Document

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 March 31, 2017

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)

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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):



Large accelerated filer	ý	Accelerated filer	o

Non-accelerated filer	o (Do not check if a smaller reporting company)	Smaller reporting company	o

		Emerging growth company	o

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 ý

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of April 24, 2017 was 811,013,257.

Synchrony Financial



PART I - FINANCIAL INFORMATION	Page
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	6

Item 1. Financial Statements:

Condensed Consolidated Statements of Earnings for the three months ended March 31, 2017 and 2016	31

Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2017 and 2016	32

Condensed Consolidated Statements of Financial Position at March 31, 2017 and at December 31, 2016	33

Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2017 and 2016	34

Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2017 and 2016	35

Notes to Condensed Consolidated Financial Statements	36

Item 3. Quantitative and Qualitative Disclosures About Market Risk	55

Item 4. Controls and Procedures	55

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	56
Item 1A. Risk Factors	56
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	56
Item 3. Defaults Upon Senior Securities	56
Item 4. Mine Safety Disclosures	56
Item 5. Other Information	56
Item 6. Exhibits	57
Signatures	58

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;


•	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 “Board of Directors” are to Synchrony's board of directors;


•	“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.

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, 2016 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 “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, 2016 (our “2016 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™ 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.

Cautionary Note Regarding Forward-Looking Statements:

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

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

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

PART I. FINANCIAL INFORMATION

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

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 2016 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 months ended March 31, 2017, we financed $28.9 billion of purchase volume and had 69.6 million average active accounts, and at March 31, 2017, we had $73.4 billion of loan receivables. For the three months ended March 31, 2017, we had net earnings of $499 million, representing a return on assets of 2.3%.

We offer our credit products primarily through our wholly-owned subsidiary, Synchrony Bank (the "Bank"). In addition through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”), including certificates of deposit, individual retirement accounts (“IRAs”), money market accounts and savings accounts. We also take deposits at the Bank through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. We have significantly expanded our online direct banking operations in recent years and our deposit base serves as a source of stable and diversified low cost funding for our credit activities. At March 31, 2017, we had $51.6 billion in deposits, which represented 72% of our total funding sources.

Our Sales Platforms

_________________________________________________________________

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

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 27 national and regional retailers with which we have ongoing program agreements. The average length of our relationship with these Retail Card partners is 19 years. Retail Card’s revenue 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 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 primarily private label credit cards and installment loans. Payment Solutions offered 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 this platform 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 income associated with promotional financing.

CareCredit

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

Our Credit Products

____________________________________________________________________________________________

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

The following table sets forth each credit product by type and indicates the percentage of our total loan receivables that are under standard terms only or pursuant to a promotional financing offer at March 31, 2017.



			Promotional Offer
Credit Product	Standard Terms Only		Deferred Interest		Other Promotional		Total
Credit cards	66.7	%	16.3	%	13.2	%	96.2	%
Commercial credit products	1.8		—		—		1.8
Consumer installment loans	—		—		1.9		1.9
Other	0.1		—		—		0.1
Total	68.6	%	16.3	%	15.1	%	100.0	%

Credit Cards

We 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 elsewhere. We also offer general purpose co-branded credit cards that do not function as private label cards. Credit extended under our Dual Cards and general purpose co-branded credit cards typically is extended under standard terms only. Currently, only our Retail Card platform offers Dual Cards and general purpose co-branded credit cards. At March 31, 2017, we offered these credit cards through 19 of our 27 ongoing Retail Card programs, of which the majority are Dual Cards.

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.

Business Trends and Conditions

____________________________________________________________________________________________

We believe our business and results of operations will be impacted in the future by various trends and conditions. For a discussion of these trends and conditions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Trends and Conditions” in our 2016 Form 10-K. For a discussion of how these trends and conditions impacted the three months ended March 31, 2017, see “—Results of Operations.”

Seasonality

____________________________________________________________________________________________

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

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

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

The seasonal trends discussed above are most evident between the fourth quarter and the first quarter of the following year. Loan receivables decreased by $3.0 billion, or 3.9%, to $73.4 billion at March 31, 2017 compared to December 31, 2016, and our allowance for loan losses as a percentage of total loan receivables increased to 6.37% at March 31, 2017, from 5.69% at December 31, 2016, primarily reflecting the effects of these trends. Past due balances declined to $3.1 billion at March 31, 2017 from $3.3 billion at December 31, 2016, primarily due to collections from customers that were previously delinquent. The increase in the allowance for loan losses as a percentage of loan receivables at March 31, 2017 compared to December 31, 2016, despite a decrease in our past due balances, primarily reflects these same seasonal trends.

Results of Operations

____________________________________________________________________________________________

Highlights for the three months ended March 31, 2017

Below are highlights of our performance for the three months ended March 31, 2017 compared to the three months ended March 31, 2016, as applicable, except as otherwise noted.


•	Net earnings decreased 14.3% to $499 million for the three months ended March 31, 2017, driven by increases in provision for loan losses and other expense, partially offset by higher net interest income.


•	Loan receivables increased 11.4% to $73,350 million at March 31, 2017 compared to March 31, 2016, primarily driven by higher purchase volume and average active account growth.


•	Net interest income increased 11.8% to $3,587 million for the three months ended March 31, 2017, primarily due to higher average loan receivables.


•	Retailer share arrangements increased 2.1% to $684 million for the three months ended March 31, 2017, 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 40 basis points to 4.25% at March 31, 2017, and net charge-off rate increased 59 basis points to 5.33% for the three months ended March 31, 2017.


•	Provision for loan losses increased by $403 million, or 44.6%, for the three months ended March 31, 2017, due to a higher loan loss reserve and loan receivables growth. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) increased to 6.37% at March 31, 2017, as compared to 5.50% at March 31, 2016.


•	Other expense increased by $108 million, or 13.5%, for the three months ended March 31, 2017, primarily driven by business growth, as well as higher operational losses.


•	We continue to invest in our direct banking activities to grow our deposit base. Total deposits increased 0.9% to $51.6 billion at March 31, 2017, compared to December 31, 2016, driven primarily by growth in our direct deposits of 4.0% to $39.4 billion, partially offset by a reduction in our brokered deposits.


•	During the three months ended March 31, 2017, we repurchased $238 million of our outstanding common stock, and declared and paid cash dividends of $0.13 per share, or $105 million.


•	On March 20, 2017, we announced our acquisition of GPShopper, a developer of mobile applications that offers retailers and brands a full suite of commerce, engagement and analytical tools.

