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Synchrony Financial  (NYSE:SYF)
Q3 2018 Earnings Conference Call
Oct. 19, 2018, 8:30 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Welcome to the Synchrony Financial Third Quarter 2018 Earnings Conference Call. My name is Vanessa and I will be your operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Please note that this conference is being recorded. I will now turn the call over to Mr. Greg Ketron, Director of Investor Relations. Sir, you may begin.

Gregory Ketron -- Director of Investor Relations

Thanks, operator. Good morning everyone and welcome to our quarterly earnings conference call, thanks for joining us. 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 nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website.

Margaret Keane, President and Chief Executive Officer; and Brian Doubles, Executive Vice President and Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open the call up for questions. Now it's my pleasure to turn the call over to Margaret.

Margaret Keane -- President and Chief Executive Officer

Thanks, Greg, good morning everyone and thanks for joining us today. I'll begin on slide three. Our performance was strong across several key business drivers in the third quarter. Broad-based growth helped drive earnings of $671 million or $0.91 per share. Loan receivables grew 14% and we generated strong net interest income growth of 9%. Purchase volume increased 11% and average active accounts were up 9%. As you know, we completed our acquisition of the PayPal Credit program in the third quarter and that is now included in our results. Brian will discuss some of the associated impacts later in the call.

We also recently renewed and extended key relationships and added some exciting new partnerships. In our Retail Card sales platform, we extended our strategic partnership with Lowe's, building on a nearly four decade long relationship. As part of this extension, we will continue to manage and service both consumer and commercial credit card programs. A key focus for the program is making the consumer experience even easier by further advancing technological capabilities to enhance the digital experience for Lowe's customers, tapping the power of mobile for areas such as payments and applications. We look forward to continuing to work closely with Lowe's to help them grow sales and enhance their customers' experience.

We are also very pleased to renew our partnership with JCPenney. This nearly two decade long partnership has been very successful with high engagement. Working together, we have leveraged data analytics to uncover new customer insights, further personalizing the customer experience. We have also helped JCPenney integrate credit payments into their mobile app. The deep collaboration between us has already proven to benefit customers across all shopping channels and we will continue to leverage advanced data analytics to help drive even better experiences for cardholders. We have been able to add significant value to the program in a dynamic market environment and look forward to continuing the strategic partnership with JCPenney.

In our Payment Solutions sales platform, we renewed key relationships with Associated Materials, a leading manufacturer and distributor of exterior residential building products and Generac, a leading supplier of backup power and prime power products, systems, and engine power tools. We also signed some exciting new programs during the quarter. In Payment Solutions, we added a new partnership with Fred Meyer Jewelers, a national jewelry chain and in CareCredit we added a new partnership with Eargo, a hearing aid manufacturer. Over the past several quarters, we have broadened the scope of our valuable CareCredit network adding more than 25 new specialties where the card is accepted. Our focus on expanding CareCredit's utility has led to the acceptance of the card in medical specialties including primary care and general practice, physical therapy, ambulatory surgery, durable medical equipment and urgent care. The CareCredit card can be used for deductibles, co-pays, planned medical procedures, annual wellness visits, imaging and other out of pocket costs. As you know, expanding acceptance and utility of this successful card and network has been a key objective for us as we strive to move these cards to the top of the cardholders' wallets, migrating toward more repeat purchase behavior. To that end, we've made substantial progress in improving the usage of our cards as evidenced by our reuse rates. For CareCredit, the reuse rate in the third quarter was 53% and for Payment Solutions, it was 29% of total purchase volume. Ease of application and use of our cards while ensuring (ph) that cardholders have access to their cards, rewards, and account information across whatever channel they choose to use is critical. As the mobile channel becomes particularly important to retailers and their customers who are using apps to make purchases and much more, we have developed tools to ensure cardholders can easily utilize their cards in this increasingly popular channel.

SyPI, our mobile plugin application is an example of an investment we made to expand our mobile engagement capabilities and where we are receiving a very positive response from our retail partners. SyPI is currently being used in 19 of our retail partners apps including Gap, Lowe's and JCPenney and recently crossed over $1 billion (ph) in credit card bill payments since the product's launch in 2016. Comparing September of this year to the last year, the number of visits, unique visitors, and total payments have increased over 200%.

Our overall digital sales penetration for our retail card consumers has been growing. Digital sales penetration was 33% in the third quarter, 46% of applications are happening online with the mobile channel alone growing 59% over the same quarter of last year. Overall, this was a strong quarter for us. We continue to generate organic growth and renew and extend important relationships while also adding new programs, extending the utility of our cards and focusing on digital innovations to further improve the customer experience.

Before I turn the call over to Brian, I will give a quick review on how each of our sales platforms performed during the quarter, which is on slide five of the presentation. In Retail Card, strong results were driven by our PayPal Credit program acquisition along with continued organic growth. Loan receivables increased 16% and interest and fees on loans increased 12% over last year. Purchase volume grew 11% and average active accounts were up 10%. As I noted earlier, we had a very active quarter in our Retail Card sales platform. With the renewal and extension of the Lowe's and JCPenney programs, we are very excited about these significant relationships and their future potential.

Payment Solutions delivered another strong quarter. We generated broad-based growth across the sales platform with particular strength in home furnishings and power products, that resulted in loan receivables growth of 9%. Interest and fees on loans increased 8% primarily driven by the loan receivables growth. Purchase volume was up 10% and average active accounts increased 5%. We are pleased to have added the Fred Meyer Jewelers partnership and to renew our programs with Associated Materials and Generac.

CareCredit also delivered another strong quarter. Receivables growth of 8% was led by dental and veterinary specialties. Interest and fees on loans also increased 6% primarily driven by the loan receivables growth. Purchase volume was up 9% and average active accounts increased 5%. Expanding into new specialties thereby increasing utility of the CareCredit card is helping to drive performance. We are pleased to add new partnerships including Eargo. We are also making investments such as enhancing the mobile app to continue to support the network and its growth potential.

