SYNCHRONY FINANCIAL The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report and in our 2019 Form 10-K. The discussion below contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. See "Cautionary Note Regarding Forward-Looking Statements." Introduction and Business Overview ____________________________________________________________________________________________ We are a premier consumer financial services company delivering a wide range of specialized financing programs, as well as innovative consumer banking products, across key industries including digital, retail, home, auto, travel, health and pet. 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 endedSeptember 30, 2020 , we financed$36.0 billion and$99.2 billion of purchase volume, respectively, and had 64.3 million and 67.2 million average active accounts, respectively, and atSeptember 30, 2020 , we had$78.5 billion of loan receivables. We offer our credit products primarily through our wholly-owned subsidiary, the Bank. In addition, through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by theFederal 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 ourFDIC -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. AtSeptember 30, 2020 , we had$63.5 billion in deposits, which represented 80% of our total funding sources. Our Sales Platforms _________________________________________________________________ We conduct our operations through a single business segment. Profitability and expenses, including funding costs, credit losses and operating expenses, are managed for the business as a whole. Substantially all of our operations are withinthe 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, active accounts and other sales metrics. 6
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Retail Card
Retail Card is a leading provider of private label credit cards, and also
provides Dual Cards, general purpose co-branded credit cards and small and
medium-sized business credit products. We offer one or more of these products
primarily through 25 national and regional retailers with which we have ongoing
program agreements. The average length of our relationship with these Retail
Card partners is 22 years. Retail Card's revenue primarily consists of interest
and fees on our loan receivables. Other income primarily consists of interchange
fees earned when our Dual Card or general purpose co-branded credit cards are
used outside of our partners' sales channels and fees paid to us by customers
who purchase our debt cancellation products, less loyalty program payments. In
addition, the majority of our retailer share arrangements, which provide for
payments to our partner if the economic performance of the program exceeds a
contractually-defined threshold, are with partners in the Retail Card sales
platform. Substantially all of the credit extended in this platform is on
standard terms.
Payment Solutions
Payment Solutions is a leading provider of promotional financing for major
consumer purchases, offering consumer choice for financing at the point of sale,
including primarily private label credit cards, Dual Cards and installment
loans. Payment Solutions offers these products through participating partners
consisting of national and regional retailers, manufacturers, buying groups and
industry associations. Credit extended in this platform, other than for our oil
and gas retail partners, is primarily promotional financing. Payment Solutions'
revenue primarily consists of interest and fees on our loan receivables,
including "merchant discounts," which are fees paid to us by our partners in
almost all cases to compensate us for all or part of foregone interest income
associated with promotional financing.
CareCredit
CareCredit is a leading provider of promotional financing to consumers for
health, veterinary and personal care procedures, services and 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
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.
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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 atSeptember 30, 2020 . Promotional Offer Standard Terms Credit Product Only Deferred Interest Other Promotional Total Credit cards 62.0 % 17.9 % 15.9 % 95.8 % Commercial credit products 1.6 - - 1.6 Consumer installment loans - - 2.5 2.5 Other 0.1 - - 0.1 Total 63.7 % 17.9 % 18.4 % 100.0 %
Credit Cards We typically offer the following principal types of credit cards: • Private Label Credit Cards. Private label credit cards are
partner-branded credit cards (e.g., Lowe's or Amazon) or
program-branded credit cards (e.g.,
that are used primarily for the purchase of goods and services from the
partner or within the program network. In addition, in some cases,
cardholders may be permitted to access their credit card accounts for
cash advances. In Retail Card, credit under our private label credit
cards typically is extended on standard terms only, and in Payment
Solutions and CareCredit, credit under our private label credit cards
typically is extended pursuant to a promotional financing offer.
• Dual Cards and General Purpose Co-Brand Cards. Our patented Dual Cards
are credit cards that function as private label credit cards when used
to purchase goods and services from our partners, and as general
purpose credit cards when used to make purchases from other retailers
whenever cards from those card networks are accepted or for cash
advance transactions. We also offer general purpose co-branded credit
cards that do not function as private label cards, as well as, in
limited circumstances, a Synchrony-branded general purpose credit card.Credit extended under our Dual Cards and general purpose co-branded
credit cards typically is extended on standard terms only. We offer
either Dual Cards or general purpose co-branded credit cards across all
of our sales platforms, spanning 22 ongoing credit partners and our
CareCredit Dual Card, of which the majority are Dual Cards. Consumer
Dual Cards and Co-Branded cards totaled 23% of our total loan
receivables portfolio at September 30, 2020 .
Commercial Credit Products
We offer private label cards and Dual Cards for commercial customers that are
similar to our consumer offerings. We also offer a commercial pay-in-full
accounts receivable product to a wide range of business customers. We offer our
commercial credit products primarily through our Retail Card platform to the
commercial customers of our Retail Card partners.
Installment Loans
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.
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Business Trends and Conditions ____________________________________________________________________________________________ We believe our business and results of operations will be impacted in the future by various trends and conditions, including the following: • Growth in loan receivables and interest income.
• Adoption of ASU 2016-13 Financial Instruments-Credit Losses: Measurement
of Credit Losses on Financial Instruments ("CECL").
• Asset quality.
• Retailer share arrangement payments under our program agreements.
• Extended duration of our Retail Card program agreements.
• Growth in interchange revenues and loyalty program costs.
• Capital and liquidity levels.
For a further discussion of the above trends and conditions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Business Trends and Conditions" in our 2019 Form 10-K. COVID-19 The outbreak of the global pandemic of COVID-19 and resultant economic effects of preventative measures taken acrossthe United States and worldwide during the nine months endedSeptember 30, 2020 have resulted in significant and numerous changes to the previously disclosed trends and conditions referred to above. As of the date of filing of this report, the duration and magnitude of the effects of COVID-19 continue to be unknown, and as such the expectations and guidance for 2020 provided during the Company's earnings conference call onJanuary 24, 2020 can no longer be relied upon. While the magnitude of the impact from COVID-19 is uncertain and difficult to predict, we anticipate the following key trends will be affected: • Growth in loan receivables and interest income. We have experienced
significant declines in consumer purchase activity following the outbreak
of COVID-19 and associated governmental preventative measures, such as
closures of non-essential businesses. Interest and fees on loans decreased
16% for the nine months ended September 30, 2020 compared to the prior
year period. The sale of the Walmart consumer portfolio sale drove a
decline compared to the prior year period of approximately 11%. Theremaining decrease in interest and fees on loans, along with a decline in
loan receivables of 6% and a reduction in purchase volume for our ongoing
partners of 3%, in all instances at or for the nine months ended
addition, we have experienced a reduction in benchmark interest rates and
we have also provided, for a temporary period of time, forbearance in
terms of deferrals of minimum payments and waivers of interest and fees
for qualifying cardholders that are impacted by COVID-19 and request
relief. The decreases in loan receivables and benchmark interest rates
along with the forbearance actions have led to the reductions in interest
income for the nine months ended
growth in purchase volume compared to the prior year for the month of
September 2020 , we expect the above factors will likely result in a
reduction in the growth of our interest income for the remainder of 2020.
As noted above, the extent of the impacts from these conditions is
currently uncertain and dependent on various factors. These factorsinclude, the nature of and duration for which the preventative measures
remain in place, including responses to increases in COVID-19 infections
nationally that may occur, and the type of any additional stimulus
measures and other policy responses that the
9
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• Adoption of ASU 2016-13 Financial Instruments-Credit Losses: Measurement
of Credit Losses on Financial Instruments ("CECL"). In response to the
COVID-19 pandemic, in March 2020 , the Coronavirus Aid, Relief, and
Economic Security Act ("CARES Act") was signed into law and includes aprovision that permits financial institutions to defer temporarily the use
of CECL. However, in a related action, the joint federal bank regulatory
agencies issued an interim final rule that allows banking organizations to
mitigate the effects of the CECL accounting standard in their regulatory
capital. Banking organizations that are required under
standards to adopt CECL this year can elect to mitigate the estimated
cumulative regulatory capital effects of CECL for up to two years. This
two-year delay is in addition to the three-year transition period that the
agencies had already made available. The Company has elected to adopt the
option provided by the interim final rule, which will largely delay the
effects of CECL on its regulatory capital for the next two years, after
which the effects will be phased-in over a three-year period from January
1, 2022 through
amount of adjustments to regulatory capital deferred until the phase-in
period includes both the initial impact of our adoption of CECL at January
1, 2020 and 25% of subsequent changes in our allowance for credit losses
during each quarter of the two-year period ended
• Asset quality. Prior to COVID-19, we had experienced slightly improving
asset quality trends that reflected stable U.S. unemployment rates and
consumer confidence. In addition, over-30 day loan delinquencies as a
percentage of period-end loan receivables decreased to 2.67% at
an improvement in customer payment behavior. Beginning in
have taken certain forbearance actions for our customers impacted by
COVID-19. Through
forbearance to a cumulative total of approximately 2.0 million accounts,
or
balances remained in forbearance. To date, while not having a material
impact to the Company's overall delinquency metrics at September 30, 2020 ,
we have experienced a higher incidence rate of accounts becoming
delinquent following their exit from these short-term programs, as
compared to accounts that did not enter the forbearance program. We
anticipate that this post-program performance and the current levels of
filings for unemployment benefits in
mitigated by the effects of governmental actions such as the CARES Act
which included unemployment benefits that expired in
result in an increase from current levels in the Company's delinquencies
and net charge-off rate for the remainder of 2020 and into 2021.
