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, 2017
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)
sflogoa01a07.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, 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 October 23, 2017 was 782,591,569.



Synchrony Financial
PART I - FINANCIAL INFORMATION
Page
 
 
Item 1. Financial Statements:
 
 
 
Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2017 and 2016
 
 
Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2017 and 2016
 
 
Condensed Consolidated Statements of Financial Position at September 30, 2017 and at December 31, 2016
 
 
Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2017 and 2016
 
 
Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2017 and 2016
 
 
 
 
 
 
 
 
PART II - OTHER INFORMATION
 
 
 


3


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; and
•
“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.
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®, Dual Card™, eQuickscreen™, Quickscreen® and Synchrony Car Care™, belong to us. Solely for convenience, we refer to our trademarks in this report without the ™ and ® symbols, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks. Other service marks, trademarks and trade names referred to in this report are the property of their respective owners.
On our website at www.synchronyfinancial.com, we make available under the "Investors-SEC Filings" menu selection, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports or amendments are electronically filed with, or furnished to, the SEC. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information that we file electronically with the SEC.

4



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.

5


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 and nine months ended September 30, 2017, we financed $32.9 billion and $95.2 billion of purchase volume, respectively, and had 69.3 million average active accounts in both periods and at September 30, 2017, we had $76.9 billion of loan receivables. For the three and nine months ended September 30, 2017, we had net earnings of $555 million and $1,550 million, respectively, representing a return on assets of 2.4% and 2.3%, respectively.
We offer our credit products primarily through our wholly-owned subsidiary, Synchrony Bank (the "Bank"). In addition, through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”), including certificates of deposit, individual retirement accounts (“IRAs”), money market accounts and savings accounts. We also take deposits at the Bank through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. We have significantly expanded our online direct banking operations in recent years and our deposit base serves as a source of stable and diversified low cost funding for our credit activities. At September 30, 2017, we had $54.5 billion in deposits, which represented 73% of our total funding sources.
Our Sales Platforms
_________________________________________________________________
We conduct our operations through a single business segment. Profitability and expenses, including funding costs, loan losses and operating expenses, are managed for the business as a whole. Substantially all of our operations are within the United States. We offer our credit products through three sales platforms (Retail Card, Payment Solutions and CareCredit). Those platforms are organized by the types of products we offer and the partners we work with, and are measured on interest and fees on loans, loan receivables, new accounts and other sales metrics.



6


platformpiesa24.jpg
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 29 national and regional retailers with which we have ongoing program agreements. The average length of our relationship with these Retail Card partners is 20 years. Retail Card’s revenue primarily consists of interest and fees on our loan receivables. Other income primarily consists of interchange fees earned when our Dual Card or general purpose co-branded credit cards are used outside of our partners' sales channels and fees paid to us by customers who purchase our debt cancellation products, less loyalty program payments. In addition, the majority of our retailer share arrangements, which generally provide for payment to our partner if the economic performance of the program exceeds a contractually-defined threshold, are with partners in the Retail Card sales platform. Substantially all of the credit extended in this platform is on standard terms.
Payment Solutions
Payment Solutions is a leading provider of promotional financing for major consumer purchases, offering primarily 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 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. In October 2017, we also announced the launch of our CareCredit Dual Card offering. Substantially all of the credit extended in this platform is promotional financing. CareCredit’s revenue primarily consists of interest and fees on our loan receivables, including merchant discounts.

7


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, 2017.
 
 
 
Promotional Offer
 
 
Credit Product
Standard Terms Only
 
Deferred Interest
 
Other Promotional
 
Total
Credit cards
66.5
%
 
16.0
%
 
13.7
%
 
96.2
%
Commercial credit products
1.8

 
—

 
—

 
1.8

Consumer installment loans
—

 
—

 
2.0

 
2.0

Other
—

 
—

 
—

 
—

Total
68.3
%
 
16.0
%
 
15.7
%
 
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. Dual Cards and general purpose co-branded credit cards are primarily offered through our Retail Card platform. At September 30, 2017, we offered these credit cards through 21 of our 29 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.

