UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended September 30, 2020
OR
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
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Securities Registered Pursuant to Section 12(b) of the Act:
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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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.
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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of October 15, 2020 was 583,792,187 .
Synchrony Financial
PART I - FINANCIAL INFORMATION | Page |
Item 1. Financial Statements: | |
PART II - OTHER INFORMATION | |
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Certain Defined Terms
Except as the context may otherwise require in this report, references to:
• | “we,” “us,” “our” and the “Company” are to SYNCHRONY FINANCIAL and its subsidiaries; |
• | “Synchrony” are to SYNCHRONY FINANCIAL only; |
• | the “Bank” are to Synchrony Bank (a subsidiary of Synchrony); |
• | the “Board of Directors” or “Board” are to Synchrony's board of directors; |
• | “GE” are to General Electric Company and its subsidiaries; and |
• | “FICO” are to a credit score developed by Fair Isaac & Co., which is widely used as a means of evaluating the likelihood that credit users will pay their obligations. |
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, in our business and in this report, we refer to as our “partners.” The terms of the programs all require cooperative efforts between us and our partners of varying natures and degrees to establish and operate the programs. Our use of the term “partners” to refer to these entities is not intended to, and does not, describe our legal relationship with them, imply that a legal partnership or other relationship exists between the parties or create any legal partnership or other relationship. The “average length of our relationship” with respect to a specified group of partners or programs is measured on a weighted average basis by interest and fees on loans for the year ended December 31, 2019 for those partners or for all partners participating in a program, based on the date each partner relationship or program, as applicable, started.
Unless otherwise indicated, references to “loan receivables” do not include loan receivables held for sale.
For a description of certain other terms we use, including “active account” and “purchase volume,” see the notes to “Management’s Discussion and Analysis—Results of Operations—Other Financial and Statistical Data” in our Annual Report on Form 10-K for the year ended December 31, 2019 (our “2019 Form 10-K”). There is no standard industry definition for many of these terms, and other companies may define them differently than we do.
“Synchrony” and its logos and other trademarks referred to in this report, including CareCredit®, Quickscreen®, Dual Card™, Synchrony Car Care™ and SyPI™, 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.
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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, including the future impacts of the novel coronavirus disease (“COVID-19”) outbreak and measures taken in response thereto for which future developments are highly uncertain and difficult to predict; retaining existing partners and attracting new partners, concentration of our revenue in a small number of Retail Card partners, and promotion and support of our products by our partners; cyber-attacks or other security breaches; disruptions in the operations of our computer systems and data centers; the financial performance of our partners; the sufficiency of our allowance for credit losses and the accuracy of the assumptions or estimates used in preparing our financial statements, including those related to the new CECL accounting guidance; higher borrowing costs and adverse financial market conditions impacting our funding and liquidity, and any reduction in our credit ratings; our ability to grow our deposits in the future; damage to our reputation; our ability to securitize our loan receivables, occurrence of an early amortization of our securitization facilities, loss of the right to service or subservice our securitized loan receivables, and lower payment rates on our securitized loan receivables; 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,; 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 acquisitions and strategic investments; reductions in interchange fees; fraudulent activity; failure of third-parties to provide various services that are important to our operations; 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; our ability to attract, retain and motivate key officers and employees; tax legislation initiatives or challenges to our tax positions and/or interpretations, and state sales tax rules and regulations; a material indemnification obligation to GE under the Tax Sharing and Separation Agreement with GE 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 other legislative and regulatory developments 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 Relating to Our Business” and “Risk Factors Relating to Regulation” in our 2019 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 law.
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PART I. FINANCIAL INFORMATION
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 2019 Form 10-K. The discussion below contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. See “Cautionary Note Regarding Forward-Looking Statements.”
Introduction and Business Overview
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We are a premier consumer financial services company delivering a wide range of specialized financing programs, as well as innovative consumer banking products, across key industries including digital, retail, home, auto, travel, health and pet. We provide a range of credit products through our financing programs which we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners.” For the three and nine months ended September 30, 2020, we financed $36.0 billion and $99.2 billion of purchase volume, respectively, and had 64.3 million and 67.2 million average active accounts, respectively, and at September 30, 2020, we had $78.5 billion of loan receivables.
We offer our credit products primarily through our wholly-owned subsidiary, the Bank. In addition, through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by 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 September 30, 2020, we had $63.5 billion in deposits, which represented 80% 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 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, active accounts and other sales metrics.
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Retail Card
Retail Card is a leading provider of private label credit cards, and also provides Dual Cards, general purpose co-branded credit cards and small and medium-sized business credit products. We offer one or more of these products primarily through 25 national and regional retailers with which we have ongoing program agreements. The average length of our relationship with these Retail Card partners is 22 years. Retail Card’s revenue primarily consists of interest and fees on our loan receivables. Other income primarily consists of interchange fees earned when our Dual Card or general purpose co-branded credit cards are used outside of our partners' sales channels and fees paid to us by customers who purchase our debt cancellation products, less loyalty program payments. In addition, the majority of our retailer share arrangements, which provide for payments to our partner if the economic performance of the program exceeds a contractually-defined threshold, are with partners in the Retail Card sales platform. Substantially all of the credit extended in this platform is on standard terms.
Payment Solutions
Payment Solutions is a leading provider of promotional financing for major consumer purchases, offering consumer choice for financing at the point of sale, including primarily private label credit cards, Dual Cards and installment loans. Payment Solutions offers these products through participating partners consisting of national and regional retailers, manufacturers, buying groups and industry associations. Credit extended in this platform, other than for our oil and gas retail partners, is primarily promotional financing. Payment Solutions’ revenue primarily consists of interest and fees on our loan receivables, including “merchant discounts,” which are fees paid to us by our partners in almost all cases to compensate us for all or part of foregone interest income associated with promotional financing.