Similarly, we have experienced an increase to our allowance for credit
losses and provision for credit losses during the three and nine months
ended
extent the current environment continues beyond our expectations or
deteriorates further, we may experience further increases to our allowance
for credit losses and provision for credit losses related to COVID-19.
• Retailer share arrangement payments under our program agreements. To the
extent we experience further reductions in interest income and also
increases in expected net charge-offs related to COVID-19 discussed above,
we expect that the growth in absolute terms of our payments to our
partners under our retailer share arrangements, compared to the prior
year, will decrease.
For a further discussion of the risks and uncertainties relating to COVID-19 for our results of operations and business condition, see Item 1A. Risk Factors. For a discussion of how certain trends and conditions impacted the three and nine months endedSeptember 30, 2020 , 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 credit losses as a percentage of total loan receivables between quarterly periods. 10
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In addition to the seasonal variance in loan receivables discussed above, we
also typically 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 credit 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 credit losses at an interim period end compared to the prior year
end, reflecting these same seasonal trends.
11
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Results of Operations ____________________________________________________________________________________________ Highlights for the Three and Nine Months EndedSeptember 30, 2020 Below are highlights of our performance for the three and nine months endedSeptember 30, 2020 compared to the three and nine months endedSeptember 30, 2019 , as applicable, except as otherwise noted. • Net earnings decreased 70.4% to$313 million for the three months ended
ended
higher provision for credit losses, partially offset by a decrease in
retailer share arrangements. These changes were primarily due to the
impact of COVID-19 and the effects from the sale of the Walmart consumer
portfolio in 2019.
• We adopted the new CECL accounting guidance in
an increase to our allowance for loan losses of
the increases in provision for credit losses for the three and nine months
ended
and
applying the new CECL guidance as compared to the prior accounting
guidance.
• Loan receivables decreased 5.6% to $78.5 billion at September 30, 2020
compared to
and a decrease in average active accounts for our ongoing partner programs
due to the impact of COVID-19, as well as the sale of loan receivables
associated with the Yamaha portfolio.
• Net interest income decreased 21.2% to $3.5 billion and 15.9% to $10.7
billion for the three and nine months ended September 30, 2020 ,
respectively, primarily due to a decrease in interest and fees on loans
due to the impact of COVID-19 and the Walmart consumer portfolio sale,
partially offset by a decrease in interest expense reflecting lower
benchmark interest rates.
• Retailer share arrangements decreased 11.5% to
respectively, reflecting the impact of COVID-19 on program performance.
• Over-30 day loan delinquencies as a percentage of period-end loan
receivables decreased 180 basis points to 2.67% at
the net charge-off rate decreased 93 basis points to 4.42% and 75 basis
points to 5.05% for the three and nine months ended
respectively.
• Provision for credit losses increased by
billion, or 48.2%, for the three and nine months ended
respectively. The increases were primarily driven by higher reserve builds
reflecting the projected impacts of COVID-19, the increases attributable
to CECL discussed above and the effects of the prior year reductions in
reserves for credit losses related to the Walmart consumer portfolio sale
of $326 million and $1.1 billion , respectively. These increases were
partially offset by lower net charge-offs. Our allowance coverage ratio(allowance for credit losses as a percent of period-end loan receivables)
increased to 12.92% at
and impacts from COVID-19.
• Other expense remained flat and decreased by
the three and nine months ended
primarily driven by the cost reductions related to the sale of the Walmart
consumer portfolio, lower purchase volume and average active accounts and
reductions in certain discretionary spend. These decreases in expenses
were offset by a restructuring charge of $89 million recorded in the
current quarter, as well as expenditures related to our response to
COVID-19. The decrease for the nine months ended September 30, 2020 also
included lower professional fees due to interim servicing costs in theprior year associated with acquired portfolios, partially offset by higher
operational losses.
• At
sources. Total deposits decreased by 2.5% to $63.5 billion at
September 30, 2020 , compared to December 31, 2019 .
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• During the nine months ended
dividends on our Series A 5.625% non-cumulative preferred stock of
per share, or $32 million .
• During the nine months ended September 30, 2020 , we repurchased $1.0
billion of our outstanding common stock, and declared and paid cash
dividends of
have suspended share repurchases until we have greater visibility as to
the current economic environment.
2020 Partner Agreements • In our Retail Card sales platform, we launched new programs with Harbor
Freight Tools, Venmo and Verizon and extended our program agreement with
Sam's Club .
• In our Payment Solutions sales platform, we announced our new partnerships
with
Furniture and Piaggio, extended our program agreements with
Bernina, CarX, Englert, 4 Wheel Parts, Hanks, Icahn Enterprises LP
automotive brands (
Care,
Living Spaces, Puronics,
Vanderhall and completed the sale of loan receivables associated with the
Yamaha portfolio.
• In our CareCredit sales platform, we expanded our network through our new
partnership with AdventHealth, launched other healthcare system
partnerships with
Health Network andCox Health , extended Pets Best's relationship with Progressive, and renewed our agreements with Blue River Petcare, NVA,Vision Group Holdings and West Coast Dental.
Summary Earnings The following table sets forth our results of operations for the periods indicated.
Three months ended September 30, Nine months ended September 30,
($ in millions) 2020 2019 2020 2019
Interest income $ 3,837 $ 4,981 $ 12,074 $ 14,505
Interest expense 380 592 1,331 1,735
Net interest income 3,457 4,389 10,743 12,770
Retailer share arrangements (899 ) (1,016 ) (2,598 ) (2,829 )
Provision for credit losses 1,210 1,019 4,560 3,076
Net interest income, after retailer
share arrangements and provision for
credit losses 1,348 2,354 3,585 6,865
Other income 131 85 323 267
Other expense 1,067 1,064 3,055 3,166
Earnings before provision for income
taxes 412 1,375 853 3,966
Provision for income taxes 99 319 206 950
Net earnings $ 313 $ 1,056 $ 647 $ 3,016
Net earnings available to common
stockholders $ 303 $ 1,056 $ 615 $ 3,016
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Other Financial and Statistical Data
The following table sets forth certain other financial and statistical data for
the periods indicated.
At and for the At and for the
Three months ended September 30, Nine months ended September 30,
($ in millions) 2020 2019 2020 2019
Financial Position Data (Average):
Loan receivables, including held for
sale $ 78,005 $ 90,556 $ 80,368 $ 89,752
Total assets $ 96,340 $ 106,413 $ 98,333 $ 105,542
Deposits $ 63,876 $ 65,898 $ 64,380 $ 64,826
Borrowings $ 16,017 $ 21,117 $ 17,207 $ 21,577
Total equity $ 12,139 $ 14,828 $ 12,303 $ 14,812
Selected Performance Metrics:
Purchase volume(1)(2) $ 36,013 $ 38,395 $ 99,210 $ 109,199
Retail Card $ 27,374 $ 29,282 $ 75,762 $ 83,472
Payment Solutions $ 5,901 $ 6,281 $ 16,099 $ 17,478
CareCredit $ 2,738 $ 2,832 $ 7,349 $ 8,249
Average active accounts (in
thousands)(2)(3) 64,270 76,695 67,246 76,653
Net interest margin(4) 13.80 % 16.29 % 14.17 % 16.04 %
Net charge-offs $ 866 $ 1,221 $ 3,037 $ 3,896
Net charge-offs as a % of average
loan receivables, including held for
sale 4.42 % 5.35 % 5.05 % 5.80 %
Allowance coverage ratio(5) 12.92 % 6.74 % 12.92 % 6.74 %
Return on assets(6) 1.3 % 3.9 % 0.9 % 3.8 %
Return on equity(7) 10.3 % 28.3 % 7.0 % 27.2 %
Equity to assets(8) 12.60 % 13.93 % 12.51 % 14.03 %
Other expense as a % of average loan
receivables, including held for sale 5.44 % 4.66 % 5.08 % 4.72 %
Efficiency ratio(9) 39.7 % 30.8 % 36.1 % 31.0 %
Effective income tax rate 24.0 % 23.2 % 24.2 % 24.0 %
Selected Period-End Data:
Loan receivables $ 78,521 $ 83,207 $ 78,521 $ 83,207
Allowance for credit losses $ 10,146 $ 5,607 $ 10,146 $ 5,607
30+ days past due as a % of
period-end loan receivables(10) 2.67 % 4.47 % 2.67 % 4.47 %
90+ days past due as a % of
period-end loan receivables(10) 1.24 % 2.07 % 1.24 % 2.07 %
Total active accounts (in
thousands)(2)(3) 64,800 77,094 64,800 77,094
______________________(1) Purchase volume, or net credit sales, represents the aggregate amount of
charges incurred on credit cards or other credit product accounts less
returns during the period.