8


Business Trends and Conditions
____________________________________________________________________________________________
We believe our business and results of operations will be impacted in the future by various trends and conditions. For a discussion of these trends and conditions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Trends and Conditions” in our 2016 Form 10-K. For a discussion of how these trends and conditions impacted the three and nine months ended September 30, 2017, see “—Results of Operations.”
Seasonality
____________________________________________________________________________________________
In our Retail Card and Payment Solutions platforms, we experience fluctuations in transaction volumes and the level of loan receivables as a result of higher seasonal consumer spending and payment patterns that typically result in an increase of loan receivables from August through a peak in late December, with reductions in loan receivables occurring over the first and second quarters of the following year as customers pay their balances down.
The seasonal impact to transaction volumes and the loan receivables balance typically results in fluctuations in our results of operations, delinquency metrics and the allowance for loan losses as a percentage of total loan receivables between quarterly periods.
In addition to the seasonal variance in loan receivables discussed above, we also experience a seasonal increase in delinquency rates and delinquent loan receivables balances during the third and fourth quarters of each year due to lower customer payment rates resulting in higher net charge-off rates in the first and second quarters. Our delinquency rates and delinquent loan receivables balances typically decrease during the subsequent first and second quarters as customers begin to pay down their loan balances and return to current status resulting in lower net charge-off rates in the third and fourth quarters. Because customers who were delinquent during the fourth quarter of a calendar year have a higher probability of returning to current status when compared to customers who are delinquent at the end of each of our interim reporting periods, we expect that a higher proportion of delinquent accounts outstanding at an interim period end will result in charge-offs, as compared to delinquent accounts outstanding at a year end. Consistent with this historical experience, we generally experience a higher allowance for loan losses as a percentage of total loan receivables at the end of an interim period, as compared to the end of a calendar year. In addition, despite improving credit metrics such as declining past due amounts, we may experience an increase in our allowance for loan losses at an interim period end compared to the prior year end, reflecting these same seasonal trends.


9


Results of Operations
____________________________________________________________________________________________
Highlights for the Three and Nine Months Ended September 30, 2017
Below are highlights of our performance for the three and nine months ended September 30, 2017 compared to the three and nine months ended September 30, 2016, as applicable, except as otherwise noted.
•
Net earnings decreased 8.1% to $555 million and 7.5% to $1,550 million for the three and nine months ended September 30, 2017, respectively, driven by increases in provision for loan losses and other expense, partially offset by higher net interest income.
•
Loan receivables increased 8.9% to $76,928 million at September 30, 2017 compared to September 30, 2016, primarily driven by higher purchase volume and average active account growth.
•
Net interest income increased 11.3% to $3,876 million and 12.1% to $11,100 million for the three and nine months ended September 30, 2017, respectively, primarily due to higher average loan receivables.
•
Retailer share arrangements increased 6.3% to $805 million and 3.2% to $2,158 million for the three and nine months ended September 30, 2017, respectively, primarily as a result of growth and margin improvement of the programs in which we have retailer share arrangements, partially offset by higher provision for loan losses associated with these programs.
•
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased 54 basis points to 4.80% at September 30, 2017 from 4.26% at September 30, 2016, and net charge-off rate increased 56 basis points to 4.95% and 69 basis points to 5.23% for the three and nine months ended September 30, 2017, respectively.
•
Provision for loan losses increased by $324 million, or 32.9%, for the three months ended September 30, 2017, primarily due to higher net charge-offs and loan receivables growth. Provision for loan losses increased by $1,032 million, or 35.5%, for the nine months ended September 30, 2017, primarily due to an increase in net charge-offs and higher loan loss reserve. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) increased to 6.97% at September 30, 2017, as compared to 5.82% at September 30, 2016.
•
Other expense increased by $99 million, or 11.5%, and $279 million, or 11.2%, for the three and nine months ended September 30, 2017, respectively, primarily driven by business growth.
•
We continue to invest in our direct banking activities to grow our deposit base. Total deposits increased 4.6% to $54.5 billion at September 30, 2017, compared to December 31, 2016, driven primarily by growth in our direct deposits of 9.8% to $41.6 billion, partially offset by a reduction in our brokered deposits.
•
On May 18, 2017, the Board announced plans to increase our quarterly dividend to $0.15 per share commencing in the third quarter of 2017 and approval of a share repurchase program of up to $1.64 billion through June 30, 2018. During the nine months ended September 30, 2017, we repurchased $1,066 million of our outstanding common stock, and declared and paid cash dividends of $0.41 per share, or $328 million.
•
During the nine months ended September 30, 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 during the nine months ended September 30, 2017
•
We extended our Retail Card program agreements with Belk, QVC and Evine, and launched our new programs with Cathay Pacific, Nissan and Infiniti, zulily and At Home.

