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Text: This information can be accessed by going to the Investor Relations section of the 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.
Synchrony delivered strong results during the second quarter, reflecting the power of our technology-enabled model, the durability of our partner-centric value proposition, and the early indications of a consumer resurgence.
With now more than a year of the COVID-19 pandemic moving into the rearview mirror, I am proud of how our team has continued to execute on our strategic priorities.
Our multi-product, multi-capability strategy has enabled us to nimbly adapt and deliver best-in-class products and services to address our partners' evolving needs, while also generating appropriate risk-adjusted returns for all our stakeholders.
Let's get things started by reviewing some of the key financial highlights from the quarter.
Net earnings reached a record $1.2 billion, or $2.12 per diluted share.
This reflected an increase of $2.06 over last year as we mark the anniversary of the pandemic's initial impact on our business and really, the world.
We are deeply grateful for all of the front line workers, scientists and leaders have done to support our community and make progress toward an eventual return to normalcy.
Purchase volume grew 35% over last year, reflecting a 33% increase in purchase volume per account.
This increased spend was broad-based across our five business platforms.
This strength in purchase volume was largely offset by the persistently elevated payment rate trends resulting from the government stimulus and industrywide forbearance actions, leading to a slight increase in loan receivables, which were $78.4 billion for the second quarter.
Average balances per account were down about 4% for the period, while new accounts were up about 58%.
Net interest margin of 13.78% was 25 basis points higher than last year.
Elevated payment rates and excess liquidity levels continue to have an impact on receivables and yield.
The efficiency ratio was 39.6% for the quarter, primarily reflecting lower net interest income.
Expenses were down about 4%, compared to last year and down 5% year-to-date as our cost efficiency initiatives continue as planned.
We remain on track to remove about $210 million from our expense base by year end, even as we continue to invest in our business.
Credit continue to perform very well.
Net charge-offs were 3.57% for the second quarter, down almost 178 basis points from last year.
Turning to our balance sheet.
Deposits were down $4 billion, or 7% versus last year, reflecting retail deposit rate actions we took to manage our excess liquidity position.
Deposits represented 81% of our funding mix at quarter end, a slight increase versus last year due to the retirement of some of our debt during the second quarter of 2021.
During the quarter, we returned $521 million in capital through share repurchases of $393 million and $128 million in common stock dividends.
We also continue to reinvest in our business.
One of our greatest competitive differentiators remains our digital capabilities.
We continue to invest in innovative products and services that enable our partners to meet their customers wherever and however they want to be met.
That where and how, of course, can change fairly quickly, as can the objectives that our partners seek to achieve.
So we need to stay nimble and ahead of the curve.
We have continued to win and renew key partnerships, including our recent renewal with TJX Companies.
This has been a very valuable partnership for over 10 years now, and we are excited to continue to provide innovative financing products to TJX customers.
We also renewed 10 other programs during the quarter, including Shop HQ, Daniels, and Sutherlands and added four new programs, including JCB and Ochsner Health.
Our go-to-market strategy utilizes innovative and scalable ways to reach and serve customers effectively across a broad spectrum of industries and financing needs and over the course of their life cycle.
We have built a technology platform that harnesses our proprietary data analytics, cutting edge digital capabilities to offer a customized suite of products specifically designed with our partners and their customers in mind, all while delivering appropriately aligned economic outcomes.
Our recent business reorganization, which included the creation of a growth organization and the redistribution of our partners from three sales platforms into five will allow us to better leverage these company resources and deliver swifter, more optimized products and capabilities for our partners and sustainable profitable growth for our business.
In fact, the growth we expect to achieve within each platform will be driven by utilizing our suite of products to expand lifetime value, deploying more of our digital capabilities to expand customer reach, or adapting our value propositions to harness organic trends as the landscape evolves.
In the case of our Home & Auto platform, a combination of all three.
In particular, our home partnerships have been a focus of Synchrony's going back to our business inception when we started providing financing for appliance purchases.
Over the years, we've significantly broadened the scope of this platform and expanded our customer reach.
Today, Synchrony has penetrated across all distribution points in each sector of the home market, from big retailers, to independent merchants and contractors and OEMs and dealers, our Home platform provides financing solutions to about 60,000 merchants and locations across a broad spectrum of industries, including furniture and accessories, mattresses and bedding, appliances, windows, roofing, HVAC and flooring.
Our partnerships are deeply rooted in industry expertise, data-driven strategic objectives, and mutually beneficial economic outcomes.
The average length of our top 20 partners is over 30 years, because we are able to deliver a breadth of financing products, innovative digital capabilities, and seamless customer experiences that are customized to each partners' needs as they evolve over time.
