UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2016
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to         
001-36560
(Commission File Number)
sflogoa01a04.jpg
SYNCHRONY FINANCIAL
(Exact name of registrant as specified in its charter) 
Delaware
 
51-0483352
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
777 Long Ridge Road
 
 
Stamford, Connecticut
 
06902
(Address of principal executive offices)
 
(Zip Code)
(Registrant’s telephone number, including area code) (203) 585-2400
 
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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
ý
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of October 24, 2016 was 825,465,791.



Synchrony Financial
PART I - FINANCIAL INFORMATION
Page
 
 
Item 1. Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 


2


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;
•
“GE” are to General Electric Company and its subsidiaries;
•
“GECC” are to General Electric Capital Corporation (a subsidiary of GE) and its subsidiaries;
•
the “Bank” are to Synchrony Bank (a subsidiary of Synchrony);
•
the “Bank Term Loan” are to the term loan agreement, dated as of July 30, 2014, among Synchrony, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto, as amended;
•
the “GECC Term Loan” are to the term loan agreement, dated as of July 30, 2014, among Synchrony, as borrower, GECC, as administrative agent, and the other Lenders party thereto, as amended;
•
“FICO” score 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; and
•
“EMV” are to new security technology that utilizes embedded security chips in our credit cards.
For a description of certain other terms we use, including “active account” and “purchase volume,” see the notes to “Item 7. Management’s Discussion and Analysis—Other Financial and Statistical Data” in our Annual Report on Form 10-K for the year ended December 31, 2015 (our “2015 Form 10-K”). There is no standard industry definition for many of these terms, and other companies may define them differently than we do.
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 partner, group of partners or programs is measured on a weighted average basis by interest and fees on loans for the year ended December 31, 2015 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.

“Synchrony” and its logos and other trademarks referred to in this report, including, CareCredit®, Quickscreen®, Dual Card™ and eQuickscreen™ 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. Materials that we file or furnish to the SEC may also be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Also, 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.

3



Cautionary Note Regarding Forward-Looking Statements:
Various statements in this Quarterly Report on Form 10-Q may contain “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “targets,” “outlook,” “estimates,” “will,” “should,” “may” or words of similar meaning, but these words are not the exclusive means of identifying forward-looking statements.
Forward-looking statements are based on management’s current expectations and assumptions, and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, actual results could differ materially from those indicated in these forward-looking statements. Factors that could cause actual results to differ materially include global political, economic, business, competitive, market, regulatory and other factors and risks, such as: the impact of macroeconomic conditions and whether industry trends we have identified develop as anticipated; retaining existing partners and attracting new partners, concentration of our revenue in a small number of Retail Card partners, promotion and support of our products by our partners, and financial performance of our partners; higher borrowing costs and adverse financial market conditions impacting our funding and liquidity, and any reduction in our credit ratings; our ability to securitize our loans, occurrence of an early amortization of our securitization facilities, loss of the right to service or subservice our securitized loans, and lower payment rates on our securitized loans; our ability to grow our deposits in the future; changes in market interest rates and the impact of any margin compression; effectiveness of our risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, our ability to manage our credit risk, the sufficiency of our allowance for loan losses and the accuracy of the assumptions or estimates used in preparing our financial statements; our ability to offset increases in our costs in retailer share arrangements; competition in the consumer finance industry; our concentration in the U.S. consumer credit market; our ability to successfully develop and commercialize new or enhanced products and services; our ability to realize the value of strategic investments; reductions in interchange fees; fraudulent activity; cyber-attacks or other security breaches; failure of third parties to provide various services that are important to our operations; our transition to a replacement third-party vendor to manage the technology platform for our online retail deposits; disruptions in the operations of our computer systems and data centers; international risks and compliance and regulatory risks and costs associated with international operations; alleged infringement of intellectual property rights of others and our ability to protect our intellectual property; litigation and regulatory actions; damage to our reputation; our ability to attract, retain and motivate key officers and employees; tax legislation initiatives or challenges to our tax positions and state sales tax rules and regulations; a material indemnification obligation to GE under the tax sharing and separation agreement with GE (the "TSSA") if we cause the split-off from GE or certain preliminary transactions to fail to qualify for tax-free treatment or in the case of certain significant transfers of our stock following the split-off; obligations associated with being an independent public company; regulation, supervision, examination and enforcement of our business by governmental authorities, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the impact of the Consumer Financial Protection Bureau's (the “CFPB”) regulation of our business; changes to our methods of offering our CareCredit products; 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 Synchrony Bank’s ability to pay dividends to us; regulations relating to privacy, information security and data protection; use of third-party vendors and ongoing third-party business relationships; and failure to comply with anti-money laundering and anti-terrorism financing laws.
For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this report and in our public filings, including under the heading “Risk Factors” in our 2015 Form 10-K. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by the federal securities laws.

4


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 2015 Form 10-K. The discussion below contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. See “Cautionary Note Regarding Forward-Looking Statements.”
Introduction and Business Overview
____________________________________________________________________________________________
We are one of the premier consumer financial services companies in the United States. We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners.” For the three and nine months ended September 30, 2016, we financed $31.6 billion and $90.1 billion of purchase volume and had 66.6 million and 66.2 million average active accounts, respectively, and at September 30, 2016, we had $70.6 billion of loan receivables. For the three and nine months ended September 30, 2016, we had net earnings of $604 million and $1,675 million, respectively, representing a return on assets of 2.8% and 2.7%, respectively.
We offer our credit products primarily through our wholly-owned subsidiary, the Bank. 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 expanded and continue to expand our online direct banking operations to increase our deposit base as a source of stable and diversified low cost funding for our credit activities. At September 30, 2016 we had $49.8 billion in deposits, which represented 71% of our total funding sources.
In November 2015, Synchrony Financial became a stand-alone savings and loan holding company following the completion of GE's exchange offer, in which GE exchanged shares of GE common stock for all of the shares of our common stock it owned (the “Separation”).
Our Sales Platforms
_________________________________________________________________
We conduct our operations through a single business segment. Our revenue activities are managed for the business as a whole. Substantially all of our operations are within the United States. We offer our credit products through three sales platforms (Retail Card, Payment Solutions and CareCredit). Those platforms are organized by the types of products we offer and the partners we work with, and are measured on interest and fees on loans, loan receivables, new accounts and other sales metrics.