10


•
We launched our Synchrony Car Care program in our Payment Solutions sales platform and extended our program agreements with Midas, MEGA Group USA, City Furniture, Yamaha, BrandsMart U.S.A. and Nautilus.
•
In our CareCredit sales platform, we acquired the Citi Health Card portfolio, renewed National Veterinary Associates and Mars Petcare in our network of providers and launched our new CareCredit Dual Card.
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)
2017
 
2016
 
2017
 
2016
Interest income
$
4,233

 
$
3,796

 
$
12,116

 
$
10,831

Interest expense
357

 
315

 
1,016

 
929

Net interest income
3,876

 
3,481

 
11,100

 
9,902

Retailer share arrangements
(805
)
 
(757
)
 
(2,158
)
 
(2,091
)
Net interest income, after retailer share arrangements
3,071

 
2,724

 
8,942

 
7,811

Provision for loan losses
1,310

 
986

 
3,942

 
2,910

Net interest income, after retailer share arrangements and provision for loan losses
1,761

 
1,738

 
5,000

 
4,901

Other income
76

 
84

 
226

 
259

Other expense
958

 
859

 
2,777

 
2,498

Earnings before provision for income taxes
879

 
963

 
2,449

 
2,662

Provision for income taxes
324

 
359

 
899

 
987

Net earnings
$
555

 
$
604

 
$
1,550

 
$
1,675


11


Other Financial and Statistical Data
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)
2017
 
2016
 
2017
 
2016
Financial Position Data (Average):
 
 
 
 
 
 
 
Loan receivables, including held for sale
$
76,165

 
$
69,316

 
$
74,803

 
$
67,364

Total assets
$
91,121

 
$
84,874

 
$
90,004

 
$
82,939

Deposits
$
53,526

 
$
48,099

 
$
52,555

 
$
46,130

Borrowings
$
20,010

 
$
19,702

 
$
20,079

 
$
20,140

Total equity
$
14,431

 
$
13,898

 
$
14,399

 
$
13,458

Selected Performance Metrics:
 
 
 
 
 
 
 
Purchase volume(1)
$
32,893

 
$
31,615

 
$
95,249

 
$
90,099

Retail Card
$
26,347

 
$
25,285

 
$
76,400

 
$
72,246

Payment Solutions
$
4,178

 
$
4,152

 
$
11,794

 
$
11,447

CareCredit
$
2,368

 
$
2,178

 
$
7,055

 
$
6,406

Average active accounts (in thousands)(2)
69,331

 
66,639

 
69,319

 
66,204

Net interest margin(3)
16.74
%
 
16.34
%
 
16.38
%
 
16.05
%
Net charge-offs
$
950

 
$
765

 
$
2,925

 
$
2,292

Net charge-offs as a % of average loan receivables, including held for sale
4.95
%
 
4.39
%
 
5.23
%
 
4.54
%
Allowance coverage ratio(4)
6.97
%
 
5.82
%
 
6.97
%
 
5.82
%
Return on assets(5)
2.4
%
 
2.8
%
 
2.3
%
 
2.7
%
Return on equity(6)
15.3
%
 
17.3
%
 
14.4
%
 
16.6
%
Equity to assets(7)
15.84
%
 
16.37
%
 
16.00
%
 
16.23
%
Other expense as a % of average loan receivables, including held for sale
 
4.99
%
 
4.93
%
 
4.96
%
 
4.95
%
Efficiency ratio(8)
30.4
%
 
30.6
%
 
30.3
%
 
31.0
%
Effective income tax rate
36.9
%
 
37.3
%
 
36.7
%
 
37.1
%
Selected Period-End Data:
 
 
 
 
 
 
 
Loan receivables
$
76,928

 
$
70,644

 
$
76,928

 
$
70,644

Allowance for loan losses
$
5,361

 
$
4,115

 
$
5,361

 
$
4,115

30+ days past due as a % of period-end loan receivables(9)
4.80
%
 
4.26
%
 
4.80
%
 
4.26
%
90+ days past due as a % of period-end loan receivables(9)
2.22
%
 
1.89
%
 
2.22
%
 
1.89
%
Total active accounts (in thousands)(2)
69,008

 
66,781

 
69,008

 
66,781

______________________
(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.

12


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 September 30 ($ in millions)
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate(1)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield /
Rate(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(2)
$
11,895

 
$
37

 
1.23
%
 
$
12,480

 
$
16

 
0.51
%
Securities available for sale
3,792

 
14

 
1.46
%
 
2,960

 
9

 
1.21
%
Loan receivables(3):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale
73,172

 
4,111

 
22.29
%
 
66,519

 
3,705

 
22.16
%
Consumer installment loans
1,543

 
35

 
9.00
%
 
1,333

 
31

 
9.25
%
Commercial credit products
1,392

 
36

 
10.26
%
 
1,401

 
35

 
9.94
%
Other
58

 
—

 
—
%
 
63

 
—

 
—
%
Total loan receivables
76,165

 
4,182

 
21.78
%
 
69,316

 
3,771

 
21.64
%
Total interest-earning assets
91,852

 
4,233

 
18.28
%
 
84,756

 
3,796

 
17.82
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
877

 
 
 
 
 
862

 
 
 
 
Allowance for loan losses
(5,125
)
 
 
 
 
 
(3,933
)
 
 
 
 
Other assets
3,517

 
 
 
 
 
3,189

 
 
 
 
Total non-interest-earning assets
(731
)
 
 
 
 
 
