Synchrony's capabilities and future growth opportunities.

Given the performance of our business so far this year and the expectations for the remainder of 2026, we now expect to deliver between $9.25 and $9.50 in diluted earnings per share. In summary, we're confident in our path forward as we execute on 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.

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. 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 one on your telephone keypad. You may remove yourself from the queue by pressing star two.

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.

Brian Doubles Hey, Ryan. Brian Wenzel Good morning, Ryan.

Ryan Nash 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 and what people have modeled, right?

When you think about the reserve coverage ratio, I think the ending point, how they got there was a little bit more peanut buttered across quarters, right? 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.

You're going to see more growth-driven provisions in the back half. 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, right? Net interest margin was really at the lowest point here in the second quarter, that's going to begin to build.

Again, what we tried to say to folks is, number one, as much as you have that charge-off declines, you're going to have a significant impact relative to late fees. When you look at it, walking from the first quarter to second quarter, you had your 18 basis points of just reduction related to late fees, put aside the AEA piece and the ALR piece.

I think as people try to model this, I think they have to take into better account, number one, the effects of late fees are kind of coming from the better charge-off position. Two, kind of have to get the reserve transpired right over the quarters as it kind of builds with growth.

The last thing I'd leave you with, 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.

Again, that's something we're dealing with and dealt with in the first half of the year, that's really going to be consistent. I think people still model a little bit lower OpEx because they're using efficiency ratio.

Again, we're trying to help you with dollars. 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.

No, I appreciate the color. Brian, you had flagged that the margin could be lower in the quarter, and that came through.

I know that you just noted the margin begin to build from here, but maybe just talk about some of the drivers and the key assumptions embedded in that. Do these elevated payment rates, they going to impede your ability to expand the margin further over time?

Thank you. Brian Wenzel Yeah.

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 in the payment rate.

85% of that or 62 basis points were really driven by two factors. Number one, new portfolios accounted for probably half that miss, which related to not only Walmart, but you had Bob's, you had some other portfolios that kind of come through.

The amalgamation of a bunch of new programs drove a significant increase in the payment rate quarter-on-quarter. Then second, promo mix contributed a factor as well that's in there.

Those two combined were 85% of the mix. 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, as a framework to think about it, you are going to get a benefit on ALR as you step out, and that builds between the third quarter and the fourth quarter. Late fees probably have hit what I'd say is a trough to some degree.

You won't see as much impact really as you kind of move into the back half of the year. That headwind that you experienced being 19 basis points this quarter, that kind of abates and swings quarter-on-quarter.

Those are probably some of the bigger pieces. Again, that late fee component is overwhelming the benefit that we got from the PPPC.

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 Sakhrani with KBW.

Please go ahead. Your line is open.

Sanjay Sakhrani 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.

Brian Wenzel Thanks. Good morning, Ryan.

Thank you for the question. RSAs, there's a number of things that factor through there.

I think when you take a step back and look at the relative % relative to PPNR minus net charge-offs exclusive of 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 charge back through operational losses. When I think about that piece of it for a second, a good bulk, I want to say 70+% of the operational losses are covered by RSA.

In particular, over $20 million this quarter was covered directly through the RSA and not through that offset on the operational losses line. As I take a step back, again, some of the idiosyncratic things that we saw in operational losses and some of the things may be caused by partners who made modifications that had an unintended impact, that hopefully is behind us.

Again, we're coming off of historic lows relative to operational losses in 2025. While we expect it to elevate, we think that the acceleration here should flatten out in the back half of the year.

We'll certainly mix, and I'd say that item drove a little bit of the RSA movement. You'll see RSAs generally move up a little bit from here, but stay within the range.

Sanjay Sakhrani Okay. 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, and obviously you guys have moved the mix to, I think, a higher credit quality consumer.

Maybe this is a 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 what it means for the ROA. Thanks.

Brian Doubles I'll start on that, Sanjay. 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.

