Synchrony Financial (SYF) FY 2022 MD&A

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 consolidated financial statements and related notes included elsewhere in this report. For a discussion and analysis of our financial condition and results of operations comparing 2021 vs. 2020, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2021 (our “2021 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.”

Results of Operations for the Three Years Ended December 31, 2022

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Key Earnings Metrics

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Growth Metrics

Asset Quality Metrics

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Capital and Liquidity

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Highlights for the Year Ended December 31, 2022

Below are highlights of our performance for the year ended December 31, 2022 compared to the year ended December 31, 2021, as applicable, except as otherwise noted.

•Net earnings decreased 28.5% to $3.0 billion for the year ended December 31, 2022, primarily driven by increases in provision for credit losses, primarily due to reserve reductions in the prior year, partially offset by higher net interest income.

•Loan receivables increased 14.5% to $92.5 billion at December 31, 2022 compared to December 31, 2021, driven by strong purchase volume growth and moderation in customer payment rates.

•Net interest income increased 9.7% to $15.6 billion for the year ended December 31, 2022. Interest and fees on loans increased 10.9%, primarily driven by growth in average loan receivables, partially offset by the impacts of portfolios sold in the second quarter of 2022. Interest expense increased 47.4%, due to higher benchmark rates and higher funding liabilities.

•Retailer share arrangements decreased 4.4% to $4.3 billion for the year ended December 31, 2022, 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.

•Over-30 day loan delinquencies as a percentage of period-end loan receivables increased 103 basis points to 3.65% at December 31, 2022 from 2.62% at December 31, 2021. The net charge-off rate increased 8 basis points to 3.00% for the year ended December 31, 2022.

•Provision for credit losses increased by $2.6 billion to $3.4 billion, for the year ended December 31, 2022, primarily driven by reserve increases in the current year versus reserve reductions in the prior year. The increase in reserves for credit losses was $839 million for the year ended December 31, 2022 primarily driven by portfolio growth, compared to the reserve reductions in the prior year totaling $1.6 billion. Our allowance coverage ratio (allowance for credit losses as a percentage of period-end loan receivables) decreased to 10.30% at December 31, 2022, as compared to 10.76% at December 31, 2021.

•Other expense increased by $374 million, or 9.4%, for the year ended December 31, 2022, primarily driven by higher employee costs, other expense, information processing and professional fees.

•At December 31, 2022, deposits represented 84% of our total funding sources. Total deposits increased 15.2% to $71.7 billion at December 31, 2022, compared to December 31, 2021.

•During the year ended December 31, 2022, we declared and paid cash dividends on our Series A 5.625% non-cumulative preferred stock of $56.24 per share, or $42 million.

•In April 2022, we announced that our Board approved an incremental share repurchase authorization of $2.8 billion through June 2023 and increased our quarterly dividend by 5% to $0.23 per common share commencing in the third quarter of 2022. During the year ended December 31, 2022, we repurchased $3.3 billion of our outstanding common stock, and declared and paid cash dividends of $0.90 per common share, or $434 million. At December 31, 2022, we have a total share repurchase authorization of $700 million remaining. For more information, see “Capital—Dividend and Share Repurchases.”

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2022 Partner Agreements

During the year ended December 31, 2022, we continued to expand and diversify our portfolios with the addition or renewal of more than 80 partners, which included the following:

•In our Health & Wellness sales platform:

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◦We expanded our partnership with AdventHealth to offer CareCredit as the primary patient financing solution across a nationwide footprint.

◦We announced our integration with Sycle, to deliver a comprehensive financing solution suite.

•We launched Synchrony's buy now, pay later products at various partners, including Belk and Discount Tire, and also made them available on the Clover point-of-sale and business management platform from Fiserv.

•We completed the sales of a total of $3.8 billion of loan receivables associated with our program agreements with Gap Inc. and BP during the second quarter of 2022, and recognized a gain on sale of $120 million included within other income in our consolidated statement of earnings.

