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, 2018
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)
sflogoa01a14.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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    Yes  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.
Large accelerated filer
ý
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o 
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 22, 2018 was 718,731,714.



Synchrony Financial
PART I - FINANCIAL INFORMATION
Page
 
 
Item 1. Financial Statements:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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 “Board of Directors” are to Synchrony's board of directors;
•
the “Tax Act” are to P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act, signed into law on December 22, 2017;
•
“Separation” are to Synchrony's separation from GE in November 2015 when Synchrony became a stand-alone savings and loan holding company following the completion of GE's exchange offer, in which GE exchanged shares of GE common stock for all the remaining shares of our common stock it owned; and
•
“FICO” are to a credit score developed by Fair Isaac & Co., which is widely used as a means of evaluating the likelihood that credit users will pay their obligations.
We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which, in our business and in this report, we refer to as our “partners.” The terms of the programs all require cooperative efforts between us and our partners of varying natures and degrees to establish and operate the programs. Our use of the term “partners” to refer to these entities is not intended to, and does not, describe our legal relationship with them, imply that a legal partnership or other relationship exists between the parties or create any legal partnership or other relationship. The “average length of our relationship” with respect to a specified group of partners or programs is measured on a weighted average basis by interest and fees on loans for the year ended December 31, 2017 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—Results of Operations—Other Financial and Statistical Data” in our Annual Report on Form 10-K for the year ended December 31, 2017 (our “2017 Form 10-K”). There is no standard industry definition for many of these terms, and other companies may define them differently than we do.

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

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,” “future,” “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 grow our deposits in the future; our ability to securitize our loan receivables, occurrence of an early amortization of our securitization facilities, loss of the right to service or subservice our securitized loan receivables, and lower payment rates on our securitized loan receivables; changes in market interest rates and the impact of any margin compression; effectiveness of our risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, our ability to manage our credit risk, 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 acquisitions and strategic investments; our ability to realize the benefits of and expected capital available from strategic options; 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/or interpretations and state sales tax rules and regulations; a material indemnification obligation to GE under the Tax Sharing and Separation Agreement with GE if we cause the split-off from GE or certain preliminary transactions to fail to qualify for tax-free treatment or in the case of certain significant transfers of our stock following the split-off; regulation, supervision, examination and enforcement of our business by governmental authorities, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and 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 2017 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 2017 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 a premier consumer financial services company delivering customized financing programs across key industries including retail, health, auto, travel and home, along with award-winning consumer banking products. We provide a range of credit products through our financing programs which we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners.” For the three and nine months ended September 30, 2018, we financed $36.4 billion and $100.3 billion of purchase volume, respectively, and had 75.5 million and 72.6 million average active accounts, respectively, and at September 30, 2018, we had $87.5 billion of loan receivables.
We offer our credit products primarily through our wholly-owned subsidiary, the Bank. In addition, through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”), including certificates of deposit, individual retirement accounts (“IRAs”), money market accounts and savings accounts. We also take deposits at the Bank through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. We have significantly expanded our online direct banking operations in recent years and our deposit base serves as a source of stable and diversified low cost funding for our credit activities. At September 30, 2018, we had $62.3 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.



6


platformpies.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 27 national and regional retailers with which we have ongoing program agreements. The average length of our relationship with these Retail Card partners is 21 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 and our CareCredit Dual Card offering. Substantially all of the credit extended in this platform is promotional financing. CareCredit’s revenue primarily consists of interest and fees on our loan receivables, including merchant discounts.

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, 2018.
 
 
 
Promotional Offer
 
 
Credit Product
Standard Terms Only
 
Deferred Interest
 
Other Promotional
 
Total
Credit cards
66.2
%
 
16.9
%
 
13.3
%
 
96.4
%
Commercial credit products
1.5

 
—

 
—

 
1.5

Consumer installment loans
—

 
—

 
2.0

 
2.0

Other
0.1

 
—

 
—

 
0.1

Total
67.8
%
 
16.9
%
 
15.3
%
 
100.0
%
Credit Cards
We typically offer the following principal types of credit cards:
•
Private Label Credit Cards. Private label credit cards are partner-branded credit cards (e.g., Lowe’s or Amazon) or program-branded credit cards (e.g., Synchrony Car Care or CareCredit) that are used primarily for the purchase of goods and services from the partner or within the program network. In addition, in some cases, cardholders may be permitted to access their credit card accounts for cash advances. In Retail Card, credit under our private label credit cards typically is extended on standard terms only, and in Payment Solutions and CareCredit, credit under our private label credit cards typically is extended pursuant to a promotional financing offer.
•
Dual Cards and General Purpose Co-Brand Cards. Our patented Dual Cards are credit cards that function as private label credit cards when used to purchase goods and services from our partners and as general purpose credit cards when used 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, 2018, we offered these credit cards through 20 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.

