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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.
The power of Synchrony's model continued to show through in our third quarter financial results.
We continued to reach and serve more partners and customers.
New accounts grew 17% to 6.2 million and average active accounts increased 5% to 67.2 million during the period.
This is in large part attributable to the powerful combination of our data driven insights, our seamless customer experiences, and our industry-leading product suite, which resonates deeply with customers.
Synchrony's omnichannel capabilities enable our partners and customers to connect wherever and whenever they want to be met and the variety of financing options and value propositions we offer empowers them with choice.
As we continue to anticipate and deliver on the needs of our partners and customers, we drive more value and greater utilization.
This translated to an 11% increase in purchase volume per active account during the third quarter and 16% growth in total purchase volume compared to last year.
Of course, this strength in purchase volume was largely offset by the persistently elevated payment rate trends resulting from government stimulus and industrywide forbearance actions, leading to a 2% increase in loans, including loans held for sale.
Net interest margin of 15.45% was 165 basis points higher than last year, primarily reflecting the reduction in excess liquidity.
Operating expenses were down 10% compared to last year and down 7% year-to-date as our cost efficiency initiatives continue as planned.
We remain on track to reduce about $210 million from our expense base by year-end even as we continue to invest in our business.
The efficiency ratio was 38.7% for the quarter largely flat with last year.
Credit continued to perform very well.
Net charge-offs were 2.18% for the third quarter, down 224 basis points from last year.
Net earnings were $1.1 billion or $2 per diluted share and included a $0.33 benefit from the reserve release related to the reclassification of the Gap portfolio to held for sale.
Turning to our balance sheet, deposits were down $3 billion or 5% versus last year, reflecting retail deposit rate actions we took to manage our excess liquidity.
Deposits represented 82% of our funding mix at quarter-end, a slight increase versus last year due to the retirement of debt.
During the quarter, we returned $1.4 billion in capital through share repurchases of $1.3 billion and $124 million in common stock dividends.
We also continue to reinvest in our business.
As we highlighted during our recent Investor Day, our ability to remain nimble and adapt to the ever-changing consumer finance landscape has been driven by our continued investment in our product suite and our innovative digital capabilities.
In fact, if you think about the last decade alone, the introduction of digital wallets, point of sale financing and a greater variety of installment offerings just to name a few has demonstrated the importance of diversity, accessibility, and utility in both products and experience.
And so Synchrony has continuously evolved, adding new financing options, enhancing our technology platform and expanding our channels and distribution networks in order to reach and serve more partners and customers in sustainable ways that drive greater value for all.
In addition to launching new products and partner programs, we are remaining focused on innovative ways to get scale distribution of our product suite.
Last week, we announced our expanded strategic partnership with Fiserv through which small businesses will now be able to access Synchrony products and services and accept private label credit card payments via the Clover point of sale and business management platform from Fiserv.
This will enable accelerated growth for small businesses, empowering merchants to attract more customers and generate more revenue by offering our customers greater flexibility and choice in how they make purchases.
We will also explore additional opportunities to cross-sell Synchrony products to existing Clover merchants.
Importantly, this strategic partnership also deepens Synchrony's ecosystem and reinforces our growth strategy to expand and accelerate innovative product offerings through additional distribution channels.
It builds on our momentum to bring our products to merchants faster and leverages Synchrony's leadership in financing, analytics and services.
We're excited to utilize the point of sale innovations driven by Clover to continue to transform the way people purchase while helping merchants grow.
Furthermore, as we and our partners' endeavor to provide more comprehensive customer access to financial products and resources, we are excited to expand our partnership with PayPal.
As announced in late September, Synchrony will be launching PayPal savings, a new PayPal branded savings account.
This unique opportunity will allow us to expand the distribution of our savings product to a unique set of customers with features and functionality inside the PayPal app delivering an enhanced customer experience while also further diversifying our deposit base at an attractively low cost to acquire.
In addition to our ongoing efforts to expand both our product suite and distribution network, we also seek to enhance partner and customer engagement through customized value propositions and omnichannel capabilities.
We recently launched two industry-first retail health and wellness credit cards.
The myWalgreens Mastercard and myWalgreens private label credit card, which reward customers with savings on future health and wellness purchases.
MyWalgreens credit card holders can earn 10% Walgreens cash rewards on eligible Walgreens branded products and 5% Walgreens cash rewards on other eligible brands and pharmacy purchases.
myWalgreens Mastercard holders can also earn 3% Walgreens cash rewards on eligible grocery and health and wellness purchases everywhere else, including healthcare providers and 1% Walgreens cash rewards on eligible purchases anywhere Mastercard credit cards are accepted.