CareCredit
CareCredit is a leading provider of promotional financing to consumers for health, veterinary and personal care procedures, services and products. We have a network of CareCredit providers and health-focused retailers, the vast majority of which are individual or small groups of independent healthcare providers, through which we offer a CareCredit branded private label credit card and our CareCredit Dual Card offering. Substantially all of the credit extended in this platform is promotional financing. CareCredit’s revenue primarily consists of interest and fees on our loan receivables, including merchant discounts.
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Our Credit Products
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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 September 30, 2020.
Promotional Offer | |||||||||||
Credit Product | Standard Terms Only | Deferred Interest | Other Promotional | Total | |||||||
Credit cards | 62.0 | % | 17.9 | % | 15.9 | % | 95.8 | % | |||
Commercial credit products | 1.6 | — | — | 1.6 | |||||||
Consumer installment loans | — | — | 2.5 | 2.5 | |||||||
Other | 0.1 | — | — | 0.1 | |||||||
Total | 63.7 | % | 17.9 | % | 18.4 | % | 100.0 | % | |||
Credit Cards
We typically offer the following principal types of credit cards:
• | Private Label Credit Cards. Private label credit cards are partner-branded credit cards (e.g., Lowe’s or Amazon) or program-branded credit cards (e.g., Synchrony Car Care or CareCredit) that are used primarily for the purchase of goods and services from the partner or within the program network. In addition, in some cases, cardholders may be permitted to access their credit card accounts for cash advances. In Retail Card, credit under our private label credit cards typically is extended on standard terms only, and in Payment Solutions and CareCredit, credit under our private label credit cards typically is extended pursuant to a promotional financing offer. |
• | Dual Cards and General Purpose Co-Brand Cards. Our patented Dual Cards are credit cards that function as private label credit cards when used to purchase goods and services from our partners, and as general purpose credit cards when used to make purchases from other retailers whenever cards from those card networks are accepted or for cash advance transactions. We also offer general purpose co-branded credit cards that do not function as private label cards, as well as, in limited circumstances, a Synchrony-branded general purpose credit card. Credit extended under our Dual Cards and general purpose co-branded credit cards typically is extended on standard terms only. We offer either Dual Cards or general purpose co-branded credit cards across all of our sales platforms, spanning 22 ongoing credit partners and our CareCredit Dual Card, of which the majority are Dual Cards. Consumer Dual Cards and Co-Branded cards totaled 23% of our total loan receivables portfolio at September 30, 2020. |
Commercial Credit Products
We offer private label cards and Dual Cards for commercial customers that are similar to our consumer offerings. We also offer a commercial pay-in-full accounts receivable product to a wide range of business customers. We offer our commercial credit products primarily through our Retail Card platform to the commercial customers of our Retail Card partners.
Installment Loans
In Payment Solutions, we originate installment loans to consumers (and a limited number of commercial customers) in the United States, primarily in the power products market (motorcycles, ATVs and lawn and garden). Installment loans are closed-end credit accounts where the customer pays down the outstanding balance in installments. Installment loans are assessed periodic finance charges using fixed interest rates.
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Business Trends and Conditions
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We believe our business and results of operations will be impacted in the future by various trends and conditions, including the following:
• | Growth in loan receivables and interest income. |
• | Adoption of ASU 2016-13 Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”). |
• | Asset quality. |
• | Retailer share arrangement payments under our program agreements. |
• | Extended duration of our Retail Card program agreements. |
• | Growth in interchange revenues and loyalty program costs. |
• | Capital and liquidity levels. |
For a further discussion of the above trends and conditions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Trends and Conditions” in our 2019 Form 10-K.
COVID-19
The outbreak of the global pandemic of COVID-19 and resultant economic effects of preventative measures taken across the United States and worldwide during the nine months ended September 30, 2020 have resulted in significant and numerous changes to the previously disclosed trends and conditions referred to above. As of the date of filing of this report, the duration and magnitude of the effects of COVID-19 continue to be unknown, and as such the expectations and guidance for 2020 provided during the Company’s earnings conference call on January 24, 2020 can no longer be relied upon. While the magnitude of the impact from COVID-19 is uncertain and difficult to predict, we anticipate the following key trends will be affected:
• | Growth in loan receivables and interest income. We have experienced significant declines in consumer purchase activity following the outbreak of COVID-19 and associated governmental preventative measures, such as closures of non-essential businesses. Interest and fees on loans decreased 16% for the nine months ended September 30, 2020 compared to the prior year period. The sale of the Walmart consumer portfolio sale drove a decline compared to the prior year period of approximately 11%. The remaining decrease in interest and fees on loans, along with a decline in loan receivables of 6% and a reduction in purchase volume for our ongoing partners of 3%, in all instances at or for the nine months ended September 30, 2020, were primarily due to the impacts of COVID-19. In addition, we have experienced a reduction in benchmark interest rates and we have also provided, for a temporary period of time, forbearance in terms of deferrals of minimum payments and waivers of interest and fees for qualifying cardholders that are impacted by COVID-19 and request relief. The decreases in loan receivables and benchmark interest rates along with the forbearance actions have led to the reductions in interest income for the nine months ended September 30, 2020. While we experienced growth in purchase volume compared to the prior year for the month of September 2020, we expect the above factors will likely result in a reduction in the growth of our interest income for the remainder of 2020. As noted above, the extent of the impacts from these conditions is currently uncertain and dependent on various factors. These factors include, the nature of and duration for which the preventative measures remain in place, including responses to increases in COVID-19 infections nationally that may occur, and the type of any additional stimulus measures and other policy responses that the U.S. government may adopt. |