(2) Includes activity and accounts associated with loan receivables held for
sale.
(3) Active accounts represent credit card or installment loan accounts on which
there has been a purchase, payment or outstanding balance in the current
month.
(4) Net interest margin represents net interest income divided by average
interest-earning assets.
(5) Allowance coverage ratio represents allowance for credit losses divided by
total period-end loan receivables.
(6) Return on assets represents net earnings as a percentage of average total
assets.
(7) Return on equity represents net earnings as a percentage of average total
equity.
(8) Equity to assets represents average total equity as a percentage of average
total assets.
(9) Efficiency ratio represents (i) other expense, divided by (ii) sum of net
interest income, plus other income, less retailer share arrangements.
(10) Based on customer statement-end balances extrapolated to the respective
period-end date.
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Average Balance Sheet
The following tables set forth information for the periods indicated regarding
average balance sheet data, which are used in the discussion of interest income,
interest expense and net interest income that follows.
2020 2019
Interest Average Interest Average
Three months ended September 30 Average Income / Yield / Average Income/ Yield /
($ in millions) Balance Expense Rate(1) Balance Expense Rate(1)
Assets
Interest-earning assets:
Interest-earning cash and
equivalents(2) $ 13,664 $ 4 0.12 % $ 10,947 $ 59 2.14 %
Securities available for sale 7,984 12 0.60 % 5,389 32 2.36 %
Loan receivables, including held
for sale(3):
Credit cards 74,798 3,752 19.96 % 87,156 4,807 21.88 %
Consumer installment loans 1,892 46 9.67 % 2,022 48 9.42 %
Commercial credit products 1,238 22 7.07 % 1,329 35 10.45 %
Other 77 1 NM 49 - - %
Total loan receivables,
including held for sale 78,005 3,821 19.49 % 90,556 4,890 21.42 %
Total interest-earning assets 99,653 3,837 15.32 % 106,892 4,981 18.49 %
Non-interest-earning assets:
Cash and due from banks 1,489 1,374
Allowance for credit losses (9,823 ) (5,773 )
Other assets 5,021 3,920
Total non-interest-earning
assets (3,313 ) (479 )
Total assets $ 96,340 $ 106,413
Liabilities
Interest-bearing liabilities:
Interest-bearing deposit
accounts $ 63,569 $ 245 1.53 % $ 65,615 $ 411 2.49 %
Borrowings of consolidated
securitization entities 8,057 53 2.62 % 11,770 88 2.97 %
Senior unsecured notes 7,960 82 4.10 % 9,347 93 3.95 %
Total interest-bearing
liabilities 79,586 380 1.90 % 86,732 592 2.71 %
Non-interest-bearing
liabilities:
Non-interest-bearing deposit
accounts 307 283
Other liabilities 4,308 4,570
Total non-interest-bearing
liabilities 4,615 4,853
Total liabilities 84,201 91,585
Equity
Total equity 12,139 14,828
Total liabilities and equity $ 96,340 $ 106,413
Interest rate spread(4) 13.42 % 15.78 %
Net interest income $ 3,457 $ 4,389
Net interest margin(5) 13.80 % 16.29 %
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2020 2019
Interest Average Interest Average
Nine months ended September 30 Average Income / Yield / Average Income/ Yield /
($ in millions) Balance Expense Rate(1) Balance Expense Rate(1)
Assets
Interest-earning assets:
Interest-earning cash and
equivalents(2) $ 13,992 $ 49 0.47 % $ 10,989 $ 190 2.31 %
Securities available for sale 6,918 56 1.08 % 5,679 102 2.40 %
Loan receivables, including held
for sale(3):
Credit cards 77,476 11,764 20.28 % 86,471 13,975 21.61 %
Consumer installment loans 1,624 118 9.71 % 1,931 134 9.28 %
Commercial credit products 1,210 85 9.38 % 1,304 103 10.56 %
Other 58 2 4.61 % 46 1 2.91 %
Total loan receivables,
including held for sale 80,368 11,969 19.89 % 89,752 14,213 21.17 %
Total interest-earning assets 101,278 12,074 15.92 % 106,420 14,505 18.22 %
Non-interest-earning assets:
Cash and due from banks 1,475 1,327
Allowance for credit losses (9,253 ) (6,006 )
Other assets 4,833 3,801
Total non-interest-earning
assets (2,945 ) (878 )
Total assets $ 98,333 $ 105,542
Liabilities
Interest-bearing liabilities:
Interest-bearing deposit
accounts $ 64,075 $ 894 1.86 % $ 64,546 $ 1,183 2.45 %
Borrowings of consolidated
securitization entities 8,966 185 2.76 % 12,315 278 3.02 %
Senior unsecured notes 8,241 252 4.08 % 9,262 274 3.96 %
Total interest-bearing
liabilities 81,282 1,331 2.19 % 86,123 1,735 2.69 %
Non-interest-bearing
liabilities:
Non-interest-bearing deposit
accounts 305 280
Other liabilities 4,443 4,327
Total non-interest-bearing
liabilities 4,748 4,607
Total liabilities 86,030 90,730
Equity
Total equity 12,303 14,812
Total liabilities and equity $ 98,333 $ 105,542
Interest rate spread(4) 13.73 % 15.53 % Net interest income$ 10,743 $ 12,770 Net interest margin(5) 14.17 % 16.04 %
_______________________
(1) Average yields/rates are based on total interest income/expense over average
balances.
(2) Includes average restricted cash balances of
for the three months ended
and 2019, respectively.
(3) Interest income on loan receivables includes fees on loans of
and
respectively, and
(4) Interest rate spread represents the difference between the yield on total
interest-earning assets and the rate on total interest-bearing liabilities.
(5) Net interest margin represents net interest income divided by average total
interest-earning assets.