Our data insights and analytics expertise, when combined with the partners' own data, empowers each merchant as they seek to optimize their marketing, customer acquisition and sales strategies.
And the value that our suite of products provides to their customers is clear, about 58% of our sales are repeat purchases.
Whether customers are looking to upgrade their living room couch, or suddenly find themselves in need of a new washing machine, we enable our partners to consistently support those needs through a variety of financing options that are best suited to the customer and the particular purchase they're considering.
So, whether we've been entrusted to enhance customer loyalty, drive transaction volume, or usher a retailers' adoption of digital assets, our strategy has enabled steady growth across the home market.
For the four years prior to the pandemic, Synchrony's Home receivables grew at a 7% CAGR as consumers spend within home improvement, furniture and decor and electronic and appliances sectors each grew by between 4% and 8% annually.
Certainly, the pandemic has brought with it both challenges and opportunities.
As consumers quarantined in their homes, the desire to renovate their homes or upgrade their furniture and decor intensified.
As people thought to leave crowded metropolitan communities for suburban neighborhoods, home improvement spend increased.
In 2020 alone, the home industry represented an approximate $600 billion market opportunity.
Synchrony serves a fraction of that today.
Even as we normalize toward a pre-pandemic cadence, the consumers' desire to invest in their living spaces is as strong as ever, perhaps reflecting a secular shift in favor of more remote work.
We have positioned our Home platform very well to capitalize on these trends.
We have opportunities to deepen the scope and reach of existing partnerships, while also implementing a number of strategic initiatives to better leverage our core competencies and deepen our market penetration.
For example, we have begun using more data and advanced analytics to enhance our acquisition marketing and drive higher repeat sales.
We've also launched our direct-to-device capability, which puts the simplicity of our financing application and the power of our underwriting in the hands of the contractors and customers as they seek to install a new HVAC system, replace their windows or repair an oven.
This direct-to-device technology is also being deployed in retailer locations, which helps shorten checkout lines and delivers a completely digital solution to apply and buy when in store.
In short, we are excited about the opportunities for growth that we see in our Home platform.
There are certainly some natural tailwinds in the industry that should feel home spend even as life normalizes in a post-pandemic world.
But we are actually more excited about the ways in which we're leveraging our technological innovations to extend our customer reach, enhance the value of the products and services we offer, and deepen our competitive differentiation.
As we continue to execute on our long-term strategy, we are driving even greater customer lifetime value for our partners, better experiences for their customers and strong returns for our stakeholders.
As Brian mentioned earlier, the strong results we achieved during the second quarter reflected a number of factors.
First, a healthy consumer with significant savings and pent-up demand to spend it leading to broad-based purchase volume growth.
Second, continued strength in credit quality across our portfolio.
We continue to closely monitor our portfolio as industrywide forbearance begins to expire across the broader consumer finance landscape and for some customers, as rental forbearance also expires.
Finally, the strong positioning of our business, combined with consistent execution by our team, while we maintain focus on efficient delivery of customized financing solutions and digitally enabled customer experiences across our diverse portfolio of partners, merchants and providers focusing on the healthy consumer who has robust savings and desire to spend in an environment with improving economic trends.
During the second quarter, consumer savings rates remained strong, unemployment continued to improve and consumer confidence reached a 16-month high.
As a result, discretionary spend seems to be making a gradual return to pre-pandemic levels.
In fact, a conference board survey from June indicated that there is also a healthy interest among consumers to spend on long-lasting manufactured goods over the next six months, including homes, cars, and major household appliances, which we expect to be a positive tailwind for our Home & Auto platform in particular.
Across our diverse set of platforms, strong consumer spend trends contributed to 35% higher purchase volume compared to last year, primarily reflecting 33% stronger purchase volume per account.
When comparing these trends to the more normalized operating environment of the second quarter 2019, and excluding the impact of Walmart, purchase volume was 18% higher in the second quarter 2021 and purchase volume per account was 22% higher.
This demonstrates strong consumer demand translating to higher spend relative to pre-pandemic levels.
Dual and co-branded cards accounted for 39% of the purchase volume in the second quarter and increased 56% from last year.
On a loan receivables basis, they accounted for 23% of the portfolio and were flat to the prior year.
Average active accounts were up about 2%, compared to last year and new accounts were 58% higher, totaling more than 6 million new accounts in the second quarter and over 11 million new accounts year-to-date.
Loan receivables reached $78.4 billion in the second quarter, a slight increase year-over-year as the period [Phonetic] strong purchase volume growth was largely offset by persistently elevated payment rate.
