Synchrony 6.30.2014 10Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 
(Mark One)
x    
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 2014
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)

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  ¨    No  ý
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
o
Accelerated filer
o
 
 
 
 
Non-accelerated filer
ý (Do not check if a smaller reporting company)
Smaller reporting company
o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of September 4, 2014 was 833,764,589.




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





















2



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, 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,” “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 platform revenue in a small number of Retail Card partners, promotion and support of our products by our partners, and financial performance of our partners; our need for additional financing, 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 reliance on dividends, distributions and other payments from the Bank; our ability to grow our deposits in the future; changes in market interest rates and the impact of any margin compression; effectiveness of our risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, our ability to manage our credit risk, the sufficiency of our allowance for loan losses and the accuracy of the assumptions or estimates used in preparing our financial statements; our ability to offset increases in our costs in retailer share arrangements; competition in the consumer finance industry; our concentration in the U.S. consumer credit market; our ability to successfully develop and commercialize new or enhanced products and services; our ability to realize the value of strategic investments; reductions in interchange fees; fraudulent activity; cyber-attacks or other security breaches; failure of third parties to provide various services that are important to our operations; disruptions in the operations of our computer systems and data centers; international risks and compliance and regulatory risks and costs associated with international operations; catastrophic events; 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; significant and extensive regulation, supervision, examination and enforcement of our business by governmental authorities, the impact of the Dodd-Frank Act and the impact of the CFPB’s regulation of our business; changes to our methods of offering our CareCredit products; impact of capital adequacy rules; restrictions that limit the Bank’s ability to pay dividends; regulations relating to privacy, information security and data protection as well as anti-money laundering and anti-terrorism financing laws; use of third-party vendors and ongoing third-party business relationships; effect of GECC being subject to regulation by the Federal Reserve Board both as a savings and loan holding company and as a systemically important financial institution; GE not completing the separation from us as planned or at all, GE’s inability to obtain savings and loan holding company deregistration (the “GE SLHC Deregistration”) and GE continuing to have significant control over us; completion by the Federal Reserve Board of a review (with satisfactory results) of our preparedness to operate on a standalone basis, independently of GE, and Federal Reserve Board approval required for us to continue to be a savings and loan holding company, including the timing of the approval and the imposition of any significant additional capital or liquidity requirements; our need to establish and significantly expand many aspects of our operations and infrastructure; delays in receiving or failure to receive Federal Reserve Board agreement required for us to be treated as a financial holding company after the GE SLHC Deregistration; loss of association with GE’s strong brand and reputation; limited right to use the GE brand name and logo and need to establish a new brand; GE has significant control over us; terms of our arrangements with GE may be more favorable than we will be able to obtain from unaffiliated third parties; obligations associated with being a public company; our incremental cost of operating as a standalone public company could be substantially more than anticipated; GE could engage in businesses that compete with us, and conflicts of interest may arise between us and GE; and failure caused by us of GE’s distribution of our common stock to its stockholders in exchange for its common stock to qualify for tax-free treatment, which may result in significant tax liabilities to GE for which we may be required to indemnify GE.

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 the Registration Statement on Form S-1, as amended and filed on July 18, 2014 (File No. 333-194528) (the “Registration Statement”). 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.

3



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 and combined financial statements and related notes included elsewhere in this quarterly report. 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.” References in this Form 10-Q to the Company, “we”, “us” and “our” are to Synchrony Financial and its combined and consolidated subsidiaries unless the context otherwise requires; references to “GE” are to General Electric Company and its subsidiaries; references to “GECC” are to General Electric Capital Corporation (a subsidiary of GE) and its subsidiaries; and references to the “Bank” are to our wholly-owned subsidiary, Synchrony Bank.
Introduction
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 six months ended June 30, 2014, we financed $26.0 billion and $47.1 billion of purchase volume, respectively, and at June 30, 2014, we had $54.9 billion of loan receivables and 59.2 million active accounts. For the three and six months ended June 30, 2014, we had net earnings of $472 million and $1,030 million, respectively, representing a return on assets of 3.1% and 3.5%, respectively.
We offer our credit products primarily through our wholly-owned subsidiary, Synchrony Bank. Through the Bank, we offer a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”). We are continuing to expand our direct banking operations to increase our deposit base as a source of stable and diversified low cost funding for our credit activities. We had $30.5 billion in deposits at June 30, 2014.
The Transactions

In connection with the Company’s initial public offering of its common stock, we entered into the following series of transactions (the “Transactions”) to effect the first steps in GE’s planned staged exit from our business.

The IPO

On August 5, 2014, we closed the initial public offering (the “IPO”) of 125 million shares of our common stock at a price to the public of $23.00 per share and on September 3, 2014, we issued an additional 3.5 million shares of our common stock pursuant to an option granted to the underwriters in the IPO (the “Underwriters' Option”). We received net proceeds from the IPO and the Underwriters' Option of approximately $2.8 billion. Following the closing of the IPO and the Underwriters' Option, GE currently owns approximately 84.6% of our common stock.

