filings.toolsItem 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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 2022 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
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We are a premier consumer financial services company delivering one of the industry's most complete, digitally-enabled product suites. Our experience, expertise and scale encompass a broad spectrum of industries including digital, health and wellness, retail, telecommunications, home, auto, outdoor, pet and more. We have an established and 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 ended March 31, 2023, we financed $41.6 billion of purchase volume and had 69.5 million average active accounts, and at March 31, 2023, we had $91.1 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, affinity relationships and commercial customers, a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”), including certificates of deposit, individual retirement accounts (“IRAs”), money market accounts, savings accounts and sweep and affinity deposits. We also take deposits at the Bank through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. We have significantly expanded our online direct banking operations in recent years and our deposit base serves as a source of stable and diversified low cost funding for our credit activities. At March 31, 2023, we had $74.4 billion in deposits, which represented 83% of our total funding sources.
Our Sales Platforms
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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 revenue activities are within the United States. We primarily manage our credit products through five sales platforms (Home & Auto, Digital, Diversified & Value, Health & Wellness and Lifestyle). Those platforms are organized by the types of partners we work with, and are measured on interest and fees on loans, loan receivables, active accounts and other sales metrics.
Home & Auto
Our Home & Auto sales platform provides comprehensive payments and financing solutions with integrated in-store and digital experiences through a broad network of partners and merchants providing home and automotive merchandise and services, as well as our Synchrony Car Care network and Synchrony HOME credit card offering. Our Home & Auto sales platform partners include a wide range of key retailers in the home improvement, furniture, bedding, appliance and electronics industry, such as Ashley HomeStores LTD, Lowe's, and Mattress Firm, as well as automotive merchandise and services, such as Chevron and Discount Tire. In addition, we also have program agreements with buying groups, manufacturers and industry associations, such as Nationwide Marketing Group and the Home Furnishings Association.
Digital
Our Digital sales platform provides comprehensive payments and financing solutions with integrated digital experiences through partners and merchants who primarily engage with their consumers through digital channels. Our Digital sales platform includes key partners delivering digital payment solutions, such as PayPal, including our Venmo program, online marketplaces, such as Amazon and eBay, and digital-first brands and merchants, such as Verizon, the Qurate brands, and Fanatics.
Diversified & Value
Our Diversified & Value sales platform provides comprehensive payments and financing solutions with integrated in-store and digital experiences through large retail partners who deliver everyday value to consumers shopping for daily needs or important life moments. Our Diversified & Value sales platform is comprised of five large retail partners: Belk, Fleet Farm, JCPenney, Sam's Club and TJX Companies, Inc.
Health & Wellness
Our Health & Wellness sales platform provides comprehensive healthcare payments and financing solutions, through a network of providers and health systems, for those seeking health and wellness care for themselves, their families and their pets, and includes key brands such as CareCredit and Pets Best, as well as partners such as Walgreens.
Lifestyle
Lifestyle provides comprehensive payments and financing solutions with integrated in-store and digital experiences through partners and merchants who offer merchandise in power sports, outdoor power equipment, and other industries such as sporting goods, apparel, jewelry and music. Our Lifestyle sales platform partners include a wide range of key retailers in the apparel, specialty retail, outdoor, music and luxury industry, such as
American Eagle, Dick's Sporting Goods, Guitar Center, Sweetwater, Kawasaki, Polaris, Suzuki and Pandora.
Corp, Other
Corp, Other includes activity and balances related to certain program agreements with retail partners and merchants that will not be renewed beyond their current expiration date and certain programs that were previously terminated, which are not managed within the five sales platforms discussed above. Prior year activity in Corp, Other primarily includes activity associated with the Gap Inc. and BP portfolios, which were both sold in the second quarter of 2022. Corp, Other also includes amounts related to changes in the fair value of equity investments and realized gains or losses associated with the sale of investments.
Our Credit Products
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Through our sales platforms, we offer three principal types of credit products: credit cards, commercial credit products and consumer installment loans. We also offer a debt cancellation product.
The following table sets forth each credit product by type and indicates the percentage of our total loan receivables that are under standard terms only or pursuant to a promotional financing offer at March 31, 2023.
| Promotional Offer | |||||||||||||||||||||||
| Credit Product | Standard Terms Only | Deferred Interest | Other Promotional | Total | |||||||||||||||||||
| Credit cards | 58.3 | % | 19.8 | % | 16.4 | % | 94.5 | % | |||||||||||||||
| Commercial credit products | 1.8 | — | — | 1.8 | |||||||||||||||||||
| Consumer installment loans | 0.1 | 0.1 | 3.4 | 3.6 | |||||||||||||||||||
| Other | 0.1 | — | — | 0.1 | |||||||||||||||||||
| Total | 60.3 | % | 19.9 | % | 19.8 | % | 100.0 | % |
Credit Cards
We offer the following principal types of credit cards:
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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. Credit under our private label credit cards typically is extended either on standard terms only or pursuant to a promotional financing offer.
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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 a Synchrony-branded general purpose credit card. Dual Cards and general purpose co-branded credit cards are offered across all of our sales platforms and credit is typically extended on standard terms only. We offer either Dual Cards or general purpose co-branded credit cards through over 15 of our large partners, of which the majority are Dual Cards, as well as our CareCredit Dual Card. Consumer Dual Cards and Co-Branded cards totaled 24% of our total loan receivables portfolio at March 31, 2023.
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.
Installment Loans
We originate secured installment loans to consumers (and a limited number of commercial customers) in the United States, primarily for power products in our Outdoor market (motorcycles, ATVs and lawn and garden). We also offer unsecured installment loans primarily in our Health and Wellness sales platform and through our various other installment products, such as our Synchrony Pay Later solutions, including pay in 4 and pay monthly options for short-term loans. Installment loans are closed-end credit accounts where the customer pays down the outstanding balance in installments. Installment loans are generally assessed periodic finance charges using fixed interest rates.
Business Trends and Conditions
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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 2022 Form 10-K. For a discussion of how certain trends and conditions impacted the three months ended March 31, 2023, see “—Results of Operations.”
Seasonality
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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 typically 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, even in instances of 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, particularly with respect to our loan receivables which decreased by $1.3 billion, or 1.5% to $91.1 billion at March 31, 2023 compared to $92.5 billion at December 31, 2022, and our allowance for credit losses as a percentage of total loan receivables that increased to 10.44% at March 31, 2023, from 10.30% at December 31, 2022.