5


platformpiesa07.jpg
Retail Card
Retail Card is a leading provider of private label credit cards, and also provides Dual Cards and small and medium-sized business credit products. 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 elsewhere. 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 relationships with these Retail Card partners is 19 years. Retail Card’s revenue primarily consists of interest and fees on our loan receivables. Other income earned by the Retail Card sales platform primarily consists of interchange fees earned on Dual Card transactions (when the card is 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 Retail Card sales platform includes the majority of our retailer share arrangements, which generally provide for payment to our partner if the economic performance of the program exceeds a contractually-defined threshold. 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 private label credit cards and installment loans. Payment Solutions offers these products through participating partners consisting of national and regional retailers, local merchants, manufacturers, buying groups and industry associations. Substantially all of the credit extended in Payment Solutions is 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 revenue associated with promotional financing.
CareCredit
CareCredit is a leading provider of promotional financing to consumers for elective healthcare procedures, products or services, such as dental, veterinary, cosmetic, vision and audiology. CareCredit offers financing through a CareCredit-branded private label credit card that may be used across our network of CareCredit providers in which the vast majority are individual or small groups of independent healthcare providers. 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 and from merchant discounts. We also process general purpose card transactions for some providers as their acquiring bank within most of the credit card network associations, for which we obtain an interchange fee.

6


Our Credit Products
____________________________________________________________________________________________
Through our platforms, we offer three principal types of credit products: credit cards, commercial credit products and consumer installment loans. We also offer a debt cancellation product.
The following table sets forth each credit product by type and indicates the percentage of our total loan receivables that are under standard terms only or pursuant to a promotional financing offer at September 30, 2016.
 
 
 
Promotional Offer
 
 
Credit Product
Standard Terms Only
 
Deferred Interest
 
Other Promotional
 
Total
Credit cards
65.9
%
 
17.0
%
 
13.1
%
 
96.0
%
Commercial credit products
2.0

 
—

 
—

 
2.0

Consumer installment loans
—

 
—

 
1.9

 
1.9

Other
0.1

 
—

 
—

 
0.1

Total
68.0
%
 
17.0
%
 
15.0
%
 
100.0
%
Credit Cards
We offer two principal types of credit cards: private label credit cards and Dual 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., CarCareONE 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. Our patented Dual Cards are co-branded general purpose 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 elsewhere. Credit extended under our Dual Cards typically is extended under standard terms only. Currently, only our Retail Card platform offers Dual Cards. We offer Dual Cards or co-branded credit cards through 17 of our 25 ongoing Retail Card programs.
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 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 product 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.

7


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
•
Extended duration of our Retail Card program agreements
•
Increases in retailer share arrangement payments and other expense under extended program agreements
•
Growth in interchange revenues and loyalty program costs
•
Impact of regulatory developments
•
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. As discussed in our 2015 Form 10-K, our Board of Directors (the "Board") intended to establish both dividend and share repurchase programs, and accordingly, on July 7, 2016, they approved a $0.13 per share quarterly common stock dividend as well as a share repurchase program of up to $952 million for the four quarters ending June 30, 2017. Our Board also declared our first quarterly cash dividend of $0.13 per share, which was paid on August 25, 2016. During the three months ended September 30, 2016, we repurchased $238 million of our outstanding common stock. While these programs have now been established, we continue to expect to maintain capital ratios well in excess of minimum regulatory requirements.
•
Stable asset quality; During 2016 our actual net charge-off rates have remained relatively stable, increasing slightly by 14 basis points to 4.51% for the nine months ended September 30, 2016, compared to 4.37% for the nine months ended September 30, 2015. The assessment of our credit profile includes the evaluation of portfolio mix, account maturation, as well as broader consumer trends, such as payment behavior and overall indebtedness. During 2016, these factors have contributed to an increase in our delinquent accounts and our forecasted net charge-off rate over the next twelve months. Accordingly, we also experienced a corresponding increase in our allowance coverage ratio, as we reserved for these forecasted losses inherent in our loan portfolio.
For a further discussion of these trends and conditions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Trends and Conditions” in our 2015 Form 10-K. For a discussion of how these trends and conditions impacted the three and nine months ended September 30, 2016, see “—Results of Operations.”
Seasonality
____________________________________________________________________________________________
In our Retail Card and Payment Solutions platforms, we experience fluctuations in transaction volumes and the level of loan receivables as a result of higher seasonal consumer spending and payment patterns that typically result in an increase of loan receivables from August through a peak in late December, with reductions in loan receivables occurring over the first and second quarters of the following year as customers pay their balances down.
The seasonal impact to transaction volumes and the loan receivables balance typically results in fluctuations in our results of operations, delinquency metrics and the allowance for loan losses as a percentage of total loan receivables between quarterly periods.

8


In addition to the seasonal variance in loan receivables discussed above, we also experience a seasonal increase in delinquency rates and delinquent loan receivables balances during the third and fourth quarters of each year due to lower customer payment rates resulting in higher net charge-off rates in the first and second quarters. Our delinquency rates and delinquent loan receivables balances typically decrease during the subsequent first and second quarters as customers begin to pay down their loan balances and return to current status resulting in lower net charge-off rates in the third and fourth quarters. Because customers who were delinquent during the fourth quarter of a calendar year have a higher probability of returning to current status when compared to customers who are delinquent at the end of each of our interim reporting periods, we expect that a higher proportion of delinquent accounts outstanding at an interim period end will result in charge-offs, as compared to delinquent accounts outstanding at a year end. Consistent with this historical experience, we generally experience a higher allowance for loan losses as a percentage of total loan receivables at the end of an interim period, as compared to the end of a calendar year. In addition, despite improving credit metrics such as declining past due amounts, we may experience an increase in our allowance for loan losses at an interim period end compared to the prior year end, reflecting these same seasonal trends.
Results of Operations
____________________________________________________________________________________________
Highlights for the Three and Nine Months Ended September 30, 2016
Below are highlights of our performance for the three and nine months ended September 30, 2016 compared to the three and nine months ended September 30, 2015, as applicable, except as otherwise noted.
•
Net earnings increased 5.2% to $604 million for the three months ended September 30, 2016 driven by higher net interest income, partially offset by increases in provision for loan losses and other expense. Net earnings remained relatively flat at $1,675 million for the nine months ended September 30, 2016 as higher net interest income was offset by increases in provision for loan losses and other expense and a decrease in other income.
•
Loan receivables increased 11.2% to $70,644 million at September 30, 2016 compared to September 30, 2015, primarily driven by higher purchase volume and average active account growth.
•
Net interest income increased 12.2% to $3,481 million and 11.4% to $9,902 million for three and nine months ended September 30, 2016, respectively, primarily due to higher average loan receivables.
•
Retailer share arrangements increased 4.7% to $757 million and 4.3% to $2,091 million for the three and nine months ended September 30, 2016, respectively, primarily as a result of growth and improved performance of the programs in which we have retailer share arrangements, partially offset by higher provision for loan losses and loyalty costs associated with these programs.
•
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 4.26% at September 30, 2016 from 4.02% at September 30, 2015, and the net charge-off rate increased 36 basis points to 4.38% and 14 basis points to 4.51% for the three and nine months ended September 30, 2016, respectively.
•
Provision for loan losses increased by $284 million, or 40.5%, and $781 million or 36.7% for the three and nine months ended September 30, 2016, respectively, due to a higher loan loss reserve build and receivable growth. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) increased to 5.82% at September 30, 2016, as compared to 5.31% at September 30, 2015.
•
Other expense increased by $16 million, or 1.9%, and $104 million or 4.3% for the three and nine months ended September 30, 2016, respectively, primarily driven by business growth, partially offset by lower marketing and other expenses, as well as EMV re-issue costs in the prior year that did not repeat.
•
We continue to invest in our direct banking activities to grow our deposit base. Total deposits increased 14.9% to $49.8 billion at September 30, 2016, compared to December 31, 2015, driven primarily by growth in our direct deposits of 21.9% to $36.2 billion, partially offset by a reduction in our brokered deposits.