Debt Financings

On August 5, 2014, we borrowed the full amount under a new term loan facility (the “New Bank Term Loan Facility”) with third party lenders that provided $8.0 billion principal amount of unsecured term loans maturing in 2019. We also repaid all of our existing related party debt owed to GECC, outstanding on the closing date of the IPO, which totaled $8.0 billion (of which $7.9 billion was outstanding at June 30, 2014), and borrowed the full amount under a new term loan facility (the “New GECC Term Loan Facility”) with GECC that provided $1.5 billion principal amount of unsecured term loan maturing in 2019. On August 11, 2014, we issued a total of $3.6 billion principal amount of unsecured senior notes with various maturities ranging from 2017 through 2024, and used $0.6 billion of the net proceeds from this issuance to prepay, on a pro rata basis, $0.5 billion of the New Bank Term Loan Facility and $0.1 billion of the New GECC Term Loan Facility.


4



Agreements with GE and Affiliates

In connection with the IPO, we entered into a master agreement and a number of other agreements with GE and GECC for the purpose of accomplishing our separation from GE and setting forth various matters governing our relationship with GE after the completion of the IPO.

See Note 15. Subsequent Events to our condensed consolidated and combined financial statements for additional information on the Transactions.
Our Sales Platforms
We conduct our operations through a single business segment and offer our 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 platform revenues, loan receivables, new accounts and other sales metrics.
The following table sets forth the platform revenue for each of our sales platforms for the periods indicated.

Sales Platform Revenue(1)
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Retail Card
$
1,673

68.5
%
 
$
1,544

68.3
%
 
$
3,363

68.8
%
 
$
3,165

68.7
%
Payment Solutions
375

15.4
%
 
356

15.8
%
 
746

15.2
%
 
730

15.9
%
CareCredit
394

16.1
%
 
358

15.9
%
 
782

16.0
%
 
710

15.4
%
 
$
2,442

100.0
%
 
$
2,258

100.0
%
 
$
4,891

100.0
%
 
$
4,605

100.0
%
______________________
(1)
For a definition of platform revenue, which is a non-GAAP measure, see “Results of Operations - For the Three and Six Months Ended June 30, 2014 and 2013 - Platform Analysis - Non-GAAP Measure” below.
Retail Card. Retail Card is a leading provider of private label credit cards, and also provides Dual Cards and small and medium-sized business credit products. Our patented Dual Cards are credit cards that function as private label credit cards when used to purchase goods and services from our partners and as general purpose credit cards when used elsewhere. We offer one or more of these products primarily through 19 national and regional retailers with which we have program agreements that have an expiration date in 2016 or beyond and which accounted for greater than 95% of both our Retail Card platform revenue for the six months ended June 30, 2014 and our Retail Card loan receivables at June 30, 2014. The average length of our relationship with these Retail Card partners is 16 years. Retail Card’s platform revenue consists of interest and fees on our loan receivables, plus other income, less retailer share arrangements. Other income primarily consists of interchange fees earned on Dual Card transactions (when the card is used outside of our partners' sales channels) and fees paid to us by customers who purchase our debt cancellation products, less loyalty program payments. 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. At June 30, 2014, Payment Solutions offered these products through 260 programs with national and regional retailers, manufacturers, buying groups and industry associations and a total of approximately 62,000 participating partners. Substantially all of the credit extended in this platform is promotional financing. Payment Solutions’ platform revenue primarily consists of interest and fees on our loan receivables, including “merchant discounts,” which are fees paid to us by our partners in almost all cases to compensate us for all or part of foregone interest revenue associated with promotional financing.
CareCredit. CareCredit is a leading provider of promotional financing to consumers for elective healthcare procedures or services, such as dental, veterinary, cosmetic, vision and audiology. At June 30, 2014, we had a network of CareCredit providers that collectively have approximately 183,000 locations, the vast majority of which are individual or small groups of independent healthcare providers, through which we offer a CareCredit branded private label credit card. Substantially all of the credit extended in this platform is promotional financing. CareCredit’s platform revenue primarily consists of interest and fees on our loan receivables, including merchant discounts.

5



Our Credit Products
Through our platforms, we offer three principal types of credit products: credit cards, commercial credit products and consumer installment loans.
The following table sets forth each credit product by type (and within credit cards, by private label and Dual Cards) and indicates the percentage of our total loan receivables that are under standard terms only or pursuant to a promotional financing offer at June 30, 2014.
Credit Product
Standard Terms
 
Promotional Offer
 
Total
Private label credit cards
45.5
%
 
27.6
%
 
73.1
%
Dual Cards
22.3

 
0.2

 
22.5

Total credit cards
67.8

 
27.8

 
95.6

Commercial credit products
2.5

 