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 certain trends and conditions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Trends and Conditions” in our 2017 Form 10-K. For a discussion of how certain trends and conditions impacted the three and nine months ended September 30, 2018, see “—Results of Operations.”
On July 2, 2018, we completed our acquisition of the U.S. PayPal Credit financing program, comprising of $7.6 billion of outstanding loan receivables (the “PayPal Credit acquisition”). The new program contributed to significant increases in loan receivables, interest income and provision for loan losses for the three and nine months ended September 30, 2018. See Note 4. Loan Receivables and Allowance for Loan Losses to our condensed consolidated financial statements for further details on this acquisition.
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, 2018
Below are highlights of our performance for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017, as applicable, except as otherwise noted.
•
Net earnings increased 20.9% to $671 million and 29.5% to $2,007 million for the three and nine months ended September 30, 2018, respectively, driven by higher net interest income and lower provision for income taxes, partially offset by increases in provision for loan losses and other expense.
•
Loan receivables increased 13.8% to $87,521 million at September 30, 2018 compared to September 30, 2017, primarily driven by the PayPal Credit acquisition, higher purchase volume and average active account growth.
•
Net interest income increased 8.5% to $4,206 million and 6.2% to $11,785 million for the three and nine months ended September 30, 2018, respectively, primarily due to the PayPal Credit acquisition and higher average loan receivables, partially offset by increases in interest expense reflecting higher benchmark interest rates.
•
Retailer share arrangements increased 8.2% to $871 million and 4.0% to $2,244 million for the three and nine months ended September 30, 2018, primarily due to growth of the programs in which we have retailer share arrangements, including the PayPal Credit acquisition. The increases in the three and nine months ended September 30, 2018 were partially offset by the impact from the Toys "R" Us bankruptcy.
•
Over-30 day loan delinquencies as a percentage of period-end loan receivables decreased 21 basis points to 4.59% at September 30, 2018 from 4.80% at September 30, 2017, and net charge-off rate remained relatively flat at 4.97% and increased 44 basis points to 5.67% for the three and nine months ended September 30, 2018, respectively.
•
Provision for loan losses increased by $141 million, or 10.8%, and $151 million, or 3.8%, for the three and nine months ended September 30, 2018, respectively, primarily due to the reserve build for the PayPal Credit portfolio and higher net charge-offs, partially offset by a lower loan loss reserve build for our existing portfolio. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) increased to 7.11% at September 30, 2018, as compared to 6.97% at September 30, 2017.
•
Other expense increased by $96 million, or 10.0%, and $240 million, or 8.6%, for the three and nine months ended September 30, 2018, respectively, primarily driven by business growth and the PayPal Credit acquisition.
•
Provision for income taxes decreased by $102 million, or 31.5%, and $274 million, or 30.5%, for the three and nine months ended September 30, 2018, respectively, primarily due to the reduction in the corporate tax rate included in the Tax Act.
•
At September 30, 2018, deposits represented 72% of our total funding sources. Total deposits increased 10.3% to $62.3 billion at September 30, 2018, compared to December 31, 2017, driven primarily by growth in our direct deposits of 13.3% to $48.4 billion.
•
On May 17, 2018, the Board announced plans to increase our quarterly dividend to $0.21 per share commencing in the third quarter of 2018 and approval of a share repurchase program of up to $2.2 billion through June 30, 2019. During the nine months ended September 30, 2018, we repurchased $1.9 billion of our outstanding common stock, and declared and paid cash dividends of $0.51 per share, or $383 million.
•
In June 2018, we completed our acquisition of Loop Commerce, a provider of digital and in-store gifting services.

10


2018 Partner Agreements
•
On July 2, 2018, we completed our acquisition of the U.S. PayPal Credit financing program, comprising of $7.6 billion of outstanding loan receivables. We also extended our existing co-brand credit card program with PayPal and Synchrony Bank is now PayPal’s exclusive issuing bank for the PayPal Credit consumer financing program in the United States.
•
On July 26, 2018, we announced that we will not be renewing our Retail Card program agreement with Walmart, which expires July 31, 2019. See “Our Sales Platforms — Retail Card" in our 2017 Form 10-K for further information on our current program with Walmart.
•
We extended our Retail Card program agreements with Lowe's and JCPenney and announced our new partnership with Crate and Barrel.
•
We extended our Payment Solutions program agreements with American Signature Furniture, Ashley HomeStore, Associated Materials, Briggs & Stratton, Generac, Havertys, Nationwide Marketing Group, Robbins Brothers and Sleep Number and announced our new partnerships with Furniture Row, Fred Meyer Jewelers, Mahindra and jtv.
•
In our CareCredit sales platform, we renewed LCA Vision and expanded our network to include American Med Spa Association, Eargo, The Good Feet Store, the Spa Industry Association and the American Veterinary Medical Association.
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)
2018
 
2017
 
2018
 
2017
Interest income
$
4,694

 
$
4,233

 
$
13,112

 
$
12,116

Interest expense
488

 
357

 
1,327

 
1,016

Net interest income
4,206

 
3,876

 
11,785

 
11,100

Retailer share arrangements
(871
)
 
(805
)
 
(2,244
)
 