118

 
 
 
 
Total assets
$
91,121

 
 
 
 
 
$
84,874

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
53,294

 
$
219

 
1.63
%
 
$
47,895

 
$
188

 
1.56
%
Borrowings of consolidated securitization entities
11,759

 
65

 
2.19
%
 
12,254

 
63

 
2.05
%
Senior unsecured notes
8,251

 
73

 
3.51
%
 
7,448

 
64

 
3.42
%
Total interest-bearing liabilities
73,304

 
357

 
1.93
%
 
67,597

 
315

 
1.85
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
232

 
 
 
 
 
204

 
 
 
 
Other liabilities
3,154

 
 
 
 
 
3,175

 
 
 
 
Total non-interest-bearing liabilities
3,386

 
 
 
 
 
3,379

 
 
 
 
Total liabilities
76,690

 
 
 
 
 
70,976

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
14,431

 
 
 
 
 
13,898

 
 
 
 
Total liabilities and equity
$
91,121

 
 
 
 
 
$
84,874

 
 
 
 
Interest rate spread(5)
 
 
 
 
16.35
%
 
 
 
 
 
15.97
%
Net interest income
 
 
$
3,876

 
 
 
 
 
$
3,481

 
 
Net interest margin(6)
 
 
 
 
16.74
%
 
 
 
 
 
16.34
%

13


 
 
 
 
 
 
 
 
 
 
 
 
 
2017
 
2016
Nine months ended September 30 ($ in millions)
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate(1)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield /
Rate(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(2)
$
11,073

 
$
86

 
1.04
%
 
$
12,132

 
$
46

 
0.51
%
Securities available for sale
4,732

 
44

 
1.24
%
 
2,932

 
22

 
1.00
%
Loan receivables(3):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale
71,920

 
11,780

 
21.90
%
 
64,701

 
10,573

 
21.83
%
Consumer installment loans
1,465

 
101

 
9.22
%
 
1,240

 
86

 
9.26
%
Commercial credit products
1,363

 
104

 
10.20
%
 
1,367

 
103

 
10.06
%
Other
55

 
1

 
2.43
%
 
56

 
1

 
2.39
%
Total loan receivables
74,803

 
11,986

 
21.42
%
 
67,364

 
10,763

 
21.34
%
Total interest-earning assets
90,608

 
12,116

 
17.88
%
 
82,428

 
10,831

 
17.55
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
836

 
 
 
 
 
1,041

 
 
 
 
Allowance for loan losses
(4,774
)
 
 
 
 
 
(3,752
)
 
 
 
 
Other assets
3,334

 
 
 
 
 
3,222

 
 
 
 
Total non-interest-earning assets
(604
)
 
 
 
 
 
511

 
 
 
 
Total assets
$
90,004

 
 
 
 
 
$
82,939

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
52,325

 
$
615

 
1.57
%
 
$
45,915

 
$
539

 
1.57
%
Borrowings of consolidated securitization entities
12,096

 
193

 
2.13
%
 
12,441

 
180

 
1.93
%
Bank term loan(4)
—

 
—

 
—
%
 
742

 
31

 
5.58
%
Senior unsecured notes
7,983

 
208

 
3.48
%
 
6,957

 
179

 
3.44
%
Total interest-bearing liabilities
72,404

 
1,016

 
1.88
%
 
66,055

 
929

 
1.88
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
230

 
 
 
 
 
215

 
 
 
 
Other liabilities
2,971

 
 
 
 
 
3,211

 
 
 
 
Total non-interest-bearing liabilities
3,201

 
 
 
 
 
3,426

 
 
 
 
Total liabilities
75,605

 
 
 
 
 
69,481

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
14,399

 
 
 
 
 
13,458

 
 
 
 
Total liabilities and equity
$
90,004

 
 
 
 
 
$
82,939

 
 
 
 
Interest rate spread(5)
 
 
 
 
16.00
%
 
 
 
 
 
15.67
%
Net interest income
 
 
$
11,100

 
 
 
 
 
$
9,902

 
 
Net interest margin(6)
 
 
 
 
16.38
%
 
 
 
 
 
16.05
%
______________________
(1)
Average yields/rates are based on total interest income/expense over average balances.
(2)
Includes average restricted cash balances of $816 million and $313 million for the three months ended September 30, 2017 and 2016, respectively and $659 million and $461 million for the nine months ended September 30, 2017 and 2016, respectively.
(3)
Interest income on loan receivables includes fees on loans of $692 million and $645 million for the three months ended September 30, 2017 and 2016, respectively, and $1,945 million and $1,799 million for the nine months ended September 30, 2017 and 2016, respectively.
(4)
The effective interest rate for the Bank term loan for the nine months ended September 30, 2016 was 2.48%. The Bank term loan's 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.