Summary Earnings

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

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Other Financial and Statistical Data

The following table sets forth certain other financial and statistical data for the periods indicated.

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(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 equity as a percentage of average total assets.

(9)Efficiency ratio represents (i) other expense, divided by (ii) sum of net interest income, plus other income, less retailer share arrangements.

(10)Based on customer statement-end balances extrapolated to the respective period-end date.

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Average Balance Sheet

The following table sets 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.

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(1)Average yields/rates are based on total interest income/expense over average balances.

(2)Includes average restricted cash balances of $558 million, $459 million and $475 million for the years ended December 31, 2022, 2021 and 2020, respectively.

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(3)Interest income on loan receivables includes fees on loans of $2.7 billion, $2.3 billion and $2.2 billion for the years ended December 31, 2022, 2021 and 2020, respectively.

(4)Interest rate spread represents the difference between the yield on total interest-earning assets and the rate on total interest-bearing liabilities.

(5)Net interest margin represents net interest income divided by average total interest-earning assets.

The following table sets forth the amount of changes in interest income and interest expense due to changes in average volume and average yield/rate. Variances due to changes in both average volume and average yield/rate have been allocated between the average volume and average yield/rate variances on a consistent basis based upon the respective percentage changes in average volume and average yield/rate.

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Business Trends and Conditions

We believe our business and results of operations will be impacted in the future by various trends and conditions, including the following:

•Growth in loan receivables and interest income. During 2022 we experienced purchase volume growth that reflected the continued strength of the consumer. Purchase volume for the year ended December 31, 2022 increased 9% compared to the prior year, and increased 15% when excluding the impact of the portfolio sales in the second quarter of 2022. In addition, customer payments as a percentage of beginning-of-period loan receivables remain significantly elevated compared to historical averages. However, we have experienced some moderation in payment rates in the second half of 2022 that, in addition to the strong purchase volume growth discussed above, have contributed to increases in both loan receivables and interest income for the year ended December 31, 2022. We expect interest income and loan receivables to increase in 2023, primarily reflecting both the continued moderation of customer payment behavior and the impact of higher benchmark interest rates, as well as from purchase volume growth. The amount of the increases however will be dependent on various factors. These factors include the timing and extent of continued payment rate moderation and changes in benchmark interest rates.

•Asset quality. As a result of the continued elevated customer payment behavior, our asset quality metrics continue to be lower than our historical averages. However, as discussed above, we have experienced some moderation in payment behavior in the second half of 2022, which has resulted in increases in our credit metrics compared to prior year. Our over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 3.65% at December 31, 2022 from 2.62% at December 31, 2021. We anticipate that the elevated payment levels will continue to moderate in 2023, such that we expect increases in both delinquencies and net charge-offs as compared to current levels and for these metrics to trend towards our historical averages. We have also experienced increases to both our allowance for credit losses and provision for credit losses during the year ended December 31, 2022 primarily attributable to growth in our loan receivables and reserve reductions in the prior year. Our allowance coverage ratio at December 31, 2022 was 10.30%. We anticipate that our allowance for credit losses and provision for credit losses in 2023 will be higher than the current year period primarily due to the anticipated increase in net charge-offs and growth in loan receivables.

•Funding costs. During 2022 benchmark interest rates increased significantly and our average funding liabilities have also increased to support the growth in our loan receivables. As a result, interest expense for the year ended December 31, 2022 increased by $489 million or 47.4%, compared to the prior year, and our cost of funds increased by 55 basis points to 1.92%. We expect interest expense and our cost of funds to continue to increase in 2023, reflecting the continuing impact of higher benchmark rates and growth in our funding liabilities to support the expected growth in loan receivables. The amount of the increases however will be dependent on further benchmark rate changes, competition for our deposit product offerings and the extent of the growth in our loan receivables.