9


•
During the three months ended September 30, 2016, we repurchased $238 million of our outstanding common stock. Our Board also declared our first quarterly cash dividend of $0.13 per share, which was paid on August 25, 2016.
New and Extended Partner Agreements during the nine months ended September 30, 2016
•
We extended our Retail Card program agreement with TJX Companies and Stein Mart, launched our new programs with Citgo and Marvel, announced our new partnerships with Cathay Pacific, Fareportal, Nissan and At Home, and in October 2016 launched our new program with Google Store.
•
We extended our Payment Solutions program agreements with hhgregg, La-Z-Boy, Nationwide Marketing Group, Ashley Homestore and Suzuki and launched our new program with Mattress Firm and The Container Store.
•
In our CareCredit sales platform, we renewed our endorsements with the American Dental Association, American Society of Plastic Surgeons and VCA Animal Hospitals.
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)
2016
 
2015
 
2016
 
2015
Interest income
$
3,796

 
$
3,392

 
$
10,831

 
$
9,719

Interest expense
315

 
289

 
929

 
834

Net interest income
3,481

 
3,103

 
9,902

 
8,885

Retailer share arrangements
(757
)
 
(723
)
 
(2,091
)
 
(2,004
)
Net interest income, after retailer share arrangements
2,724

 
2,380

 
7,811

 
6,881

Provision for loan losses
986

 
702

 
2,910

 
2,129

Net interest income, after retailer share arrangements and provision for loan losses
1,738

 
1,678

 
4,901

 
4,752

Other income
84

 
84

 
259

 
305

Other expense
859

 
843

 
2,498

 
2,394

Earnings before provision for income taxes
963

 
919

 
2,662

 
2,663

Provision for income taxes
359

 
345

 
987

 
996

Net earnings
$
604

 
$
574

 
$
1,675

 
$
1,667


10


Other Financial and Statistical Data(1) 
The following table sets forth certain other financial and statistical data for the periods indicated.    
 
At and for the
 
At and for the
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Financial Position Data (Average):
 
 
 
 
 
 
 
Loan receivables, including held for sale
$
69,525

 
$
62,504

 
$
67,856

 
$
60,946

Total assets
$
85,021

 
$
77,841

 
$
83,416

 
$
75,393

Deposits
$
48,129

 
$
39,197

 
$
46,125

 
$
36,830

Borrowings
$
19,777

 
$
23,905

 
$
20,552

 
$
24,407

Total equity
$
13,801

 
$
11,880

 
$
13,376

 
$
11,310

Selected Performance Metrics:
 
 
 
 
 
 
 
Purchase volume(2)
$
31,615

 
$
29,206

 
$
90,099

 
$
81,155

Retail Card
$
25,285

 
$
23,560

 
$
72,246

 
$
65,422

Payment Solutions
$
4,152

 
$
3,635

 
$
11,447

 
$
9,954

CareCredit
$
2,178

 
$
2,011

 
$
6,406

 
$
5,779

Average active accounts (in thousands)(3)
66,639

 
62,247

 
66,204

 
61,762

Net interest margin(4)
16.27
%
 
15.97
%
 
15.94
%
 
15.81
%
Net charge-offs
$
765

 
$
633

 
$
2,292

 
$
1,994

Net charge-offs as a % of average loan receivables, including held for sale
4.38
%
 
4.02
%
 
4.51
%
 
4.37
%
Allowance coverage ratio(5)
5.82
%
 
5.31
%
 
5.82
%
 
5.31
%
Return on assets(6)
2.8
%
 
2.9
%
 
2.7
%
 
3.0
%
Return on equity(7)
17.4
%
 
19.2
%
 
16.7
%
 
19.7
%
Equity to assets(8)
16.23
%
 
15.26
%
 
16.04
%
 
15.00
%
Other expense as a % of average loan receivables, including held for sale
4.92
%
 
5.35
%
 
4.92
%
 
5.25
%
Efficiency ratio(9)
30.6
%
 
34.2
%
 
31.0
%
 
33.3
%
Effective income tax rate
37.3
%
 
37.5
%
 
37.1
%
 
37.4
%
Selected Period-End Data:
 
 
 
 
 
 
 
Loan receivables
$
70,644

 
$
63,520

 
$
70,644

 
$
63,520

Allowance for loan losses
$
4,115

 
$
3,371

 
$
4,115

 
$
3,371

30+ days past due as a % of period-end loan receivables(10)
4.26
%
 
4.02
%
 
4.26
%
 
4.02
%
90+ days past due as a % of period-end loan receivables(10)
1.89
%
 
1.73
%
 
1.89
%
 
1.73
%
Total active accounts (in thousands)(3)
66,781

 
62,831

 
66,781

 
62,831

______________________
(1)
Certain balance sheet amounts and related metrics have been updated to reflect the adoption of ASU 2015-03. See “—New Accounting Standards” for a more detailed discussion.
(2)
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. Purchase volume includes activity related to our portfolios classified as 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 loan 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) net interest income, after retailer share arrangements, plus other income.
(10)
Based on customer statement-end balances extrapolated to the respective period-end date.


11


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.
 