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For a summary description of the composition of our key line items included in our Statements of Earnings, see Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Form 10-K. Interest Income Interest income decreased by$1.1 billion , or 23.0%, for the three months endedSeptember 30, 2020 primarily driven by a decrease in interest and fees on loans of 21.9%. The decrease in interest and fees on loans was primarily driven by the impact of COVID-19 and the Walmart consumer portfolio sale. The sale of the Walmart consumer portfolio drove a decline in interest and fees on loans compared to the prior year quarter of approximately 11%. Interest income decreased by$2.4 billion , or 16.8%, for the nine months endedSeptember 30, 2020 primarily driven by a decrease in interest and fees on loans related to the Walmart consumer portfolio sale, as well as the impact of COVID-19. The sale of the Walmart consumer portfolio drove a decline in interest and fees on loans compared to the prior year period of approximately 11%. Average interest-earning assets Three months ended September 30 ($ in millions) 2020 % 2019 % Loan receivables, including held for sale$ 78,005 78.3 %$ 90,556 84.7 % Liquidity portfolio and other 21,648 21.7 % 16,336 15.3 % Total average interest-earning assets$ 99,653 100.0 % $
106,892 100.0 %
Nine months ended September 30 ($ in millions) 2020 % 2019 % Loan receivables, including held for sale$ 80,368 79.4 %$ 89,752 84.3 % Liquidity portfolio and other 20,910 20.6 %
16,668 15.7 %
Total average interest-earning assets
The decreases in average loan receivables, including held for sale, of 13.9% and 10.5% for the three and nine months endedSeptember 30, 2020 , respectively, were primarily driven by the sale of loan receivables associated with the Walmart and Yamaha portfolios, inOctober 2019 andJanuary 2020 , respectively. In addition, the decreases also reflect a decline in average active accounts of 7.8% at our ongoing partner programs for the quarter endedSeptember 30, 2020 , primarily due to the impact of COVID-19. Yield on average interest-earning assets The yield on average interest-earning assets decreased for the three and nine months endedSeptember 30, 2020 , primarily due to decreases in loan receivable yield and decreases in the percentage of interest-earning assets attributable to loan receivables. The decrease in loan receivable yield was 193 basis points to 19.49% and 128 basis points to 19.89% for the three and nine months endedSeptember 30, 2020 , respectively, primarily driven by lower benchmark rates and the sale of the Walmart consumer portfolio, as well as fee and interest waivers related to COVID-19. Interest Expense Interest expense decreased by$212 million , or 35.8%, and$404 million , or 23.3%, for the three and nine months endedSeptember 30, 2020 , respectively, driven primarily by lower benchmark interest rates and a decrease in borrowings of our securitization entities and senior unsecured notes. Our cost of funds decreased to 1.90% and 2.19% for the three and nine months endedSeptember 30, 2020 , respectively, compared to 2.71% and 2.69% for the three and nine months endedSeptember 30, 2019 , respectively. 17
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Average interest-bearing liabilities Three months ended September 30 ($ in millions) 2020 % 2019 % Interest-bearing deposit accounts$ 63,569 79.9 %$ 65,615 75.6 % Borrowings of consolidated securitization entities 8,057 10.1 % 11,770 13.6 % Senior unsecured notes 7,960 10.0 %
9,347 10.8 %
Total average interest-bearing liabilities
Nine months ended
$ 64,075 78.9 %$ 64,546 74.9 % Borrowings of consolidated securitization entities 8,966 11.0 % 12,315 14.3 % Senior unsecured notes 8,241 10.1 %
9,262 10.8 %
Total average interest-bearing liabilities
Net Interest Income Net interest income decreased by$932 million , or 21.2%, and$2.0 billion , or 15.9%, for the three and nine months endedSeptember 30, 2020 , respectively, primarily driven by a decrease in interest and fees on loans due to the impact of COVID-19 and the Walmart consumer portfolio sale, partially offset by decreases in interest expense reflecting lower benchmark interest rates. Retailer Share Arrangements Retailer share arrangements decreased by$117 million , or 11.5%, and$231 million , or 8.2%, for the three and nine months endedSeptember 30, 2020 , respectively, reflecting the impact of COVID-19 on program performance. Provision for Credit Losses Provision for credit losses increased by$191 million , or 18.7%, and$1.5 billion , or 48.2%, for the three and nine months endedSeptember 30, 2020 , respectively, primarily driven by the higher reserve build in the current year periods and the prior year reductions in reserves for credit losses related to the Walmart consumer portfolio sale, partially offset by lower net charge-offs. The higher reserve build reflects both the projected impacts of COVID-19 and the increases attributable to the CECL implementation of$66 million and$650 million for the three and nine months endedSeptember 30, 2020 , respectively. The prior year reductions in reserves related to the Walmart portfolio were$326 million and$1.1 billion for the three and nine months endedSeptember 30, 2020 , respectively. Other Income Three months ended September 30, Nine months ended September 30, ($ in millions) 2020 2019 2020 2019 Interchange revenue $ 172 $ 197 $ 467 $ 556 Debt cancellation fees 68 64 206 201 Loyalty programs (155 ) (203 ) (447 ) (562 ) Other 46 27 97 72 Total other income $ 131 $ 85 $ 323 $ 267 Other income increased by$46 million , or 54.1%, and increased by$56 million , or 21.0%, for the three and nine months endedSeptember 30, 2020 , respectively, primarily driven by lower loyalty costs, partially offset by a decrease in interchange revenue. The decreases in loyalty costs and interchange revenue were primarily due to lower purchase volume and the effects from the Walmart consumer portfolio sale. 18
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Other Expense
Three months ended September 30, Nine months ended September 30,
($ in millions) 2020 2019 2020 2019
Employee costs $ 382 $ 359 $ 1,033 $ 1,070
Professional fees 187 205 573 668
Marketing and business development 107 139 309 397
Information processing 125 127 364 363
Other 266 234 776 668
Total other expense $ 1,067 $ 1,064 $ 3,055 $ 3,166
Other expense remained flat for the three months ended September 30, 2020 , as
the restructuring charge of $89 million recorded in the current quarter and
expenditures related to our response to COVID-19 were offset by the cost
reductions related to the sale of the Walmart consumer portfolio, lower purchase
volume and average active accounts and reductions in certain discretionary
spend. The restructuring charge included $45 million of operating lease and
other asset impairments and $44 million of employee-related expenses. See Note
12. Restructuring Charges to our condensed consolidated financial statements for
more information on our strategic plan to reduce operating expenses.
Other expense decreased by $111 million , or 3.5%, for the nine months ended
September 30, 2020 primarily driven by the same factors discussed above as well
as lower professional fees due to interim servicing costs in the prior year
associated with acquired portfolios. These decreases were also partially offset
by higher operational losses.
Provision for Income Taxes
Three months ended September 30, Nine months ended September 30,
($ in millions) 2020 2019 2020 2019
Effective tax rate 24.0 % 23.2 % 24.2 % 24.0 %
Provision for income taxes $ 99 $ 319 $ 206 $ 950
The effective tax rate for the three months ended September 30, 2020 increased
compared to the same period in the prior year primarily due to higher research
and development credits recorded in the prior year. The effective tax rate for
the nine months ended September 30, 2020 increased slightly compared to the same
period in the prior year primarily due to an increase in state tax rates. For
the nine months ended September 30, 2020 , the effective tax rate differs from
the applicable U.S. federal statutory tax rate primarily due to state income
taxes.
Platform Analysis
As discussed above under "-Our Sales Platforms," we offer our products through
three sales platforms (Retail Card, Payment Solutions and CareCredit), which
management measures based on their revenue-generating activities. The following
is a discussion of certain supplemental information for the three and nine
months ended September 30, 2020 , for each of our sales platforms.
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Retail Card
Three months ended September 30, Nine months ended September 30,
($ in millions) 2020 2019 2020 2019
Purchase volume $ 27,374 $ 29,282 $ 75,762 $ 83,472
Period-end loan receivables $ 49,595 $ 52,697 $ 49,595 $ 52,697
Average loan receivables, including
held for sale $ 49,503 $ 60,660 $ 51,181 $ 60,494
Average active accounts (in
thousands) 47,065 58,082 49,197 58,156
Interest and fees on loans $ 2,619 $ 3,570 $ 8,296 $ 10,414
Retailer share arrangements $ (877 ) $ (998 ) $ (2,533 ) $ (2,774 )
Other income $ 84 $ 65 $ 199 $ 200
Retail Card interest and fees on loans decreased by $951 million , or 26.6%, for
the three months ended September 30, 2020 . The sale of the Walmart consumer
portfolio drove a decline compared to the prior year period of approximately
14%. The remaining decrease was primarily due to the impact of COVID-19. Retail
Card interest and fees on loans decreased by $2.1 billion , or 20.3%, for the
nine months ended September 30, 2020 driven by these same factors.
Retailer share arrangements decreased by $121 million , or 12.1%, and $241
million , or 8.7%, for the three and nine months ended September 30, 2020 ,
respectively, primarily as a result of the factors discussed under the heading
"Retailer Share Arrangements" above.
Other income increased by $19 million , or 29.2%, and remained relatively flat,
for the three and nine months ended September 30, 2020 , respectively. The
increase for the three months ended September 30, 2020 was primarily driven by
lower loyalty costs, partially offset by a decrease in interchange revenue.
Payment Solutions
Three months ended September 30, Nine months ended September 30,
($ in millions) 2020 2019 2020 2019
Purchase volume $ 5,901 $ 6,281 $ 16,099 $ 17,478
Period-end loan receivables $ 19,550 $ 20,478 $ 19,550 $ 20,478
Average loan receivables, including
held for sale $ 19,247 $ 20,051 $ 19,551 $ 19,654
Average active accounts (in
thousands) 11,497 12,384 12,031 12,354
Interest and fees on loans $ 650 $ 721 $ 1,988 $ 2,092
Retailer share arrangements $ (20 ) $ (15 ) $ (56 ) $ (48 )
Other income $ 13 $ (1 ) $ 40 $ 11
Payment Solutions interest and fees on loans decreased by $71 million , or 9.8%,
and $104 million , or 5.0%, for the three and nine months ended September 30,
2020 , respectively. The decreases were primarily driven by lower late fees in
the three and nine months ended September 30, 2020 as well as the sale of the
Yamaha portfolio in January 2020 .
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CareCredit
Three months ended September 30, Nine months ended September 30,
($ in millions) 2020 2019 2020 2019
Purchase volume $ 2,738 $ 2,832 $ 7,349 $ 8,249
Period-end loan receivables $ 9,376 $ 10,032 $ 9,376 $ 10,032
Average loan receivables $ 9,255 $ 9,845 $ 9,636 $ 9,604
Average active accounts (in thousands) 5,708 6,229 6,018 6,143
Interest and fees on loans $ 552 $ 599 $ 1,685 $ 1,707
Retailer share arrangements $ (2 ) $ (3 ) $ (9 ) $ (7 )
Other income $ 34 $ 21 $ 84 $ 56
CareCredit interest and fees on loans decreased by $47 million , or 7.8%, and $22
million , or 1.3%, for the three and nine months ended September 30, 2020 ,
respectively, primarily driven by lower merchant discount as a result of the
declines in purchase volume. The decrease in the nine months ended September 30,
2020 was partially offset by growth in average loan receivables in the first
quarter of 2020.