•Retailer share arrangement payments under our program agreements. Retailer share arrangements decreased 4.4% to $4.3 billion for the year ended December 31, 2022, primarily reflecting the impact of the portfolio sales in the second quarter of 2022 and higher net charge-offs, partially offset by higher net interest income. We believe that the payments we make to our partners under our retailer share arrangements, in the aggregate, in 2023 are likely to continue to decrease in absolute terms compared to the year ended December 31, 2022, primarily as a result of the impact of the expected credit trends discussed above. We expect this decrease will be partially offset by growth of the programs for which we have retailer share arrangements. The magnitude of the decrease in retailer share arrangements will be dependent in part on the precise timing and extent of the anticipated credit trends discussed above. See Management’s Discussion and Analysis—Retailer Share Arrangements for additional information on these agreements.

•Extended duration of our credit card program agreements. Our credit card program agreements typically have contract terms ranging from approximately five to ten years, and the length of our relationship with each of our five largest partners is over 15 years, and in the case of Lowe's, 43 years. We expect to continue to benefit from these and our other ongoing programs on a long-term basis.

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The current expiration dates of our program agreements with our five largest partners range from 2026 through 2033. In addition, a total of 15 of our 25 largest ongoing program agreements have an expiration date in 2026 or beyond, which represented in the aggregate 92% of our interest and fees on loans for the year ended December 31, 2022 and 90% of our loan receivables at December 31, 2022, attributable to our 25 largest ongoing programs.

•Growth in interchange revenues and loyalty program costs. We believe that as a result of the overall growth in Dual Card and general purpose co-branded credit card transactions occurring outside of our credit card partners’ locations, interchange revenues will continue to increase. The expected growth in these transactions is driven, in part, by both existing and new loyalty programs with our credit card partners. In addition, we continue to offer and add new loyalty programs for our private label credit cards, for which we typically do not receive interchange fees. The growth in these existing and new loyalty programs will result in an increase in costs associated with these programs. For the year ended December 31, 2022, our loyalty program costs were partially offset by our interchange revenues, although the increase in loyalty program costs exceeded the increase in interchange revenues. Overall, we expect these trends for our loyalty program costs and interchange revenues to continue in 2023. These changes have been contemplated in our program agreements with our partners and are a component of the calculation of our payments due under our retailer share arrangements.

•Capital and liquidity levels. We continue to expect to maintain sufficient capital and liquidity resources to support our daily operations, our business growth, and our credit ratings as well as regulatory and compliance requirements in a cost effective and prudent manner through expected and unexpected market environments. During the year ended December 31, 2022, we declared and paid common stock dividends of $434 million and repurchased $3.3 billion of our outstanding common stock. We plan to continue to deploy capital through both dividends and share repurchases, subject to regulatory restrictions, as well as to support business growth. At December 31, 2022 we had $700 million remaining in share repurchase authorization. We continue to expect to maintain capital ratios well in excess of minimum regulatory requirements. At December 31, 2022, the Company had a Basel III common equity Tier 1 ratio of 12.8%, which reflects our election to defer the impact of CECL on our regulatory capital and the current year phase-in of 25% of the impact. The effects of CECL are being phased-in over a three-year transitional period through December 31, 2024 and will be fully phased-in beginning in the first quarter of 2025. As a result of the second year of the phase-in, our common equity Tier 1 ratio will be reduced by approximately 60 additional basis points in 2023.

We expect that our liquidity portfolio will continue to be sufficient to support all of our business objectives and to meet all regulatory requirements for the foreseeable future. At December 31, 2022 our liquid assets were $14.2 billion, an increase of 9% compared to the prior year, primarily as a result of deposit growth, the proceeds from portfolio sales in the second quarter of 2022 and retention of excess cash flows from operations, partially offset by loan receivables growth and share repurchase activity.

Seasonality

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. These fluctuations are generally most evident between the fourth quarter and the first quarter of the following year.

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

While the effects of the seasonal trends discussed above remain evident, the elevated customer payment behavior we have experienced in recent years discussed within Business Trends and Conditions, including subsequent moderation, has also significantly impacted our key financial metrics, including the fluctuations experienced between quarterly periods.