The one thing that the lens we look at all of those things through is the long-term guidance of 2.5% plus ROA. I think when you do all the puts and takes, everything we've brought on, even smaller programs that we've exited because they were below our return threshold, they all kind of steer you back to that same range in terms of return.

Sanjay Sakhrani Okay. Great.

Thank you. Brian Doubles Yep.

Thanks, Sanjay. Brian Wenzel Thanks, Sanjay.

Operator 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.

You called out some of the impact on the overall consolidated yield for the book. If I look at kind of platform results, it looks like digital and Diversified Value showed the most market decline in yields year-over-year.

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 fee there?

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, and 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 Sam's Club, but clearly the yield gets impacted when you begin to introduce a new program like the Walmart OnePay program that's in there that has an impact in there. There's nothing fundamental, I would say, in Diversified Value.

As you slide up to digital, again, we have a couple of just amazing partners that are up there when you think about an Amazon and a PayPal and the refreshed value propositions which have drawn significant growth in purchase volume and asset growth there. That has an impact.

Again, when you change the trajectory of the company, we were down last year in assets, now we're plus 2%. When you do that, there are implications, and I tried to outline this back in January throughout the P&L, 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. 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. Maybe just talking about Home & Auto, looks like Lowe's was in there this quarter.

Maybe just talk about the underlying trends that you're seeing ex Lowe's. I think you called out some green shoots last quarter.

Thank you. Brian Wenzel Yeah.

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 ticket type purchases.

Real bright spots that are in there that we feel good about. Obviously, we're excited about expanding the relationship with Lowe's and bringing that commercial co-branded portfolio in.

That does have a very different type of payment and volume turn to it. Again, we're excited about expanding that relationship.

What we haven't really talked about is when you add that co-branded 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. Hopefully it should expand growth as we move forward.

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 Darrin Peller with Wolfe Research. Please go ahead.

Darrin Peller Hey guys, thanks. With much of the recent increase in expense from tech investments and just some early operational losses as you launch the Nova programs build, can you just give us some color on your expectation for similar second half expense dollars versus first half?

Brian Wenzel Good morning, Darrin, and thanks. As we think about it, our expectation is that operational losses here, again, flatten out to trend downward as you think about it.

The tech investment will kind of continue at the same pace. I think we're showing discipline relative to employee costs and other things.

When you think about it, the back half generally has more volume associated than the first half, particularly when you think about the fourth quarter. When you think about volume-oriented expenses, whether it's active accounts growing, increasing, or whether it's some of the fees associated with the networks that are volume-oriented, you see a little bit more of those dollars coming through.

Again, those dollars in totality in the back half will approximate the first half. Which brings you back into, if you pull out operational losses, our expense that we're laying out for you on a dollar basis will align directly with the asset growth.

We feel good about that as we move forward. Again, I think we're showing a lot of discipline around expenses, but making sure that we invest, well, certainly in technology so that we can ensure that we can hit medium and longer term goals for growth of the company driving intrinsic value.

Darrin Peller Right. Okay.

Thanks, Brian. Just for a quick follow-up, the chart we saw on slide three, we found that really helpful.

Just shows, at least among your co-branding cards, there appears to be pretty little discretionary spend impacts despite higher gas prices, I suppose. Is this the case from what you're seeing?

Is it more the seasoning of the new programs or anything else you could just touch on in terms of the drivers? Thanks.

Brian Wenzel Yeah. When you look at the consumer, again, people are expecting 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 put a greater burden.

While the consumers don't like it, and they most certainly are showing that in what they say about consumer confidence, it hasn't really reflected in the action. When you look at that trend, it was solid to accelerating throughout the quarter.

I think it goes back to having the right product set and a multi-product set with value props that resonate. Again, 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. You go down to our lifestyle segment, we saw strength in luxury, and in other areas, specialty retailer down there, again, a little bit of headwind when it comes to the outdoor side.