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• | Adoption of ASU 2016-13 Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments (“CECL”). In response to the COVID-19 pandemic, in March 2020, the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”) was signed into law and includes a provision that permits financial institutions to defer temporarily the use of CECL. However, in a related action, the joint federal bank regulatory agencies issued an interim final rule that allows banking organizations to mitigate the effects of the CECL accounting standard in their regulatory capital. Banking organizations that are required under U.S. accounting standards to adopt CECL this year can elect to mitigate the estimated cumulative regulatory capital effects of CECL for up to two years. This two-year delay is in addition to the three-year transition period that the agencies had already made available. The Company has elected to adopt the option provided by the interim final rule, which will largely delay the effects of CECL on its regulatory capital for the next two years, after which the effects will be phased-in over a three-year period from January 1, 2022 through December 31, 2024. Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period includes both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021. |
• | Asset quality. Prior to COVID-19, we had experienced slightly improving asset quality trends that reflected stable U.S. unemployment rates and consumer confidence. In addition, over-30 day loan delinquencies as a percentage of period-end loan receivables decreased to 2.67% at September 30, 2020 from 4.47% at September 30, 2019, primarily driven by an improvement in customer payment behavior. Beginning in March 2020, we have taken certain forbearance actions for our customers impacted by COVID-19. Through September 30th, we have granted minimum payment forbearance to a cumulative total of approximately 2.0 million accounts, or $3.8 billion in account balances at the time of forbearance. At September 30th, only 0.1 million accounts or $227 million in account balances remained in forbearance. To date, while not having a material impact to the Company’s overall delinquency metrics at September 30, 2020, we have experienced a higher incidence rate of accounts becoming delinquent following their exit from these short-term programs, as compared to accounts that did not enter the forbearance program. We anticipate that this post-program performance and the current levels of filings for unemployment benefits in the United States, while partially mitigated by the effects of governmental actions such as the CARES Act which included unemployment benefits that expired in July 2020, will result in an increase from current levels in the Company’s delinquencies and net charge-off rate for the remainder of 2020 and into 2021. Similarly, we have experienced an increase to our allowance for credit losses and provision for credit losses during the three and nine months ended September 30, 2020 attributable to the impact of COVID-19. To the extent the current environment continues beyond our expectations or deteriorates further, we may experience further increases to our allowance for credit losses and provision for credit losses related to COVID-19. |
• | Retailer share arrangement payments under our program agreements. To the extent we experience further reductions in interest income and also increases in expected net charge-offs related to COVID-19 discussed above, we expect that the growth in absolute terms of our payments to our partners under our retailer share arrangements, compared to the prior year, will decrease. |
For a further discussion of the risks and uncertainties relating to COVID-19 for our results of operations and business condition, see Item 1A. Risk Factors. For a discussion of how certain trends and conditions impacted the three and nine months ended September 30, 2020, see “—Results of Operations.”
Seasonality
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In our Retail Card and Payment Solutions platforms, we experience fluctuations in transaction volumes and the level of loan receivables as a result of higher seasonal consumer spending and payment patterns that typically result in an increase of loan receivables from August through a peak in late December, with reductions in loan receivables occurring over the first and second quarters of the following year as customers pay their balances down.
The seasonal impact to transaction volumes and the loan receivables balance typically results in fluctuations in our results of operations, delinquency metrics and the allowance for credit losses as a percentage of total loan receivables between quarterly periods.
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In addition to the seasonal variance in loan receivables discussed above, we also typically experience a seasonal increase in delinquency rates and delinquent loan receivables balances during the third and fourth quarters of each year due to lower customer payment rates resulting in higher net charge-off rates in the first and second quarters. Our delinquency rates and delinquent loan receivables balances typically decrease during the subsequent first and second quarters as customers begin to pay down their loan balances and return to current status resulting in lower net charge-off rates in the third and fourth quarters. Because customers who were delinquent during the fourth quarter of a calendar year have a higher probability of returning to current status when compared to customers who are delinquent at the end of each of our interim reporting periods, we expect that a higher proportion of delinquent accounts outstanding at an interim period end will result in charge-offs, as compared to delinquent accounts outstanding at a year end. Consistent with this historical experience, we generally experience a higher allowance for credit losses as a percentage of total loan receivables at the end of an interim period, as compared to the end of a calendar year. In addition, despite improving credit metrics such as declining past due amounts, we may experience an increase in our allowance for credit losses at an interim period end compared to the prior year end, reflecting these same seasonal trends.
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Results of Operations
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Highlights for the Three and Nine Months Ended September 30, 2020
Below are highlights of our performance for the three and nine months ended September 30, 2020 compared to the three and nine months ended September 30, 2019, as applicable, except as otherwise noted.