 
2.5

Consumer installment loans

 
1.9

 
1.9

Total
70.3
%
 
29.7
%
 
100.0
%
Credit Cards. We offer two principal types of credit cards: private label credit cards and Dual Cards:
Private label credit cards. Private label credit cards are partner-branded credit cards (e.g., Lowe’s or Amazon) or program-branded credit cards (e.g., CarCareONE or CareCredit) that are used primarily for the purchase of goods and services from the partner or within the program network. In Retail Card, credit under our private label credit cards typically is extended on standard terms only, and in Payment Solutions and CareCredit, credit under our private label credit cards typically is extended pursuant to a promotional financing offer.
Dual Cards. Our patented Dual Cards are credit cards that function as private label credit cards when used to purchase goods and services from our partners and as general purpose credit cards when used elsewhere. Credit extended under our Dual Cards typically is extended under standard terms only. Currently, only Retail Card offers Dual Cards. At June 30, 2014, we offered Dual Cards through 18 of our 24 Retail Card programs.
Commercial Credit Products. We offer private label cards and co-branded 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, and are rolling out an improved customer experience for this product with enhanced functionality. We offer commercial credit products primarily through our Retail Card platform to the commercial customers of our Retail Card partners.
Installment Loans. In Payment Solutions, we originate installment loans to consumers (and a limited number of commercial customers) in the United States, primarily in the power product market (motorcycles, ATVs and lawn and garden). Installment loans are closed-end credit accounts where the customer pays down the outstanding balance in installments. Installment loans are assessed periodic finance charges using fixed interest rates.
Business Trends and Conditions
We believe our business and results of operations will be impacted in the future by the following trends and conditions:
Anticipated growth in loan receivables and interest income
Changing funding mix and increased funding costs, including:
expected continued growth in our direct deposits
a significant increase in the amount of debt outstanding to fund an increase in the size of our liquidity portfolio
the replacement of existing related party debt with higher cost funding provided by third parties
a rising interest rate environment
Extended duration of program agreements and expiration of program agreements that are not extended
Increases in retailer share arrangement payments and other expense under extended program agreements
Stable asset quality and enhancements to allowance for loan loss methodology

6



Increases in other expense to operate as a fully independent company
Impact of regulatory developments
Increased capital and liquidity levels
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 Registration Statement.
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 quarter of the following year as customers pay their balances down. Loan receivables decreased from $57,254 million at December 31, 2013 to $54,285 million at March 31, 2014, before increasing to $56,331 million (including loan receivables held for sale) at June 30, 2014, reflecting these patterns.
The seasonal impact to transaction volumes and the loan receivables balance 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. For example, in addition to the seasonal increase in loan receivables at year end as a result of higher levels of consumer spending during the fourth quarter of 2013, we also experienced a seasonal increase in delinquency rates and delinquent loan receivables balances during the fourth quarter of 2013 due to lower customer payment rates, consistent with our historical fourth quarter experience. Our delinquency rates and delinquent loan receivables balances then decreased during the subsequent first quarter as customers began to pay down their loan balances and returned to current status. Because customers who were delinquent during the fourth quarter of 2013 had a higher probability of returning to current status during the first quarter of 2014 than customers who were delinquent at the end of the current period, we expected that a higher proportion of delinquent accounts outstanding at June 30, 2014 would result in charge-offs as compared to December 31, 2013. Consistent with historical experience, this resulted in a higher allowance for loan losses as a percentage of total loan receivables at the end of the current period as compared to at December 31, 2013. Accordingly, our allowance for loan losses as a percentage of total loan receivables of 5.4% at June 30, 2013 decreased to 5.1% at December 31, 2013 and again increased to 5.5% at June 30, 2014, reflecting the effects of these seasonal trends. Past due balances declined to $2,097 million at June 30, 2014 from $2,488 million at December 31, 2013, primarily due to collections from customers that were previously delinquent, resulting in their accounts returning to current status. The increase in the allowance for loan losses at June 30, 2014 compared to December 31, 2013, despite a decrease in our past due balances as a percentage of loan receivables at June 30, 2014 compared to December 31, 2013, reflected these same seasonal trends.
Results of Operations—For the Three and Six Months Ended June 30, 2014 and 2013
The discussion below provides an analysis of our results of operations for the three and six months ended June 30, 2014 and 2013.
2014 Second Quarter Highlights
Below are highlights of our performance for the three and six months ended June 30, 2014 compared to the three and six months ended June 30, 2013, as applicable, except as otherwise noted.
Net earnings decreased 11.9% to $472 million for the three months ended June 30, 2014, driven by increases in other expenses and retailer share arrangements, partially offset by higher net interest income. Net earnings increased 15.1% to $1,030 million for the six months ended June 30, 2014, driven by a reduction in our provision for loan losses and higher net interest income, partially offset by increases in retailer share arrangements and other expenses.
Loan receivables, including loan receivables held for sale, increased 8.9% to $56,331 million at June 30, 2014 compared to June 30, 2013, primarily driven by higher purchase volume.
Net interest income increased 8.5% to $2,720 million and 8.8% to $5,463 million for the three and six months ended June 30, 2014, respectively, due to higher average loan receivables.
Payments to our partners under our retailer share arrangements increased 7.9% to $590 million and 14.8% to $1,184 million for the three and six months ended June 30, 2014, respectively, primarily as a result of improved performance, including lower provision for loan losses for the six months ended June 30, 2014, and the growth of the programs in which we have retailer share arrangements, as well as from changes to the terms of the retailer