We continue to deliver solid growth across all three of our sales platforms in the third quarter and we are extending relationships, signing new programs, and providing value added solutions to our partners and cardholders. Before I turn the call over to Brian, I will make a quick comment about Walmart. Though we currently have no updates to provide, I want to emphasize that we continue to work closely with Walmart to support the program and we'll do everything on our end to ensure a successful program transition next year. With that, I'll turn the call over to Brian.

Brian Doubles -- Chief Financial Officer, Executive Vice President

Thanks, Margaret. I'll start on slide six of the presentation. This morning we reported third quarter earnings of $671 million, which translates to $0.91 per diluted share. In addition to adding the PayPal Credit portfolio this quarter, we continued to deliver solid growth with loan receivables up 14% and interest and fees on loan receivables up 10% over last year. Overall, we're pleased with the growth we generated across the business as well as the risk adjusted returns on this growth. The interest and fee income growth were driven primarily by the growth in receivables. Purchase volume grew 11% over the last year and average active account growth was 9%. The positive trends continued in average balances with growth in average balance per average active account up 5% compared to last year.

We're also pleased to have announced the extension of both the Lowe's and JCPenney programs. In both cases, we are able to renew these relationships at attractive risk adjusted returns. While on both cases we made some modest changes to the economic sharing in these programs, the earnings profile for us going forward will be very similar to our current run rate on these programs. We were also able to enhance some of the growth commitments and value propositions in the programs as well as some of the contractual protections we have, which will improve our risk profile and benefit us over the long term. At the end of the day, these are very good renewals for us with improved alignment on growth and very attractive risk adjusted returns.

RSAs increased $66 million or 8% from last year. Excluding the impact of adding the PayPal Credit portfolio, the primary drivers of the increase were growth and lower provision expense. RSAs as a percentage of average receivables was 4% for the quarter compared to 4.2% last year. For the fourth quarter, we expect the RSAs to be around 4%. Comparing against the third quarter, the RSA will be driven by improving credit trends partially offset by the seasonal decline we typically see in the fourth quarter. The provision for loan losses increased $141 million or 11% from last year driven by the PayPal Credit reserve build partially offset by moderating credit trends. The reserve build in the quarter was $364 million including $272 million associated with adding the PayPal portfolio and $92 million related to the core portfolio. The reserve build was lower than our expectations as credit performance was better than we had expected. I will cover the asset quality metrics in more detail later in the presentation.

Other income was down $13 million. While interchange was up $18 million driven by continued growth in out of store spending on our Dual Card, this was offset by loyalty expense that increased $28 million primarily driven by everyday value propositions. As a reminder, the interchange and loyalty expense run back to the RSAs. So there is a partial offset on each of these items. As we noted last quarter, we expect loyalty program expense as a percent of interchange revenue to trend near 100% with some quarterly fluctuation.

Other expenses increased $96 million or 10% versus last year driven primarily by expenses related to onboarding the PayPal Credit program as well as expenses related to growth. We expect expenses going forward to be largely driven by the impact of adding the PayPal program until we are comparing against quarters with PayPal in the run rate. We will also continue to make strategic investments in our sales platforms and our direct deposit program, enhancements to our digital and mobile capabilities and investments to automate and streamline the back office. So overall, the company generated solid performance for the third quarter especially considering the reserve build related to adding the PayPal portfolio.

Moving to slide seven, I will cover net interest income and margin performance for the quarter. Net interest income was up 9% driven primarily by the addition of the PayPal portfolio and loan receivables growth. The net interest margin was 16.41% compared to last year's margin of 16.74%. The margin was mainly in line with our expectations. The largest impact on margin performance was the impact of the PayPal portfolio acquisition. As expected, the margin increased from last quarter's level of 15.33% as the liquidity resulting from pre-funding was deployed when the PayPal portfolio was added on July 2. We benefited from a higher mix of receivables versus liquidity on average compared to last year as we continue to optimize the amount of liquidity we are holding and have deployed excess liquidity to support the PayPal portfolio acquisition and receivables growth.

Also impacting the margin was the decline in the loan receivables yield and an increase in interest bearing liability costs. The loan receivables yield was 21.11%, a decline of 67 basis points versus last year mainly due to the impact of adding the PayPal portfolio. The increase in total interest bearing liabilities cost was 43 basis points to 2.36% reflecting higher benchmark rates. We expect to see the normal seasonal decline in yield in the fourth quarter given the build in receivables during holiday season. This has been as much as 50 basis points to 60 basis points historically. As a result, we expect the net interest margin to trend down into the 15.75% to 16% range in the fourth quarter, which is in line with our outlook for margins to be in the 16% range for the second half of the year.

Next, I'll cover our key credit trends on slide eight. In terms of specific dynamics in the quarter, I'll start with the delinquency trends. The 30-plus delinquency rate improved to 4.59% compared to 4.80% last year and the 90-plus delinquency rate declined to 2.09% from 2.22% last year. The year-over-year trends in both the 30-plus and 90-plus delinquency rates were stable to improving for the second quarter in a row with the 30-plus delinquency rate now 21 basis points below the prior year reflecting the impact of our underwriting refinements and a more modest impact from normalization.