(2,158
)
Net interest income, after retailer share arrangements
3,335

 
3,071

 
9,541

 
8,942

Provision for loan losses
1,451

 
1,310

 
4,093

 
3,942

Net interest income, after retailer share arrangements and provision for loan losses
1,884

 
1,761

 
5,448

 
5,000

Other income
63

 
76

 
201

 
226

Other expense
1,054

 
958

 
3,017

 
2,777

Earnings before provision for income taxes
893

 
879

 
2,632

 
2,449

Provision for income taxes
222

 
324

 
625

 
899

Net earnings
$
671

 
$
555

 
$
2,007

 
$
1,550


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)
2018
 
2017
 
2018
 
2017
Financial Position Data (Average):
 
 
 
 
 
 
 
Loan receivables, including held for sale
$
86,783

 
$
76,165

 
$
81,270

 
$
74,803

Total assets
$
100,449

 
$
91,121

 
$
97,474

 
$
90,004

Deposits
$
60,398

 
$
53,526

 
$
58,223

 
$
52,555

Borrowings
$
21,858

 
$
20,010

 
$
21,334

 
$
20,079

Total equity
$
14,421

 
$
14,431

 
$
14,369

 
$
14,399

Selected Performance Metrics:
 
 
 
 
 
 
 
Purchase volume(1)
$
36,443

 
$
32,893

 
$
100,337

 
$
95,249

Retail Card
$
29,264

 
$
26,347

 
$
79,986

 
$
76,400

Payment Solutions
$
4,606

 
$
4,178

 
$
12,717

 
$
11,794

CareCredit
$
2,573

 
$
2,368

 
$
7,634

 
$
7,055

Average active accounts (in thousands)(2)
75,482

 
69,331

 
72,594

 
69,319

Net interest margin(3)
16.41
%
 
16.74
%
 
15.94
%
 
16.38
%
Net charge-offs
$
1,087

 
$
950

 
$
3,444

 
$
2,925

Net charge-offs as a % of average loan receivables, including held for sale
4.97
%
 
4.95
%
 
5.67
%
 
5.23
%
Allowance coverage ratio(4)
7.11
%
 
6.97
%
 
7.11
%
 
6.97
%
Return on assets(5)
2.7
%
 
2.4
%
 
2.8
%
 
2.3
%
Return on equity(6)
18.5
%
 
15.3
%
 
18.7
%
 
14.4
%
Equity to assets(7)
14.36
%
 
15.84
%
 
14.74
%
 
16.00
%
Other expense as a % of average loan receivables, including held for sale
4.82
%
 
4.99
%
 
4.96
%
 
4.96
%
Efficiency ratio(8)
31.0
%
 
30.4
%
 
31.0
%
 
30.3
%
Effective income tax rate
24.9
%
 
36.9
%
 
23.7
%
 
36.7
%
Selected Period-End Data:
 
 
 
 
 
 
 
Loan receivables
$
87,521

 
$
76,928

 
$
87,521

 
$
76,928

Allowance for loan losses
$
6,223

 
$
5,361

 
$
6,223

 
$
5,361

30+ days past due as a % of period-end loan receivables(9)
4.59
%
 
4.80
%
 
4.59
%
 
4.80
%
90+ days past due as a % of period-end loan receivables(9)
2.09
%
 
2.22
%
 
2.09
%
 
2.22
%
Total active accounts (in thousands)(2)
75,457

 
69,008

 
75,457

 
69,008

______________________
(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.
 
2018
 
2017
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)
$
7,901

 
$
39

 
1.96
%
 
$
11,895

 
$
37

 
1.23
%
Securities available for sale
7,022

 
38

 
2.15
%
 
3,792

 
14

 
1.46
%
Loan receivables(3):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale
83,609

 
4,538

 
21.53
%
 
73,172

 
4,111

 
22.29
%
Consumer installment loans
1,753

 
41

 
9.28
%
 
1,543

 
35

 
9.00
%
Commercial credit products
1,355

 
37

 
10.83
%
 
1,392

 
36

 
10.26
%
Other
66

 
1

 
NM

 
58

 
—

 
—
%
Total loan receivables
86,783

 
4,617

 
21.11
%
 
76,165

 
4,182

 
21.78
%
Total interest-earning assets
101,706

 
4,694

 
18.31
%
 
91,852

 
4,233

 
18.28
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
1,217

 
 
 
 
 
877

 
 
 
 
Allowance for loan losses
(5,956
)
 
 
 
 
 
(5,125
)
 
 
 
 
Other assets
3,482

 
 
 
 
 
3,517

 
 
 
 
Total non-interest-earning assets
(1,257
)
 
 
 
 
 
(731
)
 
 
 
 
Total assets
$
100,449

 
 
 
 
 
$
91,121

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
60,123

 
$
314

 
2.07
%
 
$
53,294

 
$
219

 
1.63
%
Borrowings of consolidated securitization entities
12,306

 
86

 
2.77
%
 
11,759

 
65

 
2.19
%
Senior unsecured notes
9,552

 
88

 
3.66
%
 
8,251

 
73

 
3.51
%
Total interest-bearing liabilities
81,981

 
488

 
2.36
%
 
73,304

 
357

 
1.93
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
275

 
 