However, in addition to these seasonal trends, the elevated customer payment behavior we have experienced in recent years and more recently the subsequent moderation from these elevated levels, has also significantly impacted our key financial metrics and the fluctuations experienced between quarterly periods. The effects from these changes in customer payment behavior have resulted in either partial, or in some instances full, offset to the impact from the ongoing seasonal trends discussed above. This is most evident in our past due balances which increased to $3.5 billion at March 31, 2023 from $3.4 billion at December 31, 2022 due to the impact from lower customer payment rates which exceeded the effects of the seasonal trends we experienced. The same factors also provided a partial offset to the seasonal decrease in our loan receivables in the first quarter of 2023.
Results of Operations
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Highlights for the Three Months Ended March 31, 2023
Below are highlights of our performance for the three months ended March 31, 2023 compared to the three months ended March 31, 2022, as applicable, except as otherwise noted.
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Net earnings decreased to $601 million from $932 million. The decrease in the three months ended March 31, 2023 was primarily driven by increases in provision for credit losses and higher interest expense, partially offset by higher interest income and lower retailer share arrangements.
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Loan receivables increased 15.5% to $91.1 billion at March 31, 2023 compared to $78.9 billion at March 31, 2022, driven by purchase volume growth and lower customer payment rates.
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Net interest income increased 6.9% to $4.1 billion for the three months ended March 31, 2023. Interest and fees on loans increased 15.2% for the three months ended March 31, 2023, primarily driven by growth in average loan receivables, partially offset by the impacts of portfolios sold in the second quarter of 2022. For the three months ended March 31, 2023, interest expense increased 215.5%, due to higher benchmark rates and higher funding liabilities.
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Retailer share arrangements decreased 16.9% to $917 million for the three months ended March 31, 2023, primarily due to the impacts of portfolios sold in the second quarter of 2022 and higher net charge-offs, partially offset by higher net interest income.
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Over-30 day loan delinquencies as a percentage of period-end loan receivables increased 103 basis points to 3.81% at March 31, 2023. The net charge-off rate increased 176 basis points to 4.49% for the three months ended March 31, 2023.
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Provision for credit losses increased to $1.3 billion from $521 million for the three months ended March 31, 2023 primarily driven by higher net charge-offs and also a reserve build in the current year period driven by higher loan receivables and the potential effects of industry credit contraction on the economy, compared to a reserve release in the prior year. Our allowance coverage ratio (allowance for credit losses as a percent of period-end loan receivables) decreased to 10.44% at March 31, 2023, as compared to 10.96% at March 31, 2022.
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Other expense increased by $80 million, or 7.7%, for the three months ended March 31, 2023, primarily driven by higher employee costs, operational losses and information processing.
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At March 31, 2023, deposits represented 83% of our total funding sources. Total deposits increased by 3.7% to $74.4 billion at March 31, 2023, compared to December 31, 2022.
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During the three months ended March 31, 2023, we declared and paid cash dividends on our Series A 5.625% non-cumulative preferred stock of $14.06 per share, or $11 million.
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During the three months ended March 31, 2023, we repurchased $400 million of our outstanding common stock, and declared and paid cash dividends of $0.23 per share, or $100 million. At March 31, 2023, we have a total share repurchase authorization of $300 million remaining. For more information, see “Capital—Dividend and Share Repurchases.”
2023 Partner Agreements
During the three months ended March 31, 2023, we continued to expand and diversify our portfolio with the addition or renewal of more than 15 partners, which included the following:
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In our Home & Auto sales platform, we announced our new partnerships with Big Brand Tire & Service and LG Air Conditioning and extended our program agreements with CCA Global Partners, CertainPath, Haverty's Furniture, Haynes and LoveSac.
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In our Health & Wellness sales platform, we expanded our network through our new partnerships with Hand & Stone, Marquee Dental Partners and Valley Veterinary, and also extended our endorsements with the American Dental Association and Academy of General Dentistry.
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In our Lifestyle sales platform, we extended our program agreement with Piaggio and launched Synchrony’s Outdoor Card, enabling easy and affordable financing solutions to powersports customers.
Summary Earnings
The following table sets forth our results of operations for the periods indicated.
| Three months ended March 31, | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | |||||||||||||||||||||
| Interest income | $ | 4,786 | $ | 4,022 | |||||||||||||||||||
| Interest expense | 735 | 233 | |||||||||||||||||||||
| Net interest income | 4,051 | 3,789 | |||||||||||||||||||||
| Retailer share arrangements | (917) | (1,104) | |||||||||||||||||||||
| Provision for credit losses | 1,290 | 521 | |||||||||||||||||||||
| Net interest income, after retailer share arrangements and provision for credit losses | 1,844 | 2,164 | |||||||||||||||||||||
| Other income | 65 | 108 | |||||||||||||||||||||
| Other expense | 1,119 | 1,039 | |||||||||||||||||||||
| Earnings before provision for income taxes | 790 | 1,233 | |||||||||||||||||||||
| Provision for income taxes | 189 | 301 | |||||||||||||||||||||
| Net earnings | $ | 601 | $ | 932 | |||||||||||||||||||
| Net earnings available to common stockholders | $ | 590 | $ | 922 |
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) | 2023 | 2022 | |||||||||||||||||||||
| Financial Position Data (Average): | |||||||||||||||||||||||
| Loan receivables, including held for sale | $ | 90,815 | $ | 82,747 | |||||||||||||||||||
| Total assets | $ | 105,842 | $ | 95,556 | |||||||||||||||||||
| Deposits | $ | 72,627 | $ | 62,688 | |||||||||||||||||||
| Borrowings | $ | 14,671 | $ | 14,046 | |||||||||||||||||||
| Total equity | $ | 13,414 | $ | 13,731 | |||||||||||||||||||
| Selected Performance Metrics: | |||||||||||||||||||||||
| Purchase volume(1)(2) | $ | 41,557 | $ | 40,490 | |||||||||||||||||||
| Home & Auto | $ | 10,863 | $ | 10,260 | |||||||||||||||||||
| Digital | $ | 12,261 | $ | 11,196 | |||||||||||||||||||
| Diversified & Value | $ | 13,439 | $ | 11,558 | |||||||||||||||||||
| Health & Wellness | $ | 3,690 | $ | 3,107 | |||||||||||||||||||
| Lifestyle | $ | 1,302 | $ | 1,195 | |||||||||||||||||||
| Corp, Other | $ | 2 | $ | 3,174 | |||||||||||||||||||
| Average active accounts (in thousands)(2)(3) | 69,494 | 70,127 | |||||||||||||||||||||
| Net interest margin(4) | 15.22 | % | 15.80 | % | |||||||||||||||||||
| Net charge-offs | $ | 1,006 | $ | 558 | |||||||||||||||||||
| Net charge-offs as a % of average loan receivables, including held for sale | 4.49 | % | 2.73 | % | |||||||||||||||||||
| Allowance coverage ratio(5) | 10.44 | % | 10.96 | % | |||||||||||||||||||
| Return on assets(6) | 2.3 | % | 4.0 | % | |||||||||||||||||||
| Return on equity(7) | 18.2 | % | 27.5 | % | |||||||||||||||||||
| Equity to assets(8) | 12.67 | % | 14.37 | % | |||||||||||||||||||
| Other expense as a % of average loan receivables, including held for sale | 5.00 | % | 5.09 | % | |||||||||||||||||||
| Efficiency ratio(9) | 35.0 | % | 37.2 | % | |||||||||||||||||||
| Effective income tax rate | 23.9 | % | 24.4 | % | |||||||||||||||||||
| Selected Period-End Data: | |||||||||||||||||||||||
| Loan receivables | $ | 91,129 | $ | 78,916 | |||||||||||||||||||
| Allowance for credit losses | $ | 9,517 | $ | 8,651 | |||||||||||||||||||
| 30+ days past due as a % of period-end loan receivables(10) | 3.81 | % | 2.78 | % | |||||||||||||||||||
| 90+ days past due as a % of period-end loan receivables(10) | 1.87 | % | 1.30 | % | |||||||||||||||||||
| Total active accounts (in thousands)(2)(3) | 68,589 | 69,122 |
(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.