• | Net earnings decreased 70.4% to $313 million for the three months ended September 30, 2020 and decreased 78.5% to $647 million for the nine months ended September 30, 2020 primarily driven by lower net interest income and higher provision for credit losses, partially offset by a decrease in retailer share arrangements. These changes were primarily due to the impact of COVID-19 and the effects from the sale of the Walmart consumer portfolio in 2019. |
• | We adopted the new CECL accounting guidance in January 2020 and recorded an increase to our allowance for loan losses of $3.0 billion. In addition, the increases in provision for credit losses for the three and nine months ended September 30, 2020 included $66 million, or $50 million after-tax, and $650 million, or $491 million after-tax, respectively, attributable to applying the new CECL guidance as compared to the prior accounting guidance. |
• | Loan receivables decreased 5.6% to $78.5 billion at September 30, 2020 compared to September 30, 2019, primarily driven by lower purchase volume and a decrease in average active accounts for our ongoing partner programs due to the impact of COVID-19, as well as the sale of loan receivables associated with the Yamaha portfolio. |
• | Net interest income decreased 21.2% to $3.5 billion and 15.9% to $10.7 billion for the three and nine months ended September 30, 2020, respectively, primarily due to a decrease in interest and fees on loans due to the impact of COVID-19 and the Walmart consumer portfolio sale, partially offset by a decrease in interest expense reflecting lower benchmark interest rates. |
• | Retailer share arrangements decreased 11.5% to $899 million and 8.2% to $2.6 billion for the three and nine months ended September 30, 2020, respectively, reflecting the impact of COVID-19 on program performance. |
• | Over-30 day loan delinquencies as a percentage of period-end loan receivables decreased 180 basis points to 2.67% at September 30, 2020, and the net charge-off rate decreased 93 basis points to 4.42% and 75 basis points to 5.05% for the three and nine months ended September 30, 2020, respectively. |
• | Provision for credit losses increased by $191 million, or 18.7%, and $1.5 billion, or 48.2%, for the three and nine months ended September 30, 2020, respectively. The increases were primarily driven by higher reserve builds reflecting the projected impacts of COVID-19, the increases attributable to CECL discussed above and the effects of the prior year reductions in reserves for credit losses related to the Walmart consumer portfolio sale of $326 million and $1.1 billion, respectively. These increases were partially offset by lower net charge-offs. Our allowance coverage ratio (allowance for credit losses as a percent of period-end loan receivables) increased to 12.92% at September 30, 2020, as compared to 6.74% at September 30, 2019, primarily due to the impact of the CECL implementation and impacts from COVID-19. |
• | Other expense remained flat and decreased by $111 million, or 3.5%, for the three and nine months ended September 30, 2020, respectively, primarily driven by the cost reductions related to the sale of the Walmart consumer portfolio, lower purchase volume and average active accounts and reductions in certain discretionary spend. These decreases in expenses were offset by a restructuring charge of $89 million recorded in the current quarter, as well as expenditures related to our response to COVID-19. The decrease for the nine months ended September 30, 2020 also included lower professional fees due to interim servicing costs in the prior year associated with acquired portfolios, partially offset by higher operational losses. |
• | At September 30, 2020, deposits represented 80% of our total funding sources. Total deposits decreased by 2.5% to $63.5 billion at September 30, 2020, compared to December 31, 2019. |
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• | During the nine months ended September 30, 2020, we declared and paid cash dividends on our Series A 5.625% non-cumulative preferred stock of $42.34 per share, or $32 million. |
• | During the nine months ended September 30, 2020, we repurchased $1.0 billion of our outstanding common stock, and declared and paid cash dividends of $0.66 per share, or $392 million. In response to COVID-19, we have suspended share repurchases until we have greater visibility as to the current economic environment. |
2020 Partner Agreements
• | In our Retail Card sales platform, we launched new programs with Harbor Freight Tools, Venmo and Verizon and extended our program agreement with Sam's Club. |
• | In our Payment Solutions sales platform, we announced our new partnerships with Adorama, Club Champion, HiSun, Levin Furniture and Mattress, Modani Furniture and Piaggio, extended our program agreements with ABC Warehouse, Bernina, CarX, Englert, 4 Wheel Parts, Hanks, Icahn Enterprises LP automotive brands (Pep Boys, AAMCO Transmissions, Precision Tune Auto Care, Cottman Transmission and Auto Plus Auto Parts), Kane's Furniture, Living Spaces, Puronics, SVP Sewing Brands LLC, System Pavers and Vanderhall and completed the sale of loan receivables associated with the Yamaha portfolio. |
• | In our CareCredit sales platform, we expanded our network through our new partnership with AdventHealth, launched other healthcare system partnerships with Lehigh Valley Health Network, St. Luke's University Health Network and Cox Health, extended Pets Best's relationship with Progressive, and renewed our agreements with Blue River Petcare, NVA,Vision Group Holdings and West Coast Dental. |
Summary Earnings
The following table sets forth our results of operations for the periods indicated.
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Interest income | $ | 3,837 | $ | 4,981 | $ | 12,074 | $ | 14,505 | |||||||
Interest expense | 380 | 592 | 1,331 | 1,735 | |||||||||||
Net interest income | 3,457 | 4,389 | 10,743 | 12,770 | |||||||||||
Retailer share arrangements | (899 | ) | (1,016 | ) | (2,598 | ) | (2,829 | ) | |||||||
Provision for credit losses | 1,210 | 1,019 | 4,560 | 3,076 | |||||||||||
Net interest income, after retailer share arrangements and provision for credit losses | 1,348 | 2,354 | 3,585 | 6,865 | |||||||||||
Other income | 131 | 85 | 323 | 267 | |||||||||||
Other expense | 1,067 | 1,064 | 3,055 | 3,166 | |||||||||||
Earnings before provision for income taxes | 412 | 1,375 | 853 | 3,966 | |||||||||||
Provision for income taxes | 99 | 319 | 206 | 950 | |||||||||||
Net earnings | $ | 313 | $ | 1,056 | $ | 647 | $ | 3,016 | |||||||
Net earnings available to common stockholders | $ | 303 | $ | 1,056 | $ | 615 | $ | 3,016 | |||||||
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Other Financial and Statistical Data
The following table sets forth certain other financial and statistical data for the periods indicated.