 
 
 
232

 
 
 
 
Other liabilities
3,772

 
 
 
 
 
3,154

 
 
 
 
Total non-interest-bearing liabilities
4,047

 
 
 
 
 
3,386

 
 
 
 
Total liabilities
86,028

 
 
 
 
 
76,690

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
14,421

 
 
 
 
 
14,431

 
 
 
 
Total liabilities and equity
$
100,449

 
 
 
 
 
$
91,121

 
 
 
 
Interest rate spread(4)
 
 
 
 
15.95
%
 
 
 
 
 
16.35
%
Net interest income
 
 
$
4,206

 
 
 
 
 
$
3,876

 
 
Net interest margin(5)
 
 
 
 
16.41
%
 
 
 
 
 
16.74
%

13


 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
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)
$
11,128

 
$
145

 
1.74
%
 
$
11,073

 
$
86

 
1.04
%
Securities available for sale
6,475

 
97

 
2.00
%
 
4,732

 
44

 
1.24
%
Loan receivables(3):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale
78,227

 
12,647

 
21.62
%
 
71,920

 
11,780

 
21.90
%
Consumer installment loans
1,658

 
114

 
9.19
%
 
1,465

 
101

 
9.22
%
Commercial credit products
1,329

 
107

 
10.76
%
 
1,363

 
104

 
10.20
%
Other
56

 
2

 
4.77
%
 
55

 
1

 
2.43
%
Total loan receivables
81,270

 
12,870

 
21.17
%
 
74,803

 
11,986

 
21.42
%
Total interest-earning assets
98,873

 
13,112

 
17.73
%
 
90,608

 
12,116

 
17.88
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
1,192

 
 
 
 
 
836

 
 
 
 
Allowance for loan losses
(5,779
)
 
 
 
 
 
(4,774
)
 
 
 
 
Other assets
3,188

 
 
 
 
 
3,334

 
 
 
 
Total non-interest-earning assets
(1,399
)
 
 
 
 
 
(604
)
 
 
 
 
Total assets
$
97,474

 
 
 
 
 
$
90,004

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
57,941

 
$
836

 
1.93
%
 
$
52,325

 
$
615

 
1.57
%
Borrowings of consolidated securitization entities
12,178

 
240

 
2.63
%
 
12,096

 
193

 
2.13
%
Senior unsecured notes
9,156

 
251

 
3.67
%
 
7,983

 
208

 
3.48
%
Total interest-bearing liabilities
79,275

 
1,327

 
2.24
%
 
72,404

 
1,016

 
1.88
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
282

 
 
 
 
 
230

 
 
 
 
Other liabilities
3,548

 
 
 
 
 
2,971

 
 
 
 
Total non-interest-bearing liabilities
3,830

 
 
 
 
 
3,201

 
 
 
 
Total liabilities
83,105

 
 
 
 
 
75,605

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
14,369

 
 
 
 
 
14,399

 
 
 
 
Total liabilities and equity
$
97,474

 
 
 
 
 
$
90,004

 
 
 
 
Interest rate spread(4)
 
 
 
 
15.49
%
 
 
 
 
 
16.00
%
Net interest income
 
 
$
11,785

 
 
 
 
 
$
11,100

 
 
Net interest margin(5)
 
 
 
 
15.94
%
 
 
 
 
 
16.38
%
______________________
(1)
Average yields/rates are based on total interest income/expense over average balances.
(2)
Includes average restricted cash balances of $480 million and $816 million for the three months ended September 30, 2018 and 2017, respectively, and $538 million and $659 million for the nine months ended September 30, 2018 and 2017, respectively.
(3)
Interest income on loan receivables includes fees on loans of $732 million and $692 million for the three months ended September 30, 2018 and 2017, respectively, and $1,971 million and $1,945 million for the nine months ended September 30, 2018 and 2017, respectively.
(4)
Interest rate spread represents the difference between the yield on total interest-earning assets and the rate on total interest-bearing liabilities.
(5)
Net interest margin represents net interest income divided by average total interest-earning assets.

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 2017 Form 10-K.
Interest Income
Interest income increased by $461 million, or 10.9%, and $996 million, or 8.2%, for the three and nine months ended September 30, 2018, driven primarily by the PayPal Credit acquisition and other growth in our average loan receivables.
Average interest-earning assets
Three months ended September 30 ($ in millions)
2018
 
%
 
2017
 
%
Loan receivables, including held for sale
$
86,783

 
85.3
%
 
$
76,165

 
82.9
%
Liquidity portfolio and other
14,923

 
14.7
%
 
15,687

 
17.1
%
Total average interest-earning assets
$
101,706

 
100.0
%
 
$
91,852

 
100.0
%
 
 
 
 
 
 
 
