UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q 

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of October 23, 2017April 22, 2019 was 782,591,569.689,316,399.

“Synchrony” and its logos and other trademarks referred to in this report, including CareCredit®, Quickscreen®, Dual Card™, eQuickscreen™, Quickscreen® and Synchrony Car Care™ and SyPI™, belong to us. Solely for convenience, we refer to our trademarks in this report without the ™ and ® symbols, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks. Other service marks, trademarks and trade names referred to in this report are the property of their respective owners.

On our website at www.synchronyfinancial.com, we make available under the "Investors-SEC Filings" menu selection, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports or amendments are electronically filed with, or furnished to, the SEC. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information that we file electronically with the SEC.

Cautionary Note Regarding Forward-Looking Statements:

Various statements in this Quarterly Report on Form 10-Q may contain “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “targets,” “outlook,” “estimates,” “will,” “should,” “may” or words of similar meaning, but these words are not the exclusive means of identifying forward-looking statements.

Forward-looking statements are based on management’s current expectations and assumptions, and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, actual results could differ materially from those indicated in these forward-looking statements. Factors that could cause actual results to differ materially include global political, economic, business, competitive, market, regulatory and other factors and risks, such as: the impact of macroeconomic conditions and whether industry trends we have identified develop as anticipated; retaining existing partners and attracting new partners, concentration of our revenue in a small number of Retail Card partners, promotion and support of our products by our partners, and financial performance of our partners; cyber-attacks or other security breaches; higher borrowing costs and adverse financial market conditions impacting our funding and liquidity, and any reduction in our credit ratings; our ability to grow our deposits in the future; our ability to securitize our loans,loan receivables, occurrence of an early amortization of our securitization facilities, loss of the right to service or subservice our securitized loans,loan receivables, and lower payment rates on our securitized loans; our ability to grow our deposits in the future;loan receivables; changes in market interest rates and the impact of any margin compression; effectiveness of our risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, our ability to manage our credit risk, the sufficiency of our allowance for loan losses and the accuracy of the assumptions or estimates used in preparing our financial statements; our ability to offset increases in our costs in retailer share arrangements; competition in the consumer finance industry; our concentration in the U.S. consumer credit market; our ability to successfully develop and commercialize new or enhanced products and services; our ability to realize the value of acquisitions and strategic investments; reductions in interchange fees; fraudulent activity; failure of third-parties to provide various services that are important to our operations; disruptions in the operations of our computer systems and data centers; international risks and compliance and regulatory risks and costs associated with international operations; alleged infringement of intellectual property rights of others and our ability to protect our intellectual property; litigation and regulatory actions; damage to our reputation; our ability to attract, retain and motivate key officers and employees; tax legislation initiatives or challenges to our tax positions and/or interpretations, and state sales tax rules and regulations; a material indemnification obligation to GE under the Tax Sharing and Separation Agreement with GE (the "TSSA") if we cause the split-off from GE or certain preliminary transactions to fail to qualify for tax-free treatment or in the case of certain significant transfers of our stock following the split-off; regulation, supervision, examination and enforcement of our business by governmental authorities, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and other legislative and regulatory developments and the impact of the Consumer Financial Protection Bureau's (the “CFPB”) regulation of our business; impact of capital adequacy rules and liquidity requirements; restrictions that limit our ability to pay dividends and repurchase our common stock, and restrictions that limit the Bank’s ability to pay dividends to us; regulations relating to privacy, information security and data protection; use of third-party vendors and ongoing third-party business relationships; and failure to comply with anti-money laundering and anti-terrorism financing laws.

For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this report and in our public filings, including under the heading “Risk Factors”Factors Relating to Our Business” in our 20162018 Form 10-K. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by the federal securities laws.