14


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 $437 million, or 11.5%, and by $1,285 million, or 11.9%, for the three and nine months ended September 30, 2017, respectively, driven primarily by growth in our average loan receivables.
Average interest-earning assets
Three months ended September 30 ($ in millions)
2017
 
%
 
2016
 
%
Loan receivables, including held for sale
$
76,165

 
82.9
%
 
$
69,316

 
81.8
%
Liquidity portfolio and other
15,687

 
17.1
%
 
15,440

 
18.2
%
Total average interest-earning assets
$
91,852

 
100.0
%
 
$
84,756

 
100.0
%
Nine months ended September 30 ($ in millions)
2017
 
%
 
2016
 
%
Loan receivables, including held for sale
$
74,803

 
82.6
%
 
$
67,364

 
81.7
%
Liquidity portfolio and other
15,805

 
17.4
%
 
15,064

 
18.3
%
Total average interest-earning assets
$
90,608

 
100.0
%
 
$
82,428

 
100.0
%
The increases in average loan receivables of 9.9% and 11.0% for the three and nine months ended September 30, 2017, respectively, were driven primarily by higher purchase volume of 4.0% and 5.7% and average active account growth of 4.0% and 4.7%, respectively.
Average active accounts increased to 69.3 million for both the three and nine months ended September 30, 2017, and the average balances per these active accounts increased 5.6% and 6.1%, respectively.
Yield on average interest-earning assets
The yield on average interest-earning assets increased for the three and nine months ended September 30, 2017. The increase in the three and nine months ended September 30, 2017 was primarily due to an increase in the percentage of interest-earning assets attributable to loan receivables and an increase in the yield on our average loan receivables of 14 basis points to 21.78% and 8 basis points basis points to 21.42%, respectively. The increase in yield was primarily driven by higher revolve rates as well as a higher benchmark interest rate.
Interest Expense
Interest expense increased by $42 million, or 13.3%, and by $87 million, or 9.4%, for the three and nine months ended September 30, 2017, respectively, driven primarily by the growth in our deposit liabilities. Our cost of funds increased slightly to 1.93% for the three months ended September 30, 2017, compared to 1.85% for the three months ended September 30, 2016, primarily due to higher benchmark interest rates. Our cost of funds remained flat at 1.88% for both the nine months ended September 30, 2017 and 2016.
Average interest-bearing liabilities
Three months ended September 30 ($ in millions)
2017
 
%
 
2016
 
%
Interest-bearing deposit accounts
$
53,294

 
72.7
%
 
$
47,895

 
70.9
%
Borrowings of consolidated securitization entities
11,759

 
16.0
%
 
12,254

 
18.1
%
Third-party debt
8,251

 
11.3
%
 
7,448

 
11.0
%
Total average interest-bearing liabilities
$
73,304

 
100.0
%
 
$
67,597

 
100.0
%


15


Nine months ended September 30 ($ in millions)
2017
 
%
 
2016
 
%
Interest-bearing deposit accounts
$
52,325

 
72.3
%
 
$
45,915

 
69.5
%
Borrowings of consolidated securitization entities
12,096

 
16.7
%
 
12,441

 
18.8
%
Third-party debt
7,983

 
11.0
%
 
7,699

 
11.7
%
Total average interest-bearing liabilities
$
72,404

 
100.0
%
 
$
66,055

 
100.0
%
The increase in average interest-bearing liabilities for the three and nine months ended September 30, 2017 was driven primarily by growth in our direct deposits.
Net Interest Income
Net interest income increased by $395 million, or 11.3%, and by $1,198 million, or 12.1%, for the three and nine months ended September 30, 2017, primarily driven by higher average loan receivables.
Retailer Share Arrangements
Retailer share arrangements increased 6.3% to $805 million and 3.2% to $2,158 million for the three and nine months ended September 30, 2017, respectively, driven primarily by growth and margin improvement of the programs in which we have retailer share arrangements, partially offset by higher provision for loan losses associated with these programs.
Provision for Loan Losses
Provision for loan losses increased by $324 million, or 32.9%, for the three months ended September 30, 2017, primarily due to higher net charge-offs and loan receivables growth. Provision for loan losses increased by $1,032 million, or 35.5%, for the nine months ended September 30, 2017, primarily due to an increase in net charge-offs and higher loan loss reserve.
Our allowance coverage ratio increased to 6.97% at September 30, 2017, as compared to 5.82% at September 30, 2016, 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)
2017
 
2016
 
2017
 
2016
Interchange revenue
$
164

 
$
154

 
$
474

 
$
435

Debt cancellation fees
67

 
67

 
203

 
194

Loyalty programs
(168
)
 
(145
)
 
(511
)
 
(390
)
Other
13

 
8

 
60

 
20

Total other income
$
76

 
$
84

 
$
226

 
$
259

Other income decreased by $8 million, or 9.5%, and by $33 million, or 12.7%, for the three and nine months ended September 30, 2017, respectively. These decreases were primarily due to higher loyalty costs, partially offset by increased interchange revenue driven by increased purchase volume outside of our retail partners' sales channels. The decrease for the nine months ended September 30, 2017 was also partially offset by a pre-tax gain of $18 million associated with the sale of contractual relationships related to processing of general purpose card transactions for certain merchants.