 
Nine months ended September 30 ($ in millions)
2018
 
%
 
2017
 
%
Loan receivables, including held for sale
$
81,270

 
82.2
%
 
$
74,803

 
82.6
%
Liquidity portfolio and other
17,603

 
17.8
%
 
15,805

 
17.4
%
Total average interest-earning assets
$
98,873

 
100.0
%
 
$
90,608

 
100.0
%
The increases in average loan receivables of 13.9% and 8.6% for the three months and nine months ended September 30, 2018, respectively, were driven by higher purchase volume of 10.8% and 5.3% and average active account growth of 8.9% and 4.7%, respectively, primarily due to the PayPal Credit acquisition.
Average active accounts increased to 75.5 million and 72.6 million for the three and nine months ended September 30, 2018, respectively, and the average balance per active account increased 4.7% and 3.7% for the three and nine months ended September 30, 2018, respectively.
Yield on average interest-earning assets
The yield on average interest-earning assets increased slightly for the three months ended September 30, 2018, primarily due to a higher percentage of interest-earning assets attributable to loan receivables for the three months ended September 30, 2018, largely offset by lower yield on our average loan receivables of 67 basis points to 21.11%. The yield on average interest-earning assets decreased for the nine months ended September 30, 2018, primarily due to a decrease in the yield on our average loan receivables of 25 basis points to 21.17%.
Interest Expense
Interest expense increased by $131 million, or 36.7%, and $311 million, or 30.6%, for the three and nine months ended September 30, 2018, respectively, driven primarily by higher cost of funds and the growth in our deposit liabilities. Our cost of funds increased to 2.36% and 2.24% for the three and nine months ended September 30, 2018, respectively, compared to 1.93% and 1.88% for the three and nine months ended September 30, 2017, respectively, primarily due to higher benchmark interest rates and the funding strategy for the PayPal Credit acquisition.

15


Average interest-bearing liabilities
Three months ended September 30 ($ in millions)
2018
 
%
 
2017
 
%
Interest-bearing deposit accounts
$
60,123

 
73.3
%
 
$
53,294

 
72.7
%
Borrowings of consolidated securitization entities
12,306

 
15.0
%
 
11,759

 
16.0
%
Third-party debt
9,552

 
11.7
%
 
8,251

 
11.3
%
Total average interest-bearing liabilities
$
81,981

 
100.0
%
 
$
73,304

 
100.0
%
 
 
 
 
 
 
 
 
Nine months ended September 30 ($ in millions)
2018
 
%
 
2017
 
%
Interest-bearing deposit accounts
$
57,941

 
73.1
%
 
$
52,325

 
72.3
%
Borrowings of consolidated securitization entities
12,178

 
15.4
%
 
12,096

 
16.7
%
Third-party debt
9,156

 
11.5
%
 
7,983

 
11.0
%
Total average interest-bearing liabilities
$
79,275

 
100.0
%
 
$
72,404

 
100.0
%
The increase in average interest-bearing liabilities for the three and nine months ended September 30, 2018 was driven primarily by growth in our direct deposits.
Net Interest Income
Net interest income increased by $330 million, or 8.5%, and $685 million, or 6.2%, for the three and nine months ended September 30, 2018, respectively, driven primarily by the PayPal Credit acquisition and higher average loan receivables, partially offset by increases in interest expense reflecting higher benchmark rates.
Retailer Share Arrangements
Retailer share arrangements increased by $66 million, or 8.2%, and $86 million, or 4.0%, for the three and nine months ended September 30, 2018, respectively, primarily due to growth of the programs in which we have retailer share arrangements including the PayPal Credit acquisition. The increases for the three and nine months ended September 30, 2018 were partially offset by the impact from the Toys "R" Us bankruptcy.
Provision for Loan Losses
Provision for loan losses increased by $141 million, or 10.8%, and $151 million, or 3.8%, for the three and nine months ended September 30, 2018, respectively, primarily due to the reserve build for the PayPal Credit program and higher net charge-offs, partially offset by a lower loan loss reserve build for our existing portfolio.
Our allowance coverage ratio increased to 7.11% at September 30, 2018, as compared to 6.97% at September 30, 2017, reflecting an increase in forecasted losses inherent in our loan portfolio.
Other Income
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Interchange revenue
$
182

 
$
164

 
$
517

 
$
474

Debt cancellation fees
65

 
67

 
197

 
203

Loyalty programs
(196
)
 
(168
)
 
(543
)
 
(511
)
Other
12

 
13

 
30

 
60

Total other income
$
63

 
$
76

 
$
201

 
$
226


16


Other income decreased by $13 million, or 17.1%, and $25 million, or 11.1%, for the three and nine months ended September 30, 2018. Interchange revenue increased in both periods driven by increased purchase volume outside of our retail partners' sales channels. Loyalty costs increased for both periods primarily due to the launch of new rewards programs with our partners and growth in purchase volume associated with existing loyalty programs. Other income also decreased for the nine months ended September 30, 2018 due to the impact of a pre-tax gain of $18 million recognized in the nine months ended September 30, 2017.
Other Expense
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Employee costs
$
365