In a world where consumers are increasingly responsible for a greater proportion of their health-related costs, we believe these value propositions will drive considerable value while also providing greater financing flexibility for health-related needs and enhancing loyalty over time.
Furthermore, Synchrony's digital capabilities allow us to seamlessly engage with customers wherever they are.
We have deep digital integration across the Walgreens web, mobile, and native app channels with the ability for customers to apply and instantly buy through all of these channels.
We've launched frictionless customer experiences, leveraging technology capabilities like QR codes, quick screen [Phonetic], which is a real-time pre-screen of one [Phonetic], customer-initiated pre-qualification, a direct-to-device in-store application process, card servicing integrated seamlessly into the Walgreens app and API integration with the myWalgreens loyalty program.
And while it's still early, the initial data we're seeing indicates that both the value prop and dynamic customer experience we have achieved with Walgreens are resonating very well with card holders in driving spend both inside and outside of Walgreens in categories such as grocery, health and wellness.
By empowering our partners and customers with best-in-class wallet optionality and compelling outcomes, Synchrony is increasingly well positioned as the partner of choice.
With more than 65 million active accounts, Synchrony has market-leading reach and deep diverse lending insights that enable us to better anticipate the needs of customers and therefore which financing options will optimize utilization and drive lifetime value.
So whether it comes in the form of our dual, co-branded and private label credit cards, our various SetPay installment products or our Synchrony Mastercard, we deeply understand when, why and how customers seek financing solutions for their day-to-day purchases.
We're particularly excited about the opportunity we see for our Synchrony Mastercard, which allows us to tap into the $500 billion general purpose credit card market.
We are taking a measured approach to growth.
However, by leveraging our scale and underwriting expertise, we've been able to identify better performing customer segments, acquire more customers at lower CPAs, and fine tune our channel strategy over the last two years.
Today, Synchrony Mastercard offers a variety of value propositions, which we use in combination with our pricing strategy to expand our customer reach and optimize conversion and we have great digital utility through dApply and integration in Apple Wallet as well as our mobile app.
This allows customers to access their various bank products, their money market and high-yield savings accounts as well as their credit card balances and transaction data.
This value proposition and seamless digital experience resonates very well with our customer, leading to purchase volume growth of 36% versus the same period in 2019.
We're also seeing higher levels of engagement around the product and brand as spend per active account is up 40% versus 2019.
So we're very excited about our Synchrony Mastercard.
It's an important offering within our product suite strategy that we believe will enable us to capture a larger portion of customers top of wallet spend and which should [Phonetic] drive highly scalable growth and above average returns to our business over the long-term.
Synchrony's third quarter financial results reflected broad-based strength across our business, highlighted by a double-digit purchase volume increase and continued loan growth, a significant improvement in our net interest margin, historically low losses and delinquencies, and continued cost discipline.
The combination of these results led to $1.1 billion in net earnings or $2 per diluted share, a return on average assets of 4.9% and a return on tangible common equity of 40.1%.
These results are a true testament to the power of Synchrony's unique business model, which builds on our deep domain expertise in consumer lending and leverages dynamic digital capabilities a little bit [Phonetic] through our comprehensive multi-product suite to reach and serve deep and diverse universe of partners and customers.
Looking at our third quarter performance in greater detail, beginning with purchase volume, which grew 16% compared to last year and 16% compared to 2019 excluding Walmart demonstrates clear broad-based strength in consumer demand.
This is also reflected in our purchase volume per account, which increased 11% compared to last year.
Dual card and co-branded cards accounted for 40% of the purchase volume in the third quarter and increased 29% from the prior year.
On a loan receivable basis, excluding the impact of the reclassification of the Gap portfolio to held for sale, dual and co-branded cards accounted for 24% of the portfolio and increased 4% from the prior year.
Average active accounts increased 5% compared to last year and new accounts increased 17% totaling more than 6 million new accounts in the third quarter and over 17.5 million new accounts.
In late August, we reached an agreement for the sale of the Gap portfolio, which led to the reclassification of $3.5 billion of loan receivables to held for sale and therefore reduced our ending loan receivables balance.
Excluding the impact of the reclassification, loan receivables would have increased by 2% versus the prior year as the period's strong purchase volume growth was largely offset by a persistently elevated payment rate.
Payment rate for the third quarter was approximately 200 basis points higher when compared to the last year.
Interest and fees on loans increased 2% compared to last year, reflecting similar growth in average loan receivables.
Net interest income was 6% higher than last year, primarily reflecting a decline in interest expense due to lower benchmark rates.