Again, I already hit on home and auto where we saw furniture and home specialty pulling. The value segment has a lot of just tremendous opportunities for consumers to spend.

Again, the consumer is showing tremendous discipline, and then you combine that, Darrin, with the charge-off perspective where 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 trends.

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. Darrin Peller All right.

That's good to hear. Thanks, Brian.

Brian Wenzel Great. Thanks, Darrin.

Operator Thank you. Our next question comes from Rick Shane with JPMorgan.

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.

We're sort of now through this period of rapid deployment and probably not an enormous amount of focus on token costs, et cetera. 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 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. 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. 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 cost associated with that. 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.

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. 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 Yeah.

Rick Shane Brian— Go ahead, Brian. Sorry.

Brian Wenzel That's okay, Rick. Just to unpack that a little bit more, when you ask about the token cost, 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 come in and how they're consumed. We have a whole FinOps team that has been part of how we manage the cloud cost that are managing this.

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 $billions in technology, and how that cost, if it's going to get passed 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.

Again, it's not something that's driving our results today. Most certainly, I want to be really clear, it's not driving the technology costs here.

This is really more investments in some of the core things like Pay Later and other initiatives that we have in technology and product. Rick Shane Understood.

That's actually really helpful. I'm just curious, at some point, do you think we get to a world where we look at token cost 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. I think that's very much the norm.

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 Yeah.

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 human resources.

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. You may say, "Hey, I'm going to use AI to run a process today."

You understand what that cost is, right, when you think about the human capital and any other direct dollars. We're going to have to figure out if you do AI, what's that token consumption?

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. That is something we're going to have to build a framework around as we step out and it becomes 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. Brian Wenzel Have a good day, Rick.

Operator Thank you. We will move next with Rob Wildhack with Autonomous Research.

Please go ahead. Rob Wildhack Morning, guys.

I wanted to go back to slide three and zoom in on June a little bit. 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. I guess first, what were the drivers?

Anything to call out on June volume growth? Second, appreciate all the color on payment rate.

In light of that commentary, what are the purchase volume assumptions that kind of underpin the loan growth guide from here? Brian Wenzel 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. 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, people activating and using a new product versus a product that has gone away.

Most certainly you have building levels, right? You think about BOPS 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. A lot of it's new program-oriented in advance of that.

As you think about payment rate, 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, margins should expand. What that's left us with a higher payment rate, you are going to have a slightly higher turn.

Most certainly 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, the historical turn will be a little bit higher as you think about the back half of the year.

Rob Wildhack Thank you. Brian Wenzel Thanks, Rob.

Operator Thank you. We will move next with Mihir Bhatia with Bank of America.

Please go ahead. Mihir Bhatia All right.

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, I think it's the internal use capitalized software.

What happened there? What's driving the change?

Just more generally on capital levels and CET1 targets now that the capital stack is, I think, a little bit more built out. Is the current buyback cadence of $850 million-$900 million sustainable given the growth outlook you have for the next few quarters?

Brian Wenzel Yeah. Thanks for the question, Mihir.

Let me start a little bit where you ended. We have significant amounts of capital, both surplus capital.

Again, I think one of the strengths of the business model is that we generate large amounts of capital each quarter. 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. 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 take a step back, your initial question with regard to the treatment around the internally developed software.

There was a new accounting standard that happened last year. As part of that 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. We realized that we had a difference in presentation relative to others.

We obviously had discussions both with our external accountants as well as our regulators. We decided to reclassify the capitalized software from intangibles to other assets.

What that has the effect of is it bolsters the, or reduces the reduction to capital and then puts it in as an RWA that had a corresponding impact of about 80 basis points of CET1 that was recast both in the prior periods and the current period. Again, it just gives us more room to operate, whether we want to expand our RWAs or, again, have it available as we think about our capital return strategy.

Mihir Bhatia Got it. Thank you.

Then just switching gears a little bit. Late fees were a little bit back in the news a few weeks ago.