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Introduction and Business Overview

We are one of thea premier consumer financial services companies in the United States.company delivering customized financing programs across key industries including retail, health, auto, travel and home, along with award-winning consumer banking products. We provide a range of credit products through our financing programs which we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners.” For the three and nine months ended September 30, 2017,March 31, 2019, we financed $32.9 billion and $95.2$32.5 billion of purchase volume, respectively, and had 69.377.1 million average active accounts, in both periods and at September 30, 2017,March 31, 2019, we had $76.9$80.4 billion of loan receivables. For the three and nine months ended September 30, 2017, we had net earnings of $555 million and $1,550 million, respectively, representing a return on assets of 2.4% and 2.3%, respectively.

We offer our credit products primarily through our wholly-owned subsidiary, Synchrony Bank (the "Bank").the Bank. In addition, through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”), including certificates of deposit, individual retirement accounts (“IRAs”), money market accounts and savings accounts. We also take deposits at the Bank through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. We have significantly expanded our online direct banking operations in recent years and our deposit base serves as a source of stable and diversified low cost funding for our credit activities. At September 30, 2017,March 31, 2019, we had $54.5$64.1 billion in deposits, which represented 73%75% of our total funding sources.

Our Sales Platforms

We conduct our operations through a single business segment. Profitability and expenses, including funding costs, loan losses and operating expenses, are managed for the business as a whole. Substantially all of our operations are within the United States. We offer our credit products through three sales platforms (Retail Card, Payment Solutions and CareCredit). Those platforms are organized by the types of products we offer and the partners we work with, and are measured on interest and fees on loans, loan receivables, newactive accounts and other sales metrics.

CareCredit is a leading provider of promotional financing to consumers for health, veterinary and personal care procedures, productsservices or services.products. We have a network of CareCredit providers and health-focused retailers, the vast majority of which are individual or small groups of independent healthcare providers, through which we offer a CareCredit branded private label credit card. In October 2017, we also announced the launch ofcard and our CareCredit Dual Card offering. Substantially all of the credit extended in this platform is promotional financing. CareCredit’s revenue primarily consists of interest and fees on our loan receivables, including merchant discounts.

Our Credit Products

Through our platforms, we offer three principal types of credit products: credit cards, commercial credit products and consumer installment loans. We also offer a debt cancellation product.

The following table sets forth each credit product by type and indicates the percentage of our total loan receivables that are under standard terms only or pursuant to a promotional financing offer at September 30, 2017.March 31, 2019.

In Payment Solutions, we originate installment loans to consumers (and a limited number of commercial customers) in the United States, primarily in the power products market (motorcycles, ATVs and lawn and garden). Installment loans are closed-end credit accounts where the customer pays down the outstanding balance in installments. Installment loans are assessed periodic finance charges using fixed interest rates.

Business Trends and Conditions

We believe our business and results of operations will be impacted in the future by various trends and conditions. For a discussion of thesecertain trends and conditions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Trends and Conditions” in our 20162018 Form 10-K. For a discussion of how thesecertain trends and conditions impacted the three and nine months ended September 30, 2017,March 31, 2019, see “—Results of Operations.”

Seasonality

In our Retail Card and Payment Solutions platforms, we experience fluctuations in transaction volumes and the level of loan receivables as a result of higher seasonal consumer spending and payment patterns that typically result in an increase of loan receivables from August through a peak in late December, with reductions in loan receivables occurring over the first and second quarters of the following year as customers pay their balances down.

The seasonal impact to transaction volumes and the loan receivables balance typically results in fluctuations in our results of operations, delinquency metrics and the allowance for loan losses as a percentage of total loan receivables between quarterly periods.