7



share arrangements for those partners with whom we extended program agreements in 2013 and 2014.
Loan delinquencies as a percentage of receivables decreased with the over-30 day delinquency rate decreasing to 3.8% at June 30, 2014 from 4.3% at December 31, 2013, driven by seasonality and continued improvement in the U.S. economy and employment rates. Net charge-off rates increased slightly to 4.9% for both the three and six months ended June 30, 2014, respectively, from 4.7% and 4.8% for the three and six months ended June 30, 2013, respectively.
Provision for loan losses increased 2.3% to $681 million for the three months ended June 30, 2014 primarily as a result of portfolio growth, partially offset by a $57 million reduction in provision for loan losses associated with the classification of certain loan receivables as held for sale.
Provision for loan losses decreased 15.6% to $1,445 million for the six months ended June 30, 2014 driven primarily as a result of an incremental provision of $538 million during the six months ended June 30, 2013 relating to the enhancements to our allowance for loan loss methodology, which was not repeated, as well as the $57 million reduction in provision for loan losses in the current year period associated with the classification of certain loan receivables as held for sale. These decreases were partially offset by increased provisions associated with portfolio growth. The allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) increased to 5.5% at June 30, 2014 from 5.4% at June 30, 2013.
Other expense increased to $797 million from $563 million and to $1,407 million from $1,102 million for the three and six months ended June 30, 2014 and 2013, respectively, driven by business growth, incremental costs associated with building a standalone infrastructure and increased marketing investments. The increase in other expense for the three months ended June 30, 2014 also reflected an increase in our expenses for a self-identified consumer remediation.
We have invested in our direct banking activities to grow our deposit base. Direct deposits have increased 42.7% to $15.7 billion at June 30, 2014, compared to December 31, 2013. As our direct deposits have increased, brokered deposits have remained flat at $14.8 billion, and we have decreased our funding from our securitization financings by 1.9% to $15.1 billion at June 30, 2014, compared to December 31, 2013.
During the six months ended June 30, 2014, and to date, we have extended five program agreements in Retail Card (American Eagle, Gap Inc., Lowe's, QVC and Sam’s Club), representing $18.7 billion in loan receivables at June 30, 2014. In addition, we extended our program agreement with PayPal until October 2016 and do not expect it to extend beyond that date. Based on notices received to date, existing program agreements with five Retail Card partners, representing $1.9 billion in loan receivables at June 30, 2014, are not expected to be renewed, but may be temporarily extended for a short period beyond their current contractual expiration dates, which primarily occur during the second half of 2014. In our Payment Solutions sales platform, we either entered into new, or renewed existing, programs with a total of five partners (net of partners from whom we have received notices that they will not be extending their programs beyond their current contractual expiration dates), representing $0.5 billion in loan receivables at June 30, 2014, and increased the number of provider locations in our CareCredit network by approximately 5,000 locations. The program agreements that were not extended will continue to be reported in our results of operations through their contractual expiration dates.

8



Summary Earnings
The following table sets forth our results of operations for the periods indicated.
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Interest income
$
2,926

 
$
2,686

 
$
5,859

 
$
5,390

Interest expense
206

 
178

 
396

 
371

Net interest income
2,720

 
2,508

 
5,463

 
5,019

Retailer share arrangements
(590
)
 
(547
)
 
(1,184
)
 
(1,031
)
Net interest income, after retailer share arrangements
2,130

 
1,961

 
4,279

 
3,988

Provision for loan losses
681

 
666

 
1,445

 
1,713

Net interest income, after retailer share arrangements and provision for loan losses
1,449

 
1,295

 
2,834

 
2,275

Other income
112

 
124

 
227

 
256

Other expense
797

 
563

 
1,407

 
1,102

Earnings before provision for income taxes
764

 
856

 
1,654

 
1,429

Provision for income taxes
292

 
320

 
624

 
534

Net earnings
$
472

 
$
536

 
$
1,030

 
$
895


9



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 June 30,
 
Six months ended June 30,
($ in millions, except per account data)
2014
 
2013
 
2014
 
2013
Financial Position Data (Average):
 
 
 
 
 
 
 
Loan receivables, including held for sale
$
55,363

 
$
50,707

 
$
55,593

 
$
50,895

Total assets
$
61,215

 
$
54,502

 
$
60,471

 
$
55,304

Deposits
$
28,789

 
$
21,439

 
$
27,770

 
$
21,927

Borrowings
$
22,686

 
$
25,382

 
$
22,930

 
$
25,553

Total equity
$
6,328

 
$
4,948

 
$
6,452

 
$
5,198

Selected Performance Metrics:
 
 
 
 
 
 
 