Loan Receivables
____________________________________________________________________________________________
Loan receivables are our largest category of assets and represent our primary
source of revenue. The following discussion provides supplemental information
regarding our loan receivables portfolio. See Note 2. Basis of Presentation and
Summary of Significant Accounting Policies and Note 4. Loan Receivables and
Allowance for Credit Losses to our condensed consolidated financial statements
for additional information related to our Loan Receivables, including troubled
debt restructurings ("TDR's").
The following table sets forth the composition of our loan receivables portfolio
by product type at the dates indicated.
At September 30, At December 31,
($ in millions) 2020 (%) 2019 (%)
Loans
Credit cards $ 75,204 95.8 % $ 84,606 97.1 %
Consumer installment loans 1,987 2.5 % 1,347 1.5
Commercial credit products 1,270 1.6 % 1,223 1.4
Other 60 0.1 % 39 -
Total loans $ 78,521 100.0 % $ 87,215 100.0 %
Loan receivables decreased 10.0% to $78.5 billion at September 30, 2020 compared
to December 31, 2019 , primarily driven by lower purchase volume and a decrease
in average active accounts for our ongoing partner programs due to the impact of
COVID-19, as well as the seasonality of our business.
Loan receivables decreased 5.6% to $78.5 billion at September 30, 2020 compared
to September 30, 2019 , primarily driven by a decrease in average active accounts
and flat purchase volume for our ongoing partner programs due to the impact of
COVID-19, as well as the sale of loan receivables associated with the Yamaha
portfolio.
21
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Our loan receivables portfolio had the following geographic concentration at
($ in millions) % of Total Loan
Loan Receivables Receivables
State Outstanding Outstanding
Texas $ 8,067 10.3 %
California $ 8,023 10.2 %
Florida $ 6,750 8.6 %
New York $ 4,322 5.5 %
North Carolina $ 3,250 4.1 %
COVID-19 Related Loan Modifications
TDRs are those loans for which we have granted a concession to a borrower
experiencing financial difficulties where we do not receive adequate
compensation. These loans are identified at the point when the borrower enters
into a modification program. See Note 4 to our Condensed Consolidated Financial
Statements for additional information on loans classified as TDRs. However,
short-term loan modifications to support our customers impacted by COVID-19 are
not accounted for as a TDR.
Under the CARES Act, banks may elect to deem that loan modifications do not
result in TDRs if they are (1) related to COVID-19; (2) executed on a loan that
was not more than 30 days past due as of December 31, 2019 ; and (3) executed
between March 1, 2020 , and the earlier of (A) 60 days after the date of
termination of the National Emergency or (B) December 31, 2020 . At September 30,
2020 , we have not made such an election. Additionally, certain other short-term
modifications made on a good faith basis in response to COVID-19 are not
considered TDRs under ASC Subtopic 310-40. This includes delays in payment that
are insignificant or short-term (e.g., up to six months) modifications such as
payment deferrals, fee waivers or extensions of repayment terms to borrowers who
were current prior to any relief. Borrowers considered current are those that
are less than 30 days past due on their contractual payments at the time a
modification program is implemented.
We have provided support to our customers impacted by COVID-19 through various
actions, such as minimum payment deferrals and interest and late fee waivers.
Loans enrolled in minimum payment deferrals generally continue to accrue
interest and their delinquency status as of the modification date will not
advance through the deferment period.
During the nine months ended September 30, 2020 , we enrolled approximately 2.0
million customers in short-term modifications to defer minimum payments,
representing $3.8 billion in loan receivables. The substantial majority of these
enrollments were for our credit card customers. For certain customers we also
provided waivers of interest charges or late fees. During the nine months ended
September 30, 2020 , the waivers of interest and late fees provided to our
customers resulted in foregone interest and fee income of $84 million .
At September 30, 2020 , approximately 94% of enrolled accounts have exited our
forbearance programs and approximately 0.1 million customers, representing $227
million in loan receivables, remained in these short-term modification programs.
To date, while not having a material impact to the Company's overall delinquency
metrics at September 30, 2020 , we have experienced a higher incidence rate of
accounts becoming delinquent following their exit from these short-term
programs, as compared to accounts that did not enter the forbearance program.
Delinquencies
Over-30 day loan delinquencies as a percentage of period-end loan receivables
decreased to 2.67% at September 30, 2020 from 4.47% at September 30, 2019 , and
decreased from 4.44% at December 31, 2019 . These decreases were primarily driven
by an improvement in customer payment behavior.
22
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Net Charge-Offs
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 credit losses and subsequent recoveries of previously charged-off
amounts are credited to the allowance for credit 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.
The table below sets forth the ratio of net charge-offs to average loan
receivables, including held for sale, ("net charge-off rate") for the periods
indicated.
Three months ended September 30 ,
Nine months ended
2020 2019 2020 2019
Net charge-off rate 4.42 % 5.35 % 5.05 % 5.80 %
Allowance for Credit Losses and Impact of Adoption of CECL
The allowance for credit losses totaled $10.1 billion at September 30, 2020 ,
compared with allowance for loan losses of $5.6 billion at both December 31,
2019 and September 30, 2019 . Similarly, our allowance for credit losses as a
percentage of total loan receivables increased to 12.92% at September 30, 2020 ,
from 6.42% at December 31, 2019 and increased from 6.74% at September 30, 2019 .
The increases in the allowance for credit losses and allowance coverage ratio
reflect the impact of the CECL adoption and implementation in January 2020 . Upon
adoption of the new accounting standard on January 1, 2020 , we recorded an
increase to our allowance for loan losses of $3.0 billion . The allowance for
credit losses at September 30, 2020 reflects our estimate of expected credit
losses for the life of the loan receivables on our condensed consolidated
statement of financial position at September 30, 2020 , which includes the
consideration of current and expected macroeconomic conditions that existed at
that date.
During the initial year of implementation of the new CECL accounting standard we
continue to determine what our allowance for credit losses and allowance
coverage ratio would have been if the prior accounting guidance were still in
effect, in order to help provide comparability with our prior year results. The
following table illustrates the effects of the implementation of the new
accounting standard to our allowance for credit losses and allowance coverage
ratio at September 30, 2020 .
($ in millions) Amounts under prior Impact of adoption of Ongoing implementation of CECL
At September 30, 2020 accounting guidance(1) CECL model GAAP reported amounts
Allowance for credit
losses $ 6,475 $ 3,021 $ 650 $ 10,146
Allowance coverage
ratio 8.25 % 3.85 % 0.82 % 12.92 %
______________________(1) Amounts shown above as if the prior accounting guidance remained in effect
are non-GAAP measures and are presented only in this initial year after
adoption for comparability with the prior year reported GAAP metrics.
In addition to the effects of the increases attributable to CECL noted in the above table, our allowance coverage ratio increased as compared to bothDecember 31, 2019 andSeptember 30, 2019 primarily due to the projected impacts from COVID-19. 23
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Funding, Liquidity and Capital Resources
____________________________________________________________________________________________
We maintain a strong focus on liquidity and capital. Our funding, liquidity and
capital policies are designed to ensure that our business has the liquidity and
capital resources to support our daily operations, our business growth, our
credit ratings and our regulatory and policy requirements, in a cost effective
and prudent manner through expected and unexpected market environments.
Funding Sources
Our primary funding sources include cash from operations, deposits (direct and
brokered deposits), securitized financings and senior unsecured notes.
The following table summarizes information concerning our funding sources during
the periods indicated:
2020 2019
Three months ended September 30 Average Average Average Average ($ in millions) Balance % Rate Balance % Rate Deposits(1)$ 63,569 79.9 % 1.5 %$ 65,615 75.6 % 2.5 % Securitized financings 8,057 10.1 2.6 11,770 13.6 3.0 Senior unsecured notes 7,960 10.0 4.1 9,347 10.8 4.0 Total$ 79,586 100.0 % 1.9 %$ 86,732 100.0 % 2.7 %
______________________
(1) Excludes
non-interest-bearing deposits for the three months ended
and 2019, respectively. Non-interest-bearing deposits comprise less than 10%
of total deposits for the three months ended September 30, 2020 and 2019.
2020 2019
Nine months ended September 30 Average Average Average Average
($ in millions) Balance % Rate Balance % Rate
Deposits(1) $ 64,075 78.9 % 1.9 % $ 64,546 74.9 % 2.5 %
Securitized financings 8,966 11.0 2.8 12,315 14.3 3.0
Senior unsecured notes 8,241 10.1 4.1 9,262 10.8 4.0
Total $ 81,282 100.0 % 2.2 % $ 86,123 100.0 % 2.7 %
______________________
(1) Excludes
non-interest-bearing deposits for the nine months ended
and 2019, respectively. Non-interest-bearing deposits comprise less than 10%
of total deposits for the nine months ended
Deposits
We obtain deposits directly from retail and commercial customers ("direct
deposits") or through third-party brokerage firms that offer our deposits to
their customers ("brokered deposits"). At September 30, 2020 , we had $52.5
billion in direct deposits and $11.0 billion in deposits originated through
brokerage firms (including network deposit sweeps procured through a program
arranger that channels brokerage account deposits to us). A key part of our
liquidity plan and funding strategy is to continue to utilize our direct
deposits base as a source of stable and diversified low-cost funding.