New and Extended Partner Agreements


•	We extended our Retail Card program agreements with Belk and QVC and launched our new program with Cathay Pacific.


•	We launched our Synchrony Car Care program in our Payment Solutions sales platform and extended our program agreement with Midas.


•	In our CareCredit sales platform, we acquired the Citi Health Card portfolio.

Summary Earnings

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



	Three months ended March 31,
($ in millions)	2017			2016
Interest income	$	3,913		$	3,520
Interest expense	326			311
Net interest income	3,587			3,209
Retailer share arrangements	(684		)	(670		)
Net interest income, after retailer share arrangements	2,903			2,539
Provision for loan losses	1,306			903
Net interest income, after retailer share arrangements and provision for loan losses	1,597			1,636
Other income	93			92
Other expense	908			800
Earnings before provision for income taxes	782			928
Provision for income taxes	283			346
Net earnings	$	499		$	582

Other Financial and Statistical Data

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



	At and for the
	Three months ended March 31,
($ in millions)	2017			2016
Financial Position Data (Average):
Loan receivables, including held for sale	$	74,132		$	66,194
Total assets	$	89,468		$	82,510
Deposits	$	52,069		$	44,539
Borrowings	$	20,081		$	21,587
Total equity	$	14,323		$	12,929
Selected Performance Metrics:
Purchase volume⁽¹⁾	$	28,880		$	26,977
Retail Card	$	22,952		$	21,550
Payment Solutions	$	3,686		$	3,392
CareCredit	$	2,242		$	2,035
Average active accounts (in thousands)⁽²⁾	69,629			66,134
Net interest margin⁽³⁾	16.18		%	15.84		%
Net charge-offs	$	974		$	780
Net charge-offs as a % of average loan receivables, including held for sale	5.33		%	4.74		%
Allowance coverage ratio⁽⁴⁾	6.37		%	5.50		%
Return on assets⁽⁵⁾	2.3		%	2.8		%
Return on equity⁽⁶⁾	14.1		%	18.1		%
Equity to assets⁽⁷⁾	16.01		%	15.67		%
Other expense as a % of average loan receivables, including held for sale	4.97		%	4.86		%
Efficiency ratio⁽⁸⁾	30.3		%	30.4		%
Effective income tax rate	36.2		%	37.3		%
Selected Period-End Data:
Loan receivables	$	73,350		$	65,849
Allowance for loan losses	$	4,676		$	3,620
30+ days past due as a % of period-end loan receivables⁽⁹⁾	4.25		%	3.85		%
90+ days past due as a % of period-end loan receivables⁽⁹⁾	2.06		%	1.84		%
Total active accounts (in thousands)⁽²⁾	67,905			64,689

______________________


(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. Purchase volume includes activity related to our portfolios classified as held for sale.


(2)	Active accounts represent credit card or installment loan accounts on which there has been a purchase, payment or outstanding balance in the current month.


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


(4)	Allowance coverage ratio represents allowance for loan losses divided by total period-end loan receivables.


(5)	Return on assets represents net earnings as a percentage of average total assets.


(6)	Return on equity represents net earnings as a percentage of average total equity.


(7)	Equity to assets represents average equity as a percentage of average total assets.


(8)	Efficiency ratio represents (i) other expense, divided by (ii) net interest income, after retailer share arrangements, plus other income.


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

Average Balance Sheet

The following tables set forth information for the periods indicated regarding average balance sheet data, which are used in the discussion of interest income, interest expense and net interest income that follows.



	2017							2016
Three months ended March 31 ($ in millions)	Average Balance			Interest Income / Expense		Average Yield / Rate⁽¹⁾		Average Balance			Interest Income/ Expense		Average Yield / Rate⁽¹⁾
Assets
Interest-earning assets:
Interest-earning cash and equivalents⁽²⁾	$	10,552		$	21	0.81	%	$	12,291		$	16	0.52	%
Securities available for sale	5,213			15		1.17	%	2,977			6		0.81	%
Loan receivables⁽³⁾:
Credit cards, including held for sale	71,365			3,811		21.66	%	63,688			3,436		21.70	%
Consumer installment loans	1,389			32		9.34	%	1,154			27		9.41	%
Commercial credit products	1,317			34		10.47	%	1,313			35		10.72	%
Other	61			—		—	%	39			—		—	%
Total loan receivables	74,132			3,877		21.21	%	66,194			3,498		21.25	%
Total interest-earning assets	89,897			3,913		17.65	%	81,462			3,520		17.38	%
Non-interest-earning assets:
Cash and due from banks	802							1,367
Allowance for loan losses	(4,408		)					(3,590		)
Other assets	3,177							3,271
Total non-interest-earning assets	(429		)					1,048
Total assets	$	89,468						$	82,510
Liabilities
Interest-bearing liabilities:
Interest-bearing deposit accounts	$	51,829		$	194	1.52	%	$	44,304		$	172	1.56	%
Borrowings of consolidated securitization entities	12,321			65		2.14	%	12,860			58		1.81	%
Bank term loan⁽⁴⁾	—			—		—	%	2,170			24		4.45	%
Senior unsecured notes	7,760			67		3.50	%	6,557			57		3.50	%
Total interest-bearing liabilities	71,910			326		1.84	%	65,891			311		1.90	%
Non-interest-bearing liabilities:
Non-interest-bearing deposit accounts	240							235
Other liabilities	2,995							3,455
Total non-interest-bearing liabilities	3,235							3,690
Total liabilities	75,145							69,581
Equity
Total equity	14,323							12,929
Total liabilities and equity	$	89,468						$	82,510
Interest rate spread⁽⁵⁾						15.81	%						15.48	%
Net interest income				$	3,587						$	3,209
Net interest margin⁽⁶⁾						16.18	%						15.84	%

______________________


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


(2)	Includes average restricted cash balances of $694 million and $431 million for the three months ended March 31, 2017 and 2016, respectively.


(3)	Interest income on loan receivables includes fees on loans of $628 million and $584 million for the three months ended March 31, 2017 and 2016, respectively.


(4)	The effective interest rate for the Bank term loan for the three months ended March 31, 2016 was 2.47%. The Bank term loan effective rate excludes the impact of charges incurred in connection with prepayments of the loan.


(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 2016 Form 10-K.

Interest Income

Interest income increased by $393 million, or 11.2%, for the three months ended March 31, 2017, driven primarily by growth in our average loan receivables.