Moving on to net charge-offs, the net charge-off rate was 4.97% compared to 4.95% last year in line with our expectations. While the net charge-off rate benefited from the addition of the PayPal Credit portfolio, the credit trends in the core portfolio also continued to moderate. The allowance for loan losses as a percent of receivables was 7.11% and the reserve build from the second quarter was $364 million. As I noted earlier, the reserve build was lower than our expectations due to the improving credit trends resulting from the underwriting refinements we made. The core reserve build was $92 million and the reserve build on the PayPal portfolio acquired in the quarter was $272 million, both below expectations. As we have been noting in recent quarters, we continue to see favorable trends resulting from the impact related to the underwriting refinements on two key metrics: our more recent vintages and our purchase volume growth. First, the most recent vintages continue to trend in line with our expectations. The vintage curve data suggests that the 2017 vintage is performing better than 2016 and more in line with our 2015 vintage and while it is still early to fully assess the 2018 vintage trends, the results so far are similar to 2017.

These underwriting refinements continue to drive changes to our purchase volume mix by FICO score. If you look at purchase volume by FICO stratification excluding the impact of the acquired PayPal portfolio, we continue to grow at a fairly strong pace in accounts with a FICO score of 721 and higher which increased 11% over the same quarter last year while purchase volume for accounts with FICO scores of 660 and below actually declined 12% reflecting some of the modest tightening we've been doing. These trends help inform our view of loss expectations for this year and beyond.

Looking forward, we typically see a seasonal uptick in net charge-offs in the fourth quarter and continue to expect net charge-offs to be in the 5.5% to 5.8% range for 2018. Regarding reserve build for the fourth quarter, we expect the reserve build on our existing or core portfolio to continue to transition to be more growth driven and will be in the $75 million to $100 million range next quarter. We expect the reserve build related to the PayPal Credit portfolio due to the accounting requirements around portfolio acquisitions will result in an additional reserve build in the $125 million to $150 million range, for a total reserve build in the $200 million to $250 million range next quarter. In summary, while credit continues to normalize from here, we expect the pace of the change and the impact on our results to continue to moderate as we move forward assuming stable economic conditions. We continue to see good opportunities for continued growth at attractive risk adjusted returns.

Moving to slide nine, I'll cover our expenses for the quarter. Overall, expenses came in at $1.1 billion, up 10% over last year and were primarily driven by the acquisition of the PayPal Credit program and growth. The efficiency ratio was 31% for the quarter versus 30.4% last year and in line with our expectations. The increase was primarily driven by the timing of strategic investments. We continue to expect the efficiency ratio to be in the 31% range for 2018.

Moving to slide 10, the key highlights are maintaining our funding mix and strong liquidity and capital levels while onboarding the PayPal portfolio. We also made progress in deploying capital through our capital plans and growth by executing the capital plan we announced in May, which increased our dividends and the size of our share repurchases through June of next year. We are committed to maintaining a strong balance sheet with a robust capital and liquidity profile. Over the last year, we've grown our deposits nearly $8 billion primarily through our direct deposit program. This was a key component of our funding strategy for the PayPal portfolio. This puts deposits at 72% of our funding, maintaining the level we have been operating at over the last year. We expect to continue to drive growth in our direct deposit program by continuing to offer attractive rates and great customer service as well as building out our digital capabilities. Longer term, we continue to expect to grow deposits in line with our receivables growth. Overall, we are pleased with our ability to attract and retain our deposit customers.

On the wholesale funding side, we were pleased to do our first public issuance out of the newly established Synchrony Card Issuance Trust during the quarter. The issuance had strong demand and we ended up issuing $1 billion in three-year fixed rate funding.

Turning to capital and liquidity, we ended the quarter at 14.2% CET1 under the fully phased-in Basel III rules. This compares to 17.2% on a fully phased-in basis last year, a 300 basis point reduction reflecting the impact of capital deployment through the acquisition of the PayPal Credit portfolio, growth, and continued execution of our capital plan.

During the quarter, we continued to execute on the capital plan we announced in May. We paid a common stock dividend $0.21 per share and repurchased $966 million of common stock during the third quarter. This represented 30.3 million shares repurchased during the quarter, more than double the amount of shares we have been averaging in the prior four quarters. We have approximately $1 billion remaining in potential share repurchases of the $2.2 billion our Board authorized through the four quarters ending June 30, 2019. We will continue to execute the new share repurchase plan, subject to market conditions and other factors including any legal and regulatory restrictions and required approvals. Total liquidity including undrawn credit facilities was $23 billion, which equated to 22% of our total assets. This is down from 24% last year reflecting the deployment of some of our liquidity to support the PayPal portfolio acquisition.

Overall, we continue to execute on the strategy that we outlined previously. We are committed to maintaining a very strong balance sheet with diversified funding sources and strong capital and liquidity levels and we expect to continue deploying capital through growth and further execution of our capital plan in the form of dividends and share repurchases.

Before I conclude, I wanted to recap our current view for the fourth quarter and the year. First regarding our margin outlook. We expect to see normal seasonal decline in yield in the fourth quarter given the build in receivables during holiday season. This has been as much as 50 basis points to 60 basis points historically. As a result, we expect the net interest margin to trend into the 15.75% to 16% range in the fourth quarter, in line with our outlook that the margin would run in the 16% range for the second half of this year. We expect RSAs to be around 4% in the fourth quarter.

Regarding credit, we continue to expect net charge-offs to be in the 5.5% to 5.8% range for the year with the typical seasonal uptick in net charge-offs in the fourth quarter. We expect the reserve build on our existing or core portfolio to continue to transition to be more growth driven and will be in the $75 million to $100 million range next quarter. We expect the reserve build related to the PayPal Credit portfolio due to the accounting requirements around portfolio acquisitions will result in an additional reserve build in the $125 million to $150 million range for a total reserve build in the $200 million to $250 million range next quarter. Turning to expenses, we continue to generate positive operating leverage and still expect the efficiency ratio to be around 31% for the full year.

In summary, the business continues to generate good growth with attractive long-term returns and while the PayPal Credit portfolio acquisition creates a degree of EPS dilution in the second half of this year, we expect it to be on EPS accretive in 2019 and help provide a nice tailwind to EPS as we move forward. With that, I'll turn it back over to Margaret.