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.
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||
| Three months ended March 31 ($ in millions) | Average Balance | Interest Income / Expense | Average Yield / Rate**(1)** | Average Balance | Interest Income/ Expense | Average Yield / Rate**(1)** | |||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||||||||
| Interest-earning assets: | |||||||||||||||||||||||||||||||||||||||||
| Interest-earning cash and equivalents(2) | $ | 12,365 | $ | 140 | 4.59 | % | $ | 8,976 | $ | 5 | 0.23 | % | |||||||||||||||||||||||||||||
| Securities available for sale | 4,772 | 30 | 2.55 | % | 5,513 | 9 | 0.66 | % | |||||||||||||||||||||||||||||||||
| Loan receivables, including held for sale(3): | |||||||||||||||||||||||||||||||||||||||||
| Credit cards | 85,904 | 4,497 | 21.23 | % | 78,564 | 3,913 | 20.20 | % | |||||||||||||||||||||||||||||||||
| Consumer installment loans | 3,103 | 83 | 10.85 | % | 2,682 | 66 | 9.98 | % | |||||||||||||||||||||||||||||||||
| Commercial credit products | 1,697 | 34 | 8.13 | % | 1,434 | 28 | 7.92 | % | |||||||||||||||||||||||||||||||||
| Other | 111 | 2 | 7.31 | % | 67 | 1 | NM | ||||||||||||||||||||||||||||||||||
| Total loan receivables, including held for sale | 90,815 | 4,616 | 20.61 | % | 82,747 | 4,008 | 19.64 | % | |||||||||||||||||||||||||||||||||
| Total interest-earning assets | 107,952 | 4,786 | 17.98 | % | 97,236 | 4,022 | 16.78 | % | |||||||||||||||||||||||||||||||||
| Non-interest-earning assets: | |||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 1,024 | 1,626 | |||||||||||||||||||||||||||||||||||||||
| Allowance for credit losses | (9,262) | (8,675) | |||||||||||||||||||||||||||||||||||||||
| Other assets | 6,128 | 5,369 | |||||||||||||||||||||||||||||||||||||||
| Total non-interest-earning assets | (2,110) | (1,680) | |||||||||||||||||||||||||||||||||||||||
| Total assets | $ | 105,842 | $ | 95,556 | |||||||||||||||||||||||||||||||||||||
| Liabilities | |||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposit accounts | $ | 72,216 | $ | 557 | 3.13 | % | $ | 62,314 | $ | 127 | 0.83 | % | |||||||||||||||||||||||||||||
| Borrowings of consolidated securitization entities | 6,229 | 77 | 5.01 | % | 6,827 | 33 | 1.96 | % | |||||||||||||||||||||||||||||||||
| Senior and subordinated unsecured notes | 8,442 | 101 | 4.85 | % | 7,219 | 73 | 4.10 | % | |||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 86,887 | 735 | 3.43 | % | 76,360 | 233 | 1.24 | % | |||||||||||||||||||||||||||||||||
| Non-interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||
| Non-interest-bearing deposit accounts | 411 | 374 | |||||||||||||||||||||||||||||||||||||||
| Other liabilities | 5,130 | 5,091 | |||||||||||||||||||||||||||||||||||||||
| Total non-interest-bearing liabilities | 5,541 | 5,465 | |||||||||||||||||||||||||||||||||||||||
| Total liabilities | 92,428 | 81,825 | |||||||||||||||||||||||||||||||||||||||
| Equity | |||||||||||||||||||||||||||||||||||||||||
| Total equity | 13,414 | 13,731 | |||||||||||||||||||||||||||||||||||||||
| Total liabilities and equity | $ | 105,842 | $ | 95,556 | |||||||||||||||||||||||||||||||||||||
| Interest rate spread**(4)** | 14.55 | % | 15.54 | % | |||||||||||||||||||||||||||||||||||||
| Net interest income | $ | 4,051 | $ | 3,789 | |||||||||||||||||||||||||||||||||||||
| Net interest margin**(5)** | 15.22 | % | 15.80 | % |
(1)Average yields/rates are based on total interest income/expense over average balances.
(2)Includes average restricted cash balances of $351 million and $614 million for the three months ended March 31, 2023 and 2022, respectively.
(3)Interest income on loan receivables includes fees on loans of $639 million and $652 million for the three months ended March 31, 2023 and 2022, 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.
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 2022 Form 10-K.
Interest Income
Interest income increased by $764 million, or 19.0%, for the three months ended March 31, 2023, primarily driven by an increase in interest and fees on loans of 15.2%. The increase in interest and fees on loans was primarily driven by growth in average loan receivables, partially offset by the impacts of portfolios sold in the second quarter of 2022. Excluding the impact of the portfolio sales, interest and fees on loans increased 23.1% for the three months ended March 31, 2023.