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At and for the | At and for the | ||||||||||||||
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Financial Position Data (Average): | |||||||||||||||
Loan receivables, including held for sale | $ | 78,005 | $ | 90,556 | $ | 80,368 | $ | 89,752 | |||||||
Total assets | $ | 96,340 | $ | 106,413 | $ | 98,333 | $ | 105,542 | |||||||
Deposits | $ | 63,876 | $ | 65,898 | $ | 64,380 | $ | 64,826 | |||||||
Borrowings | $ | 16,017 | $ | 21,117 | $ | 17,207 | $ | 21,577 | |||||||
Total equity | $ | 12,139 | $ | 14,828 | $ | 12,303 | $ | 14,812 | |||||||
Selected Performance Metrics: | |||||||||||||||
Purchase volume(1)(2) | $ | 36,013 | $ | 38,395 | $ | 99,210 | $ | 109,199 | |||||||
Retail Card | $ | 27,374 | $ | 29,282 | $ | 75,762 | $ | 83,472 | |||||||
Payment Solutions | $ | 5,901 | $ | 6,281 | $ | 16,099 | $ | 17,478 | |||||||
CareCredit | $ | 2,738 | $ | 2,832 | $ | 7,349 | $ | 8,249 | |||||||
Average active accounts (in thousands)(2)(3) | 64,270 | 76,695 | 67,246 | 76,653 | |||||||||||
Net interest margin(4) | 13.80 | % | 16.29 | % | 14.17 | % | 16.04 | % | |||||||
Net charge-offs | $ | 866 | $ | 1,221 | $ | 3,037 | $ | 3,896 | |||||||
Net charge-offs as a % of average loan receivables, including held for sale | 4.42 | % | 5.35 | % | 5.05 | % | 5.80 | % | |||||||
Allowance coverage ratio(5) | 12.92 | % | 6.74 | % | 12.92 | % | 6.74 | % | |||||||
Return on assets(6) | 1.3 | % | 3.9 | % | 0.9 | % | 3.8 | % | |||||||
Return on equity(7) | 10.3 | % | 28.3 | % | 7.0 | % | 27.2 | % | |||||||
Equity to assets(8) | 12.60 | % | 13.93 | % | 12.51 | % | 14.03 | % | |||||||
Other expense as a % of average loan receivables, including held for sale | 5.44 | % | 4.66 | % | 5.08 | % | 4.72 | % | |||||||
Efficiency ratio(9) | 39.7 | % | 30.8 | % | 36.1 | % | 31.0 | % | |||||||
Effective income tax rate | 24.0 | % | 23.2 | % | 24.2 | % | 24.0 | % | |||||||
Selected Period-End Data: | |||||||||||||||
Loan receivables | $ | 78,521 | $ | 83,207 | $ | 78,521 | $ | 83,207 | |||||||
Allowance for credit losses | $ | 10,146 | $ | 5,607 | $ | 10,146 | $ | 5,607 | |||||||
30+ days past due as a % of period-end loan receivables(10) | 2.67 | % | 4.47 | % | 2.67 | % | 4.47 | % | |||||||
90+ days past due as a % of period-end loan receivables(10) | 1.24 | % | 2.07 | % | 1.24 | % | 2.07 | % | |||||||
Total active accounts (in thousands)(2)(3) | 64,800 | 77,094 | 64,800 | 77,094 | |||||||||||
(1) | Purchase volume, or net credit sales, represents the aggregate amount of charges incurred on credit cards or other credit product accounts less returns during the period. |
(2) | Includes activity and accounts associated with loan receivables held for sale. |
(3) | Active accounts represent credit card or installment loan accounts on which there has been a purchase, payment or outstanding balance in the current month. |
(4) | Net interest margin represents net interest income divided by average interest-earning assets. |
(5) | Allowance coverage ratio represents allowance for credit losses divided by total period-end loan receivables. |
(6) | Return on assets represents net earnings as a percentage of average total assets. |
(7) | Return on equity represents net earnings as a percentage of average total equity. |
(8) | Equity to assets represents average total equity as a percentage of average total assets. |
(9) | Efficiency ratio represents (i) other expense, divided by (ii) sum of net interest income, plus other income, less retailer share arrangements. |
(10) | Based on customer statement-end balances extrapolated to the respective period-end date. |
14
Average Balance Sheet
The following tables set forth information for the periods indicated regarding average balance sheet data, which are used in the discussion of interest income, interest expense and net interest income that follows.
2020 | 2019 | ||||||||||||||||||||
Three months ended September 30 ($ 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) | $ | 13,664 | $ | 4 | 0.12 | % | $ | 10,947 | $ | 59 | 2.14 | % | |||||||||
Securities available for sale | 7,984 | 12 | 0.60 | % | 5,389 | 32 | 2.36 | % | |||||||||||||
Loan receivables, including held for sale(3): | |||||||||||||||||||||
Credit cards | 74,798 | 3,752 | 19.96 | % | 87,156 | 4,807 | 21.88 | % | |||||||||||||
Consumer installment loans | 1,892 | 46 | 9.67 | % | 2,022 | 48 | 9.42 | % | |||||||||||||
Commercial credit products | 1,238 | 22 | 7.07 | % | 1,329 | 35 | 10.45 | % | |||||||||||||
Other | 77 | 1 | NM | 49 | — | — | % | ||||||||||||||
Total loan receivables, including held for sale | 78,005 | 3,821 | 19.49 | % | 90,556 | 4,890 | 21.42 | % | |||||||||||||
Total interest-earning assets | 99,653 | 3,837 | 15.32 | % | 106,892 | 4,981 | 18.49 | % | |||||||||||||
Non-interest-earning assets: | |||||||||||||||||||||
Cash and due from banks | 1,489 | 1,374 | |||||||||||||||||||
Allowance for credit losses | (9,823 | ) | (5,773 | ) | |||||||||||||||||
Other assets | 5,021 | 3,920 | |||||||||||||||||||
Total non-interest-earning assets | (3,313 | ) | (479 | ) | |||||||||||||||||
Total assets | $ | 96,340 | $ | 106,413 | |||||||||||||||||
Liabilities | |||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Interest-bearing deposit accounts | $ | 63,569 | $ | 245 | 1.53 | % | $ | 65,615 | $ | 411 | 2.49 | % | |||||||||