Margaret Keane -- President and Chief Executive Officer

Thanks, Brian. I'll provide a quick wrap up and then we'll open the call for Q&A. We generated strong results this quarter significantly expanding our relationship with PayPal with the acquisition of the PayPal Credit program while also continuing to drive organic growth. We renewed key partnerships and signed exciting new programs. We continued to invest in our digital capabilities and network focusing on ease of card use across platforms as well as card utility, enhancing our competitive position in the rapidly changing marketplace.

We are also seeing other important elements of our business such as credit quality perform in line with our expectations. All of this contributes to our ability to return capital to shareholders and we were pleased to increase our dividend and share repurchases this quarter. We are also focused on aligning (ph) capital through organic growth and program acquisitions. We focus on risk adjusted returns while pursuing strategies that help us to profitably grow the business and deliver value. I'll now turn the call back to Greg to open the Q&A.

Gregory Ketron -- Director of Investor Relations

Thanks, Margaret. That concludes our comments on the quarter. We will now begin the Q&A session. So that we can accommodate as many of you as possible, I'd like to ask 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.

Questions and Answers:

Operator

And thank you, we will now begin our question and answer session. (Operator Instructions) And we have our first question from John Hecht, Jefferies.

John Hecht -- Jefferies -- Analyst

Hey guys, thanks very much for taking my questions. First, Margaret you did refer to Walmart you're working with them to ensure the most I guess seamless transition. In the prior calls, you guys talked about various options. I'm wondering, can you give us an update on how you perceive those options and maybe give us some clarification on when you might have a final decision to make?

Margaret Keane -- President and Chief Executive Officer

Sure, we're not through those options. So what I could say is we really can't give you a reflection of which one it is, but we're working closely with them now on working through valuation and we expect to have clarity by the first quarter. I think what we said in the last call is that either option whether the portfolio transitions to another issue or whether we keep the portfolio, both cases we believe that we can replace the EPS. So focused on working with them, focused on getting to a place that we can have a final decision in the first quarter.

John Hecht -- Jefferies -- Analyst

Okay, thanks and then on PayPal, I guess a couple kind of details of PayPal, were there any one-time expenses this quarter tied to kind of onboarding that portfolio. Brian, you've given some guidance about Q4 ALLL build, will there be any other ALLL build next year and then how do we think about kind of the integration of those credit metrics, I guess the NCO trajectory as that seasons into the calendar year of 2019.

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, sure John, so I wouldn't say there was really any one-time expenses related to that. We did do some upfront spending before we brought the portfolio on just to get a team in place to manage it. You saw some of that actually in the second quarter, a little more this quarter, but other than that, I would say that where you're seeing an impact on the expenses is really running through professional fees which you saw increase. That's really driven by the interim servicing until our team takes that over in full and so you'll see that expense come down as we get into kind of the first half of '19 and then that will be replaced by true employee costs on our side as we take over the full kind of operation of that portfolio. In terms of the ALLL, I mean it came in right in line with our expectations. If anything, it was a little bit better. So the reserve came in at $272 million. That was better than we expected. Overall, we're very pleased with the credit trends that we're seeing on PayPal. So no change to the full year net charge-off guidance and if you remember just due to some of the purchase accounting on PayPal, we gave you guidance with and without so 5.5% to 5.8% with and without PayPal. So it moved us around within the range, but wasn't significant enough to change the range for the full year and that outlook is still good. I'm sorry John, did you have one more?

John Hecht -- Jefferies -- Analyst

The third (ph) one was, I just given that the onboarding process and the accounting associated with it, when should we see the PayPal charge-off trends influence the overall book?

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, sure, so I would think about PayPal, you kind of burn off that mark pretty quick in the remainder of this year and then you'll start to see some upward bias in the net charge-off rate as we move into 2019 just given the overall credit profile of PayPal relative to our book. So think about it not having much of an impact as we get through 2018 and then some modest upward bias in the net charge-off rate for 2019 which obviously we'll give you more color on that when we do our outlook for the full year.

John Hecht -- Jefferies -- Analyst

Great, appreciate the color guys. Thanks very much.

Operator

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

Donald Fandetti -- Wells Fargo -- Analyst

Margaret, there's been a little bit of investor discussions that maybe Cap One (ph) isn't super excited to buy the portfolio. I know you can't comment on that deal specifically, but can you help us understand when you win deals historically besides just getting the net interest income, what are some of the other reasons why you want to buy that portfolio, is it data, things of that nature and then the second part of the question would be if you do sell it and you move forward with the buybacks, could you also make a sizable portfolio acquisition if one were to come up that was unique or do you feel like you know you're super-committed to the buybacks and that would probably limit your ability?

Margaret Keane -- President and Chief Executive Officer

Yes, so I think the first part I would comment on probably the most important aspect of buying a book is really around the customer. What you really want to do is ensure that smooth transition from one issuer to another. So as we think about when we do an acquisition particularly of a big book that would be something that would be really important for us because one, the customer keeping that transition smooth, keeping the card utility going, you point on data and analytics, all those elements are extremely important. So those would be the things that we would be focusing on in terms of an acquisition of a portfolio. In terms of could we purchase a portfolio, obviously yes, we've said that's been one of our strategies all along in terms of how we would deploy capital similar to how we did PayPal, but obviously it would have to be at the right return, the right risk adjusted margin so that we drive the bottom line the way we want for the company. I don't know Brian if you'll add.