Purchase volume(1)
$
25,978

 
$
23,554

 
$
47,064

 
$
43,357

Retail Card
$
21,032

 
$
18,981

 
$
37,745

 
$
34,700

Payment Solutions
$
3,115

 
$
2,815

 
$
5,802

 
$
5,286

CareCredit
$
1,831

 
$
1,758

 
$
3,517

 
$
3,371

Average active accounts (in thousands)(2)
58,386

 
54,698

 
59,080

 
55,127

Average purchase volume per active account
$
445

 
$
431

 
$
797

 
$
786

Average loan receivables balance per active account
$
948

 
$
927

 
$
941

 
$
923

Net interest margin(3)
17.8
%
 
18.4
%
 
18.3
%
 
18.3
%
Net charge-offs
$
673

 
$
600

 
$
1,331

 
$
1,203

Net charge-offs as a % of average loan receivables
4.9
%
 
4.7
%
 
4.9
%
 
4.8
%
Allowance coverage ratio(4)
5.5
%
 
5.4
%
 
5.5
%
 
5.4
%
Return on assets(5)
3.1
%
 
3.9
%
 
3.5
%
 
3.3
%
Return on equity(6)
29.9
%
 
43.4
%
 
32.4
%
 
34.7
%
Equity to assets(7)
10.3
%
 
9.1
%
 
10.7
%
 
9.4
%
Other expense as a % of average loan receivables
5.8
%
 
4.5
%
 
5.1
%
 
4.4
%
Efficiency ratio(8)
35.5
%
 
27.0
%
 
31.2
%
 
26.0
%
Effective income tax rate
38.2
%
 
37.4
%
 
37.7
%
 
37.4
%
Selected Period End Data:
 
 
 
 
 
 
 
Total loan receivables
$
54,873

 
$
51,706

 
$
54,873

 
$
51,706

Allowance for loan losses
$
(3,006
)
 
$
(2,784
)
 
$
(3,006
)
 
$
(2,784
)
30+ days past due as a % of loan receivables
3.8
%
 
3.8
%
 
3.8
%
 
3.8
%
90+ days past due as a % of loan receivables
1.7
%
 
1.6
%
 
1.7
%
 
1.6
%
Total active accounts (in thousands)(2)
59,248

 
55,337

 
59,248

 
55,337

Full time employees
10,240

 
8,586

 
10,240

 
8,586

______________________
(1)
Purchase volume, or net credit sales, represents the aggregate amount of charges incurred on credit cards or other credit product accounts less returns during the period.
(2)
Active accounts represent credit card or installment loan accounts on which there has been a purchase, payment or outstanding balance in the current month. Open accounts represent credit card or installment loan accounts that are not closed, blocked or more than 60 days delinquent.
(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 end-of-period 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.


10



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.
 
2014
 
2013
Three months ended June 30 ($ in millions)
Average
Balance(1)
 
Interest
Income /
Expense
 
Average
Yield /
Rate(2)
 
Average
Balance(1)
 
Interest
Income/
Expense
 
Average
Yield /
Rate(2)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(3)
$
5,489

 
$
3

 
0.2
%
 
$
3,702

 
$
3

 
0.3
%
Securities available for sale
285

 
3

 
4.2
%
 
209

 
2

 
3.8
%
Loan receivables(4):
 
 
 
 
 
 
 
 
 
 
 
Credit cards (including held for sale) (5)
52,957

 
2,860

 
21.7
%
 
47,968

 
2,612

 
21.8
%
Consumer installment loans
1,004

 
24

 
9.6
%
 
1,375

 
33

 
9.6
%
Commercial credit products
1,387

 
36

 
10.4
%
 
1,353

 
36

 
10.7
%
Other
15

 

 
%
 
11

 

 
%
Total loan receivables
55,363

 
2,920

 
21.2
%
 
50,707

 
2,681

 
21.2
%
Total interest-earning assets
61,137

 
2,926

 
19.2
%
 
54,618

 
2,686

 
19.7
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
637

 
 
 
 
 
547

 
 
 
 
Allowance for loan losses
(3,005
)
 
 
 
 
 
(2,702
)
 
 
 
 
Other assets
2,446

 
 
 
 
 
2,039

 
 
 
 
Total non-interest-earning assets
78

 
 
 
 
 
(116
)
 
 
 
 
Total assets
$
61,215

 
 
 
 
 
$
54,502

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
28,568

 
$
109

 
1.5
%
 
$
20,972

 
$
93

 
1.8
%
Borrowings of consolidated securitization entities
14,727

 
54

 
1.5
%
 
16,609

 
55

 
1.3
%
Related party debt
7,959

 
43

 
2.2
%
 
8,773

 
30

 
1.4
%
Total interest-bearing liabilities
51,254

 
206

 
1.6
%
 
46,354

 
178

 
1.5
%
Non-interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
221

 
 
 
 
 
467

 
 
 
 
Other liabilities
3,412

 
 
 
 
 
2,733

 
 
 
 
Total non-interest-bearing liabilities
3,633

 
 
 
 
 
3,200

 
 
 
 
Total liabilities
54,887

 
 
 
 
 
49,554

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
6,328

 
 
 
 
 
4,948

 
 
 
 
Total liabilities and equity
$
61,215

 
 
 
 
 
$
54,502

 
 
 
 
Interest rate spread(6)
 
 
 
 
17.6
%
 
 
 
 
 
18.2
%
Net interest income
 
 
$
2,720

 
 
 
 
