UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q 

 

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

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of July 24,October 23, 2017 was 795,335,232.782,591,569.

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

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

Cautionary Note Regarding Forward-Looking Statements:

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

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

For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this report and in our public filings, including under the heading “Risk Factors” in our 2016 Form 10-K. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by the federal securities laws.

PART I. FINANCIAL INFORMATION

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

Introduction and Business Overview

We are one of the premier consumer financial services companies in the United States. We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners.” For the three and sixnine months ended JuneSeptember 30, 2017, we financed $33.5$32.9 billion and $62.4$95.2 billion of purchase volume, respectively, and had 68.669.3 million and 69.3 million average active accounts respectivelyin both periods and at JuneSeptember 30, 2017, we had $75.5$76.9 billion of loan receivables. For the three and sixnine months ended JuneSeptember 30, 2017, we had net earnings of $496$555 million and $995$1,550 million, respectively, representing a return on assets of 2.2% for both periods.2.4% and 2.3%, respectively.

We offer our credit products primarily through our wholly-owned subsidiary, Synchrony Bank (the "Bank"). In addition, through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”), including certificates of deposit, individual retirement accounts (“IRAs”), money market accounts and savings accounts. We also take deposits at the Bank through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. We have significantly expanded our online direct banking operations in recent years and our deposit base serves as a source of stable and diversified low cost funding for our credit activities. At JuneSeptember 30, 2017, we had $52.9$54.5 billion in deposits, which represented 72%73% of our total funding sources.

Our Sales Platforms

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

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

Our Credit Products

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

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

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

Business Trends and Conditions

We believe our business and results of operations will be impacted in the future by various trends and conditions. For a discussion of these trends and conditions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Trends and Conditions” in our 2016 Form 10-K. For a discussion of how these trends and conditions impacted the three and sixnine months ended JuneSeptember 30, 2017, see “—Results of Operations.”

Seasonality

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

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

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

Results of Operations

Below are highlights of our performance for the three and sixnine months ended JuneSeptember 30, 2017 compared to the three and sixnine months ended JuneSeptember 30, 2016, as applicable, except as otherwise noted.

New and Extended Partner Agreements during the sixnine months ended JuneSeptember 30, 2017

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

Interest income increased by $455$437 million, or 12.9%11.5%, and by $848$1,285 million, or 12.1%11.9%, for the three and sixnine months ended JuneSeptember 30, 2017, respectively, driven primarily by growth in our average loan receivables.

The increases in average loan receivables of 11.3%9.9% and 11.7%11.0% for the three and sixnine months ended JuneSeptember 30, 2017, respectively, were driven primarily by higher purchase volume of 6.2%4.0% and 6.6%5.7% and average active account growth of 4.7%4.0% and 5.0%4.7%, respectively.

Average active accounts increased to 68.6 million and 69.3 million for both the three and sixnine months ended JuneSeptember 30, 2017, and the average balances per these active accounts increased 6.3% for both periods.5.6% and 6.1%, respectively.

The yield on average interest-earning assets increased for the three and sixnine months ended JuneSeptember 30, 2017. The increase in the three and nine months ended JuneSeptember 30, 2017 was primarily due to an increase in the percentage of interest-earning assets attributable to loan receivables and an increase in the yield on our average loan receivables of 1514 basis points to 21.26%.21.78% and 8 basis points basis points to 21.42%, respectively. The increase in yield was primarily driven by higher revolve rates as well as a higher benchmark interest rate.

Interest expense increased by $30$42 million, or 9.9%13.3%, and by $45$87 million, or 7.3%9.4%, for the three and sixnine months ended JuneSeptember 30, 2017, respectively, driven primarily by the growth in our deposit liabilities. Our cost of funds decreasedincreased slightly to 1.86% and1.93% for the three months ended September 30, 2017, compared to 1.85% for the three and six months ended June 30, 2017, respectively, compared to 1.88% and 1.89% for the three and six months ended JuneSeptember 30, 2016, primarily due to a more favorable funding mix as deposits were a larger proportionhigher benchmark interest rates. Our cost of our funding.funds remained flat at 1.88% for both the nine months ended September 30, 2017 and 2016.

The increase in average interest-bearing liabilities for the three and sixnine months ended JuneSeptember 30, 2017 was driven primarily by growth in our direct deposits. The increase in the six months ended June 30, 2017 was partially offset by lower securitized financings.