Brian Doubles -- Chief Financial Officer, Executive Vice President

Don, the only thing I would add is, when we communicated our plan on both options last quarter, we did indicate that share repurchases and higher returning alternatives, so that would include portfolio acquisitions obviously. We're looking at making bigger investments in the organic growth of the business to investing in high growth programs like PayPal, like TJX, more investment in CareCredit and Payment Solutions, but then if something came along as Margaret said with the right risk adjusted returns, an attractive portfolio acquisition we would absolutely take a look at it.

Donald Fandetti -- Wells Fargo -- Analyst

Okay, that's helpful. Thank you.

Operator

And thank you. Our next question comes from Sanjay Sakhrani, KBW.

Sanjay Harkishin Sakhrani -- KBW -- Analyst

Thanks. Good morning. I guess I have two model related questions for Brian and then one for Margaret. Just on the model questions Brian, the RSA coming in better than expected as a percentage of receivables despite the renewals and better credit, is that a good run rate to think about going forward as we look into next year. And then secondly on the PayPal allowance build, is there a way to think about how much of the portfolio you'll have reserved for by the end of the year based on what you're expecting. I just want to think about how much more needs to be reserved for as we move into next year given the accounting?

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, sure Sanjay. So first on the RSAs. You know the RSAs came in a little bit better than we expected. That's been a trend all year. You know in the quarter what really drove that was some program mix. So we're seeing better growth, higher growth in programs where we pay a lower RSA percentage, so that was a big driver and then obviously we're no longer making payments on the Toys"R"Us program. And then the other factor is we did have slightly lower yield just given the improvement in the credit trends, lower delinquencies and so that drives a little less revolves, lower interest and fees et cetera. So that's what really drove the result in the quarter and then as you think about the fourth quarter, it's probably worth just commenting on a couple of drivers there, we expect it'll come in around the same 4% level. Part of that is driven by credit continuing to improve. So that results in a higher RSA. And then as you probably remember, we have that normal seasonality we see moving from the third quarter to the fourth quarter which brings the RSA back down. So a couple of puts and takes but gets you back into that, gets you back into that 4% range. So then on the PayPal reserves, again came in a little bit better than we expected just given the credit trends that we're seeing on that portfolio for the quarter. We gave you a pretty good indication of what to expect for the fourth quarter. When you add both of those up, you're in that $400 million range and if you go back and look at the size of the portfolio that we disclosed, there's some information out there in terms of what PayPal disclosed on the loss rate for that portfolio. If you assume 14 months to 15 months coverage on that, you assume that we get about $400 million done (ph) this year. That gives you a pretty good indication of what to expect through 2019 in order to complete that build. So nothing specific at this point, but I think you've got most of the pieces just given that to come up with a pretty good estimate and the way I would think about it moving through 2019, obviously, it should continue to come down. So you saw $272 million, you got our guidance for the fourth quarter. That'll come down, it will come down a bit more in the first quarter and then kind of pro rata through the balance of 2019.

Sanjay Harkishin Sakhrani -- KBW -- Analyst

I'm sorry, one more, the delinquency rate, was that impacted by PayPal in any way?

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, actually the core 30-plus delinquency rate was a little bit better than we reported. So better than the 21 basis points down year-over-year with a partial offset for PayPal. So, PayPal brought it up a few basis points.

Sanjay Harkishin Sakhrani -- KBW -- Analyst

Okay, great and then Margaret, just following up on the discussion on portfolio acquisitions, one of your competitors is considering strategic realignments and that might create an opportunity to buy a sizable smaller portfolio of private label relationships. Could you just talk about your appetite if something like that were to come up? Thanks.

Margaret Keane -- President and Chief Executive Officer

Obviously, we'd take a look but we'd have to evaluate what the overall portfolio was -- what we would like to be part of in that portfolio and it's hard for us to really comment on that given that, that's not really out there yet but obviously if it did, we would obviously take a look.

Sanjay Harkishin Sakhrani -- KBW -- Analyst

Right. Thank you.

Operator

And, thank you. Our next question comes from Bill Carcache, Nomura.

Bill Carcache -- Nomura -- Analyst

Thank you. Good morning, Brian, I had a question on the mechanics under a portfolio sale. If you were to say move the portfolio to held for sale at the end of Q1, is it reasonable to expect that at that point, you'd have to hold only four months of allowance through the July 31 portfolio transfer date and would look to use the benefits of those reserve releases to start incremental buybacks even before the portfolio officially goes away?

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, that's more or less how it works, the point at which we have confirmation that the portfolio is going to transition or move off of our balance sheet, we'd move it to held for sale. You'd start to shorten that reserve period between the time which you move it and the time you expect to transfer it. So that's a pretty reasonable assumption, Bill.

Bill Carcache -- Nomura -- Analyst

Okay, great, thank you and I had a follow-up question on renewal risk for you Margaret. For many years, you guys were able to sustain very attractive through the cycle risk adjusted margins inside of GE, but today many investors are questioning whether there really is a secret sauce and some believe your larger competitors can simply swoop in and take away your customers when contracts come up for renewal. This loss of partnerships and RSA pressure wasn't something that we saw when you guys were inside of GE, so what is it that has fundamentally changed since you guys went public that makes this a greater risk now or is it not if you could just comment on that, that'd be helpful.

Margaret Keane -- President and Chief Executive Officer

We don't see it as a greater risk. I view Walmart as an outlier. I think if you just look at what we've done in this month where we renewed Lowe's who by the way we'll have over four decades and the fact that we renewed JCPenney which we had you know for two decades, I think our experience in our trends have shown that we can renew deals. So I'm not sitting here saying that all of a sudden there's a big competitive shift. Look, our view is we're one of the best private label issuers. We know how to service the retail marketplace. We've built out a ton of capabilities and honestly, I view Walmart as an outlier.