Borrowings of consolidated securitization entities | 8,057 | 53 | 2.62 | % | 11,770 | 88 | 2.97 | % | |||||||||||||
Senior unsecured notes | 7,960 | 82 | 4.10 | % | 9,347 | 93 | 3.95 | % | |||||||||||||
Total interest-bearing liabilities | 79,586 | 380 | 1.90 | % | 86,732 | 592 | 2.71 | % | |||||||||||||
Non-interest-bearing liabilities: | |||||||||||||||||||||
Non-interest-bearing deposit accounts | 307 | 283 | |||||||||||||||||||
Other liabilities | 4,308 | 4,570 | |||||||||||||||||||
Total non-interest-bearing liabilities | 4,615 | 4,853 | |||||||||||||||||||
Total liabilities | 84,201 | 91,585 | |||||||||||||||||||
Equity | |||||||||||||||||||||
Total equity | 12,139 | 14,828 | |||||||||||||||||||
Total liabilities and equity | $ | 96,340 | $ | 106,413 | |||||||||||||||||
Interest rate spread(4) | 13.42 | % | 15.78 | % | |||||||||||||||||
Net interest income | $ | 3,457 | $ | 4,389 | |||||||||||||||||
Net interest margin(5) | 13.80 | % | 16.29 | % | |||||||||||||||||
15
2020 | 2019 | ||||||||||||||||||||
Nine months ended September 30 ($ 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) | $ | 13,992 | $ | 49 | 0.47 | % | $ | 10,989 | $ | 190 | 2.31 | % | |||||||||
Securities available for sale | 6,918 | 56 | 1.08 | % | 5,679 | 102 | 2.40 | % | |||||||||||||
Loan receivables, including held for sale(3): | |||||||||||||||||||||
Credit cards | 77,476 | 11,764 | 20.28 | % | 86,471 | 13,975 | 21.61 | % | |||||||||||||
Consumer installment loans | 1,624 | 118 | 9.71 | % | 1,931 | 134 | 9.28 | % | |||||||||||||
Commercial credit products | 1,210 | 85 | 9.38 | % | 1,304 | 103 | 10.56 | % | |||||||||||||
Other | 58 | 2 | 4.61 | % | 46 | 1 | 2.91 | % | |||||||||||||
Total loan receivables, including held for sale | 80,368 | 11,969 | 19.89 | % | 89,752 | 14,213 | 21.17 | % | |||||||||||||
Total interest-earning assets | 101,278 | 12,074 | 15.92 | % | 106,420 | 14,505 | 18.22 | % | |||||||||||||
Non-interest-earning assets: | |||||||||||||||||||||
Cash and due from banks | 1,475 | 1,327 | |||||||||||||||||||
Allowance for credit losses | (9,253 | ) | (6,006 | ) | |||||||||||||||||
Other assets | 4,833 | 3,801 | |||||||||||||||||||
Total non-interest-earning assets | (2,945 | ) | (878 | ) | |||||||||||||||||
Total assets | $ | 98,333 | $ | 105,542 | |||||||||||||||||
Liabilities | |||||||||||||||||||||
Interest-bearing liabilities: | |||||||||||||||||||||
Interest-bearing deposit accounts | $ | 64,075 | $ | 894 | 1.86 | % | $ | 64,546 | $ | 1,183 | 2.45 | % | |||||||||
Borrowings of consolidated securitization entities | 8,966 | 185 | 2.76 | % | 12,315 | 278 | 3.02 | % | |||||||||||||
Senior unsecured notes | 8,241 | 252 | 4.08 | % | 9,262 | 274 | 3.96 | % | |||||||||||||
Total interest-bearing liabilities | 81,282 | 1,331 | 2.19 | % | 86,123 | 1,735 | 2.69 | % | |||||||||||||
Non-interest-bearing liabilities: | |||||||||||||||||||||
Non-interest-bearing deposit accounts | 305 | 280 | |||||||||||||||||||
Other liabilities | 4,443 | 4,327 | |||||||||||||||||||
Total non-interest-bearing liabilities | 4,748 | 4,607 | |||||||||||||||||||
Total liabilities | 86,030 | 90,730 | |||||||||||||||||||
Equity | |||||||||||||||||||||
Total equity | 12,303 | 14,812 | |||||||||||||||||||
Total liabilities and equity | $ | 98,333 | $ | 105,542 | |||||||||||||||||
Interest rate spread(4) | 13.73 | % | 15.53 | % | |||||||||||||||||
Net interest income | $ | 10,743 | $ | 12,770 | |||||||||||||||||
Net interest margin(5) | 14.17 | % | 16.04 | % | |||||||||||||||||
_______________________
(1) | Average yields/rates are based on total interest income/expense over average balances. |
(2) | Includes average restricted cash balances of $214 million and $1.2 billion for the three months ended September 30, 2020 and 2019, respectively, and $612 million and $879 million for the nine months ended September 30, 2020 and 2019, respectively. |
(3) | Interest income on loan receivables includes fees on loans of $487 million and $737 million for the three months ended September 30, 2020 and 2019, respectively, and $1.6 billion and $2.1 billion for the nine months ended September 30, 2020 and 2019, 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. |
16
For a summary description of the composition of our key line items included in our Statements of Earnings, see Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2019 Form 10-K.
Interest Income
Interest income decreased by $1.1 billion, or 23.0%, for the three months ended September 30, 2020 primarily driven by a decrease in interest and fees on loans of 21.9%. The decrease in interest and fees on loans was primarily driven by the impact of COVID-19 and the Walmart consumer portfolio sale. The sale of the Walmart consumer portfolio drove a decline in interest and fees on loans compared to the prior year quarter of approximately 11%.
Interest income decreased by $2.4 billion, or 16.8%, for the nine months ended September 30, 2020 primarily driven by a decrease in interest and fees on loans related to the Walmart consumer portfolio sale, as well as the impact of COVID-19. The sale of the Walmart consumer portfolio drove a decline in interest and fees on loans compared to the prior year period of approximately 11%.