2016
 
2015
Three months ended September 30 ($ in millions)
Average
Balance(1)
 
Interest
Income /
Expense
 
Average
Yield /
Rate(2)
 
Average
Balance(1)
 
Interest
Income/
Expense
 
Average
Yield /
Rate(2)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(3)
$
12,574

 
$
16

 
0.51
%
 
$
11,059

 
$
7

 
0.25
%
Securities available for sale
3,018

 
9

 
1.19
%
 
3,534

 
6

 
0.67
%
Loan receivables:
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale(4)
66,746

 
3,705

 
22.08
%
 
59,890

 
3,315

 
21.96
%
Consumer installment loans
1,331

 
31

 
9.27
%
 
1,160

 
27

 
9.23
%
Commercial credit products
1,390

 
35

 
10.02
%
 
1,400

 
36

 
10.20
%
Other
58

 
—

 
—
%
 
54

 
1

 
NM

Total loan receivables
69,525

 
3,771

 
21.58
%
 
62,504

 
3,379

 
21.45
%
Total interest-earning assets
85,117

 
3,796

 
17.74
%
 
77,097

 
3,392

 
17.46
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
641

 
 
 
 
 
1,216

 
 
 
 
Allowance for loan losses
(3,977
)
 
 
 
 
 
(3,341
)
 
 
 
 
Other assets
3,240

 
 
 
 
 
2,869

 
 
 
 
Total non-interest-earning assets
(96
)
 
 
 
 
 
744

 
 
 
 
Total assets
$
85,021

 
 
 
 
 
$
77,841

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
47,926

 
$
188

 
1.56
%
 
$
39,048

 
$
159

 
1.62
%
Borrowings of consolidated securitization entities
12,369

 
63

 
2.03
%
 
13,715

 
54

 
1.56
%
Bank term loan
—

 
—

 
—
%
 
4,878

 
29

 
2.36
%
Senior unsecured notes
7,408

 
64

 
3.44
%
 
5,312

 
47

 
3.51
%
Related party debt
—

 
—

 
—
%
 
—

 
—

 
—
%
Total interest-bearing liabilities
67,703

 
315

 
1.85
%
 
62,953

 
289

 
1.82
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
203

 
 
 
 
 
149

 
 
 
 
Other liabilities
3,314

 
 
 
 
 
2,859

 
 
 
 
Total non-interest-bearing liabilities
3,517

 
 
 
 
 
3,008

 
 
 
 
Total liabilities
71,220

 
 
 
 
 
65,961

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
13,801

 
 
 
 
 
11,880

 
 
 
 
Total liabilities and equity
$
85,021

 
 
 
 
 
$
77,841

 
 
 
 
Interest rate spread(5)
 
 
 
 
15.89
%
 
 
 
 
 
15.64
%
Net interest income
 
 
$
3,481

 
 
 
 
 
$
3,103

 
 
Net interest margin(6)
 
 
 
 
16.27
%
 
 
 
 
 
15.97
%

12


 
2016
 
2015
Nine months ended September 30 ($ in millions)
Average
Balance(1)
 
Interest
Income /
Expense
 
Average
Yield /
Rate(2)
 
Average
Balance(1)
 
Interest
Income/
Expense
 
Average
Yield /
Rate(2)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(3)
$
12,172

 
$
46

 
0.50
%
 
$
11,144

 
$
19

 
0.23
%
Securities available for sale
2,960

 
22

 
0.99
%
 
3,066

 
15

 
0.65
%
Loan receivables:
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale(4)
65,201

 
10,573

 
21.66
%
 
58,442

 
9,500

 
21.73
%
Consumer installment loans
1,242

 
86

 
9.25
%
 
1,107

 
78

 
9.42
%
Commercial credit products
1,360

 
103

 
10.12
%
 
1,361

 
106

 
10.41
%
Other
53

 
1

 
NM

 
36

 
1

 
NM

Total loan receivables
67,856

 
10,763

 
21.19
%
 
60,946

 
9,685

 
21.25
%
Total interest-earning assets
82,988

 
10,831

 
17.43
%
 
75,156

 
9,719

 
17.29
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
942

 
 
 
 
 
782

 
 
 
 
Allowance for loan losses
(3,764
)
 
 
 
 
 
(3,304
)
 
 
 
 
Other assets
3,250

 
 
 
 
 
2,759

 
 
 
 
Total non-interest-earning assets
428

 
 
 
 
 
237

 
 
 
 
Total assets
$
83,416

 
 
 
 
 
$
75,393

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
45,913

 
$
539

 
1.57
%
 
$
36,677

 
$
442

 
1.61
%
Borrowings of consolidated securitization entities
12,578

 
180

 
1.91
%
 
13,952

 
159

 
1.52
%
Bank term loan
1,026

 
31

 
4.04
%
 
5,625

 
108

 
2.57
%
Senior unsecured notes
6,948

 
179

 
3.44
%
 
4,667

 
121

 
3.47
%
Related party debt
—

 
—

 
—
%
 
163

 
4

 
3.28
%
Total interest-bearing liabilities
66,465

 
929

 
1.87
%
 
61,084

 
834

 
1.83
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
212

 
 
 
 
 
153

 
 
 
 
Other liabilities
3,363

 
 
 
 
 
2,846

 
 
 
 
Total non-interest-bearing liabilities
3,575

 
 
 
 
 
2,999

 
 
 
 
Total liabilities
70,040

 
 
 
 
 
64,083

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
13,376

 
 
 
 
 
11,310

 
 
 
 
Total liabilities and equity
$
83,416

 
 
 
 
 
$
75,393

 
 
 
 
Interest rate spread(5)
 
 
 
 
15.56
%
 
 
 
 
 
15.46
%
Net interest income
 
 
$
9,902

 
 
 
 
 
$
8,885

 
 
Net interest margin(6)
 
 
 
 
15.94
%
 
 
 
 
 
15.81
%
______________________
(1)
Average balances are based on monthly balances, including beginning of period balances, except where monthly balances are unavailable and quarterly balances are used. Collection of daily averages involves undue burden and expense. We believe our average balance sheet data appropriately incorporates the seasonality in the level of our loan receivables and is representative of our operations.
(2)
Average yields/rates are based on total interest income/expense over average monthly balances.
(3)
Includes average restricted cash balances of $337 million and $308 million for the three months ended September 30, 2016 and 2015, respectively, and $475 million and $636 million for the nine months ended September 30, 2016 and 2015, respectively.
(4)
Interest income on credit cards includes fees on loans of $645 million and $586 million for the three months ended September 30, 2016 and 2015, respectively, and $1,799 million and $1,646 million for the nine months ended September 30, 2016 and 2015, respectively.