Average interest-earning assets



Three months ended March 31 ($ in millions)	2017		%		2016		%
Loan receivables, including held for sale	$	74,132	82.5	%	$	66,194	81.3	%
Liquidity portfolio and other	15,765		17.5	%	15,268		18.7	%
Total average interest-earning assets	$	89,897	100.0	%	$	81,462	100.0	%

The increase in average loan receivables of 12.0% for the three months ended March 31, 2017, was driven primarily by higher purchase volume of 7.1% and average active account growth of 5.3%. Average active accounts increased to 69.6 million for the three months ended March 31, 2017, and the average balances per these active accounts increased 6.4%.

Yield on average interest-earning assets

The yield on interest-earning assets increased for the three months ended March 31, 2017, primarily due to an increase in the percentage of interest-earning assets attributable to loan receivables. The yield on our average loan receivables remained relatively flat at 21.21% for the three months ended March 31, 2017, driven by growth in promotional balances, largely offset by slightly lower payment rates.

Interest Expense

Interest expense increased by $15 million, or 4.8%, for the three months ended March 31, 2017, driven primarily by the growth in our deposit liabilities. Our cost of funds decreased to 1.84% for the three months ended March 31, 2017, compared to 1.90% for the three months ended March 31, 2016, primarily due to a more favorable funding mix as deposits were a larger proportion of funding.

Average interest-bearing liabilities



Three months ended March 31 ($ in millions)	2017		%		2016		%
Interest-bearing deposit accounts	$	51,829	72.1	%	$	44,304	67.2	%
Borrowings of consolidated securitization entities	12,321		17.1	%	12,860		19.5	%
Third-party debt	7,760		10.8	%	8,727		13.3	%
Total average interest-bearing liabilities	$	71,910	100.0	%	$	65,891	100.0	%

The increase in average interest-bearing liabilities for the three months ended March 31, 2017, 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 11.8%, for the three months ended March 31, 2017, primarily driven by higher average loan receivables.

Retailer Share Arrangements

Retailer share arrangements increased by $14 million, or 2.1%, for the three months ended March 31, 2017, 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 $403 million, or 44.6%, for the three months ended March 31, 2017, primarily due to a higher loan loss reserve build and loan receivables growth. The reserve build was driven by an increase in our forecasted net charge-off rate over the next twelve months, as well as lower pricing of recoveries.

Our allowance coverage ratio increased to 6.37% at March 31, 2017, as compared to 5.50% at March 31, 2016, reflecting the increase in forecasted losses inherent in our loan portfolio.

Other Income



	Three months ended March 31,
($ in millions)	2017			2016
Interchange revenue	$	145		$	130
Debt cancellation fees	68			64
Loyalty programs	(137		)	(110		)
Other	17			8
Total other income	$	93		$	92

Other income remained relatively flat for the three months ended March 31, 2017 compared to the three months ended March 31, 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 Expense



	Three months ended March 31,
($ in millions)	2017		2016
Employee costs	$	325	$	280
Professional fees	151		146
Marketing and business development	94		94
Information processing	90		82
Other	248		198
Total other expense	$	908	$	800

Other expense increased by $108 million, or 13.5%, for the three months ended March 31, 2017, primarily due to increases in employee costs, information processing and other expenses.

The increase in employee costs was primarily due to new employees added to support the continued growth of the business and replacement of certain third-party services. Information processing costs increased primarily due to higher information technology investment and higher transaction volume. The increase in "other" was primarily driven by higher operational losses and growth of the business.

Provision for Income Taxes



	Three months ended March 31,
($ in millions)	2017			2016
Effective tax rate	36.2		%	37.3		%
Provision for income taxes	$	283		$	346

The effective tax rate for the three months ended March 31, 2017, decreased compared to the same period in the prior year primarily due to state-related discrete items during the current quarter. In each period the effective tax rate differs from the U.S. federal statutory rate of 35% 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 months ended March 31, 2017, for each of our sales platforms.

Retail Card



	Three months ended March 31,
($ in millions)	2017			2016
Purchase volume	$	22,952		$	21,550
Period-end loan receivables	$	49,905		$	45,113
Average loan receivables, including held for sale	$	50,644		$	45,479
Average active accounts (in thousands)	55,049			52,969

Interest and fees on loans	$	2,888		$	2,614
Retailer share arrangements	$	(681	)	$	(661	)
Other income	$	77		$	79

Retail Card interest and fees on loans increased by $274 million, or 10.5%, for the three months ended March 31, 2017. This increase was primarily the result of growth in average loan receivables.

Retailer share arrangements increased by $20 million, or 3.0%, for the three months ended March 31, 2017, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.

Other income remained relatively flat for the three months ended March 31, 2017, as a result of the factors discussed under the heading “Other Income” above.

Payment Solutions



	Three months ended March 31,
($ in millions)	2017			2016
Purchase volume	$	3,686		$	3,392
Period-end loan receivables	$	15,320		$	13,420
Average loan receivables	$	15,424		$	13,430
Average active accounts (in thousands)	9,090			8,134

Interest and fees on loans	$	515		$	457
Retailer share arrangements	$	(1	)	$	(7	)
Other income	$	4		$	4

Payment Solutions interest and fees on loans increased by $58 million, or 12.7%, for the three months ended March 31, 2017. The increase was primarily driven by growth in average loan receivables.

CareCredit



	Three months ended March 31,
($ in millions)	2017			2016
Purchase volume	$	2,242		$	2,035
Period-end loan receivables	$	8,125		$	7,316
Average loan receivables	$	8,064		$	7,285
Average active accounts (in thousands)	5,490			5,031

Interest and fees on loans	$	474		$	427
Retailer share arrangements	$	(2	)	$	(2	)
Other income	$	12		$	9

CareCredit interest and fees on loans increased by $47 million, or 11.0%, for the three months ended March 31, 2017. The increase was primarily driven by growth in average loan receivables.

Investment Securities

____________________________________________________________________________________________

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

The following table sets forth the amortized cost and fair value of our portfolio of investment securities at the dates indicated:



	At March 31, 2017				At December 31, 2016
($ in millions)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
Debt:
U.S. government and federal agency	$	3,874	$	3,873	$	3,676	$	3,676
State and municipal	44		43		47		46
Residential mortgage-backed	1,424		1,397		1,400		1,373
Equity	15		15		15		15
Total	$	5,357	$	5,328	$	5,138	$	5,110

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 March 31, 2017, our investment securities had gross unrealized gains of $3 million and gross unrealized losses of $32 million. At December 31, 2016, our investment securities had gross unrealized gains of $3 million and gross unrealized losses of $31 million.