Average interest-earning assets
Three months ended September 30 ($ in millions) | 2020 | % | 2019 | % | |||||||||
Loan receivables, including held for sale | $ | 78,005 | 78.3 | % | $ | 90,556 | 84.7 | % | |||||
Liquidity portfolio and other | 21,648 | 21.7 | % | 16,336 | 15.3 | % | |||||||
Total average interest-earning assets | $ | 99,653 | 100.0 | % | $ | 106,892 | 100.0 | % | |||||
Nine months ended September 30 ($ in millions) | 2020 | % | 2019 | % | |||||||||
Loan receivables, including held for sale | $ | 80,368 | 79.4 | % | $ | 89,752 | 84.3 | % | |||||
Liquidity portfolio and other | 20,910 | 20.6 | % | 16,668 | 15.7 | % | |||||||
Total average interest-earning assets | $ | 101,278 | 100.0 | % | $ | 106,420 | 100.0 | % | |||||
The decreases in average loan receivables, including held for sale, of 13.9% and 10.5% for the three and nine months ended September 30, 2020, respectively, were primarily driven by the sale of loan receivables associated with the Walmart and Yamaha portfolios, in October 2019 and January 2020, respectively. In addition, the decreases also reflect a decline in average active accounts of 7.8% at our ongoing partner programs for the quarter ended September 30, 2020, primarily due to the impact of COVID-19.
Yield on average interest-earning assets
The yield on average interest-earning assets decreased for the three and nine months ended September 30, 2020, primarily due to decreases in loan receivable yield and decreases in the percentage of interest-earning assets attributable to loan receivables. The decrease in loan receivable yield was 193 basis points to 19.49% and 128 basis points to 19.89% for the three and nine months ended September 30, 2020, respectively, primarily driven by lower benchmark rates and the sale of the Walmart consumer portfolio, as well as fee and interest waivers related to COVID-19.
Interest Expense
Interest expense decreased by $212 million, or 35.8%, and $404 million, or 23.3%, for the three and nine months ended September 30, 2020, respectively, driven primarily by lower benchmark interest rates and a decrease in borrowings of our securitization entities and senior unsecured notes. Our cost of funds decreased to 1.90% and 2.19% for the three and nine months ended September 30, 2020, respectively, compared to 2.71% and 2.69% for the three and nine months ended September 30, 2019, respectively.
17
Average interest-bearing liabilities
Three months ended September 30 ($ in millions) | 2020 | % | 2019 | % | |||||||||
Interest-bearing deposit accounts | $ | 63,569 | 79.9 | % | $ | 65,615 | 75.6 | % | |||||
Borrowings of consolidated securitization entities | 8,057 | 10.1 | % | 11,770 | 13.6 | % | |||||||
Senior unsecured notes | 7,960 | 10.0 | % | 9,347 | 10.8 | % | |||||||
Total average interest-bearing liabilities | $ | 79,586 | 100.0 | % | $ | 86,732 | 100.0 | % | |||||
Nine months ended September 30 ($ in millions) | 2020 | % | 2019 | % | |||||||||
Interest-bearing deposit accounts | $ | 64,075 | 78.9 | % | $ | 64,546 | 74.9 | % | |||||
Borrowings of consolidated securitization entities | 8,966 | 11.0 | % | 12,315 | 14.3 | % | |||||||
Senior unsecured notes | 8,241 | 10.1 | % | 9,262 | 10.8 | % | |||||||
Total average interest-bearing liabilities | $ | 81,282 | 100.0 | % | $ | 86,123 | 100.0 | % | |||||
Net Interest Income
Net interest income decreased by $932 million, or 21.2%, and $2.0 billion, or 15.9%, for the three and nine months ended September 30, 2020, respectively, primarily driven by a decrease in interest and fees on loans due to the impact of COVID-19 and the Walmart consumer portfolio sale, partially offset by decreases in interest expense reflecting lower benchmark interest rates.
Retailer Share Arrangements
Retailer share arrangements decreased by $117 million, or 11.5%, and $231 million, or 8.2%, for the three and nine months ended September 30, 2020, respectively, reflecting the impact of COVID-19 on program performance.
Provision for Credit Losses
Provision for credit losses increased by $191 million, or 18.7%, and $1.5 billion, or 48.2%, for the three and nine months ended September 30, 2020, respectively, primarily driven by the higher reserve build in the current year periods and the prior year reductions in reserves for credit losses related to the Walmart consumer portfolio sale, partially offset by lower net charge-offs.
The higher reserve build reflects both the projected impacts of COVID-19 and the increases attributable to the CECL implementation of $66 million and $650 million for the three and nine months ended September 30, 2020, respectively. The prior year reductions in reserves related to the Walmart portfolio were $326 million and $1.1 billion for the three and nine months ended September 30, 2020, respectively.
Other Income
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Interchange revenue | $ | 172 | $ | 197 | $ | 467 | $ | 556 | |||||||
Debt cancellation fees | 68 | 64 | 206 | 201 | |||||||||||
Loyalty programs | (155 | ) | (203 | ) | (447 | ) | (562 | ) | |||||||
Other | 46 | 27 | 97 | 72 | |||||||||||
Total other income | $ | 131 | $ | 85 | $ | 323 | $ | 267 | |||||||
Other income increased by $46 million, or 54.1%, and increased by $56 million, or 21.0%, for the three and nine months ended September 30, 2020, respectively, primarily driven by lower loyalty costs, partially offset by a decrease in interchange revenue.
The decreases in loyalty costs and interchange revenue were primarily due to lower purchase volume and the effects from the Walmart consumer portfolio sale.
18
Other Expense
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Employee costs | $ | 382 | $ | 359 | $ | 1,033 | $ | 1,070 | |||||||
Professional fees | 187 | 205 | 573 | 668 | |||||||||||
Marketing and business development | 107 | 139 | 309 | 397 | |||||||||||
Information processing | 125 | 127 | 364 | 363 | |||||||||||
Other | 266 | 234 | 776 | 668 | |||||||||||
Total other expense | $ | 1,067 | $ | 1,064 | $ | 3,055 | $ | 3,166 | |||||||
Other expense remained flat for the three months ended September 30, 2020, as the restructuring charge of $89 million recorded in the current quarter and expenditures related to our response to COVID-19 were offset by the cost reductions related to the sale of the Walmart consumer portfolio, lower purchase volume and average active accounts and reductions in certain discretionary spend. The restructuring charge included $45 million of operating lease and other asset impairments and $44 million of employee-related expenses. See Note 12. Restructuring Charges to our condensed consolidated financial statements for more information on our strategic plan to reduce operating expenses.