 
$
2,508

 
 
Net yield on total interest-earning assets(7)
 
 
 
 
17.8
%
 
 
 
 
 
18.4
%







11



 
2014
 
2013
Six months ended June 30 ($ in millions)
Average
Balance(1)
 
Interest
Income /
Expense
 
Average
Yield /
Rate(2)
 
Average
Balance(1)
 
Interest
Income/
Expense
 
Average
Yield /
Rate(2)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(3)
$
4,710

 
$
6

 
0.3
%
 
$
4,214

 
$
6

 
0.3
%
Securities available for sale
268

 
5

 
3.8
%
 
201

 
4

 
4.0
%
Loan receivables(4):
 
 
 
 
 
 
 
 
 
 
 
Credit cards (including held for sale) (5)
53,238

 
5,726

 
21.8
%
 
48,170

 
5,240

 
21.9
%
Consumer installment loans
984

 
46

 
9.5
%
 
1,386

 
67

 
9.7
%
Commercial credit products
1,356

 
76

 
11.4
%
 
1,328

 
73

 
11.1
%
Other
15

 

 
%
 
11

 

 
%
Total loan receivables
55,593

 
5,848

 
21.3
%
 
50,895

 
5,380

 
21.3
%
Total interest-earning assets
60,571

 
5,859

 
19.6
%
 
55,310

 
5,390

 
19.7
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
611

 
 
 
 
 
542

 
 
 
 
Allowance for loan losses
(2,964
)
 
 
 
 
 
(2,524
)
 
 
 
 
Other assets
2,253

 
 
 
 
 
1,976

 
 
 
 
Total non-interest-earning assets
(100
)
 
 
 
 
 
(6
)
 
 
 
 
Total assets
$
60,471

 
 
 
 
 
$
55,304

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
27,488

 
$
205

 
1.5
%
 
$
21,435

 
$
187

 
1.8
%
Borrowings of consolidated securitization entities
14,799

 
101

 
1.4
%
 
16,809

 
111

 
1.3
%
Related party debt
8,131

 
90

 
2.2
%
 
8,744

 
73

 
1.7
%
Total interest-bearing liabilities
50,418

 
396

 
1.6
%
 
46,988

 
371

 
1.6
%
Non-interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
282

 
 
 
 
 
492

 
 
 
 
Other liabilities
3,319

 
 
 
 
 
2,626

 
 
 
 
Total non-interest-bearing liabilities
3,601

 
 
 
 
 
3,118

 
 
 
 
Total liabilities
54,019

 
 
 
 
 
50,106

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
6,452

 
 
 
 
 
5,198

 
 
 
 
Total liabilities and equity
$
60,471

 
 
 
 
 
$
55,304

 
 
 
 
Interest rate spread(6)
 
 
 
 
18.0
%
 
 
 
 
 
18.1
%
Net interest income
 
 
$
5,463

 
 
 
 
 
$
5,019

 
 
Net yield on total interest-earning assets(7)
 
 
 
 
18.3
%
 
 
 
 
 
18.3
%
______________________
(1)
Average balances are based on monthly balances, including beginning of period balances, except where monthly balances are unavailable and quarterly balances are used. Collection of daily averages involves undue burden and expense. We believe our average balance sheet data appropriately incorporates the seasonality in the level of our loan receivables and is representative of our operations.
(2)
Average yields/rates are based on total interest income/expense over average monthly balances.
(3)
Includes average restricted cash balances of $156 million and $48 million for the three months ended June 30, 2014 and 2013, respectively, and $118 million and $51 million for the six months ended June 30, 2014 and 2013, respectively.
(4)
Non-accrual loans are included in the average loan receivables balances.
(5)
Interest income on credit cards includes fees on loans of $498 million and $467 million for the three months ended June 30, 2014 and 2013, respectively, and $1,026 million and $949 million for the six months ended June 30, 2014 and 2013, respectively.
(6)
Interest rate spread represents the difference between the yield on total interest-earning assets and the rate on total interest-bearing liabilities.
(7)
Net yield on interest-earning assets represents net interest income, divided by average total interest-earning assets.

12



For a summary description of the key line items included in our Statements of Earnings, see “Management's Discussion and Analysis of Financial Condition and Results of Operations - Description of Key Combined Statements of Earnings Line Items” in our Registration Statement.
Interest Income
Interest income increased by $240 million, or 8.9%, for the three months ended June 30, 2014. This increase was driven primarily by the increase in average interest-earning assets.
Average interest-earning assets. Interest-earning assets are comprised primarily of loan receivables. Average loan receivables, including loans held for sale, increased by $4,656 million, or 9.2%, for the three months ended June 30, 2014. This increase in average loan receivables was driven primarily by higher purchase volume resulting from an increase in average active credit card accounts to 58.4 million for the three months ended June 30, 2014 from 54.7 million for the three months ended June 30, 2013.
Yield on average interest-earning assets. The yield on interest-earning assets decreased to 19.2% for the three months ended June 30, 2014 from 19.7% for the three months ended June 30, 2013, driven primarily by an increase in our average interest-earning cash and equivalents which earn a lower yield than our loan receivables. The yield on our average loan receivables was flat at 21.2% for the three months ended June 30, 2014 and 2013.