Average interest-earning assets
| Three months ended March 31 ($ in millions) | 2023 | % | 2022 | % | |||||||||||||||||||||||||||||||
| Loan receivables, including held for sale | $ | 90,815 | 84.1 | % | $ | 82,747 | 85.1 | % | |||||||||||||||||||||||||||
| Liquidity portfolio and other | 17,137 | 15.9 | % | 14,489 | 14.9 | % | |||||||||||||||||||||||||||||
| Total average interest-earning assets | $ | 107,952 | 100.0 | % | $ | 97,236 | 100.0 | % |
Average loan receivables, including held for sale, increased 9.8% for the three months ended March 31, 2023, primarily driven by growth in purchase volume and moderation in customer payment rates, partially offset by the impacts from portfolios sold in the second quarter of 2022. Purchase volume increased 2.6% for the three months ended March 31, 2023 and excluding the impact of portfolios sold during the second quarter, purchase volume increased by 11.4%.
Yield on average interest-earning assets
The yield on average interest-earning assets increased for the three months ended March 31, 2023, primarily due to an increase in the yield on average loan receivables. The increase in loan receivable yield was 97 basis points to 20.61% for the three months ended March 31, 2023.
Interest Expense
Interest expense increased by $502 million, or 215.5%, for the three months ended March 31, 2023, primarily attributed to higher benchmark interest rates and higher funding liabilities. Our cost of funds increased to 3.43% for the three months ended March 31, 2023, compared to 1.24% for the three months ended March 31, 2022.
Average interest-bearing liabilities
| Three months ended March 31 ($ in millions) | 2023 | % | 2022 | % | |||||||||||||||||||||||||||||||
| Interest-bearing deposit accounts | $ | 72,216 | 83.1 | % | $ | 62,314 | 81.6 | % | |||||||||||||||||||||||||||
| Borrowings of consolidated securitization entities | 6,229 | 7.2 | % | 6,827 | 8.9 | % | |||||||||||||||||||||||||||||
| Senior and subordinated unsecured notes | 8,442 | 9.7 | % | 7,219 | 9.5 | % | |||||||||||||||||||||||||||||
| Total average interest-bearing liabilities | $ | 86,887 | 100.0 | % | $ | 76,360 | 100.0 | % |
Net Interest Income
Net interest income increased by $262 million, or 6.9%, for the three months ended March 31, 2023, resulting from the changes in interest income and interest expense discussed above.
Retailer Share Arrangements
Retailer share arrangements decreased by $187 million, or 16.9%, for the three months ended March 31, 2023, primarily due to the impact of portfolios sold in the second quarter of 2022 and higher net charge-offs, partially offset by higher net interest income.
Provision for Credit Losses
Provision for credit losses increased to $1.3 billion from $521 million, for the three months ended March 31, 2023, primarily driven by higher net charge-offs and also a reserve build in the current year driven by higher loan receivables and the potential effects of industry credit contraction on the economy, versus a reserve release in the prior year period.
Other Income
| Three months ended March 31, | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | |||||||||||||||||||||
| Interchange revenue | $ | 232 | $ | 230 | |||||||||||||||||||
| Debt cancellation fees | 115 | 89 | |||||||||||||||||||||
| Loyalty programs | (298) | (258) | |||||||||||||||||||||
| Other | 16 | 47 | |||||||||||||||||||||
| Total other income | $ | 65 | $ | 108 |
Other income decreased by $43 million, or 39.8%, for the three months ended March 31, 2023 primarily driven by higher loyalty program costs as well as downward adjustments to certain equity method investments in the current year compared to investment gains in the prior year period. These decreases were partially offset by higher debt cancellation income.
Other Expense
| Three months ended March 31, | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | |||||||||||||||||||||
| Employee costs | $ | 451 | $ | 402 | |||||||||||||||||||
| Professional fees | 186 | 210 | |||||||||||||||||||||
| Marketing and business development | 131 | 116 | |||||||||||||||||||||
| Information processing | 166 | 145 | |||||||||||||||||||||
| Other | 185 | 166 | |||||||||||||||||||||
| Total other expense | $ | 1,119 | $ | 1,039 |
Other expense increased by $80 million, or 7.7%, for the three months ended March 31, 2023 primarily driven by increases in employee costs, operational losses and information processing. The increase in employee costs was primarily attributable to an increase in headcount and increased average compensation rates. The increase in information processing was primarily due to additional technology investments.
Provision for Income Taxes
| Three months ended March 31, | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | |||||||||||||||||||||
| Effective tax rate | 23.9 | % | 24.4 | % | |||||||||||||||||||
| Provision for income taxes | $ | 189 | $ | 301 |
The effective tax rate for the three months ended March 31, 2023 decreased compared to the same period in the prior year, primarily due to a decrease in pre-tax income in the current year, which led to a larger impact related to discrete tax benefits. For both periods presented 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 credit products primarily through five sales platforms (Home & Auto, Digital, Diversified & Value, Health & Wellness and Lifestyle), which management measures based on their revenue-generating activities. The following is a discussion of certain supplemental information for the three months ended March 31, 2023, for each of our five sales platforms and Corp, Other.
Home & Auto
| Three months ended March 31, | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | |||||||||||||||||||||
| Purchase volume | $ | 10,863 | $ | 10,260 | |||||||||||||||||||
| Period-end loan receivables | $ | 29,733 | $ | 26,532 | |||||||||||||||||||
| Average loan receivables, including held for sale | $ | 29,690 | $ | 26,406 | |||||||||||||||||||
| Average active accounts (in thousands) | 18,521 | 17,473 | |||||||||||||||||||||
| Interest and fees on loans | $ | 1,225 | $ | 1,088 | |||||||||||||||||||
| Other income | $ | 25 | $ | 21 |
Home & Auto interest and fees on loans increased by $137 million, or 12.6%, for the three months ended March 31, 2023, primarily driven by growth in average loan receivables. The growth in average loan receivables reflected purchase volume growth of 5.9% reflecting strong commercial spend and higher transaction values in Furniture and Home Specialty.