Interest Income

Interest income is comprised of interest and fees on loans, which includes merchant discounts provided by partners to compensate us in almost all cases for all or part of the promotional financing provided to their customers, and interest on cash and equivalents and investment securities. We include in interest and fees on loans any past due interest and fees deemed to be collectible. Direct loan origination costs on credit card loans are deferred and amortized on a straight-line basis over a one-year period and recorded in interest and fees on loans. For non-credit card receivables, direct loan origination costs are deferred and amortized over the life of the loan and recorded in interest and fees on loans.

We analyze interest income as a function of two principal components: average interest-earning assets and yield on average interest-earning assets. Key drivers of average interest-earning assets include:

•purchase volumes, which are influenced by a number of factors including macroeconomic conditions and consumer confidence generally, our partners’ sales and our ability to increase our share of those sales;

•payment rates, reflecting the extent to which customers maintain a credit balance;

•charge-offs, reflecting the receivables that are deemed not to be collectible;

•the size of our liquidity portfolio; and

•portfolio acquisitions when we enter into new partner relationships.

Key drivers of yield on average interest-earning assets include:

•pricing (contractual rates of interest, movement in prime rates, late fees and merchant discount rates);

•changes to our mix of loans (e.g., the number of loans bearing promotional rates as compared to standard rates);

•frequency of late fees incurred when account holders fail to make their minimum payment by the required due date;

•credit performance and accrual status of our loans; and

•yield earned on our liquidity portfolio.

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Interest income increased by $1.9 billion, or 12.3%, for the year ended December 31, 2022, primarily driven by the increase in interest and fees on loans of 10.9%. The increase in interest and fees on loans were 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 15.7% for the year ended December 31, 2022.

Average interest-earning assets

Average loan receivables, including held for sale, increased 7.3% for the year ended December 31, 2022, primarily driven by growth in purchase volume growth and moderation in customer payment rates, partially offset by the impacts from portfolios sold in the second quarter of 2022. Purchase volume increased 9% for the year ended December 31, 2022, and excluding the impact of portfolios sold during the second quarter, purchase volume increased by 15%.

Yield on average interest-earning assets

The yield on average interest-earning assets increased for the year ended December 31, 2022 primarily due to an increase in the percentage of interest-earning assets attributable to loan receivables as well as an increase in the yield on average loan receivables. The increase in loan receivables yield was 65 basis points to 19.94% for the year ended December 31, 2022.

Interest Expense

Interest expense is incurred on our interest-bearing liabilities, which consists of interest-bearing deposit accounts, borrowings of consolidated securitization entities and senior unsecured notes.

Key drivers of interest expense include:

•the amounts outstanding of our deposits and borrowings;

•the interest rate environment and its effect on interest rates paid on our funding sources; and

•the changing mix in our funding sources.

Interest expense increased by $489 million, or 47.4%, for the year ended December 31, 2022, primarily attributed to increases in benchmark interest rates and higher funding liabilities. Our cost of funds increased to 1.92% for the year ended December 31, 2022 compared to 1.37% for the year ended December 31, 2021.

Average interest-bearing liabilities

Net Interest Income

Net interest income represents the difference between interest income and interest expense.

Net interest income increased by $1.4 billion, or 9.7%, for the year ended December 31, 2022, resulting from the changes in interest income and interest expense discussed above.