Our investment securities portfolio had the following maturity distribution at March 31, 2017. 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	$	3,573		$	300		$	—		$	—		$	3,873
State and municipal	—			—			1			42			43
Residential mortgage-backed	—			—			—			1,397			1,397
Total⁽¹⁾	$	3,573		$	300		$	1		$	1,439		$	5,313
Weighted average yield⁽²⁾	0.8		%	1.9		%	4.5		%	2.7		%	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 March 31, 2017, 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 revenue. The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.



($ in millions)	At March 31, 2017		(%)		At December 31, 2016		(%)
Loans
Credit cards	$	70,587	96.2	%	$	73,580	96.4	%
Consumer installment loans	1,411		1.9		1,384		1.8
Commercial credit products	1,311		1.8		1,333		1.7
Other	41		0.1		40		0.1
Total loans	$	73,350	100.0	%	$	76,337	100.0	%

Loan receivables decreased by $2,987 million, or 3.9%, at March 31, 2017 compared to December 31, 2016, primarily driven by the seasonality of our business.

Loan receivables increased by $7,501 million, or 11.4%, at March 31, 2017 compared to March 31, 2016, primarily driven by higher purchase volume and average active account growth.

Our loan receivables portfolio had the following geographic concentration at March 31, 2017.



($ in millions)	Loan Receivables Outstanding		% of Total Loan Receivables Outstanding
State	Loan Receivables Outstanding		% of Total Loan Receivables Outstanding
Texas	$	7,488	10.2	%
California	$	7,340	10.0	%
Florida	$	6,012	8.2	%
New York	$	4,043	5.5	%
Pennsylvania	$	3,107	4.2	%

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. 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.

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 March 31, 2017		At December 31, 2016
Non-accrual loan receivables	$	3	$	4
Loans contractually 90 days past-due and still accruing interest	1,505		1,542
Earning TDRs⁽¹⁾	821		802
Non-accrual, past-due and restructured loan receivables	$	2,329	$	2,348

______________________

(1)

At March 31, 2017 and December 31, 2016, balances exclude $79 million and $66 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 months ended March 31, 2017 and 2016.



	Three months ended March 31,
($ in millions)	2017		2016
Gross amount of interest income that would have been recorded in accordance with the original contractual terms	$	51	$	42
Interest income recognized	12		12
Total interest income foregone	$	39	$	30

Delinquencies

Over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 4.25% at March 31, 2017 from 3.85% at March 31, 2016, and decreased from 4.32% at December 31, 2016. The 40 basis point increase compared to the same period in the prior year was primarily driven by the factors discussed in "Business Trends and Conditions — Stable Asset Quality" in our 2016 Form 10-K. The decrease as compared to December 31, 2016, was primarily driven by the seasonality of our business, partially offset by the various factors referenced above.

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 March 31,
	2017		2016
Ratio of net charge-offs to average loan receivables, including held for sale	5.33	%	4.74	%

Allowance for Loan Losses

The allowance for loan losses totaled $4,676 million at March 31, 2017 compared with $4,344 million at December 31, 2016 and $3,620 million at March 31, 2016, 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 6.37% at March 31, 2017, from 5.69% at December 31, 2016 and 5.50% at March 31, 2016, which reflects the increase in forecasted net charge-offs over the next twelve months as well as lower pricing of recoveries. The increase from December 31, 2016 also includes the effects of the seasonality of our business. See "Business Trends and Conditions — Stable Asset Quality" in our 2016 Form 10-K for discussion of the various factors that contribute to forecasted net charge-offs over the next twelve months.

The following tables provide changes in our allowance for loan losses for the periods presented:



($ in millions)	Balance at January 1, 2017		Provision charged to operations		Gross charge-offs			Recoveries		Balance at March 31, 2017

Credit cards	$	4,254	$	1,278	$	(1,184	)	$	237	$	4,585
Consumer installment loans	37		13		(14		)	4		40
Commercial credit products	52		15		(18		)	1		50
Other	1		—		—			—		1
Total	$	4,344	$	1,306	$	(1,216	)	$	242	$	4,676



($ in millions)	Balance at January 1, 2016		Provision charged to operations		Gross charge-offs			Recoveries		Balance at March 31, 2016

Credit cards	$	3,420	$	884	$	(954	)	$	193	$	3,543
Consumer installment loans	26		13		(11		)	3		31
Commercial credit products	50		5		(13		)	2		44
Other	1		1		—			—		$	2
Total	$	3,497	$	903	$	(978	)	$	198	$	3,620

Funding, Liquidity and Capital Resources

____________________________________________________________________________________________

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

Funding Sources

Our primary funding sources include cash from operations, deposits (direct and brokered deposits), securitized financings and third-party debt.

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



	2017						2016
Three months ended March 31 ($ in millions)	Average Balance		%		Average Rate		Average Balance		%		Average Rate
Deposits⁽¹⁾	$	51,829	72.1	%	1.5	%	$	44,304	67.2	%	1.6	%
Securitized financings	12,321		17.1		2.1		12,860		19.5		1.8
Senior unsecured notes	7,760		10.8		3.5		6,557		10.0		3.5
Bank term loan	—		—		—		2,170		3.3		4.4
Total	$	71,910	100.0	%	1.8	%	$	65,891	100.0	%	1.9	%

______________________


(1)	Excludes $240 million and $235 million average balance of non-interest-bearing deposits for the three months ended March 31, 2017 and 2016, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended March 31, 2017 and 2016.

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 March 31, 2017, we had $39.4 billion in direct deposits (which includes deposits from banks and financial institutions) and $12.2 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 10 brokers that offer our deposits through their networks. Our brokered deposits consist primarily of certificates of deposit that bear interest at a fixed rate and at March 31, 2017, had a weighted average remaining life of 3.2 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 risk if we fail to pay higher rates, or interest rate risk if we are required to pay higher rates, to retain existing deposits or attract new deposits. To mitigate these risks, our funding strategy includes a range of deposit products, and we seek to maintain access to multiple other funding sources, including securitized financings (including our undrawn committed capacity) and unsecured debt.

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



Three months ended March 31 ($ in millions)	2017						2016
Three months ended March 31 ($ in millions)	Average Balance		% of Total		Average Rate		Average Balance		% of Total		Average Rate
Direct deposits:
Certificates of deposit (including IRA certificates of deposit)	$	21,235	41.0	%	1.5	%	$	18,319	41.3	%	1.5	%
Savings accounts (including money market accounts)	17,345		33.5		1.0		12,628		28.5		1.0
Brokered deposits	13,249		25.5		2.1		13,357		30.2		2.1
Total interest-bearing deposits	$	51,829	100.0	%	1.5	%	$	44,304	100.0	%	1.6	%

Our deposit liabilities provide funding with maturities ranging from one day to ten years. At March 31, 2017, the weighted average maturity of our interest-bearing time deposits was 1.9 years. See Note 7. Deposits to our condensed consolidated financial statements for more information on their maturities.