RSAs were $1.3 billion in the third quarter and 6.38% of average receivables.
The $367 million year-over-year increase primarily reflected the impact of the lower provision for credit losses and continued strong program performance including growth and improvement in net interest income.
To put this in context, remember that RSAs are designed to align interest between ourselves and each of our partners.
This means driving growth in attractive risk-adjusted returns enhancing program profitability.
This allows each partner to share the programs performance, so when profitability expands, our partners participate in that upside.
Now when you think about the combined $1.4 billion year-over-year improvement in net interest income, net losses and the reserve change, we shared $367 million of that through the RSA.
Focusing on our credit performance, provision for losses was $25 million.
Included in this quarter's provision was reserve release of $407 million which incorporated our continued strength in credit performance and we're optimistic macroeconomic environment and the impact of reclassifying our Gap portfolio loan receivables to held for sale.
This resulted in a reserve reduction of approximately $247 million.
Other income decreased $37 million, generally reflecting higher loyalty program costs from higher purchase volume during the quarter.
Other expense decreased $106 million compared to the prior year.
As you recall, last year we recognized an $89 million restructuring charge and we continue to see favorability from lower operational losses.
Moving to Slide 8 and our platform results.
We saw a broad-based purchase volume growth across all five platforms, reflecting strong consumer demand.
Our Home & Auto, Diversified & Value, Digital, and Health & Wellness platforms each experienced double-digit year-over-year growth in purchase volume.
The 10% year-over-year increase in Home & Auto was generally driven by strong retailer performance across almost all verticals while purchase volume in Diversified & Value increased 25% reflecting the continued return to in-person retail experiences.
In Digital, the 21% increase was due to broad-based growth across our partners coupled with growth in our new programs with Verizon and Venmo.
In Health & Wellness, the 10% growth in purchase volume primarily reflected consumers being more comfortable with the environment and undergoing planned procedures.
Meanwhile, purchase volume grew a more modest 2% in lifestyle reflecting broad-based growth across the platform, but having a tough comparable to last year's strong growth in power sports.
Loan receivable growth trends by platform generally reflected modest growth rates versus the prior year as higher purchase volume was largely offset by elevated payment rates.
The one exception being in our Diversified & Value platform which was impacted by store closures in 2020.
Average active account trends ranged on a platform basis up by as much as 10% in Diversified & Value and 7% in Digital while Home & Auto and Health & Wellness average active accounts were generally flat.
The active account growth in Diversified & Value largely reflected the return to in-store retail experiences.
Digital active accounts were up versus prior year due to greater engagement across our existing customer base as well as the impact of recent program launches.
Interest and fee trends were generally improved across the platform with the exception of Diversified & Value, which was down due to lower receivables.
I'll move to Slide 9 to discuss net interest income and margin trends.
The accumulated savings by consumers resulting from stimulus, forbearance and lower discretionary spending continue to impact the payment rates during the third quarter.
Payment rates were approximately 260 basis points higher than our five-year historical average.
That said, we've begun to see some signs of moderation in certain cohorts as payment rate was about 200 basis points higher year-over-year compared to almost 300 basis points higher year-over-year comparison in the second quarter.
We expect the payment rate to gradually normalize as consumer spending remains robust, excess savings have peaked and widespread forbearance dissipates.
Interest and fees were up approximately 2% in the third quarter reflecting [Phonetic] average loan receivable growth.
Net interest income increased 6% from last year reflecting the year-over-year improvement in interest and fees as well as lower interest expense for the period.
The net interest margin was 15.45% compared to last year's margin of 13.8%, a 165 basis point improvement year-over-year driven by the mix of interest earning assets and favorable interest bearing liabilities costs.
More specifically, the mix of loan receivables as a percent of total earning assets increased by 550 basis points from 78.3% to 83.8% driven by lower liquidity held during the quarter.
This accounted for 106 basis point increase in our net interest margin.
Interest bearing liabilities costs were 1.31%, a year-over-year improvement of 59 basis points primarily due to lower benchmark rates and funding mix.
This provided a 51 basis point increase in our net interest margin.
The loan receivables yield was 19.59%, a year-over-year improvement of 10 basis points.
This resulted in an 8 basis point improvement in our net interest margin.
Next, I'll cover our key credit trends on Slide 10.
First, let's discuss our delinquency trends where higher payment trends have continued to drive year-over-year improvements.
Our 30-plus delinquency rate was 2.42% compared to 2.67% last year.
Our 90 plus delinquency rate was 1.05% compared to 1.24% last year.