Other expense decreased by $111 million, or 3.5%, for the nine months ended September 30, 2020 primarily driven by the same factors discussed above as well as lower professional fees due to interim servicing costs in the prior year associated with acquired portfolios. These decreases were also partially offset by higher operational losses.
Provision for Income Taxes
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Effective tax rate | 24.0 | % | 23.2 | % | 24.2 | % | 24.0 | % | |||||||
Provision for income taxes | $ | 99 | $ | 319 | $ | 206 | $ | 950 | |||||||
The effective tax rate for the three months ended September 30, 2020 increased compared to the same period in the prior year primarily due to higher research and development credits recorded in the prior year. The effective tax rate for the nine months ended September 30, 2020 increased slightly compared to the same period in the prior year primarily due to an increase in state tax rates. For the nine months ended September 30, 2020, the effective tax rate differs from the applicable U.S. federal statutory tax rate primarily due to state income taxes.
Platform Analysis
As discussed above under “—Our Sales Platforms,” we offer our products through three sales platforms (Retail Card, Payment Solutions and CareCredit), which management measures based on their revenue-generating activities. The following is a discussion of certain supplemental information for the three and nine months ended September 30, 2020, for each of our sales platforms.
19
Retail Card
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Purchase volume | $ | 27,374 | $ | 29,282 | $ | 75,762 | $ | 83,472 | |||||||
Period-end loan receivables | $ | 49,595 | $ | 52,697 | $ | 49,595 | $ | 52,697 | |||||||
Average loan receivables, including held for sale | $ | 49,503 | $ | 60,660 | $ | 51,181 | $ | 60,494 | |||||||
Average active accounts (in thousands) | 47,065 | 58,082 | 49,197 | 58,156 | |||||||||||
Interest and fees on loans | $ | 2,619 | $ | 3,570 | $ | 8,296 | $ | 10,414 | |||||||
Retailer share arrangements | $ | (877 | ) | $ | (998 | ) | $ | (2,533 | ) | $ | (2,774 | ) | |||
Other income | $ | 84 | $ | 65 | $ | 199 | $ | 200 | |||||||
Retail Card interest and fees on loans decreased by $951 million, or 26.6%, for the three months ended September 30, 2020. The sale of the Walmart consumer portfolio drove a decline compared to the prior year period of approximately 14%. The remaining decrease was primarily due to the impact of COVID-19. Retail Card interest and fees on loans decreased by $2.1 billion, or 20.3%, for the nine months ended September 30, 2020 driven by these same factors.
Retailer share arrangements decreased by $121 million, or 12.1%, and $241 million, or 8.7%, for the three and nine months ended September 30, 2020, respectively, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Other income increased by $19 million, or 29.2%, and remained relatively flat, for the three and nine months ended September 30, 2020, respectively. The increase for the three months ended September 30, 2020 was primarily driven by lower loyalty costs, partially offset by a decrease in interchange revenue.
Payment Solutions
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Purchase volume | $ | 5,901 | $ | 6,281 | $ | 16,099 | $ | 17,478 | |||||||
Period-end loan receivables | $ | 19,550 | $ | 20,478 | $ | 19,550 | $ | 20,478 | |||||||
Average loan receivables, including held for sale | $ | 19,247 | $ | 20,051 | $ | 19,551 | $ | 19,654 | |||||||
Average active accounts (in thousands) | 11,497 | 12,384 | 12,031 | 12,354 | |||||||||||
Interest and fees on loans | $ | 650 | $ | 721 | $ | 1,988 | $ | 2,092 | |||||||
Retailer share arrangements | $ | (20 | ) | $ | (15 | ) | $ | (56 | ) | $ | (48 | ) | |||
Other income | $ | 13 | $ | (1 | ) | $ | 40 | $ | 11 | ||||||
Payment Solutions interest and fees on loans decreased by $71 million, or 9.8%, and $104 million, or 5.0%, for the three and nine months ended September 30, 2020, respectively. The decreases were primarily driven by lower late fees in the three and nine months ended September 30, 2020 as well as the sale of the Yamaha portfolio in January 2020.
20
CareCredit
Three months ended September 30, | Nine months ended September 30, | ||||||||||||||
($ in millions) | 2020 | 2019 | 2020 | 2019 | |||||||||||
Purchase volume | $ | 2,738 | $ | 2,832 | $ | 7,349 | $ | 8,249 | |||||||
Period-end loan receivables | $ | 9,376 | $ | 10,032 | $ | 9,376 | $ | 10,032 | |||||||
Average loan receivables | $ | 9,255 | $ | 9,845 | $ | 9,636 | $ | 9,604 | |||||||
Average active accounts (in thousands) | 5,708 | 6,229 | 6,018 | 6,143 | |||||||||||
Interest and fees on loans | $ | 552 | $ | 599 | $ | 1,685 | $ | 1,707 | |||||||
Retailer share arrangements | $ | (2 | ) | $ | (3 | ) | $ | (9 | ) | $ | (7 | ) | |||
Other income | $ | 34 | $ | 21 | $ | 84 | $ | 56 | |||||||
CareCredit interest and fees on loans decreased by $47 million, or 7.8%, and $22 million, or 1.3%, for the three and nine months ended September 30, 2020, respectively, primarily driven by lower merchant discount as a result of the declines in purchase volume. The decrease in the nine months ended September 30, 2020 was partially offset by growth in average loan receivables in the first quarter of 2020.
Loan Receivables
____________________________________________________________________________________________
Loan receivables are our largest category of assets and represent our primary source of revenue. The following discussion provides supplemental information regarding our loan receivables portfolio. See Note 2. Basis of Presentation and Summary of Significant Accounting Policies and Note 4. Loan Receivables and Allowance for Credit Losses to our condensed consolidated financial statements for additional information related to our Loan Receivables, including troubled debt restructurings (&