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Text: Our call today will include remarks from our CEO, Roger Hochschild; and John Greene, our Chief Financial Officer.
After we conclude our formal comments, there will be time for question-and-answer session.
During the Q&A session, we request that you ask one question, followed by one follow-up question, after your follow-up question, please return to the queue.
We had another period of strong financial results in the third quarter, with earnings of $1.1 billion after-tax or $3.54 per share.
In many respects, these results reflected the unique benefits of our integrated digital banking and payments model, which continues to be a source of significant competitive advantage by supporting our value proposition to consumers and merchants and differentiating our brand.
These advantages enabled our continued investment in account acquisition, technology and analytics, while generating substantial capital in an environment characterized by new entrants and intensifying competition, we believe the strengths of our model position us to accelerate our growth.
Underlying our results this quarter were three important advancements.
The first was our return to year-over-year receivables growth, which is driven by our investment in acquisition and brand marketing and continued strong sales trends.
Total sales were up 27% over 2019 levels with strong momentum across all categories, even travel sales increased, and while they dropped a bit in August due to concerns related to the Delta variant, travel has steadily improved since then.
We also continue to see attractive opportunities for account acquisition and increased our marketing investments to take advantage of this.
While the competitive environment has intensified, new accounts are now up 17% over 2019, reflecting the strength of our value proposition.
This value proposition remains anchored in our industry-leading onshore customer service model, no annual fees and useful and transparent rewards.
While some of our peers had to reinvigorate their rewards offerings and substantial cost, our rewards costs were up only 6 basis points year-over-year and nearly all of this increase was driven by higher consumer spending as evidenced in our strong discount revenue.
Given these dynamics, we will continue investing in new accounts, as long as the environment supports profitable opportunities and our robust account growth and our expectations for modest improvement in payment rates supports our view of stronger receivables growth in 2022.
The second key trend was credit, which remained exceptionally strong.
Our disciplined approach to credit management and favorable economic trends contributed to a record low net charge off rate and continued low delinquencies.
The delinquency outlook affirmed our expectations that losses will be below last year's levels for the full-year and supported additional reserve releases during the quarter.
And third is the continued expansion of our payments business.
PULSE saw a meaningful increase in debit volume with 9% growth year-over-year and a 26% increase over the third quarter of 2019, demonstrating both the impact of the recovery and an increase in debit used through the pandemic.
Our Diners business has also started to see some improvement from the global recovery with volume up 12% from the prior year as the global economy recovers, we will continue to look for opportunities to expand our international reach.
In summary, our value proposition continues to be attractive in our integrated digital banking and payments model supports profitable long-term customer relationships and is highly capital generative.
I continue to feel very good about our prospects for future growth.
I'll now ask John to discuss key aspects of our financial results in more detail.
Once again, our results this quarter reflect strong execution and that continued economic recovery.
Looking at our financial summary results on Page 4, there are three key things I want to call out.
First, our total revenue, net of interest expense is up 8% from the prior year, excluding $167 million unrealized loss due to market adjustments on our equity investments.
Including this, revenue is up 2% for the quarter.
Second, is a continuation of very strong credit performance.
Net charge-offs were down $343 million from the prior year, which supported a $165 million reserve release this quarter.
Lastly, we continue investing for growth, with increased marketing spend, higher operating expenses and other areas were largely related to the economic recovery.
I'll go over the details of our quarterly results and our full-year outlook on the following slides.
Looking at loan growth on Slide 5.
We saw the return to growth this quarter with ending loans up 1% over the prior year and up 2% sequentially.
Card loans were the primary driver and we're also up 1% year-over-year and 2% over the prior quarter.
The year-over-year increase in card receivables was driven by strong sales volume and robust account acquisition.
Sales growth continued to accelerate and was up 27% over the third quarter of 2019.
Year-to-date, new accounts were up 27% from the prior year and up 17% over 2019 levels.
The contribution from these factors was mostly offset by the ongoing high payment rates as household savings and cash flows remain elevated.
The payment rate was approximately 500 basis points over pre-pandemic levels.
We anticipate that the payment rate will moderate a bit as most federal COVID support programs have ended and consumer savings rates have started to decrease.
That said, we expect payment rates to remain above historical levels through 2022.
Looking at our other lending products.
Organic student loans increased 4% from the prior year with originations up 7% as most schools have returned to the normal in-person learning model.
Personal loans decreased 4% driven by high payment rates.
Our underwriting criteria have returned to pre-pandemic levels and we expect a return to growth in this product in future periods.
Moving to Slide 6, net interest margin was 10.8%, up 61 basis points from the prior year and 12 basis points from the prior quarter.