This marks the first quarter of year-over-year growth since the start of the pandemic.
Payment rate was almost 300 basis points higher when compared to last year, which primarily led to a 6% reduction in interest and fees on loans.
RSAs increased $233 million, or 30% from last year and were 5.25% of average receivables.
The increase relative to last year's second quarter was primarily reflecting the significant improvement in net charge-offs.
As a reminder, our retailer share arrangements are designed to share in the program's performance and when the portfolios are performing better on a risk-adjusted basis, our partner share in this performance.
So the RSA is performing as it is designed and the elevated levels we have seen over the last few quarters are a reflection of Synchrony's particular financial strength through the pandemic.
We continue to expect RSAs to decline as net charge-offs begin to rise.
With an improved credit performance and a more optimistic macroeconomic environment, we reduced our loan loss reserves by $878 million this quarter.
Other income decreased $6 million, generally reflecting higher loyalty program costs from higher purchase volume during the quarter.
Other expense decreased $38 million due to lower operational losses, partially offset by an increase in employee, marketing and business development, and information processing costs.
Moving to Slide 8 and our platform results.
We saw a broad-based purchase volume growth across all five platforms as consumers have become increasingly confident and remaining local restrictions are being lifted.
Both our Health & Wellness and Diversified & Value platforms experienced more than 50% growth in purchase volume.
In Health & Wellness, this primarily reflected lifting of local restrictions on in-person interactions and consumers being more comfortable with the environment and undergoing elective procedures.
The lifting of state restrictions was also a primary driver of the significant purchase volume growth in our Diversified & Value platform as consumers increased their discretionary spend in categories like clothing and assorted household goods.
Meanwhile, purchase volume grew by 30% in our Digital platform, 25% in Home & Auto and 9% in Lifestyle.
Loan receivable growth trends by platform generally reflected stabilization or modest growth versus the prior year as the higher purchase volume was partially offset by the elevated payment rates.
The one exception being our Diversified & Value platform, which is also impacted by store closures in 2020.
Average active account trends were mixed on a platform basis, up by as much as 5% in Digital and down by as much as 6% in Health & Wellness.
The active account growth in Digital generally reflected the combination of a shift in the timing of an annual promotional events and the ramp up of some of our recent partner launches.
The active account decline in Health & Wellness was primarily associated with the continued strength in consumer balance sheets.
Interest and fees were generally down across the platforms, with the exception of Lifestyle due to lower yield as a result of elevated payment trends we've been discussing.
I'll move to Slide 9 to discuss net interest income and margin trends.
During the quarter, the continued combined impacts of the March stimulus and high savings balance built during the pandemic led to higher-than-average payment rate across our portfolio.
As Slide 9 shows, payment rate ran approximately 280 basis points higher than our five-year historical average and about 300 basis points higher relative to last year's second quarter.
It's worth noting the gradual moderation in payment rate from April to June, at which point the payment rate was 18.5%, a 90 basis point decrease for the March monthly peak of 19.4%.
We expect continued gradual moderation in payment rate as consumers continue to spend the excess savings they accumulated resulting from the combined impact of stimulus and slower discretionary spend during the lockdown.
Interest and fees were down about 6% in the second quarter, reflecting lower finance charge yield from elevated payment rate trends and continued lower delinquent accounts resulting from our strong credit performance.
Net interest income decreased 2% from last year.
The net interest margin was 13.78%, compared to last year's margin of 13.53%, a 25 basis points year-over-year improvement driven by favorable interest-bearing liabilities costs and mix of interest earning assets, partially offset by the pandemic's impact of loan receivable yield.
More specifically, interest-bearing liabilities costs were 1.42%, a year-over-year improvement of 73 basis points, primarily due to lower benchmark rates.
This provided a 62 basis point increase in our net interest margin.
The mix of loan receivables as a percent of total earning assets increased by 170 basis points from 78% to 79.7% driven by lower liquidity held during the quarter.
This accounted for 32 basis point increase in the margin.
The loan receivables yield was 18.62% during the second quarter.
The 84 basis points year-over-year reduction reflected the impact of higher payment rate and lower interest and fees, which we discussed earlier and impacted our net interest margin by 65 basis points.
We continue to believe that in the second half of the year liquidity will continue to be deployed into asset growth and slowing payment rates should result in a higher interest and fee yields leading to increasing net interest margin.
Next, I'll cover our key credit trends on Slide 10.
In terms of specific dynamics for the quarter, I'll start with the delinquency trends.