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Retailer Share Arrangements

Most of our program agreements with large retail and certain other partners contain retailer share arrangements that provide for payments to our partners if the economic performance of the program exceeds a contractually defined threshold. We also provide other economic benefits to our partners such as royalties on purchase volume or payments for new accounts, in some cases instead of retailer share arrangements (for example, on our co-branded credit cards). All of these arrangements are designed to align our interests and provide an additional incentive to our partners to promote our credit products. Although the retailer share arrangements vary by partner, these arrangements are generally structured to measure the economic performance of the program, based typically on agreed upon program revenues (including interest income and certain other income) less agreed upon program expenses (including interest expense, provision for credit losses, retailer payments and operating expenses), and share portions of this amount above a negotiated threshold. The threshold and economic performance of a program that are used to calculate payments to our partners may be based on, among other things, agreed upon measures of program expenses rather than our actual expenses, and therefore increases in our actual expenses (such as funding costs, higher provision for credit losses or operating expenses) may not necessarily result in reduced payments under our retailer share arrangements. These arrangements are typically designed to permit us to achieve an economic return before we are required to make payments to our partners based on the agreed contractually defined threshold. Our payments to ongoing partners pursuant to these retailer share arrangements have generally increased in recent years, primarily as a result of the growth and performance of the programs in which we have retailer share arrangements, as well as changes to the terms of certain program agreements that have been renegotiated in the past few years. However, as noted above in Business Trends and Conditions, we believe that the payments we make to our partners under our retailer share arrangements, in the aggregate, in 2023 are likely to decrease in absolute terms compared to the year ended December 31, 2022, primarily as a result of the impact of the expected increase in our credit metrics.

We believe that our retailer share arrangements have been effective in helping us to grow our business by aligning our partners’ interests with ours. We also believe that the changes to the terms of certain program agreements in recent years will help us to grow our business by providing an additional incentive to the relevant partners to promote our credit products going forward. Payments to partners pursuant to these retailer share arrangements would generally decrease, and mitigate the impact on our profitability, in the event of declines in the performance of the programs or the occurrence of other unfavorable developments that impact the calculation of payments to our partners pursuant to our retailer share arrangements.

Retailer share arrangements decreased by $197 million, or 4.4%, for the year ended December 31, 2022, 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 is the expense related to maintaining the allowance for credit losses at an appropriate level to absorb the expected credit losses for the life of the loan balance as of the period end date. Provision for credit losses in each period is a function of net charge-offs (gross charge-offs net of recoveries) and the required level of the allowance for credit losses. Our process to determine our allowance for credit losses is based upon our estimate of expected credit losses for the life of the loan balance as of the period end date. See “Critical Accounting Estimates - Allowance for Credit Losses” and Note 2. Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements for additional information on our allowance for credit loss methodology.

Provision for credit losses increased by $2.6 billion to $3.4 billion, for the year ended December 31, 2022, primarily driven by reserve increases in the current year versus reserve reductions in the prior year. The increase in reserves for credit losses was $839 million for the year ended December 31, 2022 primarily driven by portfolio growth, compared to reserve reductions in the prior year of $1.6 billion.

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Other Income

Interchange revenue

We earn interchange fees on Dual Card and other co-branded credit card transactions outside of our partners’ sales channels, based on a flat fee plus a percentage of the purchase amount. Interchange revenue has been, and is expected to continue to be, driven primarily by growth in our Dual Card and general purpose co-branded credit card products.

Interchange revenue increased by $102 million, or 11.6%, for the year ended December 31, 2022, driven by an increase in purchase volume outside of our retail partners' sales channels, partially offset by the impacts of portfolios sold in the second quarter of 2022.

Debt cancellation fees

Debt cancellation fees relate to payment protection products purchased by our credit card customers. Customers who choose to purchase these products are charged a monthly fee based on their account balance. In return, we will cancel all or a portion of a customer’s credit card balance in the event of certain qualifying life events. We offer our debt cancellation product to our credit card customers via online, mobile and, on a limited basis, direct mail.

Debt cancellation fees increased by $103 million, or 36.3%, for the year ended December 31, 2022, primarily as a result of increases in customer enrollment.

