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 2020 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 months endedMarch 31, 2021 , we financed$34.7 billion of purchase volume and had 66.3 million average active accounts, and atMarch 31, 2021 , we had$76.9 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. AtMarch 31, 2021 , we had$62.7 billion in deposits, which represented 81% 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 24 national and regional retailers with which we have ongoing
program agreements. The average length of our relationship with these Retail
Card partners is 23 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 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, along with complementary products such as
Pets Best pet insurance. 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 atMarch 31, 2021 . Promotional Offer Credit Product Standard Terms Only Deferred Interest Other Promotional Total Credit cards 61.4 % 17.9 % 16.0 % 95.3 % Commercial credit products 1.6 - - 1.6 Consumer installment loans - 0.1 3.0 3.1 Other - - - - Total 63.0 % 18.0 % 19.0 % 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.,Synchrony Car Care or CareCredit) 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-Branded 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 wherever 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 credit 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 21 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 atMarch 31, 2021 . 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 We originate installment loans to consumers (and a limited number of commercial customers) inthe 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. 8
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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. For a discussion of certain trends and conditions, see "Management's Discussion and Analysis of Financial Condition and Results of Operations-Business Trends and Conditions" in our 2020 Form 10-K. For a discussion of how certain trends and conditions impacted the three months endedMarch 31, 2021 , 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. 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. The seasonal trends discussed above are most evident between the fourth quarter and the first quarter of the following year. In addition to these seasonal trends, we continue to experience improvements in customer payment behavior, which include the effects of recent governmental stimulus actions. Customer payments as a percentage of beginning-of-period loan receivables for the three months endedMarch 31, 2021 were approximately 200 basis points higher than our prior five-year historical average for the first quarter. Loan receivables decreased by$5.0 billion , or 6.1%, to$76.9 billion atMarch 31, 2021 compared toDecember 31, 2020 , primarily due to the effects of customers paying down their balances and past due balances declined to$2.2 billion atMarch 31, 2021 from$2.5 billion atDecember 31, 2020 , primarily due to collections from customers that were previously delinquent. Our allowance for credit losses as a percentage of total loan receivables increased to 12.88% atMarch 31, 2021 , from 12.54% atDecember 31, 2020 . The increase in the allowance for credit losses as a percentage of loan receivables atMarch 31, 2021 compared toDecember 31, 2020 , despite a decrease in our past due balances, primarily reflects these same seasonal trends. 9
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Results of Operations ____________________________________________________________________________________________ Highlights for the Three Months EndedMarch 31, 2021 Below are highlights of our performance for the three months endedMarch 31, 2021 compared to the three months endedMarch 31, 2020 , as applicable, except as otherwise noted. •Net earnings increased 258.4% to$1.0 billion for the three months endedMarch 31, 2021 primarily driven by lower provision for credit losses and a decrease in other expense, partially offset by lower net interest income. •Loan receivables decreased 6.8% to$76.9 billion atMarch 31, 2021 compared toMarch 31, 2020 , primarily driven by the impacts of the 2020 shutdowns and improvements in customer payment behavior, partially offset by higher purchase volume. •Net interest income decreased 11.6% to$3.4 billion for the three months endedMarch 31, 2021 primarily due to a decrease in interest and fees on loans driven by an increase in payment rates and lower delinquencies, partially offset by a decrease in interest expense reflecting lower benchmark interest rates. •Retailer share arrangements increased 6.8% to$989 million for the three months endedMarch 31, 2021 , primarily due to lower net charge-offs. •Over-30 day loan delinquencies as a percentage of period-end loan receivables decreased 141 basis points to 2.83% atMarch 31, 2021 , and the net charge-off rate decreased 174 basis points to 3.62% for the three months endedMarch 31, 2021 . •Provision for credit losses decreased by$1.3 billion , or 80.1% for the three months endedMarch 31, 2021 . The decrease was primarily driven by lower reserves and lower net charge-offs. Our allowance coverage ratio (allowance for credit losses as a percent of period-end loan receivables) increased to 12.88% atMarch 31, 2021 , as compared to 11.13% atMarch 31, 2020 , primarily due to the impact of the prior year pandemic shutdowns. •Other expense decreased by$70 million , or 7.0%, for the three months endedMarch 31, 2021 primarily driven by lower operational losses and lower marketing and business development costs, partially offset by higher employee costs. •AtMarch 31, 2021 , deposits represented 81% of our total funding sources. Total deposits were flat at$62.7 billion atMarch 31, 2021 , compared toDecember 31, 2020 . •During the three months endedMarch 31, 2021 , we declared and paid cash dividends on our Series A 5.625% non-cumulative preferred stock of$14.06 per share, or$11 million . •During the three months endedMarch 31, 2021 , we repurchased$200 million of our outstanding common stock, and declared and paid cash dividends of$0.22 per share, or$128 million . •InFebruary 2021 in our CareCredit sales platform, we completed our acquisition of Allegro Credit, a leading provider of point-of-sale consumer financing for audiology products and dental services. 2021 Partner Agreements •In our Retail Card sales platform, we extended our program agreement with American Eagle. InApril 2021 , we announced that we will not be renewing our program agreement with Gap Inc. when it expires onApril 30, 2022 . We expect our strategic options will be accretive to dilutive earnings per share relative to renewal terms and if the portfolio is sold we expect to recognize a gain on sale of the portfolio and redeploy approximately$1 billion of capital. 10