13


(5)
Interest rate spread represents the difference between the yield on total interest-earning assets and the rate on total interest-bearing liabilities.
(6)
Net interest margin represents net interest income divided by average total interest-earning assets.
For a summary description of the composition of our key line items included in our Statements of Earnings, see Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2015 Form 10-K.
Interest Income
Interest income increased by $404 million, or 11.9%, and by $1,112 million, or 11.4%, for the three and nine months ended September 30, 2016, respectively, driven primarily by growth in our average loan receivables.
Average interest-earning assets
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Loan receivables, including held for sale
$
69,525

 
$
62,504

 
$
67,856

 
$
60,946

Liquidity portfolio and other
15,592

 
14,593

 
15,132

 
14,210

Total average interest-earning assets
$
85,117

 
$
77,097

 
$
82,988

 
$
75,156

The increases in average loan receivables of 11.2% and 11.3% for the three and nine months ended September 30, 2016, respectively, were driven primarily by higher purchase volume of 8.2% and 11.0%, respectively. Average active accounts increased 7.1% to 66.6 million and 7.2% to 66.2 million for the three and nine months ended September 30, 2016, respectively, and the average balances per these active accounts increased 4% for both periods.
Yield on average interest-earning assets
 
Three months ended
 
Nine months ended
 
 
 
 
Yield on average interest-earning assets for the period ended September 30, 2015
17.46
%
 
17.29
 %
Yield on loan receivables, including held for sale
0.13

 
(0.06
)
Liquidity portfolio and other
0.15

 
0.20

Yield on average interest-earning assets for the period ended September 30, 2016
17.74
%
 
17.43
 %
 
 
 
 
The yield on interest-earning assets increased for the three and nine months ended September 30, 2016 primarily due to higher yield on our average receivables and an increase in the percentage of interest-earning assets attributable to loan receivables. The yield on our average loan receivables increased to 21.58% for the three months ended September 30, 2016, driven by lower payment rates as well as increased benchmark rates, partially offset by an increase in promotional balances. The yield on our average loan receivables decreased slightly to 21.19% for the nine months ended September 30, 2016, reflecting growth in promotional balances.
Interest Expense
Interest expense increased by $26 million, or 9.0%, and by $95 million, or 11.4%, for the three and nine months ended September 30, 2016, respectively, driven primarily by the increases in our deposit liabilities. Our cost of funds increased to 1.85% and 1.87% for the three and nine months ended September 30, 2016, respectively, compared to 1.82% and 1.83% for the three and nine months ended September 30, 2015, respectively, primarily due to higher short-term benchmark rates.

14


Average interest-bearing liabilities
 
Three months ended September 30,
Nine months ended September 30,
($ in millions)
2016
 
2015
2016
 
2015
Interest-bearing deposit accounts
$
47,926

 
$
39,048

$
45,913

 
$
36,677

Borrowings of consolidated securitization entities
12,369

 
13,715

12,578

 
13,952

Third-party debt
7,408

 
10,190

7,974

 
10,292

Related party debt
—

 
—

—

 
163

Total average interest-bearing liabilities
$
67,703

 
$
62,953

$
66,465

 
$
61,084

The increases in average interest-bearing liabilities for the three and nine months ended September 30, 2016 was driven primarily by growth in our direct deposits partially offset by the repayment of third-party debt and lower securitized financings.
Net Interest Income
Net interest income increased by $378 million, or 12.2%, and by $1,017 million, or 11.4%, for the three and nine months ended September 30, 2016, respectively, driven by higher average loan receivables.
Retailer Share Arrangements
Retailer share arrangements increased by $34 million, or 4.7%, and by $87 million, or 4.3%, for the three and nine months ended September 30, 2016, respectively, driven primarily by the growth and improved performance of the programs in which we have retailer share arrangements, partially offset by higher provision for loan losses and loyalty costs associated with these programs.
Provision for Loan Losses
Provision for loan losses increased by $284 million, or 40.5%, and by $781 million, or 36.7%, for the three and nine months ended September 30, 2016, respectively, primarily due to higher loan loss reserve build and receivables growth. The reserve build included increases in expected losses which were primarily driven by the factors discussed in "Business Trends and Conditions - Stable Asset Quality" above.
Our allowance coverage ratio increased to 5.82% at September 30, 2016, as compared to 5.31% at September 30, 2015 reflecting the increase in forecasted losses inherent in our loan portfolio.
Other Income
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Interchange revenue
$
154

 
$
135

 
$
435

 
$
358

Debt cancellation fees
67

 
61

 
194

 
187

Loyalty programs
(145
)
 
(122
)
 
(390
)
 
(294
)
Other
8

 
10

 
20

 
54

Total other income
$
84

 
$
84

 
$
259

 
$
305

Other income was unchanged for the three months ended September 30, 2016, primarily due to an increase in interchange revenue driven by purchase volume outside of our retail partners' sales channels, which was offset by higher loyalty costs. Other income decreased by $46 million, or 15.1%, for the nine months ended September 30, 2016, primarily due to a pre-tax gain of $20 million associated with the sale of certain loan portfolios in the nine months ended September 30, 2015 and higher loyalty costs, partially offset by increased interchange revenue.

15


Other Expense
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Employee costs
$
311

 
$
268

 
$
892

 
$
757

Professional fees
174

 
162

 
474

 
480

Marketing and business development
92

 
115

 
293

 
305

Information processing
87

 
77

 
250

 
214

Other
195

 
221

 
589

 
638

Total other expense
$
859

 
$
843

 
$
2,498

 
$
2,394

Other expense increased by $16 million, or 1.9%, for the three months ended September 30, 2016, primarily due to an increase in employee costs, partially offset by reductions in marketing and other expenses, as well as EMV re-issue costs incurred in the prior year which did not repeat.
Employee costs increased for the three months ended September 30, 2016, primarily due to new employees added to support the continued growth of the business and replacement of certain services provided by GE and third parties. Marketing and business development decreased in the three months ended September 30, 2016 driven primarily by redirecting marketing funds into our partners' loyalty programs and reduced marketing on retail deposits. The decrease in "other" was primarily driven by lower payments to GE due to the replacement of certain services that were previously provided to us under the Transition Services Agreement ("TSA"), as well as benefits from the rollout of EMV cards.
Other expense increased by $104 million, or 4.3%, for the nine months ended September 30, 2016, primarily due to increases in employee costs and information processing, partially offset by a decrease in the "other" component of other expense. The changes in employee costs and "other" were primarily due to the same factors attributable to the changes for the three months ended September 30, 2016. Information processing costs increased in the nine months ended September 30, 2016 primarily due to higher information technology investment and higher transaction volume.
Provision for Income Taxes
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Effective tax rate
37.3
%
 