Interest income increased by $469 million, or 8.7%, for the six months ended June 30, 2014. This increase was driven primarily by the increase in average interest-earning assets.
Average interest-earning assets. Interest-earning assets are comprised primarily of loan receivables. Average loan receivables, including loans held for sale, increased by $4,698 million, or 9.2%, for the six months ended June 30, 2014. This increase in average loan receivables was driven primarily by higher purchase volume resulting from an increase in average active credit card accounts to 59.1 million for the six months ended June 30, 2014 from 55.1 million for the six months ended June 30, 2013.
Yield on average interest-earning assets. The yield on interest-earning assets decreased to 19.6% for the six months ended June 30, 2014 from 19.7% for the six months ended June 30, 2013, driven primarily by an increase in our average interest-earning cash and equivalents which earn a lower yield than our loan receivables. The yield on our average loan receivables was flat at 21.3% for the six months ended June 30, 2014 and 2013.
Interest Expense
Interest expense increased by $28 million, or 15.7%, and by $25 million, or 6.7%, for the three and six months ended June 30, 2014, respectively, driven primarily by increases in average interest-bearing liabilities of $4,900 million, or 10.6%, and of $3,430 million, or 7.3%, respectively. The increases in average interest-bearing liabilities were driven primarily by increases of $7.6 billion and $6.1 billion, respectively, in our average interest-bearing deposit accounts, partially offset by a reduction in average borrowings under our securitization programs and our related party debt. The increase in interest expense for the three months ended June 30, 2014 also reflected an increase in our cost of funds from 1.5% to 1.6%.
Net Interest Income
Net interest income increased by $212 million, or 8.5%, and by $444 million, or 8.8%, for the three and six months ended June 30, 2014, respectively, driven by increases in average interest-earning receivables, partially offset by higher interest expense and a decrease in our yield on interest-earning assets due to a higher average interest-earning cash and equivalents balance.
Retailer Share Arrangements
Retailer share arrangements increased by $43 million, or 7.9%, and by $153 million, or 14.8%, for the three and six months ended June 30, 2014, respectively, driven by the growth and improved performance of the programs in which we have retailer share arrangements, as well as by changes to the terms of the retailer share arrangements for those partners with whom we extended program agreements in the second half of 2013 and in 2014. For the six months ended June 30, 2014, the improved performance of the programs in which we have retailer share arrangements also included the effect of a lower provision for loan losses.

13



Provision for Loan Losses
Provision for loan losses increased by $15 million, or by 2.3%, for the three months ended June 30, 2014. This increase was primarily driven by portfolio growth partially offset by a $57 million reduction in provision for loan losses associated with the classification of certain loan receivables as held for sale. During the three months ended June 30, 2014, we classified a total of $1.5 billion of loan receivables as held for sale for two portfolios we plan to sell in the fourth quarter of 2014.
Provision for loan losses decreased by $268 million, or by 15.6%, for the six months ended June 30, 2014. This decrease was driven primarily as a result of an incremental provision of $538 million during the six months ended June 2013 relating to the enhancements to our allowance for loan loss methodology, which was not repeated in the current year period, as well as a $57 million reduction in provision for loan losses associated with the classification of certain loan receivables as held for sale. This decrease was offset in part by increased provisions relating to loan receivables growth.
Other Income
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Interchange revenue
$
92

 
$
81

 
$
168

 
$
153

Debt cancellation fees
70

 
77

 
140

 
162

Loyalty programs
(63
)
 
(58
)
 
(106
)
 
(98
)
Other
13

 
24

 
25

 
39

Total other income
$
112

 
$
124

 
$
227

 
$
256

Other income decreased by $12 million, or 9.7%, and by $29 million, or 11.3%, for the three and six months ended June 30, 2014, respectively, primarily due to a decrease in the “other” component resulting from a gain recorded in the prior year period that did not re-occur. Lower debt cancellation fees driven by fewer customers being enrolled in the product and higher loyalty costs were partially offset by increased interchange revenue driven by increased purchase volume outside of our retail partners' sales channels.
Other Expense
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Employee costs
$
207

 
$
173

 
$
400

 
$
335

Professional fees
155

 
107

 
296

 
209

Marketing and business development
97

 
53

 
180

 
98

Information processing
53

 
48

 
105

 
94

Corporate overhead allocations and assessments(1)
73

 
56

 
134

 
109

Other(1)
212

 
126

 
292

 
257

Total other expense
$
797

 
$
563

 
$
1,407

 
$
1,102

______________________ 
(1)
In our Condensed Consolidated and Combined Statements of Earnings, these two items are combined and included under a single line item in other expense under the heading “other.”
Other expense increased by $234 million and by $305 million, for the three and six months ended June 30, 2014, respectively, due to increases in all of our expense categories.
Employee costs increased primarily due to additional compensation expenses for new employees and salary increases for existing employees driven by the growth of our business and the building of our standalone infrastructure. Professional fees increased due to higher professional and other consulting fees related to the IPO, our planned separation from GE and growth of the retail deposit platform. Marketing and business development costs increased due to increased marketing expenses, investments in our brand and increased amortization expense associated with program acquisitions and extensions. Information processing costs increased driven primarily by the growth of our business.