Loyalty programs

We operate a number of loyalty programs that are designed to generate incremental purchase volume per customer, while reinforcing the value of the card and strengthening cardholder loyalty. These programs typically provide cardholders with statement credit or cash back rewards. Other programs include rewards points, which are redeemable for a variety of products or awards, or merchandise discounts that are earned by achieving a pre-set spending level on their private label credit card, Dual Card or general purpose co-branded credit card. Growth in loyalty program payments has been, and is expected to continue to be, driven by growth in purchase volume related to existing loyalty programs and the rollout of new loyalty programs.

Loyalty programs cost increased by $265 million, or 26.7%, for the year ended December 31, 2022, primarily as a result of growth in purchase volume associated with existing loyalty programs.

Other

Other includes a variety of items including ancillary fees, commission fees related to Pets Best, changes in the fair value of equity investments, realized gains or losses associated with the sale of investments, loan receivables or other assets and changes in contingent consideration obligations.

Other decreased by $41 million, or 13.3%, for the year ended December 31, 2022 primarily due to lower investment gains, partially offset by the recognition of the gain on sale of $120 million from portfolio sales in the second quarter of 2022 and higher commission fees related to Pets Best.

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Other Expense

Employee costs

Employee costs primarily consist of employee compensation and benefit costs.

Employee costs increased by $180 million, or 12.0%, for the year ended December 31, 2022, primarily attributable to an increase in headcount driven by growth and insourcing, higher hourly wages and other compensation adjustments.

Professional fees

Professional fees consist primarily of outsourced provider fees (e.g., collection agencies and call centers), legal, accounting, consulting, and recruiting expenses.

Professional fees increased by $50 million, or 6.4%, for the year ended December 31, 2022, primarily due to an increase in third-party expenses related to strategic technology investments.

Marketing and business development

Marketing and business development costs consist primarily of our contractual and discretionary marketing and business development spend, as well as amortization expense associated with retail partner contract acquisitions and extensions.

Marketing and business development costs remained relatively flat for the year ended December 31, 2022, as additional marketing and growth investments resulting from the reinvestment of the proceeds from the gain on sale of loan receivables were offset by strategic investments in our sales platforms in the prior year.

Information processing

Information processing costs primarily consist of fees related to outsourced information processing providers, credit card associations and software licensing agreements.

Information processing costs increased by $73 million, or 13.3%, for the year ended December 31, 2022, primarily driven by technology investments and the growth in purchase volume.

Other

Other primarily consists of postage, operational losses, litigation and regulatory matters expense and various other corporate overhead items such as facilities' costs and telephone charges. Postage is driven primarily by the number of our active accounts and the percentage of customers that utilize our electronic billing option. Fraud, or operational losses, are driven primarily by the number of our active Dual Card and general purpose co-branded credit card accounts.

The “other” component increased by $70 million, or 10.9%, for the year ended December 31, 2022, primarily due to higher operational losses.

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Provision for Income Taxes

The effective tax rate for the year ended December 31, 2022, increased compared to the prior year primarily due to the resolution of certain tax matters in the prior period. The effective tax rate differs from the U.S. federal statutory tax rate primarily due to state income taxes.

Platform Analysis

As discussed above under “Our Business—Our Sales Platforms,” we offer our credit products 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 years ended December 31, 2022 and 2021, for each of our five sales platforms and Corp, Other information.

Home & Auto

Home & Auto interest and fees on loans increased by $423 million, or 10.0%, for the year ended December 31, 2022, primarily driven by growth in average loan receivables. The growth in average loan receivables reflected purchase volume growth of 10.4%, reflecting the continued strength in Home and higher Auto-related spend.

Other income increased by $18 million, or 26.1%, for the year ended December 31, 2022 primarily driven by debt cancellation fees.

Digital

Digital interest and fees on loans increased by $807 million, or 21.3%, for the year ended December 31, 2022, primarily driven by growth in average loan receivables. The growth in average loan receivables reflected purchase volume growth of 15.0%, and average active account growth of 9.8%, reflecting strong engagement across both new and established programs.

Other income increased by $26 million for the years ended December 31, 2022, primarily driven by increases in interchange revenue and debt cancellation fees, partially offset by higher program loyalty costs associated with the increases in purchase volume.