16


Other Expense
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2017
 
2016
 
2017
 
2016
Employee costs
$
335

 
$
311

 
$
981

 
$
892

Professional fees
161

 
174

 
470

 
474

Marketing and business development
124

 
92

 
342

 
293

Information processing
96

 
87

 
274

 
250

Other
242

 
195

 
710

 
589

Total other expense
$
958

 
$
859

 
$
2,777

 
$
2,498

Other expense increased by $99 million, or 11.5%, and by $279 million, or 11.2%, for the three and nine months ended September 30, 2017, respectively, primarily due to increases in employee costs, marketing and business development and other expenses.
The increases in employee costs were primarily due to new employees added to support the continued growth of the business and replacement of certain third-party services. Marketing and business development expense increased primarily due to strategic investments in our sales platforms, card re-issuances for some of our partner programs and increased marketing on retail deposits. The increases in "other" were primarily driven by higher operational losses and business growth.
Provision for Income Taxes
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2017
 
2016
 
2017
 
2016
Effective tax rate
36.9
%
 
37.3
%
 
36.7
%
 
37.1
%
Provision for income taxes
$
324

 
$
359

 
$
899

 
$
987

The effective tax rate for the three and nine months ended September 30, 2017 decreased compared to the same periods in the prior year primarily due to the impact of research and development credits recorded in the current year periods. In each period the effective tax rate differs from the U.S. federal statutory rate of 35% primarily due to state income taxes.
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, 2017, for each of our sales platforms.

17


Retail Card
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2017
 
2016
 
2017
 
2016
Purchase volume
$
26,347

 
$
25,285

 
$
76,400

 
$
72,246

Period-end loan receivables
$
52,119

 
$
48,010

 
$
52,119

 
$
48,010

Average loan receivables
$
51,817

 
$
47,274

 
$
51,002

 
$
46,119

Average active accounts (in thousands)
54,471

 
52,959

 
54,639

 
52,834

 
 
 
 
 
 
 
 
Interest and fees on loans
$
3,102

 
$
2,790

 
$
8,890

 
$
7,989

Retailer share arrangements
$
(795
)
 
$
(752
)
 
$
(2,133
)
 
$
(2,069
)
Other income
$
61

 
$
70

 
$
163

 
$
218

Retail Card interest and fees on loans increased by $312 million, or 11.2%, and by $901 million, or 11.3%, for the three and nine months ended September 30, 2017, respectively. These increases were primarily the result of growth in average loan receivables.
Retailer share arrangements increased by $43 million, or 5.7%, and by $64 million, or 3.1%, for the three and nine months ended September 30, 2017, respectively, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Other income decreased by $9 million, or 12.9%, and by $55 million, or 25.2%, for the three and nine months ended September 30, 2017, respectively, primarily as a result of higher loyalty costs, partially offset by increased interchange revenue driven by increased purchase volume outside of our retail partners' sales channels.
Payment Solutions
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2017
 
2016
 
2017
 
2016
Purchase volume
$
4,178

 
$
4,152

 
$
11,794

 
$
11,447

Period-end loan receivables
$
16,153

 
$
14,798

 
$
16,153

 
$
14,798

Average loan receivables
$
15,848

 
$
14,367

 
$
15,538

 
$
13,786

Average active accounts (in thousands)
9,183

 
8,461

 
9,108

 
8,261

 
 
 
 
 
 
 
 
Interest and fees on loans
$
559

 
$
505

 
$
1,607

 
$
1,429

Retailer share arrangements
$
(9
)
 
$
(3
)
 
$
(19
)
 
$
(17
)
Other income
$
2

 
$
3

 
$
12

 
$
10

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

18


CareCredit
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2017
 
2016
 
2017
 
2016
Purchase volume
$
2,368

 
$
2,178

 
$
7,055

 
$
6,406

Period-end loan receivables
$
8,656

 
$
7,836

 
$
8,656

 
$
7,836

Average loan receivables
$
8,500

 
$
7,675

 
$
8,263

 
$
7,459

Average active accounts (in thousands)
5,677

 
5,219

 
5,572

 
5,109

 
 
 
 
 
 
 
 
Interest and fees on loans
$
521

 
$
476

 
$
1,489

 
$
1,345

Retailer share arrangements
$
(1
)
 
$
(2
)
 