The following table summarizes deposits by contractual maturity at March 31, 2017.



($ in millions)	3 Months or Less		Over 3 Months but within 6 Months		Over 6 Months but within 12 Months		Over 12 Months		Total
U.S. deposits (less than $100,000)⁽¹⁾	$	7,267	$	1,758	$	2,556	$	10,075	$	21,656
U.S. deposits ($100,000 or more)
Direct deposits:
Certificates of deposit (including IRA certificates of deposit)	2,209		2,352		3,897		5,741		14,199
Savings accounts (including money market accounts)	14,227		—		—		—		14,227
Brokered deposits:
Sweep accounts	1,523		—		—		—		1,523
Total	$	25,226	$	4,110	$	6,453	$	15,816	$	51,605

______________________


(1)	Includes brokered certificates of deposit for which underlying individual deposit balances are assumed to be less than $100,000.

Securitized Financings

We have been engaged in the securitization of our credit card receivables since 1997. We access the asset-backed securitization market using the Synchrony Credit Card Master Note Trust (“SYNCT”) through which we issue asset-backed securities through both public transactions and private transactions funded by financial institutions and commercial paper conduits. In addition, we issue asset-backed securities in private transactions through the Synchrony Sales Finance Master Trust (“SFT”).

The following table summarizes expected contractual maturities of the investors’ interests in securitized financings, excluding debt premiums, discounts and issuance cost at March 31, 2017.



($ in millions)	Less Than One Year		One Year Through Three Years		After Three Through Five Years		After Five Years		Total
Scheduled maturities of long-term borrowings—owed to securitization investors:
SYNCT⁽¹⁾	$	2,853	$	4,982	$	959	$	—	$	8,794
SFT	42		3,608		—		—		3,650
Total long-term borrowings—owed to securitization investors	$	2,895	$	8,590	$	959	$	—	$	12,444

______________________


(1)	Excludes subordinated classes of SYNCT notes that we own.

We retain exposure to the performance of trust assets through: (i) in the case of SYNCT and SFT, subordinated retained interests in the receivables transferred to the trust in excess of the principal amount of the notes for a given series to provide credit enhancement for a particular series, as well as a pari passu seller’s interest in each trust and (ii) subordinated classes of SYNCT notes that we own.

All of our securitized financings include early repayment triggers, referred to as early amortization events, including events related to material breaches of representations, warranties or covenants, inability or failure of the Bank to transfer loans to the trusts as required under the securitization documents, failure to make required payments or deposits pursuant to the securitization documents, and certain insolvency-related events with respect to the related securitization depositor, Synchrony (solely with respect to SYNCT) or the Bank. In addition, an early amortization event will occur with respect to a series if the excess spread as it relates to a particular series falls below zero. Following an early amortization event, principal collections on the loans in our trusts are applied to repay principal of the asset-backed securities rather than being available on a revolving basis to fund the origination activities of our business. The occurrence of an early amortization event also would limit or terminate our ability to issue future series out of the trust in which the early amortization event occurred. No early amortization event has occurred with respect to any of the securitized financings in SYNCT or SFT.

The following table summarizes for each of our trusts the three-month rolling average excess spread at March 31, 2017.



	Note Principal Balance ($ in millions)		# of Series Outstanding	Three-Month Rolling Average Excess Spread⁽¹⁾
SYNCT⁽²⁾	$	10,175	17	~15.2% to 16.4%
SFT	$	3,650	10	13.1	%

______________________

(1)

Represents the excess spread (generally calculated as interest income collected from the applicable pool of loan receivables less applicable net charge-offs, interest expense and servicing costs, divided by the aggregate principal amount of loan receivables in the applicable pool) for each trust (or, in the case of SYNCT, represents a range of the excess spreads relating to the particular series issued within the trust), in each case calculated in accordance with the applicable trust or series documentation, for the three securitization monthly periods ending prior to March 31, 2017.


(2)	Includes subordinated classes of SYNCT notes that we own.

Third-Party Debt

Senior Unsecured Notes

The following table provides a summary of our outstanding senior unsecured notes at March 31, 2017.



($ in millions)	Maturity	Principal Amount Outstanding⁽¹⁾
Fixed rate senior unsecured notes:
1.875% senior unsecured notes	August, 2017	$	500
2.600% senior unsecured notes	January, 2019	1,000
3.000% senior unsecured notes	August, 2019	1,100
2.700% senior unsecured notes	February, 2020	750
3.750% senior unsecured notes	August, 2021	750
4.250% senior unsecured notes	August, 2024	1,250
4.500% senior unsecured notes	July, 2025	1,000
3.700% senior unsecured notes	August, 2026	500
Total fixed rate senior unsecured notes		$	6,850

Floating rate senior unsecured notes:
Three-month LIBOR plus 1.40% senior unsecured notes	November, 2017	$	700
Three-month LIBOR plus 1.23% senior unsecured notes	February, 2020	$	250
Total floating rate senior unsecured notes		$	950

______________________


(1)	The amounts shown exclude unamortized debt discount, premiums and issuance cost.

At March 31, 2017, the aggregate amount of outstanding senior unsecured notes was $7.8 billion and the weighted average interest rate was 3.28%.

Short-Term Borrowings

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

Undrawn Credit Facilities

At March 31, 2017, we had an aggregate of $5.1 billion of undrawn committed capacity on our securitized financings, subject to customary borrowing conditions, from private lenders under our two existing securitization programs, and an aggregate of $0.5 billion of undrawn committed capacity under our unsecured revolving credit facility with private lenders.

Other

At March 31, 2017, we had more than $25.0 billion of unencumbered assets in the Bank available to be used to generate additional liquidity through secured borrowings or asset sales or to be pledged to the Federal Reserve Board for credit at the discount window.

Covenants

The indenture pursuant to which our senior unsecured notes have been issued includes various covenants. If we do not satisfy any of these covenants, the maturity of amounts outstanding thereunder may be accelerated and become payable. We were in compliance with all of these covenants at March 31, 2017.

Our real estate leases also include various covenants, but typically do not include financial covenants. If we do not satisfy the covenants in the real estate leases, the leases may be terminated and we may be liable for damage claims.