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Diversified & Value

Diversified & Value interest and fees on loans increased by $495 million, or 15.9%, for the year ended December 31, 2022, primarily driven by growth in average loan receivables. The growth in average loan receivables reflected purchase volume growth of 20.6%, driven by strong retailer performance and customer engagement and average active account growth of 9.1%.

Other income decreased by $77 million for the year ended December 31, 2022 primarily driven by higher program loyalty costs, partially offset by higher interchange revenue.

Health & Wellness

Health & Wellness interest and fees on loans increased by $439 million, or 19.3%. for the year ended December 31, 2022, primarily driven by growth in average loan receivables. The growth in average loan receivables reflected strength across the network, particularly in Dental and Pet categories. Purchase volume increased 15.8%, and average active accounts increased 10.2%.

Other income increased by $58 million for the years ended December 31, 2022. This increase was primarily driven by higher debt cancellation fees and higher commission fees earned by Pets Best.

Lifestyle

Lifestyle interest and fees on loans increased by $70 million, or 9.4%, for the year ended December 31, 2022, primarily driven by growth in average loan receivables reflecting purchase volume growth of 3.4%, which was driven by higher retailer sales in Music and Specialty, an industry-specific rebound within our Luxury retail partners and higher out-of-partner spend more broadly, partially offset by the ongoing impact of inventory constraints in Outdoor by comparison to strong growth in the prior year.

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Corp, Other

Corp, Other interest and fees on loans decreased by $581 million, or 54.9%, for the year ended December 31, 2022, primarily driven by the effects of the sale of the BP and Gap Inc. portfolios in May 2022 and June 2022, respectively.

Other income decreased by $131 million, or 38.0%, for the year ended December 31, 2022, primarily due to lower investment gains and interchange revenue, partially offset by the gain on sale of $120 million recognized related to the portfolio sales in the second quarter of 2022.

Loan Receivables

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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 consolidated financial statements for additional information related to our loan receivables, including troubled debt restructurings (“TDRs”).

The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.

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Loan receivables increased 14.5% to $92.5 billion at December 31, 2022 compared to December 31, 2021, primarily driven by strong purchase volume growth and some moderation in customer payment rates.

Our loan receivables portfolio, excluding held for sale, had the following maturity distribution at December 31, 2022.

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(1)Credit card loans have minimum payment requirements but no stated maturity and therefore are included in the due within one year category. However, many of our credit card holders will revolve their balances, which may extend their repayment period beyond one year for balances at December 31, 2022.

(2)Credit card and commercial loans due after one year relate to TDR assets.

(3)Reflects scheduled repayments up to the final contractual maturity of our installment loans.

Our loan receivables portfolio had the following geographic concentration at December 31, 2022.

Delinquencies

Over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 3.65% at December 31, 2022, as compared to 2.62% at December 31, 2021. The 103 basis point increase in 2022 was primarily driven by the moderation in 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 Consolidated Statements of Earnings.

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The table below sets forth net charge-offs and the ratio of net charge-offs to average loan receivables, including held for sale, (“net charge-off rate”) for the periods indicated.

Allowance for Credit Losses

The allowance for credit losses totaled $9.5 billion at December 31, 2022, compared to $8.7 billion at December 31, 2021, 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 decreased to 10.30% at December 31, 2022, from 10.76% at December 31, 2021.

The increase in the allowance for credit losses was primarily due to growth in loan receivables.

Funding, Liquidity and Capital Resources

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We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources to support our daily operations, our business growth, our credit ratings and our regulatory and policy requirements, in a cost effective and prudent manner through expected and unexpected market environments.

Funding Sources

Our primary funding sources include cash from operations, deposits (direct and brokered deposits), securitized financings and senior unsecured notes.

The following table summarizes information concerning our funding sources during the periods indicated:

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(1)Excludes $382 million, $349 million and $306 million average balance of non-interest-bearing deposits for the years ended December 31, 2022, 2021 and 2020, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the years ended December 31, 2022, 2021 and 2020.