37.5
%
 
37.1
%
 
37.4
%
Provision for income taxes
$
359

 
$
345

 
$
987

 
$
996

The effective tax rate for the three and nine months ended September 30, 2016 decreased slightly primarily due to a tax benefit that is reimbursed to GE under the terms of the Tax Sharing and Separation Agreement (“TSSA”). The decrease for the three months ended September 30, 2016 was partially offset by a discrete impact of a change in state tax rates. The decrease for the nine months ended September 30, 2016 was also attributable to a research and development credit and a discrete impact of a change in state tax rates. In each period, the effective tax rate differs from the U.S. federal statutory tax rate of 35.0% 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, 2016, for each of our sales platforms.


16


Retail Card
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Purchase volume
$
25,285

 
$
23,560

 
$
72,246

 
$
65,422

Period-end loan receivables
$
48,010

 
$
43,432

 
$
48,010

 
$
43,432

Average loan receivables, including held for sale
$
47,420

 
$
42,933

 
$
46,491

 
$
41,853

Average active accounts (in thousands)
52,959

 
49,953

 
52,834

 
49,671

 
 
 
 
 
 
 
 
Interest and fees on loans
$
2,790

 
$
2,508

 
$
7,989

 
$
7,180

Retailer share arrangements
$
(752
)
 
$
(708
)
 
$
(2,069
)
 
$
(1,965
)
Other income
$
70

 
$
70

 
$
218

 
$
263

Retail Card interest and fees on loans increased by $282 million, or 11.2%, and by $809 million, or 11.3%, for the three and nine months ended September 30, 2016, respectively. These increases were primarily the result of increases in average loan receivables.
Retailer share arrangements increased by $44 million, or 6.2%, and by $104 million, or 5.3%, for the three and nine months ended September 30, 2016, respectively, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Other income was unchanged for the three months ended September 30, 2016. Other income decreased by $45 million, or 17.1%, for the nine months ended September 30, 2016. The decreases were primarily as a result of the factors discussed under the heading “—Other Income” above.
Payment Solutions
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Purchase volume
$
4,152

 
$
3,635

 
$
11,447

 
$
9,954

Period-end loan receivables
$
14,798

 
$
12,933

 
$
14,798

 
$
12,933

Average loan receivables
$
14,391

 
$
12,523

 
$
13,865

 
$
12,183

Average active accounts (in thousands)
8,461

 
7,468

 
8,261

 
7,335

 
 
 
 
 
 
 
 
Interest and fees on loans
$
505

 
$
442

 
$
1,429

 
$
1,257

Retailer share arrangements
$
(3
)
 
$
(13
)
 
$
(17
)
 
$
(35
)
Other income
$
3

 
$
5

 
$
10

 
$
14

Payment Solutions interest and fees on loans increased by $63 million, or 14.3%, and by $172 million, or 13.7%, for the three and nine months ended September 30, 2016, respectively. These increases were primarily driven by increases in average loan receivables.

17


CareCredit
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Purchase volume
$
2,178

 
$
2,011

 
$
6,406

 
$
5,779

Period-end loan receivables
$
7,836

 
$
7,155

 
$
7,836

 
$
7,155

Average loan receivables
$
7,714

 
$
7,048

 
$
7,500

 
$
6,910

Average active accounts (in thousands)
5,219

 
4,826

 
5,109

 
4,756

 
 
 
 
 
 
 
 
Interest and fees on loans
$
476

 
$
429

 
$
1,345

 
$
1,248

Retailer share arrangements
$
(2
)
 
$
(2
)
 
$
(5
)
 
$
(4
)
Other income
$
11

 
$
9

 
$
31

 
$
28

CareCredit interest and fees on loans increased by $47 million, or 11.0%, and by $97 million, or 7.8%, for the three and nine months ended September 30, 2016, respectively. These increases were primarily the result of increases in average loan receivables.
Investment Securities
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our investment securities portfolio. All of our investment securities are classified as available-for-sale at September 30, 2016 and December 31, 2015, and are held to meet our liquidity objectives and to comply with the Community Reinvestment Act. Investment securities classified as available-for-sale are reported in our Condensed Consolidated Statements of Financial Position at fair value.
The following table sets forth the amortized cost and fair value of our portfolio of investment securities at the dates indicated:
 
At September 30, 2016
 
At December 31, 2015
($ in millions)
Amortized
Cost
 
Estimated Fair Value
 
Amortized
Cost
 
Estimated Fair Value
Debt:
 
 
 
 
 
 
 
U.S. government and federal agency
$
2,100

 
$
2,101

 
$
2,768

 
$
2,761

State and municipal
47

 
49

 
51

 
49

Residential mortgage-backed
1,183

 
1,191

 
323

 
317

Equity
15

 
15

 
15

 
15

Total
$
3,345

 
$
3,356

 
$
3,157

 
$
3,142

Unrealized gains and losses, net of the related tax effect, on available-for-sale securities that are not other-than-temporarily impaired are excluded from earnings and are reported as a separate component of comprehensive income (loss) until realized. At September 30, 2016, our investment securities had gross unrealized gains of $12 million and gross unrealized losses of $1 million. At December 31, 2015, our investment securities had gross unrealized gains of $2 million and gross unrealized losses of $17 million.