Brian Doubles -- Chief Financial Officer, Executive Vice President

Hey Bill, the other thing I would just point out if you go back to the last round of renewals that we did, those were all done with the knowledge that we were going to separate from GE. So we're really in kind of the second or third wave of renewals and as Margaret said, we think about Walmart as an outlier. Our track record on renewals has been very strong with and without GE.

Bill Carcache -- Nomura -- Analyst

That's very helpful. Thank you.

Operator

And thank you. Our next question comes from Rick Shane with J.P. Morgan.

Richard Shane -- J.P. Morgan -- Analyst

Hey guys, thanks for taking my questions. When we think about credit performance, obviously the primary driver is FICO score and credit quality but one of the other influential factors is utility. I'm curious when you think about the PayPal product versus your core private label, if there's a utility factor that you think will influence credit performance related to delinquencies and charge-offs over the longer term?

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, Rick, I mean certainly that's a factor I would say broadly across the portfolio but I wouldn't say that PayPal is unique relative to other products and other programs that we have. I think the elements that you talked about initially drive more of the performance. So whether it's the FICO even though we don't use that really to underwrite we use it to score the portfolio our proprietary scores are really the primary driver in terms of what we expect to see on overall credit performance. So it's a factor but I wouldn't highlight anything unique on PayPal.

Richard Shane -- J.P. Morgan -- Analyst

Got it. So when you differentiate the performance for PayPal versus your core portfolio, what do you think the primary factor is?

Brian Doubles -- Chief Financial Officer, Executive Vice President

I would say -- I would go back to what I said, it's the overall credit profile and how we underwrite that portfolio relative to others. You know I think as we've talked about in the past, if you look at all of our programs, we underwrite based on a set of overall guidelines, overall parameters, but then we drill down into the individual program level and we underwrite a little bit differently based on the customer mix, the customer profile, the through the door population in terms of who's applying for credit and it's a combination of all those factors, that mosaic that gives us the overall credit performance that we target for that program.

Richard Shane -- J.P. Morgan -- Analyst

Okay, great. Thank you. That's very helpful.

Operator

And thank you. Our next question is from Mark DeVries with Barclays.

Mark DeVries -- Barclays -- Analyst

Yes, thank you. Was interested in hearing how you thought about the potential trade-offs of renegotiating Lowe's well in advance of when that was up in an environment where presumably it's quite competitive and you might have to give away some economics to renew versus you know the ability to kind of push out some of the renewal risk on that relationship?

Brian Doubles -- Chief Financial Officer, Executive Vice President

I think we've been pretty clear Mark there. We're always working to renew all of our big partners and if we can do that outside of a competitive process and do it in a way where we protect our return profile and our economics and do in a way that we get some really good alignment around growth or change some things around the value prop or acquisition incentives and that's always something we're looking to do and we've got a pretty good track record of doing that. So I wouldn't say there's anything unique in either the Lowe's or the JCPenney renewals. I think these things naturally happen as part of these relationships.

Mark DeVries -- Barclays -- Analyst

Okay, were there any enhancements made to the value propositions around -- out of the cards in those renewal programs?

Brian Doubles -- Chief Financial Officer, Executive Vice President

What I would say and I can't get too specific, but you know in all of these cases when you early renew, typically there's some puts and takes in terms of the economics and what we're going to do in terms of the value prop and acquisition incentives and in both cases JCPenney and Lowe's, we got some really nice commitments around growth and some things that we're going to change but nothing that's been announced at this point.

Mark DeVries -- Barclays -- Analyst

Okay, thank you.

Operator

And thank you, our next question comes from Eric Wasserstrom with UBS. Eric, perhaps you are muted on your end?

Eric Wasserstrom -- UBS -- Analyst

Yes, I'm sorry, can you hear me now?

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes.

Eric Wasserstrom -- UBS -- Analyst

Yes, sorry about that. Just Brian, one question on PayPal and then a follow up on Walmart. On the PayPal portfolio, other than the credit performance which you've already guided to a little bit for the fourth quarter, now that you've seen it perform for about one quarter. Is there anything about it that is behaving differently than your expectation?

Brian Doubles -- Chief Financial Officer, Executive Vice President

No, I'd say it's performing very much in line with our expectations. I would maybe point to credit performance being a touch better than we thought. That's what drove the lower reserve build. The turn of the books is slightly different than we thought, but overall, we're very pleased with the performance and it's pretty much in line with our expectations. So we're pretty excited to get focused on growth.

Eric Wasserstrom -- UBS -- Analyst

Thank you for that and then just to follow up on Walmart and I appreciate that you've already talked a lot about it and you're still in the midst of this negotiation, but is it your baseline assumption that the portfolio will be sold or are you still pursuing each avenue on like a 50/50 probability for example?

Margaret Keane -- President and Chief Executive Officer

We're still in discussions. So I wouldn't put any kind of 50/50 or anything on it. I think we're working closely with Walmart. Again, our job is to come to a conclusion in the first quarter and whatever the decision is, we are committed to really ensuring a smooth transition and really delivering for Walmart through the end of the contract.

Eric Wasserstrom -- UBS -- Analyst

Thanks very much.

Operator

And thank you. Our next question comes from Matt O'Neill with Autonomous Research.

Matthew Casey O'Neill -- Autonomous Research -- Analyst

Yes, hi. Thanks for taking my question. I think I have basically two for Brian. The first around the underwriting refinements that seemed to have start in earnest this year and the results you discussed regarding the performance above (inaudible) 720, 721 and 660 and below. I was wondering if that's a trend that we should kind of continue to expect beyond 2018 and maybe just a high level view on kind of loan growth outlook as a result and then if I could for a follow up, one of your smaller competitors commented recently around seeing minimal if any impacts from CCIL (ph) and I was just wondering if you could comment on that regarding your business?