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 December 31, 2022, we had $58.0 billion in direct deposits and $13.7 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger that channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to continue to utilize our direct deposits base as a source of stable and diversified low-cost funding.

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Our direct deposits 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 11 brokers that offer our deposits through their networks. Our brokered deposits consist primarily of certificates of deposit that bear interest at a fixed rate. 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.

In December 2020, the FDIC issued a final rule to revise and clarify its framework for classifying deposits as brokered deposits, with full compliance with this rule required by January 1, 2022. In accordance with this final rule, deposits generated through certain sweep deposit relationships were reclassified from brokered to direct deposits in the first quarter of 2022.

The following table summarizes certain information regarding our interest-bearing deposits by type (all of which constitute U.S. deposits) for the periods indicated:

Our deposit liabilities provide funding with maturities ranging from one day to ten years. At December 31, 2022, the weighted average maturity of our interest-bearing time deposits was 1.3 years. See Note 7. Deposits to our consolidated financial statements for more information on the maturities of our time deposits.

The following table summarizes deposits by contractual maturity at December 31, 2022.

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(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 uninsured accounts.

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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”).

At December 31, 2022, we had $3.9 billion of outstanding private asset-backed securities and $2.4 billion of outstanding public asset-backed securities, in each case held by unrelated third parties.

The following table summarizes expected contractual maturities of the investors’ interests in securitized financings, excluding debt premiums, discounts and issuance costs at December 31, 2022.

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(1)Excludes any subordinated classes of SYNCT notes and SYNIT notes that we owned at December 31, 2022.

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 December 31, 2022.

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(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 December 31, 2022.

Senior Unsecured Notes

During the year ended December 31, 2022 we made repayments of senior unsecured notes totaling $1.5 billion, comprising of $750 million of notes issued by Synchrony Financial and $750 million of notes issued by Synchrony Bank.

The following table provides a summary of our outstanding fixed rate senior unsecured notes at December 31, 2022, which includes $750 million of senior unsecured notes issued by Synchrony Financial in June 2022, and $900 million and $600 million of senior unsecured notes issued by Synchrony Bank in August 2022.

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(1)Weighted average interest rate of all senior unsecured notes at December 31, 2022 was 4.46%.

(2)The amounts shown exclude unamortized debt discounts, premiums and issuance costs.

In February 2023, Synchrony Financial issued $750 million of 7.250% subordinated unsecured notes that rank junior to our senior unsecured notes.

Short-Term Borrowings

Except as described above, there were no material short-term borrowings for the periods presented.

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Other

At December 31, 2022, we had more than $25.0 billion of unencumbered assets in the Bank available to be used to generate additional liquidity through secured borrowings or asset sales or to be pledged to the Federal Reserve Board for credit at the discount window.

Covenants

The indenture pursuant to which our senior unsecured notes have been issued includes various covenants, including covenants that restrict (subject to certain exceptions) Synchrony’s ability to dispose of, or incur liens on, any of the voting stock of the Bank or otherwise permit the Bank to be merged, consolidated, leased or sold in a manner that results in the Bank being less than 80% controlled by us.

If we do not satisfy any of these covenants discussed above, the maturity of amounts outstanding thereunder may be accelerated and become payable. We were in compliance with all of these covenants at December 31, 2022.

At December 31, 2022, 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:

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

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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.

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We maintain a liquidity portfolio, which at December 31, 2022 had $14.2 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 $13.0 billion of liquid assets at December 31, 2021. The increase in liquid assets was primarily due to deposit growth, $3.9 billion of proceeds from portfolios sold during the second quarter of 2022 and the retention of excess cash flows from operations, partially offset by loan receivables growth and share repurchase activity. We believe our liquidity position at December 31, 2022 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 December 31, 2022, 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—Savings Association Regulation—Dividends and Stock Repurchases.”