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•Excluding our program agreement with Gap Inc., our five largest programs based upon interest and fees on loans for the year endedDecember 31, 2020 were Amazon, JCPenney, Lowe's,PayPal andSam's Club . •In our Payment Solutions sales platform, we announced our new partnerships withFamily Farm & Home and BoxDrop and extended our program agreements withAshley HomeStores LTD , CITGO, Phillips 66 andTacony Corporation . •In our CareCredit sales platform, we expanded our network through our new partnerships withEmory Healthcare ,Mercy Health ,Prime Health and Southern Veterinary Partners . In addition, we also made our CareCredit patient financing app available in the EpicApp Orchard , further expanding the availability of CareCredit to healthcare organizations using Epic. Information About Our Executive Officers and Board of Directors •The following events were effectiveApril 1, 2021 : •Margaret Keane, 61, Synchrony's Chief Executive Officer ("CEO"), transitioned roles from CEO to Executive Chair of the Board. •Brian Doubles, 45, Synchrony's President, succeededMs. Keane to become President and CEO, and joined the Board as a director. •Rick Hartnack, 75, Non-Executive Chair of the Board, retired. •Jeffrey Naylor, 62, became Lead Independent Director of the Board. Summary Earnings The following table sets forth our results of operations for the periods indicated. Three months ended March 31, ($ in millions) 2021 2020 Interest income$ 3,742 $ 4,407 Interest expense 303 517 Net interest income 3,439 3,890 Retailer share arrangements (989) (926) Provision for credit losses 334 1,677 Net interest income, after retailer share arrangements and provision for credit losses 2,116 1,287 Other income 131 97 Other expense 932 1,002 Earnings before provision for income taxes 1,315 382 Provision for income taxes 290 96 Net earnings$ 1,025 $ 286 Net earnings available to common stockholders $
1,014
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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
Three months ended March 31,
($ in millions) 2021 2020
Financial Position Data (Average):
Loan receivables, including held for sale $ 78,358 $ 84,428
Total assets $ 96,455 $ 100,722
Deposits $ 63,070 $ 64,665
Borrowings $ 15,659 $ 18,793
Total equity $ 13,071 $ 12,592
Selected Performance Metrics:
Purchase volume(1)(2) $ 34,749 $ 32,042
Retail Card $ 26,540 $ 24,008
Payment Solutions $ 5,561 $ 5,375
CareCredit $ 2,648 $ 2,659
Average active accounts (in thousands)(2)(3) 66,280 72,078
Net interest margin(4) 13.98 % 15.15 %
Net charge-offs $ 699 $ 1,125
Net charge-offs as a % of average loan receivables, including held
for sale 3.62 % 5.36 %
Allowance coverage ratio(5) 12.88 % 11.13 %
Return on assets(6) 4.3 % 1.1 %
Return on equity(7) 31.8 % 9.1 %
Equity to assets(8) 13.55 % 12.50 %
Other expense as a % of average loan receivables, including held
for sale 4.82 % 4.77 %
Efficiency ratio(9) 36.1 % 32.7 %
Effective income tax rate 22.1 % 25.1 %
Selected Period-End Data:
Loan receivables $ 76,858 $ 82,469
Allowance for credit losses $ 9,901 $ 9,175
30+ days past due as a % of period-end loan receivables(10) 2.83 % 4.24 %
90+ days past due as a % of period-end loan receivables(10) 1.52 % 2.10 %
Total active accounts (in thousands)(2)(3) 65,219 68,849
______________________
(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.
2021 2020
Interest Average Interest Average
Average Income / Yield / Average Income/
Yield /
Three months ended
Rate(1) Balance Expense Rate(1)
Assets
Interest-earning assets: Interest-earning cash and equivalents(2)$ 14,610 $ 4 0.11 %$ 12,902 $ 42 1.31 % Securities available for sale 6,772 6 0.36 % 5,954 25 1.69 % Loan receivables, including held for sale(3): Credit cards 74,865 3,657 19.81 % 81,716 4,272 21.03 % Consumer installment loans 2,219 53 9.69 % 1,432 35 9.83 % Commercial credit products 1,231 21 6.92 % 1,243 33 10.68 % Other 43 1 NM 37 - - % Total loan receivables, including held for sale 78,358 3,732 19.32 % 84,428 4,340 20.67 % Total interest-earning assets 99,740 3,742 15.22 % 103,284 4,407 17.16 % Non-interest-earning assets: Cash and due from banks 1,635 1,450 Allowance for credit losses (10,225) (8,708) Other assets 5,305 4,696 Total non-interest-earning assets (3,285) (2,562) Total assets$ 96,455 $ 100,722 Liabilities Interest-bearing liabilities: Interest-bearing deposit accounts$ 62,724 $ 170 1.10 %$ 64,366 $ 356 2.22 % Borrowings of consolidated securitization entities 7,694 51 2.69 % 9,986 73 2.94 % Senior unsecured notes 7,965 82 4.18 % 8,807 88 4.02 % Total interest-bearing liabilities 78,383 303 1.57 % 83,159 517 2.50 % Non-interest-bearing liabilities: Non-interest-bearing deposit accounts 346 299 Other liabilities 4,655 4,672 Total non-interest-bearing liabilities 5,001 4,971 Total liabilities 83,384 88,130 Equity Total equity 13,071 12,592 Total liabilities and equity$ 96,455 $ 100,722 Interest rate spread(4) 13.65 % 14.66 % Net interest income$ 3,439 $ 3,890 Net interest margin(5) 13.98 % 15.15 % _______________________ (1)Average yields/rates are based on total interest income/expense over average balances. (2)Includes average restricted cash balances of$423 million and$981 million for the three months endedMarch 31, 2021 and 2020, respectively. (3)Interest income on loan receivables includes fees on loans of$514 million and$656 million for the three months endedMarch 31, 2021 and 2020, respectively. (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. 13
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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 2020 Form 10-K. Interest Income Interest income decreased by$665 million , or 15.1%, for the three months endedMarch 31, 2021 primarily driven by a decrease in interest and fees on loans attributed to improvements in customer payment behavior and lower delinquencies.
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