Digital
| Three months ended March 31, | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | |||||||||||||||||||||
| Purchase volume | $ | 12,261 | $ | 11,196 | |||||||||||||||||||
| Period-end loan receivables | $ | 24,944 | $ | 21,075 | |||||||||||||||||||
| Average loan receivables, including held for sale | $ | 24,982 | $ | 21,160 | |||||||||||||||||||
| Average active accounts (in thousands) | 20,564 | 19,000 | |||||||||||||||||||||
| Interest and fees on loans | $ | 1,363 | $ | 1,022 | |||||||||||||||||||
| Other income | $ | 1 | $ | (12) |
Digital interest and fees on loans increased by $341 million, or 33.4%, for the three months ended March 31, 2023, primarily driven by growth in average loan receivables and higher benchmark interest rates. The growth in average loan receivables reflected purchase volume growth of 9.5% and average active account growth of 8.2% with strong customer engagement.
Diversified & Value
| Three months ended March 31, | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | |||||||||||||||||||||
| Purchase volume | $ | 13,439 | $ | 11,558 | |||||||||||||||||||
| Period-end loan receivables | $ | 17,702 | $ | 15,166 | |||||||||||||||||||
| Average loan receivables, including held for sale | $ | 17,713 | $ | 15,128 | |||||||||||||||||||
| Average active accounts (in thousands) | 20,807 | 19,201 | |||||||||||||||||||||
| Interest and fees on loans | $ | 1,070 | $ | 826 | |||||||||||||||||||
| Other income | $ | (14) | $ | (9) |
Diversified & Value interest and fees on loans increased by $244 million, or 29.5%, for the three months ended March 31, 2023, primarily driven by growth in average loan receivables and higher benchmark interest rates. The growth in average loan receivables reflected purchase volume growth of 16.3% driven by higher out-of-partner spend and strong retailer performance and average active account growth of 8.4%.
Health & Wellness
| Three months ended March 31, | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | |||||||||||||||||||||
| Purchase volume | $ | 3,690 | $ | 3,107 | |||||||||||||||||||
| Period-end loan receivables | $ | 12,581 | $ | 10,407 | |||||||||||||||||||
| Average loan receivables, including held for sale | $ | 12,309 | $ | 10,251 | |||||||||||||||||||
| Average active accounts (in thousands) | 6,887 | 6,027 | |||||||||||||||||||||
| Interest and fees on loans | $ | 735 | $ | 616 | |||||||||||||||||||
| Other income | $ | 61 | $ | 53 |
Health & Wellness interest and fees on loans increased by $119 million, or 19.3%, for the three months ended March 31, 2023, primarily driven by growth in average loan receivables and higher revolve rate. The growth in average loan receivables reflected continued higher promotional purchase volume and lower payment rates. Purchase volume increased 18.8% and average active accounts increased 14.3%.
Other income increased by $8 million, or 15.1%, for the three months ended March 31, 2023 primarily due to higher debt cancellation fees, partially offset by higher program loyalty costs.
Lifestyle
| Three months ended March 31, | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | |||||||||||||||||||||
| Purchase volume | $ | 1,302 | $ | 1,195 | |||||||||||||||||||
| Period-end loan receivables | $ | 5,971 | $ | 5,381 | |||||||||||||||||||
| Average loan receivables, including held for sale | $ | 5,919 | $ | 5,379 | |||||||||||||||||||
| Average active accounts (in thousands) | 2,611 | 2,582 | |||||||||||||||||||||
| Interest and fees on loans | $ | 223 | $ | 191 | |||||||||||||||||||
| Other income | $ | 7 | $ | 6 |
Lifestyle interest and fees on loans increased by $32 million, or 16.8%, for the three months ended March 31, 2023 primarily driven by growth in average loan receivables and higher benchmark interest rates. The growth in average loan receivables reflected purchase volume growth of 9.0% for the three months ended March 31, 2023, which was driven by higher transaction values in Outdoor and Luxury.
Corp, Other
| Three months ended March 31, | |||||||||||||||||||||||
| ($ in millions) | 2023 | 2022 | |||||||||||||||||||||
| Purchase volume | $ | 2 | $ | 3,174 | |||||||||||||||||||
| Period-end loan receivables | $ | 198 | $ | 355 | |||||||||||||||||||
| Average loan receivables, including held for sale | $ | 202 | $ | 4,423 | |||||||||||||||||||
| Average active accounts (in thousands) | 104 | 5,844 | |||||||||||||||||||||
| Interest and fees on loans | $ | — | $ | 265 | |||||||||||||||||||
| Other income | $ | (15) | $ | 49 |
The decreases shown above for Corp, Other compared to the prior year period reflect the effects of the sale of the BP and Gap Inc. portfolios in May 2022 and June 2022, respectively.
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.
The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.
| ($ in millions) | At March 31, 2023 | (%) | At December 31, 2022 | (%) | |||||||||||||||||||
| Loans | |||||||||||||||||||||||
| Credit cards | $ | 86,113 | 94.5 | % | $ | 87,630 | 94.8 | % | |||||||||||||||
| Consumer installment loans | 3,204 | 3.5 | % | 3,056 | 3.3 | ||||||||||||||||||
| Commercial credit products | 1,690 | 1.9 | % | 1,682 | 1.8 | ||||||||||||||||||
| Other | 122 | 0.1 | % | 102 | 0.1 | ||||||||||||||||||
| Total loans | $ | 91,129 | 100.0 | % | $ | 92,470 | 100.0 | % |
Loan receivables decreased 1.5% to $91.1 billion at March 31, 2023 compared to December 31, 2022, primarily driven by the seasonality of our business, partially offset by lower customer payment rates.
Loan receivables increased 15.5% to $91.1 billion at March 31, 2023 compared to $78.9 billion at March 31, 2022, driven by purchase volume growth and lower customer payment rates.
Our loan receivables portfolio had the following geographic concentration at March 31, 2023.
| ($ in millions) | Loan Receivables Outstanding | % of Total Loan Receivables Outstanding | |||||||||
| State | |||||||||||
| Texas | $ | 9,957 | 10.9 | % | |||||||
| California | $ | 9,476 | 10.4 | % | |||||||
| Florida | $ | 8,482 | 9.3 | % | |||||||
| New York | $ | 4,495 | 4.9 | % | |||||||
| North Carolina | $ | 3,754 | 4.1 | % |
Delinquencies
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 3.81% at March 31, 2023 from 2.78% at March 31, 2022, and increased from 3.65% at December 31, 2022. These increases were primarily driven by lower customer payment rates.