I guess just wanted to check in with y'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? Thanks.

Brian Doubles Yeah, not a lot that we can add. Nothing's been formalized at this point, so it's a little tough to speculate.

I would just reiterate that, as we've said in the past, it's a very competitive industry. I think price controls generally are bad.

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.

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's 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, we're clearly not there yet.

This is very early. We don't know the intent of any potential RFI, we're obviously staying very close to it.

Mihir Bhatia Got it. Thank you.

Brian Doubles Thanks. Brian Wenzel Thanks, Mihir.

Have a good day. Operator Thank you.

We will move next with John Hecht with Jefferies. Please go ahead.

John Hecht Morning, guys. Thanks for taking my questions.

Brian Doubles Hey, John. John Hecht Hecht.

Good morning. Last year, I think you guys had a really strong year of customer acquisition.

How is that looking thus far this year? Where are customers coming from, and are there any kind of notable trends there?

Brian Wenzel Yeah. Good morning, John.

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 when you have products that resonate and value propositions that are compelling for people, you're going to see that growth. Again, a lot of our partners are in very attractive segments.

When you think about a TJX or a Sam's, when you think about Lowe's, when the housing market's a little bit soft, you have things like that that are in there. The diversity we have in the verticals and the sales platform really kind of drives that growth.

There are a lot of people who would like to say, "I generated between nine and a half and $10 million new accounts for a first half of the year." Again, a little bit broader base, but we feel good about the acquisition, the accounts kind of coming in.

I think, again, it 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. That's so embedded in our DNA throughout the company.

That's a big, important metric for us. Our partners obviously are very aligned to the deal structure and RSA 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. Then any comments on how the Walmart, the latest Walmart program is ramping.

Anything you've noticed about the behavior that customer versus the, call it the book you had before? Brian Doubles Yeah.

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. 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+ member, but even if you're not. That loyalty program is much stronger in this program than it's been in the past.

There's just a lot of reasons to be excited about this. This will be a top 5 program for us, I'm certain of that.

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, and particularly Walmart+ That was not around back in 2018 and 2019. Over half our accounts are Walmart+, which are highly engaged with the brand.

They're buying multiple SKUs. Those are people that really engage with the retailer.

Those are the kind of folks that, again, you'd expect early adopters of because they're so connected to the retailer. John Hecht Wonderful.

Thanks, guys. Brian Doubles Thanks, John.

Brian Wenzel 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.

Mark DeVries Hello, can you hear me? Brian Doubles Can hear you now, Mark.

Good morning. Mark DeVries Okay, great.

Thanks. Good morning.

One question for 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 matters that haven't provided financing or inorganic.

As you think about that broader opportunity set, just talk about your confidence in getting back to kind of longer term growth aspirations. Brian Doubles Yeah, sure.

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.

Look, 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, SetPay and that allows us to graduate customers into the more traditional products, revolving, PLCC, co-brand, et cetera. I feel like that strategy is winning.

If you think about the partner base, they are highly engaged in offering that multi-product set, and it allows us to serve more of their customers, drive sales, drive loyalty, et cetera. I think that's one big kind of 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.

Making it easy for our customers to apply for credit, use them immediately. You have to be everywhere that customer wants to be.

We've been investing in integrating into ISVs and software platforms and payment providers. As I think about the future, that's a big part of it.

We call them kind of non-traditional partners because they're not a merchant, they're not a provider. They're allowing us to serve many merchants, many providers by integrating once into a software platform or an ISV.

I think that'll be a big wave of the future for us, and we're well ahead on that strategy. Particularly in our health and wellness business, we're integrated in more ISVs 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. If you go back a decade, that was always a little bit of a challenge is you'd connect and integrate once and with one partner, and now you're able to do that at scale.

Very excited about that as well. 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. We're hearing that feedback from prospects.

We're hearing it in renewal discussions, that's just a third area that I would highlight in terms of excitement going forward. Mark DeVries Okay, great.