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, sure. So first on the underwriting changes. You know I think our expectation is that we're going to start to lap those periods at some point, probably toward the end of the first half of 2019. So I think that trend continues for a couple more quarters and then some of that comes down you get back to a more -- what we would consider a core growth rate, but overall, I think we're very pleased with the result of those underwriting refinements. You know, I think we told you about a year ago that we expected the credit trends to start to moderate and level off in the second half of '18 and if anything the performance has been in line to slightly better than that. So we're still seeing really good volume on accounts greater than 720 as we indicated and what we're seeing on the accounts below 660 FICO is very targeted, very intentional and it's having the desired results and I think if you look across whether it's a reserve build or the delinquency metrics, everything is performing in line to slightly better than we thought. So I think as you move into 2019 you start to lap some of those periods and you start to see those impact on purchase volume level off a bit. And then your second question just on CCIL. You know I think there's obviously still a lot of work to do here. Most credit card issuers would say it's going to result in some increase in the level of reserves. Just going from an incurred loss model to lifetime losses, I think the vast majority of issuers are expecting some level of increase, but there is still a lot that's undecided at this point. You know you've got to determine the life of the revolving product depending on which payment allocation methodology -- you pick, you get a different answer. Frankly this is -- it's fairly challenging accounting guidance to apply to revolving credit. So, look, we're doing a lot of work on this. We're participating in all the industry groups and talking to other issuers, our teams internally are hard at work modeling this. We got six months to nine months to kind of run in parallel here and when we have an estimate of the impact, we'll certainly share it with all of you.

Matthew Casey O'Neill -- Autonomous Research -- Analyst

Thank you very much.

Operator

Thank you. Our next question is from John Coffey with Susquehanna.

Jamie Friedman -- Susquehanna -- Analyst

Hi. It's Jamie in for John. Thanks for taking my question, but -- oh periodically Margaret you would give e-commerce related disclosure. I was wondering if you had something equivalent that you could share so we can kind of mark your progress with that and maybe I'll just ask my second one upfront in case you don't happen to have that one, so if you could talk at least qualitatively about the deal pipeline for 2019 and '20 as is been alluded to one of your competitors has talked rather enthusiastically about the potential contribution coming up from new opportunities. How does it look out there and is there a lot opportunity for you guys. Thank you.

Margaret Keane -- President and Chief Executive Officer

Sure, so I would say that we're very focused on continuing trends in our digital capabilities. I think this is an area that we know becomes a critical part for our partners. And so our year-over-year mobile growth was 59% and our online penetration for Retail Card was 33%, which was up 9 percentage points. About 46% of applications occurred digitally in the third quarter. So certainly, our mobile enhancements and capabilities and the things we continue to build out are having a really good impact. On the pipeline, we feel good about the pipeline. I would say there's not one big deal out there right now other than maybe some of the rumors that were started this week. So we'd have to look at that, but I think what we've been very diligent on is looking at new start-ups and existing programs and winning across all three platforms and we feel good about the progress we make and what the pipeline looks like. I could say going into 2019 I really can't comment on what's going to be beyond that, but again we're focused on all three platforms, Retail Card being one of the ones we talk a lot about but we've been able to win very successfully in our Payment Solution business and I think CareCredit, we continue to expand with utility of the card as well as expanding our partnership and expansion into new verticals. So we feel we're poised for a strong pipeline going forward.

Jamie Friedman -- Susquehanna -- Analyst

Okay, appreciate the color, I'll drop back into the queue. Thank you.

Operator

And thank you. We have our next question from Chris Brendler with Buckingham.

Chris Brendler -- Buckingham Research -- Analyst

Hi, thanks, good morning and thanks for taking my question, just want to focus on the margin for a minute. You noted that you expect it to decline (ph) back into the 15.75% to 16% range. Just wanted to get a little more color around is that just sort of the liquidity portfolio being built back up or is there anything actually pressuring the margin and one sort of related question on the component parts, if I look at the consumer loans yields in your detailed average balance reconciliation, looks like the consumer loan yield was actually relatively flat sequentially. So I was just a little bit surprised. I thought you'd see a little more of an impact from PayPal. Is there any accounting related sort of impact that's got in there that makes this look flat or is actually 21.5 a good number for the PayPal portfolio, thanks.

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, sure, so let me -- maybe I'll take the second one first. So if you look at the yield in the quarter, it was down driven by the PayPal acquisition. Obviously, largely promotional balances, they do come on with a lower yield and then we also had I think as I indicated earlier a modest decline in interest and fees. That was similar to what you'd expect just given the improving delinquency trends. There was a slight reduction in yield just driven by purchase accounting. That's pretty standard. That burns off over the next couple of quarters, but other than that and some of the noise related to PayPal, I would say the core margins, the core yield is very stable and then as you move from the third to the fourth quarter just the seasonal decline in yield that we see has been up to 60 basis points in the past. And so that's really what you're seeing as you move from the third to the fourth is that seasonal declines, you put on a lot of holiday balances that aren't necessarily earning as you put them on and so that drives that seasonal decline in the fourth quarter. So other than that the core margins are pretty stable and for the full year, we're right on top of that range that we gave you back in January for margins to be in that 15.75% to 16% range.

Chris Brendler -- Buckingham Research -- Analyst

Okay probably a little early to comment on '19 but if you could -- it feels like these trends should continue to '19. The one thing I was worried about in this quarter was the pretty sizable increase in deposit cost. Looks like it was up about (ph) 18 basis points sequentially but you also grow deposits pretty rapidly this quarter. So I'm wondering if maybe you hit the gas a little bit on deposits to help fund PayPal and that should settle down a little bit in terms of the costs increase as you go into '19.

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, I mean nothing specific to give on '19 margins at this point but I think your comments are in line. So I would say that we were very competitive all year on deposits and pricing just to pre-fund PayPal and so you're going to feel the effects of that for a few quarters, but our expectation is that we won't have to be as competitive as we move into 2019. That was very unique to having to pre-fund the PayPal transaction.