Our direct deposits include a range of FDIC -insured deposit products, including
certificates of deposit, IRAs, money market accounts and savings accounts.
Brokered deposits are primarily from retail customers of large brokerage firms.
We have relationships with 11 brokers that offer our deposits through their
networks. Our brokered deposits consist primarily of certificates of deposit
that bear interest at a fixed rate and at September 30, 2020 , had a weighted
average remaining life of 1.9 years. These deposits generally are not subject to
early withdrawal.
24
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Our ability to attract deposits is sensitive to, among other things, the interest rates we pay, and therefore, we bear funding risk if we fail to pay higher rates, or interest rate risk if we are required to pay higher rates, to retain existing deposits or attract new deposits. To mitigate these risks, our funding strategy includes a range of deposit products, and we seek to maintain access to multiple other funding sources, such as securitized financings (including our undrawn committed capacity) and unsecured debt. The following table summarizes certain information regarding our interest-bearing deposits by type (all of which constituteU.S. deposits) for the periods indicated: 2020
2019
Three months ended September 30 Average Average Average Average ($ in millions) Balance % Rate Balance % Rate Direct deposits: Certificates of deposit (including IRA certificates of deposit)$ 29,810 46.9 % 2.0 %$ 34,100 52.0 % 2.6 % Savings accounts (including money market accounts) 22,680 35.7 0.8 18,856 28.7 2.1 Brokered deposits 11,079 17.4 1.7
12,659 19.3 2.7
Total interest-bearing deposits
2020 2019
Nine months ended
Balance Total Rate Balance Total Rate
Direct deposits:
Certificates of deposit
(including IRA certificates of
deposit) $ 31,871 49.7 % 2.2 % $ 33,147 51.3 % 2.5 %
Savings accounts (including
money market accounts) 21,121 33.0 1.2 18,626 28.9 2.1
Brokered deposits 11,084 17.3 1.9
12,773 19.8 2.7
Total interest-bearing deposits
Our deposit liabilities provide funding with maturities ranging from one day to ten years. The following table summarizes total deposits by contractual maturity atSeptember 30, 2020 : Over Over 3 Months 6 Months 3 Months or but within but within Over ($ in millions) Less 6 Months 12 Months 12 Months TotalU.S. deposits (less thanFDIC insurance limit)(1)(2)$ 26,943 $ 5,910 $ 8,771 $ 9,037 $ 50,661 U.S. deposits (in excess ofFDIC insurance limit)(2) Direct deposits: Certificates of deposit (including IRA certificates of deposit) 1,182 1,934 2,417 1,448 6,981 Savings accounts (including money market accounts) 5,827 - - - 5,827 Brokered deposits: Sweep accounts 24 - - - 24 Total$ 33,976 $ 7,844 $ 11,188 $ 10,485 $ 63,493 ______________________
(1) Includes brokered certificates of deposit for which underlying individual
deposit balances are assumed to be less than
(2) The standard deposit insurance amount is
account ownership category. Deposits in excess of
presented above include partially uninsured accounts.
AtSeptember 30, 2020 , the weighted average maturity of our interest-bearing time deposits was 1.1 years. See Note 7. Deposits to our condensed consolidated financial statements for more information on the maturities of our time deposits. 25
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Securitized Financings We access the asset-backed securitization market using theSynchrony Credit Card Master Note Trust ("SYNCT") and theSynchrony Card Issuance Trust ("SYNIT") through which we may issue asset-backed securities through both public transactions and private transactions funded by financial institutions and commercial paper conduits. In addition, we issue asset-backed securities in private transactions through theSynchrony Sales Finance Master Trust ("SFT"). The following table summarizes expected contractual maturities of the investors' interests in securitized financings, excluding debt premiums, discounts and issuance costs atSeptember 30, 2020 . One Year Four Years Through Through Less Than Three Five After Five ($ in millions) One Year Years Years Years Total Scheduled maturities of long-term borrowings-owed to securitization investors: SYNCT(1)$ 1,725 $ 3,191 $ - $ -$ 4,916 SFT - 300 - - 300 SYNIT(1) 1,000 1,600 - - 2,600 Total long-term borrowings-owed to securitization investors$ 2,725 $ 5,091 $ - $ -$ 7,816 ______________________
(1) Excludes any subordinated classes of SYNCT notes and SYNIT notes that we
owned at September 30, 2020 .
We retain exposure to the performance of trust assets through: (i) in the case
of SYNCT, SFT and SYNIT, subordinated retained interests in the loan receivables
transferred to the trust in excess of the principal amount of the notes for a
given series to provide credit enhancement for a particular series, as well as a
pari passu seller's interest in each trust and (ii) in the case of SYNCT and
SYNIT, any subordinated classes of notes that we own.
All of our securitized financings include early repayment triggers, referred to
as early amortization events, including events related to material breaches of
representations, warranties or covenants, inability or failure of the Bank to
transfer loan receivables to the trusts as required under the securitization
documents, failure to make required payments or deposits pursuant to the
securitization documents, and certain insolvency-related events with respect to
the related securitization depositor, Synchrony (solely with respect to SYNCT)
or the Bank. In addition, an early amortization event will occur with respect to
a series if the excess spread as it relates to a particular series or for the
trust, as applicable, falls below zero. Following an early amortization event,
principal collections on the loan receivables in the applicable trust are
applied to repay principal of the trust's asset-backed securities rather than
being available on a revolving basis to fund the origination activities of our
business. The occurrence of an early amortization event also would limit or
terminate our ability to issue future series out of the trust in which the early
amortization event occurred. No early amortization event has occurred with
respect to any of the securitized financings in SYNCT, SFT or SYNIT.
The following table summarizes for each of our trusts the three-month rolling
average excess spread at September 30, 2020 .
Three-Month Rolling
Note Principal Balance # of Series Average Excess
($ in millions) Outstanding Spread(1)
SYNCT $ 5,144 9 ~15.6% to 17.9%
SFT $ 300 7 16.3 %
SYNIT $ 2,600 1 16.6 %
______________________
(1) Represents the excess spread (generally calculated as interest income
collected from the applicable pool of loan receivables less applicable net
charge-offs, interest expense and servicing costs, divided by the aggregate
principal amount of loan receivables in the applicable pool) for SFT or, in
the case of SYNCT and SYNIT, a range of the excess spreads relating to the
particular series issued within each trust and omitting any series that have
not been outstanding for at least three full monthly periods, in each case
calculated in accordance with the applicable trust or series documentation,
for the three securitization monthly periods ended September 30, 2020 .
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Senior Unsecured Notes During the nine months endedSeptember 30, 2020 we made repayments of$1.5 billion , which included all of our previously outstanding floating rate senior unsecured notes. The following table provides a summary of our outstanding fixed rate senior unsecured notes atSeptember 30, 2020 . Principal Amount Issuance Date Interest Rate(1) Maturity Outstanding(2) ($ in millions) Fixed rate senior unsecured notes: Synchrony Financial August 2014 3.750% August 2021 $ 750 August 2014 4.250% August 2024 1,250 July 2015 4.500% July 2025 1,000 August 2016 3.700% August 2026 500 December 2017 3.950% December 2027 1,000 March 2019 4.375% March 2024 600 March 2019 5.150% March 2029 650 July 2019 2.850% July 2022 750 Synchrony Bank June 2017 3.000% June 2022 750 May 2018 3.650% May 2021 750 Total fixed rate senior unsecured notes $ 8,000 ______________________
(1) Weighted average interest rate of all senior unsecured notes at
2020 was 3.94%.
(2) The amounts shown exclude unamortized debt discount, premiums and issuance
cost.
Short-Term Borrowings
Except as described above, there were no material short-term borrowings for the
periods presented.
Other
At September 30, 2020 , we had more than $25.0 billion of unencumbered assets in
the Bank available to be used to generate additional liquidity through secured
borrowings or asset sales or to be pledged to the Federal Reserve Board for
credit at the discount window.
Covenants
The indenture pursuant to which our senior unsecured notes have been issued
includes various covenants. If we do not satisfy any of these covenants, the
maturity of amounts outstanding thereunder may be accelerated and become
payable. We were in compliance with all of these covenants at September 30,
2020 .
At September 30, 2020 , we were not in default under any of our credit
facilities.
Credit Ratings
Our borrowing costs and capacity in certain funding markets, including
securitizations and senior and subordinated debt, may be affected by the credit
ratings of the Company, the Bank and the ratings of our asset-backed securities.