Net interest income increased by $425$395 million, or 13.2%11.3%, and by $803$1,198 million, or 12.5%12.1%, for the three and sixnine months ended JuneSeptember 30, 2017, primarily driven by higher average loan receivables.

Retailer share arrangements remained relatively flatincreased 6.3% to $805 million and 3.2% to $2,158 million for the three and sixnine months ended JuneSeptember 30, 2017, respectively, driven primarily by the growth and improved performancemargin improvement of the programs in which we have retailer share arrangements, partially offset by higher provision for loan losses and loyalty costs associated with these programs.

Provision for loan losses increased by $305$324 million, or 29.9%32.9%, for the three months ended JuneSeptember 30, 2017, primarily due to higher net charge-offs and loan receivables growth. Provision for loan losses increased by $708$1,032 million, or 36.8%35.5%, for the sixnine months ended JuneSeptember 30, 2017, primarily due to an increase in net charge-offs and higher loan loss reserve.

Our allowance coverage ratio increased to 6.63%6.97% at JuneSeptember 30, 2017, as compared to 5.70%5.82% at JuneSeptember 30, 2016, reflecting the increase in forecasted losses inherent in our loan portfolio.

Other Income

Other Expense

Other expense increased by $72$99 million, or 8.6%11.5%, and by $180$279 million, or 11.0%11.2%, for the three and sixnine months ended JuneSeptember 30, 2017, respectively, primarily due to increases in employee costs, marketing and business development information processing and other expenses.

The increases in employee costs were primarily due to new employees added to support the continued growth of the business and replacement of certain third-party services. Marketing and business development expense increased primarily due to strategic investments in our sales platforms, card re-issuances for some of our partner programs and increased marketing on retail deposits and higher amortization expense associated with retail partner contract acquisitions and extensions. Information processing costs increased primarily due to higher information technology investment and higher transaction volume.deposits. The increases in "other" were primarily driven by higher operational losses and growth of the business.business growth.

The effective tax rate for the three and nine months ended JuneSeptember 30, 2017 increaseddecreased compared to the same periodperiods in the prior year primarily due to the discrete impact of a research and development credit and an additional tax benefit reimbursable to GE, that were bothcredits recorded in the prior year. The effective tax rate for the six months ended June 30, 2017 decreased compared to the same period in the priorcurrent year primarily due to state-related discrete items recorded during the current year.periods. In each period the effective tax rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes.

Retail Card interest and fees on loans increased by $315$312 million, or 12.2%11.2%, and by $589$901 million, or 11.3%, for the three and sixnine months ended JuneSeptember 30, 2017, respectively. These increases were primarily the result of growth in average loan receivables.

Other income decreased by $44$9 million, or 63.8%12.9%, and by $46$55 million, or 31.1%25.2%, for the three and sixnine months ended JuneSeptember 30, 2017, respectively, primarily as a result of higher loyalty costs, partially offset by increased interchange revenue driven by increased purchase volume outside of our retail partners' sales channels.

Payment Solutions interest and fees on loans increased by $66$54 million, or 14.1%10.7%, and by $124$178 million, or 13.4%12.5%, for the three and sixnine months ended JuneSeptember 30, 2017, respectively. These increases were primarily driven by growth in average loan receivables.

CareCredit interest and fees on loans increased by $52$45 million, or 11.8%9.5%, and by $99$144 million, or 11.4%10.7%, for the three and sixnine months ended JuneSeptember 30, 2017, respectively. These increases were primarily driven by growth in average loan receivables.

Investment Securities

The following discussion provides supplemental information regarding our investment securities portfolio. All of our investment securities are classified as available-for-sale at JuneSeptember 30, 2017 and December 31, 2016, and are held to meet our liquidity objectives and to comply with the Community Reinvestment Act. Investment securities classified as available-for-sale are reported in our Condensed Consolidated Statements of Financial Position at fair value.

Unrealized gains and losses, net of the related tax effects, on available-for-sale securities that are not other-than-temporarily impaired are excluded from earnings and are reported as a separate component of comprehensive income (loss) until realized. At JuneSeptember 30, 2017, our investment securities had gross unrealized gains of $4$3 million and gross unrealized losses of $27$22 million. At December 31, 2016, our investment securities had gross unrealized gains of $3 million and gross unrealized losses of $31 million.

Our investment securities portfolio had the following maturity distribution at JuneSeptember 30, 2017. Equity securities have been excluded from the table because they do not have a maturity.