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 net charge-offs and ratio of net charge-offs to average loan receivables, including held for sale, (“net charge-off rate”) for the periods indicated.
| Three months ended March 31, | |||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||
| ($ in millions) | Amount | Rate | Amount | Rate | |||||||||||||||||||||||||||||||||||||||||||
| Credit cards | $ | 938 | 4.43 | % | $ | 530 | 2.74 | % | |||||||||||||||||||||||||||||||||||||||
| Consumer installment loans | 39 | 4.97 | % | 17 | 2.57 | % | |||||||||||||||||||||||||||||||||||||||||
| Commercial credit products | 29 | 6.69 | % | 11 | 3.11 | % | |||||||||||||||||||||||||||||||||||||||||
| Other | — | — | % | — | — | % | |||||||||||||||||||||||||||||||||||||||||
| Total net charge-offs | $ | 1,006 | 4.49 | % | $ | 558 | 2.73 | % |
Allowance for Credit Losses
The allowance for credit losses totaled $9.5 billion at both March 31, 2023 and December 31, 2022, respectively, and $8.7 billion at March 31, 2022, and reflects our estimate of expected credit losses for the life of the loan receivables on our Consolidated Statement of Financial Position. Our allowance for credit losses as a percentage of total loan receivables increased to 10.44% at March 31, 2023, from 10.30% at December 31, 2022 and decreased from 10.96% at March 31, 2022.
The increase in allowance for credit losses compared to March 31, 2022 was primarily driven by growth in loan receivables. The allowance for credit losses at March 31, 2023 was relatively flat compared to December 31, 2022 and included a $294 million reduction related to the adoption of ASU 2022-02 on January 1, 2023 which eliminated the separate recognition and measurement guidance for troubled debt restructurings (“TDRs”). See Note 2. Basis of Presentation and Summary of Significant Accounting Policies and Note 4. Loan Receivables and Allowance for Credit Losses to our condensed consolidated financial statements for additional information on the effects of adoption of the new accounting guidance.
Funding, Liquidity and Capital Resources
____________________________________________________________________________________________
We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources to support our daily operations, our business growth, our credit ratings and our regulatory and policy requirements, in a cost effective and prudent manner through expected and unexpected market environments.
Funding Sources
Our primary funding sources include cash from operations, deposits (direct and brokered deposits), securitized financings and senior and subordinated unsecured notes.
The following table summarizes information concerning our funding sources during the periods indicated:
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| Three months ended March 31 ($ in millions) | Average Balance | % | Average Rate | Average Balance | % | Average Rate | |||||||||||||||||||||||||||||
| Deposits(1) | $ | 72,216 | 83.1 | % | 3.1 | % | $ | 62,314 | 81.6 | % | 0.8 | % | |||||||||||||||||||||||
| Securitized financings | 6,229 | 7.2 | 5.0 | 6,827 | 8.9 | 2.0 | |||||||||||||||||||||||||||||
| Senior and subordinated unsecured notes | 8,442 | 9.7 | 4.9 | 7,219 | 9.5 | 4.1 | |||||||||||||||||||||||||||||
| Total | $ | 86,887 | 100.0 | % | 3.4 | % | $ | 76,360 | 100.0 | % | 1.2 | % |
(1)Excludes $411 million and $374 million average balance of non-interest-bearing deposits for the three months ended March 31, 2023 and 2022, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended March 31, 2023 and 2022.
Deposits
We obtain deposits directly from retail, affinity relationships and commercial customers (“direct deposits”) or through third-party brokerage firms that offer our deposits to their customers (“brokered deposits”). At March 31, 2023, we had $60.6 billion in direct deposits and $13.8 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger that channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to continue to utilize our direct deposit base as a source of stable and diversified low-cost funding.
Our direct deposits are primarily from retail customers and include a range of FDIC-insured deposit products, including certificates of deposit, IRAs, money market accounts, savings accounts, sweep and affinity deposits.
Brokered deposits are primarily from retail customers of large brokerage firms. We have relationships with 10 brokers that offer our deposits through their networks. Our brokered deposits consist primarily of certificates of deposit that bear interest at a fixed rate. These deposits generally are not subject to early withdrawal.
Our ability to attract deposits is sensitive to, among other things, the interest rates we pay, and therefore, we bear funding risk if we fail to pay higher rates, or interest rate risk if we are required to pay higher rates, to retain existing deposits or attract new deposits. To mitigate these risks, our funding strategy includes a range of deposit products, and we seek to maintain access to multiple other funding sources, including securitized financings (including our undrawn committed capacity) and unsecured debt.
The following table summarizes certain information regarding our interest-bearing deposits by type (all of which constitute U.S. deposits) for the periods indicated:
| Three months ended March 31 ($ in millions) | 2023 | 2022 | |||||||||||||||||||||||||||||||||
| Average Balance | % | Average Rate | Average Balance | % | Average Rate | ||||||||||||||||||||||||||||||
| Direct deposits: | |||||||||||||||||||||||||||||||||||
| Certificates of deposit (including IRA certificates of deposit) | $ | 29,128 | 40.3 | % | 2.8 | % | $ | 20,226 | 32.5 | % | 1.0 | % | |||||||||||||||||||||||
| Savings, money market, and demand accounts | 29,914 | 41.4 | 3.3 | 31,097 | 49.9 | 0.5 | |||||||||||||||||||||||||||||
| Brokered deposits | 13,174 | 18.3 | 3.5 | 10,991 | 17.6 | 1.3 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits | $ | 72,216 | 100.0 | % | 3.1 | % | $ | 62,314 | 100.0 | % | 0.8 | % |
Our deposit liabilities provide funding with maturities ranging from one day to ten years. At March 31, 2023, the weighted average maturity of our interest-bearing time deposits was 1.2 years. See Note 7. Deposits to our condensed consolidated financial statements for more information on the maturities of our time deposits.
The following table summarizes deposits by contractual maturity at March 31, 2023:
| ($ in millions) | 3 Months or Less | Over 3 Months but within 6 Months | Over 6 Months but within 12 Months | Over 12 Months | Total | ||||||||||||||||||||||||
| U.S. deposits (less than FDIC insurance limit)****(1)(2) | $ | 31,670 | $ | 3,266 | $ | 9,858 | $ | 14,620 | $ | 59,414 | |||||||||||||||||||
| U.S. deposits (in excess of FDIC insurance limit)****(2) | |||||||||||||||||||||||||||||
| Direct deposits: | |||||||||||||||||||||||||||||
| Certificates of deposit (including IRA certificates of deposit) | 1,203 | 1,061 | 3,068 | 2,728 | 8,060 | ||||||||||||||||||||||||
| Savings, money market, and demand accounts | 6,951 | — | — | — | 6,951 | ||||||||||||||||||||||||
| Total | $ | 39,824 | $ | 4,327 | $ | 12,926 | $ | 17,348 | $ | 74,425 |
(1)Includes brokered certificates of deposit for which underlying individual deposit balances are assumed to be less than $250,000.