 
$
333

 
$
1,074

 
$
974

Professional fees
232

 
161

 
575

 
470

Marketing and business development
131

 
124

 
362

 
342

Information processing
105

 
96

 
308

 
274

Other
221

 
244

 
698

 
717

Total other expense
$
1,054

 
$
958

 
$
3,017

 
$
2,777

Other expense increased by $96 million, or 10.0%, and $240 million, or 8.6%, for the three and nine months ended September 30, 2018, respectively, primarily due to increases in professional fees, as well as increases in employee costs and information processing.
The increases in professional fees were primarily due to interim servicing costs associated with the PayPal Credit acquisition. Employee costs increases were primarily due to new employees added to support the continued growth of the business. Information processing costs increased primarily due to both business growth and strategic investments.
Provision for Income Taxes
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Effective tax rate
24.9
%
 
36.9
%
 
23.7
%
 
36.7
%
Provision for income taxes
$
222

 
$
324

 
$
625

 
$
899

The effective tax rate for the three and nine months ended September 30, 2018 decreased compared to the same period in the prior year primarily due to the reduction in the corporate tax rate from 35% to 21%. In each period, the effective tax rate differs from the applicable U.S. federal statutory rate primarily due to state income taxes.
Platform Analysis
As discussed above under “—Our Sales Platforms,” we offer our products through three sales platforms (Retail Card, Payment Solutions and CareCredit), which management measures based on their revenue-generating activities. The following is a discussion of certain supplemental information for the three and nine months ended September 30, 2018, for each of our sales platforms.

17


Retail Card
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Purchase volume
$
29,264

 
$
26,347

 
$
79,986

 
$
76,400

Period-end loan receivables
$
60,564

 
$
52,119

 
$
60,564

 
$
52,119

Average loan receivables
$
60,389

 
$
51,817

 
$
55,522

 
$
51,002

Average active accounts (in thousands)
59,846

 
54,471

 
57,140

 
54,639

 
 
 
 
 
 
 
 
Interest and fees on loans
$
3,465

 
$
3,102

 
$
9,554

 
$
8,890

Retailer share arrangements
$
(851
)
 
$
(795
)
 
$
(2,209
)
 
$
(2,133
)
Other income
$
51

 
$
61

 
$
164

 
$
163

Retail Card interest and fees on loans increased by $363 million, or 11.7%, and $664 million, or 7.5%, for the three and nine months ended September 30, 2018, respectively. These increases were primarily the result of the PayPal Credit acquisition and other growth in average loan receivables.
Retailer share arrangements increased by $56 million, or 7.0%, and $76 million, or 3.6%, for the three and nine months ended September 30, 2018, respectively, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Other income decreased by $10 million, or 16.4%, for the three months ended September 30, 2018, primarily as a result of the changes in interchange revenue and loyalty costs discussed under the heading “Other Income” above. Other income was relatively flat for the nine months ended September 30, 2018.
Payment Solutions
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Purchase volume
$
4,606

 
$
4,178

 
$
12,717

 
$
11,794

Period-end loan receivables
$
17,639

 
$
16,153

 
$
17,639

 
$
16,153

Average loan receivables
$
17,234

 
$
15,848

 
$
16,810

 
$
15,538

Average active accounts (in thousands)
9,675

 
9,183

 
9,569

 
9,108

 
 
 
 
 
 
 
 
Interest and fees on loans
$
601

 
$
559

 
$
1,729

 
$
1,607

Retailer share arrangements
$
(17
)
 
$
(9
)
 
$
(28
)
 
$
(19
)
Other income
$
4

 
$
2

 
$
10

 
$
12

Payment Solutions interest and fees on loans increased by $42 million, or 7.5%, and $122 million, or 7.6%, for the three and nine months ended September 30, 2018, 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)
2018
 
2017
 
2018
 
2017
Purchase volume
$
2,573

 
$
2,368

 
$
7,634

 
$
7,055

Period-end loan receivables
$
9,318

 
$
8,656

 
$
9,318

 
$
8,656

Average loan receivables
$
9,160

 
$
8,500

 
$
8,938

 
$
8,263

Average active accounts (in thousands)
5,961

 
5,677

 
5,885

 
5,572

 
 
 
 
 
 
 
 
Interest and fees on loans
$
551

 
$
521

 
$
1,587

 
$
1,489

Retailer share arrangements
$
(3
)
 
$
(1
)
 
$
(7
)
 
$
(6
)
Other income
$
8

 
$
13

 
$
27

 
$
51

CareCredit interest and fees on loans increased by $30 million, or 5.8%, and $98 million, or 6.6%, for the three and nine months ended September 30, 2018. The increase was primarily driven by growth in average loan receivables.
Debt Securities
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our debt securities portfolio. All of our debt securities are classified as available-for-sale at September 30, 2018 and December 31, 2017, and are held to meet our liquidity objectives and to comply with the Community Reinvestment Act. Debt 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 debt securities at the dates indicated:
 
At September 30, 2018
 
At December 31, 2017
($ in millions)
Amortized
Cost
 
Estimated Fair Value
 
Amortized
Cost
 
Estimated Fair Value
U.S. government and federal agency
$
4,300

 
$
4,291

 
$
2,419

 
$
2,416

State and municipal
40

 
39

 
44

 
44

Residential mortgage-backed
1,216

 
1,161

 
1,258

 
1,231

Asset-backed
1,791

 
1,788

 
781

 
780

U.S. corporate debt
2

 
2

 
2

 
2

Total
$
7,349

 
$
7,281

 
$
4,504

 
$
4,473

Unrealized gains and losses, net of the related tax effects, on available-for-sale debt 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, 2018, our debt securities had gross unrealized gains of $1 million and gross unrealized losses of $69 million. At December 31, 2017, our debt securities had gross unrealized gains of $1 million and gross unrealized losses of $32 million.