At March 31, 2017, we were not in default under any of our credit facilities or senior unsecured notes and had not received any notices of default under any of our real estate leases.

Credit Ratings

Our borrowing costs and capacity in certain funding markets, including securitizations and senior and subordinated debt, may be affected by the credit ratings of the Company, the Bank and the ratings of our asset-backed securities.

Our senior unsecured debt is rated BBB- (stable outlook) by Fitch and BBB- (stable outlook) by S&P. In addition, certain of the asset-backed securities issued by SYNCT are rated by Fitch, S&P and/or Moody’s. A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. Downgrades in these credit ratings could materially increase the cost of our funding from, and restrict our access to, the capital markets.

Liquidity

____________________________________________________________________________________________

We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth, satisfy debt obligations and to meet regulatory expectations under normal and stress conditions.

We maintain policies outlining the overall framework and general principles for managing liquidity risk across our business, which is the responsibility of our Asset and Liability Management Committee, a subcommittee of our Risk Committee. We employ a variety of metrics to monitor and manage liquidity. We perform regular liquidity stress testing and contingency planning as part of our liquidity management process. We evaluate a range of stress scenarios including Company specific and systemic events that could impact funding sources and our ability to meet liquidity needs.

We maintain a liquidity portfolio, which at March 31, 2017 had $16.2 billion of liquid assets, primarily consisting of cash and equivalents and short-term obligations of the U.S. Treasury, less cash in transit which is not considered to be liquid, compared to $13.6 billion of liquid assets at December 31, 2016. The increase in liquid assets was primarily due to the retention of excess cash flows from operations within our Company.

As additional sources of liquidity, at March 31, 2017, we had an aggregate of $5.6 billion of undrawn credit facilities, subject to customary borrowing conditions, from private lenders under our existing securitization programs and an unsecured revolving credit facility, and we had more than $25.0 billion of unencumbered assets in the Bank available to be used to generate additional liquidity through secured borrowings or asset sales or to be pledged to the Federal Reserve Board for credit at the discount window.

As a general matter, investments included in our liquidity portfolio are expected to be highly liquid, giving us the ability to readily convert them to cash. The level and composition of our liquidity portfolio may fluctuate based upon the level of expected maturities of our funding sources as well as operational requirements and market conditions.

We rely significantly on dividends and other distributions and payments from the Bank for liquidity; however, bank regulations, contractual restrictions and other factors limit the amount of dividends and other distributions and payments that the Bank may pay to us. For a discussion of regulatory restrictions on the Bank’s ability to pay dividends, see “Item 1A. Risk Factors—Risks Relating to Regulation—We are subject to restrictions that limit our ability to pay dividends and repurchase our common stock; the Bank is subject to restrictions that limit its ability to pay dividends to us, which could limit our ability to pay dividends, repurchase our common stock or make payments on our indebtedness” and “Regulation—Savings Association Regulation—Dividends and Stock Repurchases” in our 2016 Form 10-K.

Capital

____________________________________________________________________________________________

Our primary sources of capital have been earnings generated by our business and existing equity capital. We seek to manage capital to a level and composition sufficient to support the risks of our business, meet regulatory requirements, adhere to rating agency targets and support future business growth. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives and legislative and regulatory developments. Within these constraints, we are focused on deploying capital in a manner that will provide attractive returns to our stockholders.

Our capital adequacy assessment also includes tax and accounting considerations in accordance with regulatory guidance. We maintain a net deferred tax asset on our balance sheet, and we include this asset when calculating our regulatory capital levels. However, for regulatory capital purposes, deferred tax assets are limited to (i) the amount of taxes previously paid that a company could recover through loss carrybacks; and (ii) 10% of the amount of our Tier 1 capital. At March 31, 2017, no portion of our deferred tax asset was disallowed for regulatory capital purposes.

Synchrony and the Bank are required to conduct stress tests on an annual basis. Under the OCC's and the Federal Reserve Board's stress test regulations, the Bank and Synchrony are required to use stress-testing methodologies providing for results under various scenarios of economic and financial market stress. In addition, while as a savings and loan holding company we currently are not subject to the Federal Reserve Board's capital planning rule, we submitted a capital plan to the Federal Reserve Board in April 2017.

Dividend and Share Repurchases

During the three months ended March 31, 2017 we declared and paid cash dividends of $0.13 per share of common stock, or $105 million. The declaration and payment of future dividends to holders of our common stock will be at the discretion of the Board and will depend on many factors, including the financial condition, earnings, capital and liquidity requirements of us and the Bank, regulatory restrictions, corporate law and contractual restrictions and other factors that our Board of Directors deems relevant. In addition, banking laws and regulations and our banking regulators may limit our ability to pay dividends and make repurchases of our stock. For a discussion of regulatory restrictions on our and the Bank’s ability to pay dividends and repurchase stock, see “Risk Factors—Risks Relating to Regulation—Synchrony is subject to restrictions that limit its ability to pay dividends and repurchase its common stock; the Bank is subject to restrictions that limit its ability to pay dividends to Synchrony, which could limit Synchrony's ability to pay dividends, repurchase its common stock or make payments on its indebtedness” in our 2016 Form 10-K.

On July 7, 2016, the Company also approved a share repurchase program of up to $952 million for the four quarters ending June 30, 2017. During the three months ended March 31, 2017, the Company repurchased approximately 6.6 million shares of our common stock for $238 million, at an average price of $36.13. Through the end of the first quarter of 2017, we have repurchased approximately $714 million of common stock as part of the share repurchase program and expect to complete the share repurchase program by the end of the second quarter of 2017. We made and expect to continue to make share repurchases subject to market conditions and other factors, including legal and regulatory restrictions and required approvals.

Regulatory Capital Requirements - Synchrony Financial

As a savings and loan holding company, we are required to maintain minimum capital ratios, under the applicable U.S. Basel III capital rules. For more information, see “Regulation—Savings and Loan Holding Company Regulation” in our 2016 Form 10-K.

For Synchrony Financial to be a well-capitalized savings and loan holding company, Synchrony Bank must be well-capitalized and Synchrony Financial must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal Reserve Board to meet and maintain a specific capital level for any capital measure. As of March 31, 2017, Synchrony Financial met all the requirements to be deemed well-capitalized.

The following table sets forth at March 31, 2017 and December 31, 2016 the composition of our capital ratios for the Company calculated under the Basel III regulatory capital standards, respectively.