It should be noted that removing the impact of the Gap program from the third quarters of this year and last year, the 30-plus delinquency metric would have been down about 40 basis points versus 25 basis points and the 90 plus metric would be down about 25 basis points instead of 19 basis points.
And in terms of our portfolio's loss performance, our net charge-off rate was 2.18% compared to 4.42% last year.
This year-over-year improvement was primarily driven by strong delinquency trends we've experienced.
Our allowance for credit losses as a percent of loan receivables was 11.28%.
Let's move to Slide 11 and discuss expenses.
Overall expenses were down $106 million or 10% from last year to $961 million primarily reflecting the impact of the prior year's restructuring charge of $89 million and lower operational losses.
The efficiency ratio for the third quarter was 38.7% compared to 39.7% last year.
This metric remains elevated relative to our historical average due to lower revenue resulting from the impact of higher payment rate and lower average receivables.
We continue to maintain a disciplined focus on cost containment while we make strategic investments in our business to deepen our competitive advantage and drive long-term value for shareholders.
Moving to Slide 12, given the reduction in loan receivables in 2020 and early 2021 coupled with the strength of 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 and optimize our funding profile.
As a result of this strategy, there was a shift in our funding mix during the third quarter.
Our deposits declined by $3.2 billion from last year and our securitized and unsecured funding sources declined by $3 billion.
This resulted in deposits being 82% of our funding, compared to 80% last year with securitized and unsecured funding each comprising 9% of our funding sources at quarter-end.
Total liquidity including undrawn credit facilities was $18.4 billion which equated to 20% of our total assets, down from 28% last year.
Before I provide detail 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 has 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 17.1% CET1 under the CECL transition rules, 130 basis points above last year's level of 15.8%.
The Tier 1 capital ratio was 18% in the CECL transition rules compared to 16.7% last year.
The total capital ratio increased 120 basis points to 19.3% and the Tier 1 capital plus reserves ratio on a fully phased in basis decreased to 26.6% compared to 27.3% last year.
During the quarter, we returned $1.4 billion to shareholders, which included $1.3 billion in share repurchases and $124 million in common stock dividends.
Our business generates strong returns and considerable capital resulting from our commitment to drive growth at appropriate risk-adjusted returns, the scalability of our technology platform and our ongoing cost discipline.
We will continue to take the opportunistic approach to returning our excess capital to shareholders as our business performance and market conditions allow, subject to our capital plan and any regulatory restrictions.
While there are a number of external variables that are difficult to predict with precision, we generally expect the third quarter's key operating trends to be stable in the fourth quarter.
Underpinning our forecast is a stable and improving macroeconomic environment and the pandemic continues to be largely in control.
We expect strong consumer demand through the holiday season to support continued strength in purchase volume.
This strength, partially offset by continued elevation in payment rates should lead to a modest growth in receivables.
Our net interest margin will likely be consistent with 3Q '21.
Our provision for credit losses will continue to reflect the impact of asset growth, credit performance and macroeconomic factors as well as continued reserve reductions related to the Gap portfolio.
As credit losses begin to normalize, we expect the RSA as a percent of average loan receivables to begin to moderate.
Lastly, turning to our operating expense, we expect the acceleration in purchase volume to contribute to a slight sequential increase in absolute dollars for the fourth quarter.
That said, we continue to expect the full-year operating expenses to be down compared to 2020.
As we close out the year and look forward to the future, we're excited about the opportunities we see to continue to drive strong financial results and shareholder value.
We are well positioned to execute on the strategy we laid out during our Investor Day and drive sustainable growth and attractive risk-adjusted returns simply by continuing to leverage our inherent core strengths, the breadth and depth of our business model, the scalability of our innovative digital capabilities and customer lifetime value expansion we drive through our diversified product suite and powerful value propositions.
I'm really proud of the results that we as a team continued to deliver for Synchrony's partners, customers and stakeholders.
We have a truly unique understanding of the wide range of needs that our partners and customers seek to address at any given time and our differentiated approach to addressing those needs enables us to deliver solutions and experiences that deeply resonate whether it's through the optionality embedded within our diverse product suite and customized value propositions or the many ways in which we power the connection between our partners and customers, Synchrony continues to reach, engage and serve more customers and drive greater, more sustainable outcomes for our stakeholders.
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 yourselves 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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third quarter 2021 net earnings of $1.1 billion, or $2.00 per diluted share.
q3 net earnings included a $187 million post-tax benefit, or $0.33 per diluted share.
q3 net interest income increased $201 million, or 6%, to $3.7 billion.
q3 provision for credit losses decreased $1.2 billion, or 98%, to $25 million.

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