19


Our debt securities portfolio had the following maturity distribution at September 30, 2018.
($ 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
U.S. government and federal agency
$
4,024

 
$
267

 
$
—

 
$
—

 
$
4,291

State and municipal
—

 
—

 
5

 
34

 
39

Residential mortgage-backed
—

 
1

 
160

 
1,000

 
1,161

Asset-backed
1,412

 
376

 
—

 
—

 
1,788

U.S. corporate debt
2

 
—

 
—

 
—

 
2

Total(1)
$
5,438

 
$
644

 
$
165

 
$
1,034

 
$
7,281

Weighted average yield(2)
2.2
%
 
2.2
%
 
3.2
%
 
2.8
%
 
2.3
%
______________________
(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, 2018, 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, 2018
 
(%)
 
At December 31, 2017
 
(%)
Loans
 
 
 
 
 
Credit cards
$
84,319

 
96.4
%
 
$
79,026

 
96.5
%
Consumer installment loans
1,789

 
2.0

 
1,578

 
1.9

Commercial credit products
1,353

 
1.5

 
1,303

 
1.6

Other
60

 
0.1

 
40

 
—

Total loans
$
87,521

 
100.0
%
 
$
81,947

 
100.0
%
Loan receivables increased by $5,574 million, or 6.8%, at September 30, 2018 compared to December 31, 2017, primarily driven by the PayPal Credit acquisition, partially offset by the seasonality of our business.
Loan receivables increased by $10,593 million, or 13.8%, at September 30, 2018 compared to September 30, 2017, primarily driven by the PayPal Credit acquisition, higher purchase volume and average active account growth.

20


Our loan receivables portfolio had the following geographic concentration at September 30, 2018.
($ in millions)
 
Loan Receivables
Outstanding
 
% of Total Loan
Receivables
Outstanding
State
 
California
 
$
9,148

 
10.5
%
Texas
 
$
8,796

 
10.1
%
Florida
 
$
7,274

 
8.3
%
New York
 
$
4,984

 
5.7
%
Pennsylvania
 
$
3,639

 
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, 2018
 
At December 31, 2017
Non-accrual loan receivables
$
4

 
$
5

Loans contractually 90 days past-due and still accruing interest
1,829

 
1,864

Earning TDRs(1)
1,048

 
940

Non-accrual, past-due and restructured loan receivables
$
2,881

 
$
2,809

______________________
(1)
At September 30, 2018 and December 31, 2017, balances exclude $105 million and $103 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, 2018 and 2017.
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2018
 
2017
 
2018
 
2017
Gross amount of interest income that would have been recorded in accordance with the original contractual terms
$
68

 
$
58

 
$
195

 
$
162

Interest income recognized
13

 
13

 
37

 
36

Total interest income foregone
$
55

 
$
45

 
$
158

 
$
126


21


Delinquencies
Over-30 day loan delinquencies as a percentage of period-end loan receivables decreased to 4.59% at September 30, 2018 from 4.80% at September 30, 2017, and decreased from 4.67% at December 31, 2017. These decreases include the impact in the current year from certain underwriting refinements. The decrease as compared to December 31, 2017 was partially offset by the effects of 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,
 
2018
 
2017
 
2018
 
2017
Ratio of net charge-offs to average loan receivables, including held for sale
4.97
%
 
4.95
%
 
5.67
%
 
5.23
%
Allowance for Loan Losses
The allowance for loan losses totaled $6,223 million at September 30, 2018, compared with $5,574 million at December 31, 2017 and $5,361 million at September 30, 2017, representing our best estimate of probable losses inherent in the portfolio. Our allowance for loan losses as a percentage of total loan receivables increased to 7.11% at September 30, 2018, from 6.80% at December 31, 2017 and 6.97% at September 30, 2017, which reflects the increase in forecasted net charge-offs over the next twelve months. The increase from December 31, 2017 also includes the effects of the seasonality of our business. See "Business Trends and Conditions — Asset Quality" in our 2017 Form 10-K for discussion of the various factors that contribute to forecasted net charge-offs over the next twelve months.
The following tables provide changes in our allowance for loan losses for the periods presented:
 ($ in millions)
Balance at
July 1, 2018

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
September 30, 2018

 
 
 
 
 
 
 
 
 
 
Credit cards
$
5,757

 
$
1,427

 
$
(1,269
)
 
$
202

 
$
6,117

Consumer installment loans
51

 
9

 
(13
)
 
4

 
51

Commercial credit products
50

 
15

 
(13
)
 