	Basel III Transition (unless otherwise stated)
	At March 31, 2017				At December 31, 2016
($ in millions)	Amount		Ratio⁽¹⁾		Amount		Ratio⁽¹⁾
Total risk-based capital	$	13,993	19.3	%	$	14,129	18.5	%
Tier 1 risk-based capital	$	13,039	18.0	%	$	13,135	17.2	%
Tier 1 leverage	$	13,039	14.8	%	$	13,135	15.0	%
Common equity Tier 1 capital	$	13,039	18.0	%	$	13,135	17.2	%
Common equity Tier 1 capital - fully phased-in (estimated)	$	12,885	17.7	%	$	12,872	17.0	%

______________________


(1)	Tier 1 leverage ratio represents total tier 1 capital as a percentage of total average assets, after certain adjustments. All other ratios presented above represent the applicable capital measure as a percentage of risk-weighted assets.

The increase in our Common equity Tier 1 capital ratio was primarily due to the decrease in risk-weighted assets in the three months ended March 31, 2017. The decrease in risk-weighted assets was primarily due to the seasonal decrease in our loan receivables.

Non-GAAP Measures

The capital ratios presented above include Common equity Tier 1 capital ("CET1") as calculated under the U.S. Basel III capital rules on a fully phased-in basis, which is not currently required by our regulators to be disclosed and, as such, is considered to be a non-GAAP measure. We believe that this capital ratio is a useful measure to investors because it is widely used by analysts and regulators to assess the capital position of financial services companies, although this ratio may not be comparable to similarly titled measures reported by other companies. The following table sets forth a reconciliation of the components of our CET1 capital ratio as calculated on a fully phased-in basis set forth above, to the comparable GAAP components at March 31, 2017 and December 31, 2016.



($ in millions)	At March 31, 2017			At December 31, 2016
Basel III - Common equity Tier 1 (transition)	$	13,039		$	13,135
Adjustments related to capital components during transition⁽¹⁾	(154		)	(263		)

Basel III - Common equity Tier 1 (fully phased-in)	$	12,885		$	12,872



Risk-weighted assets - Basel III (transition)	$	72,627		$	76,179
Adjustments related to risk weighted assets during transition⁽²⁾	(31		)	(238		)

Risk-weighted assets - Basel III (fully phased-in)	$	72,596		$	75,941

______________________


(1)	Adjustments related to capital components to determine CET1 (fully phased-in) include the phase-in of the intangible asset exclusion.


(2)	Key differences between Basel III transition rules and fully phased-in Basel III rules relate to the calculation of risk-weighted assets including, but not limited to, adjustments for certain intangible assets and risk weighting of deferred tax assets.

Regulatory Capital Requirements - Synchrony Bank

At March 31, 2017 and December 31, 2016, the Bank met all applicable requirements to be deemed well-capitalized pursuant to OCC regulations and for purposes of the Federal Deposit Insurance Act. The following table sets forth the composition of the Bank’s capital ratios calculated under the Basel III rules at March 31, 2017 and December 31, 2016.



	At March 31, 2017				At December 31, 2016				Minimum to be Well- Capitalized under Prompt Corrective Action Provisions- Basel III
($ in millions)	Amount		Ratio		Amount		Ratio		Amount		Ratio
Total risk-based capital	$	10,043	17.3	%	$	10,101	16.7	%	$	5,816	10.0	%
Tier 1 risk-based capital	$	9,276	15.9	%	$	9,312	15.4	%	$	4,653	8.0	%
Tier 1 leverage	$	9,276	13.1	%	$	9,312	13.2	%	$	3,534	5.0	%
Common equity Tier 1 capital	$	9,276	15.9	%	$	9,312	15.4	%	$	3,780	6.5	%

Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a material adverse effect on our business, results of operations and financial condition. See “Risk Factors—Risks Relating to Regulation—Failure by Synchrony and the Bank to meet applicable capital adequacy and liquidity requirements could have a material adverse effect on us” in our 2016 Form 10-K.

Off-Balance Sheet Arrangements and Unfunded Lending Commitments

____________________________________________________________________________________________

We do not have any significant off-balance sheet arrangements, including guarantees of third-party obligations. Guarantees are contracts or indemnification agreements that contingently require us to make a guaranteed payment or perform an obligation to a third-party based on certain trigger events. At March 31, 2017, we had not recorded any contingent liabilities in our Condensed Consolidated Statement of Financial Position related to any guarantees.

We extend credit, primarily arising from agreements with customers for unused lines of credit on our credit cards, in the ordinary course of business. See Note 4 - Loan Receivables and Allowance for Loan Losses to our condensed consolidated financial statements for more information on our unfunded lending commitments.

Critical Accounting Estimates

____________________________________________________________________________________________

In preparing our condensed consolidated financial statements, we have identified certain accounting estimates and assumptions that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. The critical accounting estimates we have identified relate to allowance for loan losses, asset impairment, income taxes and fair value measurements. All of these estimates reflect our best judgment about current, and for some estimates future, economic and market conditions and their effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that these judgments and estimates could change, which may result in incremental losses on loan receivables, future impairments of investment securities, goodwill and intangible assets, and the establishment of valuation allowances on deferred tax assets and increases in our tax liabilities, among other effects. See “Management's Discussion and Analysis—Critical Accounting Estimates” in our 2016 Form 10-K, for a detailed discussion of these critical accounting estimates.

New Accounting Standards

____________________________________________________________________________________________

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB approved a one-year deferral of this standard, with a revised effective date for annual and interim reporting periods beginning after December 15, 2017. The scope of ASU 2014-09 excludes interest and fee income on loans and as a result, the majority of the Company's revenue will not be affected by the ASU. We are still evaluating the impact that ASU 2014-09 will have on our consolidated financial statements and related disclosures. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method. We have not yet selected a transition method.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU replaces the existing incurred loss impairment guidance with a new impairment model known as the Current Expected Credit Loss ("CECL") model, which is based on expected credit losses. The CECL model requires, upon origination of a loan, the recognition of all expected credit losses over the life of the loan based on historical experience, current conditions and reasonable and supportable forecasts. This standard is effective for annual and interim reporting periods for fiscal years beginning after December 15, 2019, with early adoption permitted for annual and interim periods for fiscal years beginning after December 15, 2018. The amendments in this standard will be recognized through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. While we are evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures, this standard is expected to result in an increase to the Company’s allowance for loan losses given the change to expected losses for the estimated life of the financial asset. The extent of the increase will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.