In addition to the seasonal variance in loan receivables discussed above, we also experience a seasonal increase in delinquency rates and delinquent loan receivables balances during the third and fourth quarters of each year due to lower customer payment rates resulting in higher net charge-off rates in the first and second quarters. Our delinquency rates and delinquent loan receivables balances typically decrease during the subsequent first and second quarters as customers begin to pay down their loan balances and return to current status resulting in lower net charge-off rates in the third and fourth quarters. Because customers who were delinquent during the fourth quarter of a calendar year have a higher probability of returning to current status when compared to customers who are delinquent at the end of each of our interim reporting periods, we expect that a higher proportion of delinquent accounts outstanding at an interim period end will result in charge-offs, as compared to delinquent accounts outstanding at a year end. Consistent with this historical experience, we generally experience a higher allowance for loan losses as a percentage of total loan receivables at the end of an interim period, as compared to the end of a calendar year. In addition, despite improving credit metrics such as declining past due amounts, we may experience an increase in our allowance for loan losses at an interim period end compared to the prior year end, reflecting these same seasonal trends.

Results of Operations

Below are highlights of our performance for the three and nine months ended September 30, 2017March 31, 2019 compared to the three and nine months ended September 30, 2016,March 31, 2018, as applicable, except as otherwise noted.

New and Extended2019 Partner Agreements during the nine months ended September 30, 2017

The following table sets forth our results of operations for the periods indicated.

Interest income increased by $437$542 million, or 11.5%, and by $1,285 million, or 11.9%12.8%, for the three and nine months ended September 30, 2017, respectively,March 31, 2019, driven primarily by growth in our average loan receivables.

The increasesincrease in average loan receivables of 9.9% and 11.0%13.7% for the three and nine months ended September 30, 2017, respectively, wereMarch 31, 2019, was driven primarily by the PayPal Credit acquisition, higher purchase volume of 4.0% and 5.7% and average active account growth of 4.0%growth. Purchase volume and 4.7%, respectively.

The yield on average interest-earning assets increased for the three and nine months ended September 30, 2017. The increase in the three and nine months ended September 30, 2017 wasMarch 31, 2019, primarily due to an increase in the percentage of interest-earning assets attributable to loan receivables, and an increasepartially offset by a decrease in the yield on our average loan receivables of 1425 basis points to 21.78% and 8 basis points basis points to 21.42%, respectively. The increase in yield21.14%. This decrease was primarily driven by higher revolve rates as well as a higher benchmark interest rate.due to the impact of adding the PayPal Credit program.

Interest expense increased by $42$158 million, or 13.3%, and by $87 million, or 9.4%39.3%, for the three and nine months ended September 30, 2017, respectively,March 31, 2019, driven primarily by the growth in our deposit liabilities.higher benchmark interest rates and growth. Our cost of funds increased slightly to 1.93%2.64% for the three months ended September 30, 2017,March 31, 2019, compared to 1.85%2.10% for the three months ended September 30, 2016, primarily due to higher benchmark interest rates. Our cost of funds remained flat at 1.88% for both the nine months ended September 30, 2017 and 2016.March 31, 2018.

The increase in average interest-bearing liabilities for the three and nine months ended September 30, 2017March 31, 2019 was driven primarily by growth in our direct deposits.

Net interest income increased by $395$384 million, or 11.3%, and by $1,198 million, or 12.1%10.0%, for the three and nine months ended September 30, 2017,March 31, 2019, driven primarily driven by higher average loan receivables.receivables, partially offset by increases in interest expense reflecting higher benchmark interest rates and growth.

Retailer share arrangements increased 6.3% to $805by $234 million, and 3.2% to $2,158 millionor 32.5%, for the three and nine months ended September 30, 2017, respectively, drivenMarch 31, 2019, primarily bydue to lower reserve build, growth and margin improvementimproved performance of the programs in which we have retailer share arrangements, partially offset by higher provision for loan losses associated with these programs.arrangements.

Provision for loan losses increaseddecreased by $324$503 million, or 32.9%36.9%, for the three months ended September 30, 2017,March 31, 2019, substantially due to a $522 million reserve release following the reclassification of the Walmart portfolio to loan receivables held for sale on our Condensed Consolidated Statement of Financial Position. Our allowance coverage ratio remained relatively flat at 7.39% at March 31, 2019, as compared to 7.37% at March 31, 2018.