2

 
54

Other
1

 
—

 
—

 
—

 
1

Total
$
5,859

 
$
1,451

 
$
(1,295
)
 
$
208

 
$
6,223

($ 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


22


 
 
 
 
 
 
 
 
 
 
($ in millions)
Balance at January 1, 2018

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
September 30, 2018

 
 
Credit cards
$
5,483

 
$
4,016

 
$
(4,016
)
 
$
634

 
$
6,117

Consumer installment loans
40

 
39

 
(40
)
 
12

 
51

Commercial credit products
50

 
38

 
(39
)
 
5

 
54

Other
1

 
—

 
—

 
—

 
1

Total
$
5,574

 
$
4,093

 
$
(4,095
)
 
$
651

 
$
6,223

 
 
 
 
 
 
 
 
 
 
 
Balance at
January 1, 2017

 
Provision
charged to
operations

 
Gross charge- 
offs

 
Recoveries

 
Balance at
September 30, 2017

($ in millions)
 
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

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:
 
2018
 
2017
Three months ended September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
60,123

 
73.3
%
 
2.1
%
 
$
53,294

 
72.7
%
 
1.6
%
Securitized financings
12,306

 
15.0

 
2.8

 
11,759

 
16.0

 
2.2

Senior unsecured notes
9,552

 
11.7

 
3.7

 
8,251

 
11.3

 
3.5

Total
$
81,981

 
100.0
%
 
2.4
%
 
$
73,304

 
100.0
%
 
1.9
%
(1)
Excludes $275 million and $232 million average balance of non-interest-bearing deposits for the three months ended September 30, 2018 and 2017, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended September 30, 2018 and 2017.

23


 
 
 
 
 
 
 
 
 
 
 
 
 
2018
 
2017
Nine months ended September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
57,941

 
73.1
%
 
1.9
%
 
$
52,325

 
72.3
%
 
1.6
%
Securitized financings
12,178

 
15.4

 
2.6

 
12,096

 
16.7

 
2.1

Senior unsecured notes
9,156

 
11.5

 
3.7

 
7,983

 
11.0

 
3.5

Total
$
79,275

 
100.0
%
 
2.2
%
 
$
72,404

 
100.0
%
 
1.9
%
______________________
(1)
Excludes $282 million and $230 million average balance of non-interest-bearing deposits for the nine months ended September 30, 2018 and 2017, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the nine months ended September 30, 2018 and 2017.

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, 2018, we had $48.4 billion in direct deposits and $13.9 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger that channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to continue to expand our direct deposits base as a source of stable and diversified low-cost funding.
Our direct deposits include a range of FDIC-insured deposit products, including certificates of deposit, IRAs, money market accounts and savings accounts.
Brokered deposits are primarily from retail customers of large brokerage firms. We have relationships with 10 brokers that offer our deposits through their networks. Our brokered deposits consist primarily of certificates of deposit that bear interest at a fixed rate and at September 30, 2018, had a weighted average remaining life of 2.4 years. These deposits generally are not subject to early withdrawal.
Our ability to attract deposits is sensitive to, among other things, the interest rates we pay, and therefore, we bear funding risk if we fail to pay higher rates, or interest rate risk if we are required to pay higher rates, to retain existing deposits or attract new deposits. To mitigate these risks, our funding strategy includes a range of deposit products, and we seek to maintain access to multiple other funding sources, such as securitized financings (including our undrawn committed capacity) and unsecured debt.
The following table summarizes certain information regarding our interest-bearing deposits by type (all of which constitute U.S. deposits) for the periods indicated:
Three months ended September 30 ($ in millions)
2018
 
2017
Average
Balance
 
% of
Total
 
Average
Rate
 
Average
Balance
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
28,804

 
47.9
%
 
2.0
%
 
$
23,331

 
43.8
%
 
1.6
%
Savings accounts (including money market accounts)
18,072

 
30.1

 
1.8

 
17,522

 
32.9

 
1.2

Brokered deposits
13,247

 
22.0

 
2.6

 
12,441

 
23.3

 
2.3

Total interest-bearing deposits
$
60,123

 
100.0
%
 
2.1
%
 
$
53,294

 
100.0
%
 
1.6
%

24


 
 
 
 
 
 
 
 
 
 
 
 
Nine months ended September 30 ($ in millions)
2018
 
2017
Average
Balance
 
% of
Total
 
Average
Rate
 
Average
Balance
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
27,255

 
47.1
%
 
1.9
%
 
$
22,138

 
42.3
%
 
1.6
%
Savings accounts (including money market accounts)
18,031

 
31.1

 
1.6

 
17,492

 
33.4

 
1.1

Brokered deposits
12,655

 
21.8

 
2.5

 
12,695

 
24.3

 
2.2

Total interest-bearing deposits
$
57,941

 
100.0
%
 
1.9
%
 
$
52,325

 
100.0
%
 
1.6
%
Our deposit liabilities provide funding with maturities ranging from one day to ten years. At September 30, 2018, the weighted average maturity of our interest-bearing time deposits was 1.3 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, 2018.
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