Our 30-plus delinquency rate was 2.11%, compared to 3.13% last year.
Our 90-plus delinquency rate was 1%, compared to 1.77% last year.
Higher payment trends continue to drive delinquency improvements.
Focusing on the net charge-off trends.
Our net charge-off rate was 3.57%, compared to 5.35% last year.
Our reduction in net charge-off rate was primarily driven by improving delinquency trends as customer behavior pattern improved over the last several quarters.
Our allowance for credit losses as a percent of loan receivables was 11.51%.
As far as our credit outlook is concerned, we are monitoring trends in our portfolio closely as the accounts enrolled in multiple forbearance programs roll off, but have not seen any indication in our portfolio to date.
Our best expectation at this time is that, delinquencies should begin to rise sometime in the back half of 2021, leading to peak delinquencies in mid-2022.
This would translate a net charge-off peak in late 2022.
Moving to Slide 11, I will cover expenses for the quarter.
Overall expenses were down $38 million, or 4% from last year to $948 million as we continue to execute on our strategic plan to reduce cost and remain disciplined in managing our expense base.
Specifically, the decrease was driven by lower operational losses, partially offset by increased employee, marketing and business development, and information processing costs.
The efficiency ratio for the second quarter was 39.6%, compared to 36.3% last year.
The main driver of the increase of the efficiency ratio was a negative impact from lower revenue that resulted from a combination of lower receivables and lower interest and fee yield.
This was partially offset by a reduction in expenses.
Moving to Slide 12.
Given the reduction in our loan receivables in 2020 and early 2021 and the strength in our deposit platform, we continue to carry a higher level of liquidity.
While we believe it's prudent to maintain a higher liquidity level during uncertain and volatile periods, we continue to actively manage our funding profile to mitigate excess liquidity where appropriate.
As a result of this strategy, there was a shift in our mix of funding during the quarter.
Our deposits declined $4.3 billion from last year.
Our securitized and unsecured funding sources declined by $2.6 billion.
This resulted in deposits being 81% of our funding, compared to 80% last year with securitized funding comprising 10% and unsecured funding comprising 9% of our funding sources at quarter end.
Total liquidity, including undrawn credit facilities, was $21.2 billion, which equated to 23% of our total assets, down from 29% last year.
Before I provide details on our capital position, it should be noted that we elected to take the benefit of the transition rules issued by the joint federal banking agencies, which had two primary benefits.
First, it delays the effect of the CECL transition adjustment for an incremental two years.
And second, it allows for a portion of the current period provisioning to be deferred and amortized with the transition adjustment.
With this framework, we ended the quarter at 17.8% CET1 under the CECL transition rules, 250 basis points above last year's level of 15.3%.
The Tier 1 capital ratio was 18.7% under the CECL transition rules, compared to 16.3% last year.
The total capital ratio increased 250 basis points to 20.1% and the Tier 1 capital plus reserves ratio on a fully phased in basis was 28%, compared to 26.5% last year, reflecting the impact of the retained net income.
During the quarter, we returned $521 million to shareholders, which included $393 million in share repurchases and paid a common stock dividend of $0.22 per share.
During the quarter, we also announced the approval of a $2.9 billion share repurchase program through June 2022, as well as our plans to maintain our regular quarterly dividend.
We will continue to take an opportunistic approach to returning capital to shareholders as our business performance and market conditions allow subject to our capital plan in any regulatory restrictions.
As we exit the pandemic and the environment normalizes, we are confident in our capabilities and positioning of our business.
We are emerging from this period as a stronger and more dynamic Company and we're excited about the opportunities we see to drive strong financial results and shareholder value.
While the pandemic has presented our Company and the world with never before seen challenges, Synchrony has continued to rise to the occasion facilitating the evolution of many of our partners as a new operating environment has been ushered in.
We have a truly unique understanding of the partners we serve and the customer needs they seek to address.
We have an almost 90-year history in consumer financing.
We have continued to invest in our comprehensive product suite, amass our proprietary data and leverage our advanced analytics to achieve targeted outcomes for each of the merchants we work with.
We have been consistently investing in digital innovation for years and have demonstrated how effectively we can adapt to deliver the value our partners have come to expect, while also driving strong financial results and attractive returns for our shareholders.
We will now begin the Q&A session.
So that we can accommodate as many of you as possible, I'd like to ask the participants to please limit yourself to one primary and one follow-up question.
If you have additional questions, the Investor Relations team will be available after the call.
Operator, please start the Q&A session.

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qtrly diluted earnings per share $2.12.
qtrly net interest income decreased $84 million, or 2%, to $3.3 billion.

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