$
(6
)
 
$
(5
)
Other income
$
13

 
$
11

 
$
51

 
$
31

CareCredit interest and fees on loans increased by $45 million, or 9.5%, and by $144 million, or 10.7%, for the three and nine months ended September 30, 2017, respectively. These increases were primarily driven by growth in average loan receivables.
Investment Securities
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our investment securities portfolio. All of our investment securities are classified as available-for-sale at September 30, 2017 and December 31, 2016, and are held to meet our liquidity objectives and to comply with the Community Reinvestment Act. Investment securities classified as available-for-sale are reported in our Condensed Consolidated Statements of Financial Position at fair value.
The following table sets forth the amortized cost and fair value of our portfolio of investment securities at the dates indicated:
 
At September 30, 2017
 
At December 31, 2016
($ in millions)
Amortized
Cost
 
Estimated Fair Value
 
Amortized
Cost
 
Estimated Fair Value
Debt:
 
 
 
 
 
 
 
U.S. government and federal agency
$
1,725

 
$
1,725

 
$
3,676

 
$
3,676

State and municipal
44

 
44

 
47

 
46

Residential mortgage-backed
1,321

 
1,302

 
1,400

 
1,373

Asset-backed
231

 
231

 
—

 
—

Equity
15

 
15

 
15

 
15

Total
$
3,336

 
$
3,317

 
$
5,138

 
$
5,110

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

19


Our investment securities portfolio had the following maturity distribution at September 30, 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
$
1,450

 
$
275

 
$
—

 
$
—

 
$
1,725

State and municipal
—

 
—

 
2

 
42

 
44

Residential mortgage-backed
—

 
—

 
—

 
1,302

 
1,302

Asset-backed
160

 
71

 
—

 
—

 
231

Total(1)
$
1,610

 
$
346

 
$
2

 
$
1,344

 
$
3,302

Weighted average yield(2)
0.9
%
 
1.7
%
 
3.3
%
 
2.8
%
 
1.8
%
______________________
(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, 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 September 30, 2017
 
(%)
 
At December 31, 2016
 
(%)
Loans
 
 
 
 
 
Credit cards
$
73,946

 
96.2
%
 
$
73,580

 
96.4
%
Consumer installment loans
1,561

 
2.0

 
1,384

 
1.8

Commercial credit products
1,384

 
1.8

 
1,333

 
1.7

Other
37

 
—

 
40

 
0.1

Total loans
$
76,928

 
100.0
%
 
$
76,337

 
100.0
%
Loan receivables increased slightly by $591 million, or 0.8%, at September 30, 2017 compared to December 31, 2016, primarily driven by business growth partially offset by the impacts from the seasonality of our business.
Loan receivables increased by $6,284 million, or 8.9%, at September 30, 2017 compared to September 30, 2016, primarily driven by higher purchase volume and average active account growth.

20


Our loan receivables portfolio had the following geographic concentration at September 30, 2017.
($ in millions)
 
Loan Receivables
Outstanding
 
% of Total Loan
Receivables
Outstanding
State
 
Texas
 
$
7,880

 
10.2
%
California
 
$
7,751

 
10.1
%
Florida
 
$
6,302

 
8.2
%
New York
 
$
4,320

 
5.6
%
Pennsylvania
 
$
3,246

 
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 use long-term 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 September 30, 2017
 
At December 31, 2016
Non-accrual loan receivables
$
4

 
$
4

Loans contractually 90 days past-due and still accruing interest
1,703

 
1,542

Earning TDRs(1)
902

 
802

Non-accrual, past-due and restructured loan receivables
$
2,609

 
$
2,348

______________________
(1)
At September 30, 2017 and December 31, 2016, balances exclude $84 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 and nine months ended September 30, 2017 and 2016.
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2017
 
2016
 
2017
 
2016
Gross amount of interest income that would have been recorded in accordance with the original contractual terms
$
58

 
$
46

 
$
162

 
$
131

Interest income recognized
13

 
12

 
36

 
36

Total interest income foregone
$
45

 
$
34

 
$
126

 
$
95


21


Delinquencies
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 4.80% at September 30, 2017 from 4.26% at September 30, 2016, and increased from 4.32% at December 31, 2016. The 54 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 increase as compared to December 31, 2016, 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,
 
2017
 
2016
 
2017
 
2016
Ratio of net charge-offs to average loan receivables, including held for sale
4.95
%
 
4.39
%
 
5.23
%
 
4.54
%
Allowance for Loan Losses
The allowance for loan losses totaled $5,361 million at September 30, 2017 compared with $4,344 million at December 31, 2016 and $4,115 million at September 30, 2016, representing our best estimate of probable losses inherent in the portfolio. Our allowance for loan losses as a percentage of total loan receivables increased to 6.97% at September 30, 2017, from 5.69% at December 31, 2016 and 5.82% at September 30, 2016, which reflects the increase in forecasted net charge-offs over the next twelve months. See "Business Trends and Conditions — Stable Asset Quality" in our 2016 Form 10-K for discussion of the various factors that contribute to forecasted net charge-offs over the next twelve months.
The following tables provide changes in our allowance for loan losses for the periods presented:
 ($ in millions)
Balance at
July 1, 2017