27
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The table below reflects our current credit ratings and outlooks:
S&P Fitch Ratings
Synchrony Financial
Senior unsecured debt BBB- BBB-
Preferred stock BB- B+
Outlook for Synchrony Financial senior unsecured debt Negative Negative
Synchrony Bank
Senior unsecured debt BBB BBB-
Outlook for
In addition, certain of the asset-backed securities issued by SYNCT and SYNIT are rated by Fitch, S&P and/or Moody's. A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. Downgrades in these credit ratings could materially increase the cost of our funding from, and restrict our access to, the capital markets. Liquidity ____________________________________________________________________________________________ We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth, satisfy debt obligations and to meet regulatory expectations under normal and stress conditions. We maintain policies outlining the overall framework and general principles for managing liquidity risk across our business, which is the responsibility of ourAsset and Liability Management Committee , a subcommittee of the Risk Committee of our Board of Directors. We employ a variety of metrics to monitor and manage liquidity. We perform regular liquidity stress testing and contingency planning as part of our liquidity management process. We evaluate a range of stress scenarios including Company specific and systemic events that could impact funding sources and our ability to meet liquidity needs. We maintain a liquidity portfolio, which atSeptember 30, 2020 had$21.4 billion of liquid assets, primarily consisting of cash and equivalents and short-term obligations of theU.S. Treasury , less cash in transit which is not considered to be liquid, compared to$17.3 billion of liquid assets atDecember 31, 2019 . The increase in liquid assets was primarily due to the reduction in our loan receivables, the retention of excess cash flows from operations and the seasonality of our business. Additionally, onMarch 15, 2020 , in response to the COVID-19 pandemic, theFederal Reserve Board reduced reserve requirements for insured depository institutions to zero percent, which further increased the Bank's available liquidity. We believe our liquidity position atSeptember 30, 2020 remains strong as we continue to operate in a period of uncertain economic conditions related to COVID-19 and we will continue to closely monitor our liquidity as economic conditions change. As additional sources of liquidity, atSeptember 30, 2020 , we had an aggregate of$4.9 billion of undrawn committed capacity on our securitized financings, subject to customary borrowing conditions, from private lenders under our securitization programs and$0.5 billion of undrawn committed capacity under our unsecured revolving credit facility with private lenders, and we had more than$25.0 billion of unencumbered assets in the Bank available to be used to generate additional liquidity through secured borrowings or asset sales or to be pledged to theFederal Reserve Board for credit at the discount window. As a general matter, investments included in our liquidity portfolio are expected to be highly liquid, giving us the ability to readily convert them to cash. The level and composition of our liquidity portfolio may fluctuate based upon the level of expected maturities of our funding sources as well as operational requirements and market conditions. 28
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We rely significantly on dividends and other distributions and payments from the Bank for liquidity; however, bank regulations, contractual restrictions and other factors limit the amount of dividends and other distributions and payments that the Bank may pay to us. For a discussion of regulatory restrictions on the Bank's ability to pay dividends, see "Regulation-Risk Factors Relating to Regulation-We are subject to restrictions that limit our ability to pay dividends and repurchase our common stock; the Bank is subject to restrictions that limit its ability to pay dividends to us, which could limit our ability to pay dividends, repurchase our common stock or make payments on our indebtedness" and "Regulation-Regulation Relating to OurBusiness-Savings Association Regulation-Dividends and Stock Repurchases" in our 2019 Form 10-K. Capital ____________________________________________________________________________________________ Our primary sources of capital have been earnings generated by our business and existing equity capital. We seek to manage capital to a level and composition sufficient to support the risks of our business, meet regulatory requirements, adhere to rating agency targets and support future business growth. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives and legislative and regulatory developments. Within these constraints, we are focused on deploying capital in a manner that will provide attractive returns to our stockholders. Synchrony is not currently required to conduct stress tests. See "Regulation-Regulation Relating to Our Business-Legislative and Regulatory Developments" in our 2019 Form 10-K. In addition, while as a savings and loan holding company, we have not been subject to theFederal Reserve Board's capital planning rule to-date, we submitted a capital plan to theFederal Reserve Board in 2020. While not required, our capital plan process does include certain internal stress testing. Dividend and Share Repurchases Amount per
Common
Common Stock Cash Dividends Declared Month of Payment Share
Amount
($ in millions, except per share data)
Three months ended March 31, 2020 February 2020 $ 0.22 $ 135
Three months ended June 30, 2020 May 2020 0.22 128
Three months ended September 30, 2020 August, 2020 0.22 129
Total dividends declared $ 0.66 $ 392
Amount per
Preferred Stock Cash Dividends Declared Month of Payment Preferred Share Amount
($ in millions, except per share data)
Three months ended March 31, 2020 February 2020 $ 14.22 $ 11
Three months ended June 30, 2020 May 2020 14.06 11
Three months ended September 30, 2020 August, 2020 14.06 10
Total dividends declared $ 42.34 $ 32
The declaration and payment of future dividends to holders of our common and
preferred stock will be at the discretion of the Board and will depend on many
factors. For a discussion of regulatory and other restrictions on our ability to
pay dividends and repurchase stock, see "Regulation-Risk Factors Relating to
Regulation-We are subject to restrictions that limit our ability to pay
dividends and repurchase our common stock; the Bank is subject to restrictions
that limit its ability to pay dividends to us, which could limit our ability to
pay dividends, repurchase our common stock or make payments on our indebtedness"
in our 2019 Form 10-K.
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Total Number
Common Shares Repurchased Under Publicly Announced of Shares Dollar Value of Shares Programs
Purchased Purchased
($ and shares in millions) Three months ended March 31, 2020 33.6 $ 984 Three months ended June 30, 2020 - - Three months ended September 30, 2020 - - Total 33.6 $ 984 Our previously approved share repurchase program (the "2019 Share Repurchase Program") expired onJune 30, 2020 . Under this program we repurchased$3.6 billion of common stock. In response to COVID-19, we have suspended our share repurchase activities until we have greater visibility as to the current economic environment. Regulatory Capital Requirements -Synchrony Financial As a savings and loan holding company, we are required to maintain minimum capital ratios, under the applicableU.S. Basel III capital rules. For more information, see "Regulation-Savings and Loan Holding Company Regulation" in our 2019 Form 10-K. ForSynchrony Financial to be a well-capitalized savings and loan holding company,Synchrony Bank must be well-capitalized andSynchrony Financial must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by theFederal Reserve Board to meet and maintain a specific capital level for any capital measure. As ofSeptember 30, 2020 ,Synchrony Financial met all the requirements to be deemed well-capitalized. The following table sets forth the composition of our capital ratios for the Company calculated under the Basel III Standardized Approach rules atSeptember 30, 2020 andDecember 31, 2019 , respectively. Basel III At September 30, 2020 At December 31, 2019 ($ in millions) Amount Ratio(1) Amount Ratio(1) Total risk-based capital$ 13,925 18.1 %$ 14,211 16.3 % Tier 1 risk-based capital$ 12,891 16.7 %$ 13,064 15.0 % Tier 1 leverage$ 12,891 13.3 %$ 13,064 12.6 % Common equity Tier 1 capital$ 12,157 15.8 %$ 12,330 14.1 % Risk-weighted assets$ 76,990 $ 87,302 ______________________
(1) Tier 1 leverage ratio represents total Tier 1 capital as a percentage of
total average assets, after certain adjustments. All other ratios presented
above represent the applicable capital measure as a percentage of
risk-weighted assets.