The effective tax rate for the three and nine months ended September 30, 2017March 31, 2019 decreased slightly compared to the same periodsperiod in the prior year primarily due to the impact of research and development credits recorded in the current year periods.year. In each period, the effective tax rate differs from the applicable U.S. federal statutory rate of 35% primarily due to state income taxes.

Retail Card

Retail Card interest and fees on loans increased by $312$439 million, or 11.2%, and by $901 million, or 11.3%14.6%, for the three and nine months ended September 30, 2017, respectively. These increases wereMarch 31, 2019. The increase was primarily the result of growth in average loan receivables.

Payment Solutions

Payment Solutions interest and fees on loans increased by $54$43 million, or 10.7%, and by $178 million, or 12.5%6.7%, for the three and nine months ended September 30, 2017, respectively. These increases wereMarch 31, 2019. The increase was primarily driven by growth in average loan receivables.

CareCredit interest and fees on loans increased by $45$33 million, or 9.5%, and by $144 million, or 10.7%6.4%, for the three and nine months ended September 30, 2017, respectively. These increases wereMarch 31, 2019. The increase was primarily driven by growth in average loan receivables.

Loan Receivables

The following discussion provides supplemental information regarding our loan receivables portfolio.

Loan receivables are our largest category of assets and represent our primary source of revenue. The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.

Loan receivables increased slightlydecreased by $591 million,$12.7 billion, or 0.8%13.7%, at September 30, 2017March 31, 2019 compared to December 31, 2016,2018, primarily driven by business growth partially offset by the impacts fromreclassification of $8.1 billion of loan receivables associated with the Walmart portfolio to loan receivables held for sale and the seasonality of our business.

Loan receivables increased by $6,284 million,$2.6 billion, or 8.9%3.3%, at September 30, 2017March 31, 2019 compared to September 30, 2016,March 31, 2018, primarily driven by the PayPal Credit acquisition, higher purchase volume and average active account growth.

Our loss mitigation strategy is intended to minimize economic loss and at times can result in rate reductions, principal forgiveness, extensions or other actions, which may cause the related loan to be classified as a Troubled Debt Restructuring (“TDR”) and also be impaired. We use long-term modification programs for borrowers experiencing financial difficulty as a loss mitigation strategy to improve long-term collectability of the loans that are classified as TDRs. The long-term program involves changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The long-term program does not normally provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. We also make loan modifications for some customers who request financial assistance through external sources, such as a consumer credit counseling agency program. The loans that are modified typically receive a reduced interest rate but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. The determination of whether these changes to the terms and conditions meet the TDR criteria includes our consideration of all relevant facts and circumstances.

Loans classified as TDRs are recorded at their present value with impairment measured as the difference between the loan balance and the discounted present value of cash flows expected to be collected, discounted at the original effective interest rate of the loan. Our allowance for loan losses on TDRs is generally measured based on the difference between the recorded loan receivable and the present value of the expected future cash flows.

Interest income from loans accounted for as TDRs is accounted for in the same manner as other accruing loans. We accrue interest on credit card balances until the accounts are charged-off in the period the accounts become 180 days past due. The following table presents the amount of loan receivables that are not accruing interest, loans that are 90 days or more past-due and still accruing interest, and earning TDRs for the periods presented.

Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine are uncollectible, net of recovered amounts. We exclude accrued and unpaid finance charges and fees and third-party fraud losses from charge-offs. Charged-off and recovered finance charges and fees are included in interest and fees on loans while third-party fraud losses are included in other expense. Charge-offs are recorded as a reduction to the allowance for loan losses and subsequent recoveries of previously charged-off amounts are credited to the allowance for loan losses. Costs incurred to recover charged-off loans are recorded as collection expense and included in other expense in our Condensed Consolidated Statements of Earnings.