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 think you have to remember that a little bit of the damping in 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%-6% range longer term. I think as you do that, you'll see the growth come back to where it's been historically.

Mark DeVries Okay, great. Thank you.

Brian Doubles Thanks. Brian Wenzel Thanks, Mark.

Have a good day. Operator Thank you.

We will move next with John Pancari with Evercore. Please go ahead.

John Pancari Morning. Brian Wenzel [crosstalk] John Pancari Just given the time, I'll just ask one question here.

I appreciate the color around the margin and the drivers of the pressure this quarter, and that it bottomed and you expect improvement from here. Any way to help us kind of frame that pace of improvements and possibly think of what a 4Q exit NIM could look like as we take a look at 2027?

How should we think about the pace of net interest income growth that goes along with that when you consider the mid-single-digit receivable expectation? Thanks.

Brian Wenzel Yeah. I'll try to help you again with the framework, John.

We're not providing specific guidance on most certainly any quarter. 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 kind of liquidity now that abates in the third quarter, and the fourth quarter, more in the fourth than the third.

Right? The late fees, which effectively, if you have peak kind of fee charge off, you'll see a little bit of pressure, but again, it should build off here, 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.

You should see rising net interest margin 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.

John Pancari Thanks, Brian. Figured I'd go for it.

Brian Wenzel Listen, 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.

John Pancari Will do. Appreciate it.

Brian Wenzel Thank you. Operator Thank you.

Our last question comes from Moshe Orenbuch with TD Cowen. Please go ahead.

Moshe Orenbuch Great. Maybe just another shot at a similar idea, not in terms of a forecast.

You, Brian Wenzel, you did talk about the impact of lower late fees in the first half of this year. As we go into next year, will that still be a factor?

Can you also talk about both the impact of what you've had in terms of in 2026 from the accelerating account growth, can that impact the loan yield? Will that be something that moderates in 2027 and gives you better growth in net interest income versus the loan balances and other metrics?

Brian Wenzel Yeah. Good morning, Moshe, great question.

I think if you think about 2026, we are targeting to underwrite 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%-6%. I don't want to get anyone nervous.

5.5%-6%. Moshe Orenbuch Scared me a little.

Brian Wenzel I scared myself, Moshe. I scared myself.

Anyway, in that 5.5 to 6. Again, where you see it below 5.5, 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 net interest margin, historically. That's what I would generally expect.

I think the challenge, and you probably know this as well as anyone else. Whenever you shift the trajectory, most certainly under CECL 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. You'd presume there's going to be growth next year, that growth is going to be-- I'm not going to give you an indication, it's going to be not dramatically different, maybe a little slightly higher than what we've seen this quarter or this year.

You're going to be in a flatter growth trajectory as you move through that. If you're moving 1 or 2 points versus moving 7 points or so year-over-year, you're going to see a tailwind that comes as that net interest margin matures.

Most certainly a growth profile that's more consistent, number 1, and 2, a net charge-off rate that probably moderates a little bit up should give you two tailwinds as it relates to margin for next year. Moshe Orenbuch Great.

Thanks. Maybe a follow-up for Brian Doubles.

You did say that the key driver of growth will be kind of internal growth. 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 on a de novo or taking one over from another player? Brian Doubles Yeah, absolutely, Moshe.

When I think of organic, that's all part of the engine. We're always looking at portfolios that come to market.

We're the biggest in this space, pretty much every RFP comes across our desk, we take a look at it. We're obviously very disciplined around how we price those opportunities and the terms that we seek.

That's been a big part of our growth strategy over the years and will continue to be. When I made my reference to M&A, that was more traditional M&A, 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, also looking at bringing on existing portfolios. It's a very active team, and we've got a really good pipeline at the moment.

Moshe Orenbuch Thanks very much. Brian Doubles Thanks, Moshe.

Brian Wenzel 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.