Compared to the prior quarter, the increase in net interest margin was primarily driven by lower interest charge-offs and lower funding costs.
This was partially offset by a higher mix of promotional rate balances.
Card loan yield was up 1 basis point sequentially as lower interest charge-offs were offset by the increased promotional balance mix.
Yield on personal loans declined 15 basis points sequentially due to lower pricing.
The margin continued to benefit from lower funding costs primarily driven by maturities of higher rate CDs and an increased mix of lower rate savings and money market balances.
Average consumer deposits were flat year-over-year and declined 1% from the prior quarter.
The quarter-over-quarter decline was largely driven by consumer CDs.
We also saw a slight decline in savings and money market deposits as consumers continue to spend excess levels of liquidity.
We also continue to optimize our funding stack.
Late in September, we executed our first ABS issuance since October 2019 consisting of a $1.2 billion security with a three-year fixed rate coupon of 58 basis points and a five-year $600 million security with a fixed coupon of 103 basis points.
These were our lowest ABS coupons ever and show good execution in timing by our Treasury team.
Looking at revenue on Slide 7.
Total non-interest income increased $90 million or 20% over the prior year excluding the unrealized loss on equity investments.
Net discount and interchange revenue was up $61 million or 26% driven by strong sales volume.
This was partially offset by increased rewards costs due to high sales in the 5% category, which was restaurants and PayPal, both this year and last.
We continue to benefit from strong sales through our partnership with PayPal, while restaurant sales were up 62% year-over-year as dining activity recovered.
Loan fee income was up $21 million or 21%, primarily driven by lower late fee charge-offs and higher non-sufficient funds and cash advance fees.
Looking at Slide 8.
Total operating expenses were up $185 million or 18% from the prior year.
The details reflect our focus on investing for future growth while managing our operating cost.
Employee compensation increased $12 million driven by a higher bonus accrual in the current year.
Excluding bonuses, employee compensation was down 3% from their prior year from lower headcount.
Marketing expense increased $70 million supporting another quarter of strong new account growth.
Other expense included a $50 million legal accrual.
Professional fees were up $47 million, primarily due to higher recovery fees.
Courts reopening combined with strong credit and economic conditions have driven an increase in recoveries and their associated fees.
Year-to-date, recoveries were up 20% compared to the prior year.
The benefits of these cost is reflected in lower credit losses.
Moving to Slide 9.
The trend of sustained strong credit performance continued.
Total net charge-offs were a record low at 1.46%, down 154 basis points year-over-year and 66 basis points sequentially.
Total net charge dollars decreased $343 million from their prior year and were down $131 million quarter-over-quarter.
Credit performance was strong across all products, as evidenced by the net charge-off rates on card, private student loans and personal loans.
Moving to the allowance for credit losses on Slide 10.
This quarter, we released $165 million from reserves and our reserve rate dropped 35 basis points to 7.7%.
The reserve release reflects continued strong credit performance.
And a largely stable macroeconomic outlook.
The impact of these was partially offset by a 2% increase in loans from the prior quarter.
Our economic assumptions include an unemployment rate of approximately 5.5% by year-end and GDP growth of just over 6%.
These assumptions were slightly less positive to no issues in the second quarter, but still reflect a strong economic outlook.
Looking at Slide 11.
Our common equity Tier 1 for the period was 15.5%, well above our 10.5% target.
We repurchased $815 million of common stock and as we had previously announced, increased our dividend payable by 14% to $0.50 per share.
These actions reflect our commitment to returning capital to our shareholders.
On funding, we continue to make progress toward our goals of having deposits be 70% to 80% of our funding mix.
Deposits now make up 68% of total funding, up from 62% in the prior year.
Wrapping up on Slide 12.
Our outlook for 2021 has not changed and reflects continued strong execution against our financial and strategic objectives.
In summary, we remain well positioned for profitable growth from improving loan trends.
Credit performance trends remain favorable, reflecting positive macroeconomic conditions and our approach to underwriting and credit management.
Investments for growth have supported a significant increase in new accounts while we've contained operating expenses.
Lastly, our integrated digital banking and payment model is highly capital generative allowing us to invest for growth and return capital to shareholders.
We look forward to providing our outlook for 2022 on our conference call in January.

user
compname reports q3 earnings per share $3.54.
compname reports third quarter 2021 net income of $1.1 billion or $3.54 per diluted share.
q3 earnings per share $3.54.
compname reports q3 earnings per share $3.54 (oct. 20).
quarterly total revenue net of interest expense $2,777 million , up 2%.

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