In response to the COVID-19 pandemic, inMarch 2020 the joint federal bank regulatory agencies issued an interim final rule that allows banking organizations to mitigate the effects of the CECL accounting standard in their regulatory capital. Banking organizations that adopt CECL in 2020 can elect to mitigate the estimated cumulative regulatory capital effects of CECL for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. The Company has elected to adopt the option provided by the interim final rule, which will largely delay the effects of CECL on its regulatory capital for the next two years, after which the effects will be phased-in over a three-year period fromJanuary 1, 2022 throughDecember 31, 2024 . Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period includes both the initial impact of our adoption of CECL atJanuary 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period endedDecember 31, 2021 , collectively the "CECL regulatory capital transition adjustment". Capital amounts and ratios atSeptember 30, 2020 in the above table all reflect the application of the CECL regulatory capital transition adjustment. The increase in our common equity Tier 1 capital ratio compared toDecember 31, 2019 was primarily due to the decrease in loan receivables and a corresponding decrease in risk-weighted assets in the nine months endedSeptember 30, 2020 . 30
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Regulatory Capital Requirements -Synchrony Bank AtSeptember 30, 2020 andDecember 31, 2019 , the Bank met all applicable requirements to be deemed well-capitalized pursuant to OCC regulations and for purposes of the Federal Deposit Insurance Act. The following table sets forth the composition of the Bank's capital ratios calculated under the Basel III Standardized Approach rules atSeptember 30, 2020 andDecember 31, 2019 , and also reflects the CECL regulatory capital transition adjustment in theSeptember 30, 2020 amounts and ratios. Minimum to be Well- Capitalized under Prompt Corrective Action At September 30, 2020 At December 31, 2019 Provisions ($ in millions) Amount Ratio Amount Ratio Ratio
Total risk-based capital
15.6 % 10.0% Tier 1 risk-based capital$ 11,340 16.6 %$ 10,907 14.3 % 8.0% Tier 1 leverage$ 11,340 13.0 %$ 10,907 11.9 % 5.0% Common equity Tier 1 capital$ 11,340 16.6 %$ 10,907
14.3 % 6.5%
Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a material adverse effect on our business, results of operations and financial condition. See "Regulation-Risk Factors Relating to Regulation-Failure by Synchrony and the Bank to meet applicable capital adequacy and liquidity requirements could have a material adverse effect on us" in our 2019 Form 10-K. Off-Balance Sheet Arrangements and Unfunded Lending Commitments ____________________________________________________________________________________________ We do not have any material off-balance sheet arrangements, including guarantees of third-party obligations. Guarantees are contracts or indemnification agreements that contingently require us to make a guaranteed payment or perform an obligation to a third-party based on certain trigger events. AtSeptember 30, 2020 , we had not recorded any contingent liabilities in our Condensed Consolidated Statement of Financial Position related to any guarantees. See Note 9 - Fair Value Measurements to our condensed consolidated financial statements for information on contingent consideration liabilities related to business acquisitions. We extend credit, primarily arising from agreements with customers for unused lines of credit on our credit cards, in the ordinary course of business. Each unused credit card line is unconditionally cancellable by us. See Note 4 - Loan Receivables and Allowance for Credit Losses to our condensed consolidated financial statements for more information on our unfunded lending commitments. Critical Accounting Estimates ____________________________________________________________________________________________ In preparing our condensed consolidated financial statements, we have identified certain accounting estimates and assumptions that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. The critical accounting estimates we have identified relate to allowance for credit losses and fair value measurements. These estimates reflect our best judgment about current, and for some estimates future, economic and market conditions and their effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that these judgments and estimates could change, which may result in incremental losses on loan receivables, or material changes to our Condensed Consolidated Statement of Financial Position, among other effects. 31
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Allowance for Credit Losses EffectiveJanuary 1, 2020 , losses on loan receivables are estimated and recognized upon origination of the loan, based on expected credit losses for the life of the loan balance as of the period end date. This requires us to estimate expected losses in the portfolio as of each balance sheet date. The method for calculating the estimate of expected credit loss takes into account historical experience and current conditions for homogeneous pools of loans, and reasonable and supportable forecasts about the future. We also perform a qualitative assessment in addition to model estimates and apply qualitative adjustments as necessary. The reasonable and supportable forecast period is determined based upon the accuracy level of historical loss forecast estimates, models and methodology utilized, an assessment of the current economic outlook, including the effects of COVID-19, and consideration of material changes in our loan portfolio such as changes in growth, portfolio mix and credit strategy. The reasonable and supportable forecast period used in our estimate of credit losses atSeptember 30, 2020 was 12 months, consistent with the forecast period utilized since adoption of CECL. The Company reassesses the reasonable and supportable forecast period on a quarterly basis. Beyond the reasonable and supportable forecast period, we revert to historical loss information at the loan receivables segment level over a 6-month period, gradually increasing the weight of historical losses in the reversion period, and utilize historical loss information thereafter for the remaining life of the portfolio. The reversion period, similar to the reasonable and supportable forecast period, may change in the future depending on multiple factors such as forecasting methods, portfolio changes, and macroeconomic environment. We evaluate each portfolio quarterly. For credit card receivables, our estimation process includes analysis of historical data, and there is a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance for credit losses. Our risk process includes standards and policies for reviewing major risk exposures and concentrations, and evaluates relevant data either for individual loans or on a portfolio basis, as appropriate. More specifically, we use an enhanced migration analysis to estimate the likelihood that a loan will progress through the various stages of delinquency. The enhanced migration analysis considers uncollectible principal, interest and fees reflected in the loan receivables, segmented by credit and business parameters. We use other analyses to estimate losses on non-delinquent accounts, which include past performance, bankruptcy activity such as filings, policy changes, loan volume and amounts. Holistically, for assessing the portfolio credit loss content, we also evaluate portfolio risk management techniques applied to various accounts, historical behavior of different account vintages, account seasoning, economic conditions, recent trends in delinquencies, account collection management, forecasting uncertainties, expectations about the future, and a qualitative assessment of the adequacy of the allowance for credit losses. We estimate our allowance for credit card loan losses using pools of homogeneous loans. Further, experience is not available for new portfolios; therefore, while we accumulate experience, we utilize our experience with the most closely analogous products and segments in our portfolio. The underlying assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions and expectations about the future and are subject to the regulatory examination process, which can result in changes to our assumptions. Changes in such estimates can significantly affect the allowance and provision for credit losses. It is possible that we will experience credit losses that are different from our current estimates of expected credit losses. See "Management's Discussion and Analysis-Critical Accounting Estimates" in our 2019 Form 10-K, for a detailed discussion of the critical accounting estimate related to fair value measurements. New Accounting Standards ____________________________________________________________________________________________ See Note 2. Basis of Presentation and Summary of Significant Accounting Policies - New Accounting Standards, to our condensed consolidated financial statements for additional information related recent accounting pronouncements, including ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments, which was effective and adopted by the Company onJanuary 1, 2020 . 32
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Regulation and Supervision ____________________________________________________________________________________________ Our business, including our relationships with our customers, is subject to regulation, supervision and examination underU.S. federal, state and foreign laws and regulations. These laws and regulations cover all aspects of our business, including lending practices, treatment of our customers, safeguarding deposits, customer privacy and information security, capital structure, liquidity, dividends and other capital distributions, transactions with affiliates, and conduct and qualifications of personnel. As a savings and loan holding company and a financial holding company, Synchrony is subject to regulation, supervision and examination by theFederal Reserve Board . As a large provider of consumer financial services, we are also subject to regulation, supervision and examination by theCFPB .The Bank is a federally chartered savings association. As such, the Bank is subject to regulation, supervision and examination by the OCC, which is its primary regulator, and by theCFPB . In addition, the Bank, as an insured depository institution, is supervised by theFDIC . OnMarch 27, 2020 , the CARES Act was signed into law, and includes a provision that permits financial institutions to defer temporarily the use of CECL. However, in a related action, the joint federal bank regulatory agencies issued an interim final rule effectiveMarch 31, 2020 , that allows banking organizations that implement CECL this year to elect to mitigate the effects of the CECL accounting standard on their regulatory capital for two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. The Company has elected to defer the regulatory capital effects of CECL in accordance with the interim final rule, and not to apply the provision of the CARES Act discussed above. See "-Capital" above for additional details. The CARES Act also includes a provision that permits a financial institution to elect to suspend temporarily troubled debt restructuring accounting under ASC Subtopic 310-40 in certain circumstances ("section 4013"). To be eligible under section 4013, a loan modification must be (1) related to COVID-19; (2) executed on a loan that was not more than 30 days past due as ofDecember 31, 2019 ; and (3) executed betweenMarch 1, 2020 , and the earlier of (A) 60 days after the date of termination of the National Emergency or (B)December 31, 2020 . In response to this section of the CARES Act, the federal banking agencies issued a revised interagency statement onApril 7, 2020 that, in consultation with theFinancial Accounting Standards Board , confirmed that for loans not subject to section 4013, short-term modifications made on a good faith basis in response to COVID-19 are not considered troubled debt restructurings under ASC Subtopic 310-40. This includes delays in payment that are insignificant or short-term (e.g., up to six months) modifications such as payment deferrals, fee waivers, and extensions of repayment terms to borrowers who were current prior to any relief. Borrowers considered current are those that are less than 30 days past due on their contractual payments at the time a modification program is implemented. The CARES Act also includes a range of other provisions designed to support theU.S. economy and mitigate the impact of COVID-19 on financial institutions and their customers, including through the authorization of various programs and measures that theU.S. Department of the Treasury , theSmall Business Administration , theFederal Reserve Board , and other federal banking agencies may or are required to implement. Further, in response to the COVID-19 outbreak, theFederal Reserve Board has implemented or announced a number of facilities to provide emergency liquidity to various segments of theU.S. economy and financial markets. See "Regulation" in our 2019 Form 10-K for additional information on regulations that are currently applicable to us. See also "-Capital" above, for discussion of the impact of regulations and supervision on our capital and liquidity, including our ability to pay dividends and repurchase stock. 33
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