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
September 30, 2017

 
 
 
 
 
 
 
 
 
 
Credit cards
$
4,906

 
$
1,287

 
$
(1,140
)
 
$
211

 
$
5,264

Consumer installment loans
34

 
14

 
(12
)
 
3

 
39

Commercial credit products
60

 
9

 
(14
)
 
2

 
57

Other
1

 
—

 
—

 
—

 
1

Total
$
5,001

 
$
1,310

 
$
(1,166
)
 
$
216

 
$
5,361

($ 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


22


 
 
 
 
 
 
 
 
 
 
($ in millions)
Balance at January 1, 2017

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at September 30, 2017

 
 
Credit cards
$
4,254

 
$
3,866

 
$
(3,518
)
 
$
662

 
$
5,264

Consumer installment loans
37

 
28

 
(37
)
 
11

 
39

Commercial credit products
52

 
48

 
(48
)
 
5

 
57

Other
1

 
—

 
—

 
—

 
1

Total
$
4,344

 
$
3,942

 
$
(3,603
)
 
$
678

 
$
5,361

 
 
 
 
 
 
 
 
 
 
 
Balance at
January 1, 2016

 
Provision
charged to
operations

 
Gross charge- 
offs

 
Recoveries

 
Balance at
September 30,
2016

($ in millions)
 
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

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 September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
53,294

 
72.7
%
 
1.6
%
 
$
47,895

 
70.9
%
 
1.6
%
Securitized financings
11,759

 
16.0

 
2.2

 
12,254

 
18.1

 
2.0

Senior unsecured notes
8,251

 
11.3

 
3.5

 
7,448

 
11.0

 
3.4

Total
$
73,304

 
100.0
%
 
1.9
%
 
$
67,597

 
100.0
%
 
1.9
%
______________________
(1)
Excludes $232 million and $204 million average balance of non-interest-bearing deposits for the three months ended September 30, 2017 and 2016, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended September 30, 2017 and 2016.


23


 
2017
 
2016
Nine months ended September30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
52,325

 
72.3
%
 
1.6
%
 
$
45,915

 
69.5
%
 
1.6
%
Securitized financings
12,096

 
16.7

 
2.1

 
12,441

 
18.9

 
1.9

Senior unsecured notes
7,983

 
11.0

 
3.5

 
6,957

 
10.5

 
3.4

Bank term loan
—

 
—

 
—

 
742

 
1.1

 
5.6

Total
$
72,404

 
100.0
%
 
1.9
%
 
$
66,055

 
100.0
%
 
1.9
%
______________________
(1)
Excludes $230 million and $215 million average balance of non-interest-bearing deposits for the nine months ended September 30, 2017 and 2016, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the nine months ended September 30, 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 September 30, 2017, we had $41.6 billion in direct deposits (which includes deposits from banks and financial institutions) and $12.9 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 September 30, 2017, 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 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.

24


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)
2017
 
2016
Average
Balance
 
% of
Total
 
Average
Rate
 
Average
Balance
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
23,331

 
43.8
%
 
1.6
%
 
$
20,256

 
42.3
%
 
1.6
%
Savings accounts (including money market accounts)
17,522

 
32.9

 
1.2

 
14,658

 
30.6

 
1.0

Brokered deposits
12,441

 
23.3

 
2.3

 
12,981

 
27.1

 
2.2

Total interest-bearing deposits
$
53,294

 
100.0
%
 
1.6
%
 
$
47,895

 
100.0
%
 
1.6
%
 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30 ($ in millions)
2017
 
2016
Average
Balance
 
% of
Total
 
Average
Rate
 
Average
Balance
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
22,138

 
42.3
%
 
1.6
%
 
$
19,326

 
42.1
%
 
1.5
%
Savings accounts (including money market accounts)
17,492

 
33.4

 
1.1

 
13,669

 
29.8

 
1.0

Brokered deposits
12,695

 
24.3

 
2.2

 
12,920

 
28.1

 
2.2

Total interest-bearing deposits
$
52,325

 
100.0
%
 
1.6
%
 
$
45,915

 
100.0
%
 
1.6
%
Our deposit liabilities provide funding with maturities ranging from one day to ten years. At September 30, 2017, the weighted average maturity of our interest-bearing time deposits was 1.8 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 September 30, 2017.
($ in millions)
3 Months or
Less