18


Our investment securities portfolio had the following maturity distribution at September 30, 2016. Equity securities have been excluded from the table because they do not have a maturity.
($ in millions)
Due in 1 Year
or Less
 
Due After 1
through
5 Years
 
Due After 5
through
10 Years
 
Due After
10 years
 
Total
Debt:
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$
2,101

 
$
—

 
$
—

 
$
—

 
$
2,101

State and municipal
—

 
1

 
1

 
47

 
49

Residential mortgage-backed
—

 
—

 
—

 
1,191

 
1,191

Total(1)
$
2,101

 
$
1

 
$
1

 
$
1,238

 
$
3,341

Weighted average yield(2)
0.6
%
 
2.9
%
 
4.4
%
 
2.8
%
 
1.4
%
______________________
(1)
Amounts stated represent estimated fair value.
(2)
Weighted average yield is calculated based on the amortized cost of each security. In calculating yield, no adjustment has been made with respect to any tax exempt obligations.
At September 30, 2016, we did not hold investments in any single issuer with an aggregate book value that exceeded 10% of equity, excluding obligations of the U.S. government.
Loan Receivables
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our loan receivables portfolio.
Loan receivables are our largest category of assets and represent our primary source of revenues. The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.
($ in millions)
At September 30, 2016
 
(%)
 
At December 31, 2015
 
(%)
Loans
 
 
 
 
 
Credit cards
$
67,858

 
96.0
%
 
$
65,773

 
96.3
%
Consumer installment loans
1,361

 
1.9

 
1,154

 
1.7

Commercial credit products
1,385

 
2.0

 
1,323

 
1.9

Other
40

 
0.1

 
40

 
0.1

Total loans
$
70,644

 
100.0
%
 
$
68,290

 
100.0
%
Loan receivables increased by $2,354 million, or 3.4%, at September 30, 2016 compared to December 31, 2015, primarily driven by higher purchase volume and average active account growth, partially offset by the seasonality of our business.
Loan receivables increased by $7,124 million, or 11.2%, at September 30, 2016 compared to September 30, 2015, primarily driven by higher purchase volume and average active account growth.

19


Our loan receivables portfolio had the following geographic concentration at September 30, 2016.
($ in millions)
 
Loan Receivables
Outstanding(1)
 
% of Total Loan
Receivables
Outstanding
State
 
Texas
 
$
6,756

 
9.6
%
California
 
$
6,618

 
9.4
%
Florida
 
$
5,400

 
7.6
%
New York
 
$
3,778

 
5.3
%
Pennsylvania
 
$
2,975

 
4.2
%
______________________
(1)
Based on September 2016 customer statement-end balances extrapolated to September 30, 2016. Individual customer balances at September 30, 2016 are not available without undue burden and expense.
Impaired Loans and Troubled Debt Restructurings
Our loss mitigation strategy is intended to minimize economic loss and at times can result in rate reductions, principal forgiveness, extensions or other actions, which may cause the related loan to be classified as a Troubled Debt Restructuring (“TDR”) and also be impaired. We primarily use long-term (12 to 60 months) modification programs for borrowers experiencing financial difficulty as a loss mitigation strategy to improve long-term collectability of the loans that are classified as TDRs. For our credit card customers, the short-term program primarily consists of a reduced minimum payment and an interest rate reduction, both lasting for a period no longer than 12 months. The long-term program involves changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The long-term program does not normally provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. We also make loan modifications for some customers who request financial assistance through external sources, such as a consumer credit counseling agency program. The loans that are modified typically receive a reduced interest rate but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. The determination of whether these changes to the terms and conditions meet the TDR criteria includes our consideration of all relevant facts and circumstances.
Loans classified as TDRs are recorded at their present value with impairment measured as the difference between the loan balance and the discounted present value of cash flows expected to be collected, discounted at the original effective interest rate of the loan. Our allowance for loan losses on TDRs is generally measured based on the difference between the recorded loan receivable and the present value of the expected future cash flows.
Interest income from loans accounted for as TDRs is accounted for in the same manner as other accruing loans. We accrue interest on credit card balances until the accounts are charged-off in the period the accounts become 180 days past due. The following table presents the amount of loan receivables that are not accruing interest, loans that are 90 days or more past-due and still accruing interest, and earning TDRs for the periods presented.
($ in millions)
At September 30, 2016
 
At December 31, 2015
Non-accrual loan receivables
$
3

 
$
3

Loans contractually 90 days past-due and still accruing interest
1,331

 
1,270

Earning TDRs(1)
764

 
712

Non-accrual, past-due and restructured loan receivables
$
2,098

 
$
1,985

______________________
(1)
At September 30, 2016 and December 31, 2015, balances exclude $52 million and $51 million, respectively, of TDRs which are included in loans contractually 90 days past-due and still accruing interest on the balance. See Note 4. Loan Receivables and Allowance for Loan Losses to our condensed consolidated financial statements for additional information on the financial effects of TDRs for the three and nine months ended September 30, 2016 and 2015.

20


 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Gross amount of interest income that would have been recorded in accordance with the original contractual terms
$
46

 
$
38

 
$
131

 
$
111

Interest income recognized
12

 
12

 
36

 
37

Total interest income foregone
$
34

 
$
26

 
$
95

 
$
74

Delinquencies
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 4.26% at September 30, 2016 from 4.02% at September 30, 2015, and increased from 4.06% at December 31, 2015. The 24 basis point increase compared to the same period in the prior year was driven by the factors discussed in "Business Trends and Conditions — Stable Asset Quality" above. The increase as compared to December 31, 2015 was primarily driven by the various factors referenced above, partially offset by the seasonality of our business.
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 loan losses and subsequent recoveries of previously charged-off amounts are credited to the allowance for loan losses. Costs incurred to recover charged-off loans are recorded as collection expense and included in other expense in our Condensed Consolidated Statements of Earnings.
The table below sets forth the ratio of net charge-offs to average loan receivables, including held for sale, for the periods indicated.
 
Three months ended September 30,
 
Nine months ended September 30,
 
2016
 
2015
 
2016
 
2015
Ratio of net charge-offs to average loan receivables, including held for sale
4.38
%
 
4.02
%
 
4.51
%
 
4.37
%
Allowance for Loan Losses
The allowance for loan losses totaled $4,115 million at September 30, 2016 compared with $3,497 million at December 31, 2015 and $3,371 million at September 30, 2015 representing our best estimate of probable losses inherent in the portfolio. Our allowance for loan losses as a percentage of total loan receivables increased to 5.82% at September 30, 2016, from 5.12% at December 31, 2015 and 5.31% at September 30, 2015, which reflects the increase in forecasted net charge-offs over the next twelve months as well as lower pricing of recoveries.
The following tables provide changes in our allowance for loan losses for the periods presented:
 ($ in millions)
Balance at
July 1, 2016

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
September 30, 2016

 
 
 
 
 
 
 
 
 
 
Credit cards
$
3,800

 
$
964

 
$
(919
)
 
$
172

 
$
4,017

Consumer installment loans
39

 
11

 
(11
)
 
4

 
43

Commercial credit products
53

 
12

 
(13
)
 
2

 
54

Other
2

 
(1
)
 
—

 
—

 
1

Total
$
3,894

 
$
986

 
$
(943
)
 