Chris Brendler -- Buckingham Research -- Analyst

Great. Thanks so much.

Operator

And thank you. Our next question comes from Dominic Gabriel with Oppenheimer.

Dominic Gabriel -- Oppenheimer -- Analyst

Hi, thank you for taking my questions. I just wanted to ask a previous question in maybe a different way. Could you see yourself look to expand partnerships as much smaller retailers than you typically in the past have gone after? Could there be a strategy shift there where that could be a renewed focus of some sort?

Margaret Keane -- President and Chief Executive Officer

Well, I think if you really look at our business, we actually do, do smaller retailers particularly in our Payment Solutions platform. That's where we have a number of smaller retailers, but even in the Retail Card, depending on the retailer, we really can run the gamut from small to big. So, again, if the right opportunity came up, it was the right partnership to get involved with, we would certainly look at it.

Dominic Gabriel -- Oppenheimer -- Analyst

Okay, great, thank you so much and then real quick I just wanted to get a little more detail around the renewals, you mentioned something about maybe the tender share. Is there a chance that on those two renewals of the tender share was somehow limited at some point and now you're they've kind of unshackled you almost to say where you can now grow within the total sales of those businesses at a faster rate than you previously -- OK.

Margaret Keane -- President and Chief Executive Officer

No, the goal is always to grow the sales. It's always more than beneficial for our partners to grow sales. It's always more beneficial for our partners to grow sales on their cards if you will for Lowe's to grow in the Lowe's card, JCPenney to grow in the JCPenney card, because remember they don't pay in a chain (ph) and they share in the RSAs and then the other big positive is really around the data analytics, around the customers that are using a card. So we've never been shackled by how much. We always want to grow that penetration to as high as we possibly can. So I think what we were saying here is that as we continue to build out more capabilities and leverage some of our capabilities partnering with them, that just gives us a lot more opportunity as we go into these renewals.

Dominic Gabriel -- Oppenheimer -- Analyst

Great. Thank you so much. I really appreciate it.

Gregory Ketron -- Director of Investor Relations

We have time for one more question.

Operator

And thank you. Our last question comes from Moshe Orenbuch with Credit Suisse.

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

Great, thanks. I guess there was a lot of talk about the sale of the Walmart portfolio but could you talk a little bit about your experience in the portfolios where you've kind of gone on your own after a partner and how that has worked and how we could think about this, if it were to go in that direction and the portfolio was not sold?

Margaret Keane -- President and Chief Executive Officer

Yes, I think we have two probably current examples. The first is when H. H. Gregg did engulf (ph) because they went bankrupt. We converted those cards to a new network we created called the home network, but the other good example is Toys"R"Us. I mean obviously we took -- we kept that portfolio again because of the bankruptcy and converted that to a general purpose credit card, but I would just generally say whenever a portfolio stays with us over the years whether it didn't convert or there was a bankruptcy of some sort, we always look at ways to convert those cards so they can be -- continue to be utilized. So we have processes in place to really make sure we can transfer them to either new programs or in the one case we created a network, so we feel pretty positive that we can handle either case, if Walmart were to go or to stay. I don't know Brian, if you add anything else.

Brian Doubles -- Chief Financial Officer, Executive Vice President

I would just say that the Toys"R"Us conversion into a Synchrony branded MasterCard has really paid off for us. I mean we're seeing really good activation rates, we're seeing good sales, good spending patterns and so it's performed very well so far. I mean it's still early. We're testing a number of different things and different strategies on that portfolio, but so far we've been pretty pleased with the performance.

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

And the absence of revenue share, does it help the profitability?

Brian Doubles -- Chief Financial Officer, Executive Vice President

It certainly helps the profitability. Now the way we typically think about that is that gives you more dollars to invest in the value prop. So for Toys"R"Us, we put that out with a very rich value prop. We tested 2% cash back, it's performing really well. You may not need to do that in all cases but it certainly gives you a bigger economic pool to work with to drive growth going forward.

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

Got it. Just a quick follow up. The pricing changes that you made on the PayPal Credit portfolio. When do those actually phase into the yield on the loans?

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, you'll start to see that as we move into 2019. Now you have to remember the current balances are protected, so obviously that only influences go-forward sales. So it will start to bleed in, you probably won't see much in the first half, but it will bleed in throughout 2019.

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

Great. Thanks very much.

Brian Doubles -- Chief Financial Officer, Executive Vice President

Yes, thank you.

Gregory Ketron -- Director of Investor Relations

Okay, thanks everyone for joining us this morning and your interest in Synchrony Financial. The Investor Relations team will be available to answer any further questions you may have and we hope you have a great day.

Operator

And thank you ladies and gentlemen, this concludes today's conference call. We thank you for participating. You may now disconnect.

Duration: 60 minutes

Call participants:

Gregory Ketron -- Director of Investor Relations

Margaret Keane -- President and Chief Executive Officer

Brian Doubles -- Chief Financial Officer, Executive Vice President

John Hecht -- Jefferies -- Analyst

Donald Fandetti -- Wells Fargo -- Analyst

Sanjay Harkishin Sakhrani -- KBW -- Analyst

Bill Carcache -- Nomura -- Analyst

Richard Shane -- J.P. Morgan -- Analyst

Mark DeVries -- Barclays -- Analyst

Eric Wasserstrom -- UBS -- Analyst

Matthew Casey O'Neill -- Autonomous Research -- Analyst

Jamie Friedman -- Susquehanna -- Analyst

Chris Brendler -- Buckingham Research -- Analyst

Dominic Gabriel -- Oppenheimer -- Analyst

Moshe Ari Orenbuch -- Credit Suisse -- Analyst

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