(2)The standard deposit insurance amount is $250,000 per depositor, for each account ownership category. Deposits in excess of FDIC insurance limit presented above include partially insured accounts. Our estimate of the uninsured portion of these deposit balances at March 31, 2023 was approximately $5.3 billion.
Securitized Financings
We access the asset-backed securitization market using the Synchrony Credit Card Master Note Trust (“SYNCT”) and the Synchrony Card Issuance Trust (“SYNIT”) through which we may issue asset-backed securities through both public transactions and private transactions funded by financial institutions and commercial paper conduits. In addition, we issue asset-backed securities in private transactions through the Synchrony Sales Finance Master Trust (“SFT”).
The following table summarizes expected contractual maturities of the investors’ interests in securitized financings, excluding debt premiums, discounts and issuance costs at March 31, 2023.
| ($ in millions) | Less Than One Year | One Year Through Three Years | Four Years Through Five Years | After Five Years | Total | ||||||||||||||||||||||||
| Scheduled maturities of long-term borrowings—owed to securitization investors: | |||||||||||||||||||||||||||||
| SYNCT(1) | $ | 1,457 | $ | 1,550 | $ | — | $ | — | $ | 3,007 | |||||||||||||||||||
| SFT | — | 1,550 | — | — | 1,550 | ||||||||||||||||||||||||
| SYNIT(1) | — | 1,675 | — | — | 1,675 | ||||||||||||||||||||||||
| Total long-term borrowings—owed to securitization investors | $ | 1,457 | $ | 4,775 | $ | — | $ | — | $ | 6,232 |
(1)Excludes any subordinated classes of SYNCT notes and SYNIT notes that we owned at March 31, 2023.
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 that 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 March 31, 2023.
| Note Principal Balance ($ in millions) | # of Series Outstanding | Three-Month Rolling Average Excess Spread**(1)** | |||||||||||||||
| SYNCT | $ | 3,007 | 5 | ~ 15.1% to 16.3% | |||||||||||||
| SFT | $ | 1,550 | 6 | 15.0 | % | ||||||||||||
| SYNIT | $ | 1,675 | 1 | 19.1 | % |
(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, a range of the excess spreads relating to the particular series issued within such trust or, in the case of SYNIT, the excess spread relating to the one outstanding series issued within such trust, in all cases omitting any series that have not been outstanding for at least three full monthly periods and calculated in accordance with the applicable trust or series documentation, for the three securitization monthly periods ended March 31, 2023.
Senior and Subordinated Unsecured Notes
The following table provides a summary of our outstanding fixed rate senior and subordinated unsecured notes at March 31, 2023, which includes $750 million of subordinated unsecured notes issued by Synchrony Financial in February 2023.
| Issuance Date | Interest Rate**(1)** | Maturity | Principal Amount Outstanding**(2)** | |||||||||||||||||
| ($ in millions) | ||||||||||||||||||||
| Fixed rate senior unsecured notes: | ||||||||||||||||||||
| Synchrony Financial | ||||||||||||||||||||
| 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 | |||||||||||||||||
| October 2021 | 2.875% | October 2031 | 750 | |||||||||||||||||
| June 2022 | 4.875% | June 2025 | 750 | |||||||||||||||||
| Synchrony Bank | ||||||||||||||||||||
| August 2022 | 5.400% | August 2025 | 900 | |||||||||||||||||
| August 2022 | 5.625% | August 2027 | 600 | |||||||||||||||||
| Fixed rate subordinated unsecured notes: | ||||||||||||||||||||
| Synchrony Financial | ||||||||||||||||||||
| February 2023 | 7.250% | February 2033 | 750 | |||||||||||||||||
| Total fixed rate senior and subordinated unsecured notes | $ | 8,750 | ||||||||||||||||||
(1)Weighted average interest rate of all senior and subordinated unsecured notes at March 31, 2023 was 4.69%.
(2)The amounts shown exclude unamortized debt discounts, premiums and issuance costs.
Short-Term Borrowings
Except as described above, there were no material short-term borrowings for the periods presented.
Other
At March 31, 2023, 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 and subordinated 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 March 31, 2023.
At March 31, 2023, 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.
The table below reflects our current credit ratings and outlooks:
| S&P | Fitch Ratings | ||||||||||
| Synchrony Financial | |||||||||||
| Senior unsecured debt | BBB- | BBB- | |||||||||
| Subordinated unsecured debt | BB+ | BB+ | |||||||||
| Preferred stock | BB- | B+ | |||||||||
| Outlook for Synchrony Financial | Stable | Stable | |||||||||
| Synchrony Bank | |||||||||||
| Senior unsecured debt | BBB | BBB- | |||||||||
| Outlook for Synchrony Bank | Stable | Stable |
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 our Asset 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 at March 31, 2023 had $18.7 billion of liquid assets, primarily consisting of cash and equivalents and short-term obligations of the U.S. Treasury, less cash in transit which is not considered to be liquid, compared to $14.2 billion of liquid assets at December 31, 2022. The increase in liquid assets was primarily due to deposit growth, issuance of subordinated unsecured debt and the seasonality of our business. We believe our liquidity position at March 31, 2023 remains strong as we continue to operate in a period of uncertain economic conditions and we will continue to closely monitor our liquidity as economic conditions change.
As additional sources of liquidity, at March 31, 2023, we had an aggregate of $2.5 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 the Federal 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.
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 Our Business—Savings Association Regulation—Dividends and Stock Repurchases” in our 2022 Form 10-K.
Capital
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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—Recent Legislative and Regulatory Developments” in our 2022 Form 10-K. In addition, while we have not been subject to the Federal Reserve Board's formal capital plan submission requirements to-date, we have submitted a capital plan to the Federal Reserve Board in 2023. While not required, our capital plan process does include certain internal stress testing.