Regulation and Supervision

____________________________________________________________________________________________

Our business, including our relationships with our customers, is subject to regulation, supervision and examination under U.S. federal, state and foreign laws and regulations. These laws and regulations cover all aspects of our business, including lending practices, treatment of our customers, safeguarding deposits, customer privacy and information security, capital structure, liquidity, dividends and other capital distributions, transactions with affiliates, and conduct and qualifications of personnel.

As a savings and loan holding company, Synchrony is subject to regulation, supervision and examination by the Federal Reserve Board. As a large provider of consumer financial services, we are also subject to regulation, supervision and examination by the CFPB.

The Bank is a federally chartered savings association. As such, the Bank is subject to regulation, supervision and examination by the OCC, which is its primary regulator, and by the CFPB. In addition, the Bank, as an insured depository institution, is supervised by the FDIC.

See “Regulation” in our 2016 Form 10-K for additional information. See also “—Capital” above, for discussion of the impact of regulations and supervision on our capital and liquidity, including our ability to pay dividends and repurchase stock.

ITEM 1. FINANCIAL STATEMENTS

Synchrony Financial and subsidiaries

Condensed Consolidated Statements of Earnings

(Unaudited)

____________________________________________________________________________________________



	Three months ended March 31,
($ in millions, except per share data)	2017			2016
Interest income:
Interest and fees on loans (Note 4)	$	3,877		$	3,498
Interest on investment securities	36			22
Total interest income	3,913			3,520
Interest expense:
Interest on deposits	194			172
Interest on borrowings of consolidated securitization entities	65			58
Interest on third-party debt	67			81
Total interest expense	326			311
Net interest income	3,587			3,209
Retailer share arrangements	(684		)	(670		)
Net interest income, after retailer share arrangements	2,903			2,539
Provision for loan losses (Note 4)	1,306			903
Net interest income, after retailer share arrangements and provision for loan losses	1,597			1,636
Other income:
Interchange revenue	145			130
Debt cancellation fees	68			64
Loyalty programs	(137		)	(110		)
Other	17			8
Total other income	93			92
Other expense:
Employee costs	325			280
Professional fees	151			146
Marketing and business development	94			94
Information processing	90			82
Other	248			198
Total other expense	908			800
Earnings before provision for income taxes	782			928
Provision for income taxes (Note 12)	283			346
Net earnings	$	499		$	582

Earnings per share
Basic	$	0.61		$	0.70
Diluted	$	0.61		$	0.70

Dividends declared per common share	$	0.13		$	—

See accompanying notes to condensed consolidated financial statements.

Synchrony Financial and subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

____________________________________________________________________________________________



	Three months ended March 31,
($ in millions)	2017			2016

Net earnings	$	499		$	582

Other comprehensive income (loss)
Investment securities	(1		)	11
Currency translation adjustments	(1		)	1
Employee benefit plans	—			(2		)
Other comprehensive income (loss)	(2		)	10

Comprehensive income	$	497		$	592

Amounts presented net of taxes.

See accompanying notes to condensed consolidated financial statements.

Synchrony Financial and subsidiaries

Condensed Consolidated Statements of Financial Position

____________________________________________________________________________________________



($ in millions)	At March 31, 2017			At December 31, 2016
	(Unaudited)
Assets
Cash and equivalents	$	11,392		$	9,321
Investment securities (Note 3)	5,328			5,110
Loan receivables: (Notes 4 and 5)
Unsecuritized loans held for investment	50,398			52,332
Restricted loans of consolidated securitization entities	22,952			24,005
Total loan receivables	73,350			76,337
Less: Allowance for loan losses	(4,676		)	(4,344		)
Loan receivables, net	68,674			71,993
Goodwill	992			949
Intangible assets, net (Note 6)	826			712
Other assets^(a)	1,838			2,122
Total assets	$	89,050		$	90,207

Liabilities and Equity
Deposits: (Note 7)
Interest-bearing deposit accounts	$	51,359		$	51,896
Non-interest-bearing deposit accounts	246			159
Total deposits	51,605			52,055
Borrowings: (Notes 5 and 8)
Borrowings of consolidated securitization entities	12,433			12,388
Senior unsecured notes	7,761			7,759
Total borrowings	20,194			20,147
Accrued expenses and other liabilities	2,888			3,809
Total liabilities	$	74,687		$	76,011

Equity:
Common Stock, par share value $0.001 per share; 4,000,000,000 shares authorized and 833,984,684 shares issued at March 31, 2017 and December 31, 2016, respectively, 810,804,845 and 817,352,328 shares outstanding at March 31, 2017 and December 31, 2016, respectively	$	1		$	1
Additional paid-in capital	9,405			9,393
Retained earnings	5,724			5,330
Accumulated other comprehensive income (loss):
Investment securities	(19		)	(18		)
Currency translation adjustments	(21		)	(20		)
Other	(15		)	(15		)
Treasury Stock, at cost; 23,179,839 and 16,632,356 shares at March 31, 2017 and December 31, 2016, respectively	(712		)	(475		)
Total equity	14,363			14,196
Total liabilities and equity	$	89,050		$	90,207

_______________________

(a) Other assets include restricted cash and equivalents of $307 million and $347 million at March 31, 2017 and December 31, 2016, respectively.

See accompanying notes to condensed consolidated financial statements.

Synchrony Financial and subsidiaries

Condensed Consolidated Statements of Changes in Equity

(Unaudited)

____________________________________________________________________________________________



	Common Stock
($ in millions, shares in thousands)	Shares Issued	Amount		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Equity

Balance at January 1, 2016	833,828	$	1	$	9,351	$	3,293		$	(41	)	$	—		$	12,604
Net earnings	—	—		—		582			—			—			582
Other comprehensive income	—	—		—		—			10			—			10
Stock-based compensation	2	—		8		—			—			—			8
Balance at March 31, 2016	833,830	$	1	$	9,359	$	3,875		$	(31	)	$	—		$	13,204


Balance at January 1, 2017	833,985	$	1	$	9,393	$	5,330		$	(53	)	$	(475	)	$	14,196
Net earnings	—	—		—		499			—			—			499
Other comprehensive income	—	—		—		—			(2		)	—			(2		)
Purchases of treasury stock	—	—		—		—			—			(238		)	(238		)
Stock-based compensation	—	—		12		—			—			1			13
Dividends - common stock	—	—		—		(105		)	—			—			(105		)
Balance at March 31, 2017	833,985	$	1	$	9,405	$	5,724		$	(55	)	$	(712	)	$	14,363

See accompanying notes to condensed consolidated financial statements.