$
178

 
$
4,115


21


($ in millions)
Balance at
July 1, 2015

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at September 30, 2015

 
 
 
 
 
 
 
 
 
 
Credit cards
$
3,229

 
$
691

 
$
(765
)
 
$
147

 
$
3,302

Consumer installment loans
23

 
6

 
(8
)
 
2

 
23

Commercial credit products
49

 
5

 
(11
)
 
2

 
45

Other
1

 
—

 
—

 
—

 
$
1

Total
$
3,302

 
$
702

 
$
(784
)
 
$
151

 
$
3,371

($ in millions)
Balance at January 1, 2016

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
September 30, 2016

 
 
Credit cards
$
3,420

 
$
2,836

 
$
(2,820
)
 
$
581

 
$
4,017

Consumer installment loans
26

 
38

 
(31
)
 
10

 
43

Commercial credit products
50

 
36

 
(39
)
 
7

 
54

Other
1

 
—

 
—

 
—

 
1

Total
$
3,497

 
$
2,910

 
$
(2,890
)
 
$
598

 
$
4,115

 
Balance at
January 1, 2015

 
Provision
Charged to
Operations

 
Gross Charge- 
Offs

 
Recoveries

 
Balance at
September 30, 
2015

($ in millions)
 
Credit cards
$
3,169

 
$
2,083

 
$
(2,413
)
 
$
463

 
$
3,302

Consumer installment loans
22

 
15

 
(24
)
 
10

 
23

Commercial credit products
45

 
30

 
(35
)
 
5

 
45

Other
—

 
1

 
—

 
—

 
1

Total
$
3,236

 
$
2,129

 
$
(2,472
)
 
$
478

 
$
3,371


Funding, Liquidity and Capital Resources
____________________________________________________________________________________________
We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources to support our daily operations, our business growth, our credit ratings and our regulatory and policy requirements, in a cost effective and prudent manner through expected and unexpected market environments.
Funding Sources
Our primary funding sources include cash from operations, deposits (direct and brokered deposits), third-party debt and securitized financings.

22


The following table summarizes information concerning our funding sources during the periods indicated:
 
2016
 
2015
Three months ended September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
47,926

 
70.8
%
 
1.6
%
 
$
39,048

 
62.0
%
 
1.6
%
Securitized financings
12,369

 
18.3

 
2.0

 
13,715

 
21.8

 
1.6

Senior unsecured notes
7,408

 
10.9

 
3.4

 
5,312

 
8.4

 
3.5

Bank term loan
—

 
—

 
—

 
4,878

 
7.8

 
2.4

Total
$
67,703

 
100.0
%
 
1.9
%
 
$
62,953

 
100.0
%
 
1.8
%
______________________
(1)
Excludes $203 million and $149 million average balance of non-interest-bearing deposits for the three months ended September 30, 2016 and September 30, 2015, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended September 30, 2016 and 2015.

 
2016
 
2015
Nine months ended September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
45,913

 
69.1
%
 
1.6
%
 
$
36,677

 
60.1
%
 
1.6
%
Securitized financings
12,578

 
18.9

 
1.9

 
13,952

 
22.8

 
1.5

Senior unsecured notes
6,948

 
10.5

 
3.4

 
4,667

 
7.6

 
3.5

Bank term loan
1,026

 
1.5

 
4.0

 
5,625

 
9.2

 
2.6

Related party debt(2)
—

 
—

 
—

 
163

 
0.3

 
3.3

Total
$
66,465

 
100.0
%
 
1.9
%
 
$
61,084

 
100.0
%
 
1.8
%
 
 
 
 
 
 
 
 
 
 
 
 
______________________
(1)
Excludes $212 million and $153 million average balance of non-interest-bearing deposits for the nine months ended September 30, 2016 and September 30, 2015, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the nine months ended September 30, 2016 and 2015.
(2)
Represents amounts outstanding under GECC Term Loan, which were fully repaid in the nine months ended September 30, 2015.

Deposits
We obtain deposits directly from retail and commercial customers (“direct deposits”) or through third-party brokerage firms that offer our deposits to their customers (“brokered deposits”). At September 30, 2016, we had $36.2 billion in direct deposits (which includes deposits from banks and financial institutions) and $13.6 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 expand our direct deposits base as a source of stable and diversified low cost funding.
Our direct deposits include a range of FDIC-insured deposit products, including certificates of deposit, IRAs, money market accounts and savings accounts.
Brokered deposits are primarily from retail customers of large brokerage firms. We have relationships with ten brokers that offer our deposits through their networks. Our brokered deposits consist primarily of certificates of deposit that bear interest at a fixed rate and at September 30, 2016, had a weighted average remaining life of 2.8 years. 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 and interest rate risk if we fail, or are required to pay higher rates, to attract new deposits or retain existing deposits. To mitigate these risks, we pursue a funding strategy that seeks to match our assets and liabilities by interest rate and expected maturity characteristics, and we seek to maintain access to multiple other funding sources, including securitized financings (including our undrawn committed capacity) and unsecured debt.

23


Over the next several years, we are seeking to increase our direct deposits through investing in our direct deposit programs and capabilities. The growth of direct deposits will be supported by a significant investment in marketing and brand awareness.
The following table summarizes certain information regarding our interest-bearing deposits by type (all of which constitute U.S. deposits) for the periods indicated:
Three months ended September 30 ($ in millions)
2016
 
2015
Average
Balance
 
% of
Total
 
Average
Rate
 
Average
Balance
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
20,244

 
42.2
%
 
1.6
%
 
$
16,195

 
41.5
%
 
1.4
%
Savings accounts (including money market accounts)
14,661

 
30.6

 
1.0

 
9,774

 
25.0

 
1.0

Brokered deposits
13,021

 
27.2

 
2.2

 
13,079

 
33.5

 
2.3

Total interest-bearing deposits
$
47,926

 
100.0
%
 
1.6
%
 
$
39,048

 
100.0
%
 
1.6
%
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30 ($ in millions)
2016
 
2015
Average
Balance
 
% of
Total
 
Average
Rate
 
Average
Balance
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
19,291

 
42.0
%
 
1.5
%
 
$
15,002

 
40.9
%
 
1.4
%
Savings accounts (including money market accounts)
13,647

 
29.7

 
1.0

 
7,939

 
21.6
%
 
1.0

Brokered deposits
12,975

 
28.3

 
2.2

 
13,736

 
37.5
%
 
2.2

Total interest-bearing deposits
$
45,913

 
100.0
%
 
1.6
%
 
$
36,677

 
100.0