Dividend and Share Repurchases
| Common Stock Cash Dividends Declared | Month of Payment | Amount per Common Share | Amount | |||||||||||||||||
| ($ in millions, except per share data) | ||||||||||||||||||||
| Three months ended March 31, 2023 | February 2023 | $ | 0.23 | $ | 100 | |||||||||||||||
| Total dividends declared | $ | 0.23 | $ | 100 |
| Preferred Stock Cash Dividends Declared | Month of Payment | Amount per Preferred Share | Amount | |||||||||||||||||
| ($ in millions, except per share data) | ||||||||||||||||||||
| Three months ended March 31, 2023 | February 2023 | $ | 14.06 | $ | 11 | |||||||||||||||
| Total dividends declared | $ | 14.06 | $ | 11 |
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 2022 Form 10-K.
| Common Shares Repurchased Under Publicly Announced Programs | Total Number of Shares Purchased | Dollar Value of Shares Purchased | ||||||||||||
| ($ and shares in millions) | ||||||||||||||
| Three months ended March 31, 2023 | 11.3 | $ | 400 | |||||||||||
| Total | 11.3 | $ | 400 |
During the three months ended March 31, 2023, we repurchased $400 million of common stock as part of the share repurchase programs announced in 2022, with remaining authorized share repurchase capacity of $300 million under our existing share repurchase program through June 2023.
Regulatory Capital Requirements - Synchrony Financial
As a savings and loan holding company, we are required to maintain minimum capital ratios, under the applicable U.S. Basel III capital rules. For more information, see “Regulation—Savings and Loan Holding Company Regulation” in our 2022 Form 10-K.
For Synchrony Financial to be a well-capitalized savings and loan holding company, Synchrony Bank must be well-capitalized and Synchrony Financial must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal Reserve Board to meet and maintain a specific capital level for any capital measure. At March 31, 2023, Synchrony Financial met all the requirements to be deemed well-capitalized.
The following table sets forth the composition of our capital ratios for the Company calculated under the Basel III Standardized Approach rules at March 31, 2023 and December 31, 2022, respectively.
| Basel III | |||||||||||||||||||||||
| At March 31, 2023 | At December 31, 2022 | ||||||||||||||||||||||
| ($ in millions) | Amount | Ratio**(1)** | Amount | Ratio**(1)** | |||||||||||||||||||
| Total risk-based capital | $ | 14,180 | 15.4 | % | $ | 13,713 | 15.0 | % | |||||||||||||||
| Tier 1 risk-based capital | $ | 12,207 | 13.3 | % | $ | 12,493 | 13.6 | % | |||||||||||||||
| Tier 1 leverage | $ | 12,207 | 11.6 | % | $ | 12,493 | 12.3 | % | |||||||||||||||
| Common equity Tier 1 capital | $ | 11,473 | 12.5 | % | $ | 11,759 | 12.8 | % | |||||||||||||||
| Risk-weighted assets | $ | 91,873 | $ | 91,596 |
(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.
The Company elected to adopt the option provided by the interim final rule issued by joint federal bank regulatory agencies, which largely delayed the effects of CECL on our regulatory capital through December 31, 2021. Beginning in the first quarter of 2022, the effects are now being phased-in over a three-year transitional period through 2024, collectively the “CECL regulatory capital transition adjustment”. The effects of CECL on our regulatory capital will be fully phased-in beginning in the first quarter of 2025. For more information, see “Capital—Regulatory Capital Requirements - Synchrony Financial” in our 2022 Form 10-K.
Capital amounts and ratios in the above table all reflect the applicable CECL regulatory capital transition adjustment for each period. The decrease in our common equity Tier 1 capital ratio compared to December 31, 2022 was primarily due to the second year phase-in of the impact of CECL on our regulatory capital, partially offset by the impact from the adoption of the new accounting standard for TDRs. See Note 2. Basis of Presentation and Summary of Significant Accounting Policies for additional information on the new accounting standard.
Regulatory Capital Requirements - Synchrony Bank
At March 31, 2023 and December 31, 2022, 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 at March 31, 2023 and December 31, 2022, and also reflects the applicable CECL regulatory capital transition adjustment for each period.
| At March 31, 2023 | At December 31, 2022 | Minimum to be Well-Capitalized under Prompt Corrective Action Provisions | |||||||||||||||||||||||||||
| ($ in millions) | Amount | Ratio | Amount | Ratio | Ratio | ||||||||||||||||||||||||
| Total risk-based capital | $ | 13,074 | 15.2 | % | $ | 13,313 | 15.6 | % | 10.0% | ||||||||||||||||||||
| Tier 1 risk-based capital | $ | 11,921 | 13.9 | % | $ | 12,174 | 14.2 | % | 8.0% | ||||||||||||||||||||
| Tier 1 leverage | $ | 11,921 | 12.2 | % | $ | 12,174 | 12.8 | % | 5.0% | ||||||||||||||||||||
| Common equity Tier 1 capital | $ | 11,921 | 13.9 | % | $ | 12,174 | 14.2 | % | 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 2022 Form 10-K.
Off-Balance Sheet Arrangements and Unfunded Lending Commitments
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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. At March 31, 2023, we had not recorded any contingent liabilities in our Condensed Consolidated Statement of Financial Position related to any guarantees. See Note 5 - Variable Interest Entities to our condensed consolidated financial statements for more information on our investment commitments for unconsolidated variable interest entities (“VIE's”).
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
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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. See “Management's Discussion and Analysis—Critical Accounting Estimates” in our 2022 Form 10-K, for a detailed discussion of these critical accounting estimates.
Regulation and Supervision
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Our business, including our relationships with our customers, is subject to regulation, supervision and examination under U.S. federal, state and foreign laws and regulations. These laws and regulations cover all aspects of our business, including lending and collection 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. Such laws and regulations directly and indirectly affect key drivers of our profitability, including, for example, capital and liquidity, product offerings, risk management, and costs of compliance.
As a savings and loan holding company and a financial holding company, Synchrony is subject to regulation, supervision and examination by the Federal Reserve Board. As a large provider of consumer financial services, we are also subject to regulation, supervision and examination by the CFPB.
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 the CFPB. In addition, the Bank, as an insured depository institution, is supervised by the FDIC.
At March 31, 2023, based on a four quarter average, our average total consolidated assets exceeded $100 billion and we anticipate we will become subject to enhanced prudential standards following applicable transition periods. See “Regulation” in our 2022 Form 10-K for additional information on regulations that are currently applicable to us, as well as these enhanced prudential standards. 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.
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