14



Corporate overhead allocations and assessments have been determined primarily using our percentage of GECC’s relevant expenses and increased in the current periods as we comprised a greater percentage of GECC’s total costs. These amounts do not include services provided by GE where the costs associated with such services are directly billed and included in the appropriate cost categories (e.g., employee benefit costs are included in employee costs above).
The “other” component increased for the three and six months ended June 30, 2014 primarily due to a $42 million increase in our reserves for a self-identified consumer remediation as a result of developments during the three months ended June 30, 2014. We also resolved certain regulatory matters with the Consumer Financial Protection Bureau's (the “CFPB”) and Department of Justice (the “DOJ”) in the three months ended June 30, 2014 that were previously reserved for and therefore did not have a material impact on our results for the three months ended June 30, 2014.
Provision for Income Taxes
Our effective tax rate increased to 38.2% from 37.4% for the three months ended June 30, 2014 and 2013, respectively, and increased to 37.7% from 37.4% for the six months ended June 30, 2014 and 2013, respectively. The effective tax rate for the three and six months ended June 30, 2014 differs from the effective tax rate in the same period in the previous year primarily due to certain non-deductible expenses and an item related to an internal corporate reorganization. In each period the effective tax rate differs from the U.S. federal statutory tax rate of 35.0% primarily due to state income taxes.
Platform Analysis
As discussed above under “—Introduction—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 the platform revenue for each of our platforms.
Non-GAAP Measure
In order to assess and internally report the revenue performance of our three sales platforms, we use a measure we refer to as “platform revenue.” Platform revenue is the sum of three line items in our Condensed Consolidated and Combined Statements of Earnings prepared in accordance with GAAP: “interest and fees on loans,” plus “other income,” less “retailer share arrangements.” Platform revenue itself is not a measure presented in accordance with GAAP. We deduct retailer share arrangements but do not deduct other line item expenses, such as interest expense, provision for loan losses and other expense, because those items are managed for the business as a whole. We believe that platform revenue is a useful measure to investors because it represents management’s view of the net revenue contribution of each of our platforms. This measure should not be considered a substitute for interest and fees on loans or other measures of performance we have reported in accordance with GAAP. The reconciliation of platform revenue to interest and fees on loans for each platform is set forth in the table included in the discussion of each of our three platforms below. The following table sets forth the reconciliation of total platform revenue to total interest and fees on loans for the periods indicated.
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Interest and fees on loans
$
2,920

 
$
2,681

 
$
5,848

 
$
5,380

Other income
112

 
124

 
227

 
256

Retailer share arrangements
(590
)
 
(547
)
 
(1,184
)
 
(1,031
)
Platform revenue
$
2,442

 
$
2,258

 
$
4,891

 
$
4,605


15



Retail Card
The following table sets forth supplemental information related to our Retail Card platform for the periods indicated.
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions, except per account data)
2014
 
2013
 
2014
 
2013
Purchase volume
$
21,032

 
$
18,981

 
$
37,745

 
$
34,700

Period-end loan receivables (including loan receivables held for sale)
$
38,696

 
$
35,208

 
$
38,696

 
$
35,208

Average loan receivables
$
38,047

 
$
34,488

 
$
38,273

 
$
34,651

Average active accounts (in thousands)
47,248

 
44,424

 
47,918

 
44,829

Average purchase volume per account
$
445

 
$
427

 
$
788

 
$
774

Average loan receivable balance per account
$
805

 
$
776

 
$
799

 
$
773

 
 
 
 
 
 
 
 
Interest and fees on loans
$
2,158

 
$
1,974

 
$
4,336

 
$
3,964

Other income
92

 
105

 
188

 
211

Retailer share arrangements
(577
)
 
(535
)
 
(1,161
)
 
(1,010
)
Platform revenue
$
1,673

 
$
1,544

 
$
3,363

 
$
3,165

Retail Card platform revenue increased by $129 million, or 8.4%, and by $198 million, or 6.3%, for the three and six months ended June 30, 2014, respectively. These increases were primarily the result of an increase in interest and fees on loans driven by an increase in average loan receivables, offset in part by a reduction of other income due to a gain recorded in the prior year periods that did not re-occur and increases in retailer share arrangement payments. The increases in these payments were as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Payment Solutions
The following table sets forth supplemental information relating to our Payment Solutions platform for the periods indicated.
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions, except per account data)
2014
 
2013
 
2014
 
2013
Purchase volume
$
3,115

 
$
2,815

 
$
5,802

 
$
5,286

Period-end loan receivables
$
11,014

 
$
10,311

 
$
11,014

 
$
10,311

Average loan receivables
$
10,785

 
$
10,152

 
$
10,799

 
$
10,232

Average active accounts (in thousands)
6,692

 
6,147

 
6,718

 
6,185

Average purchase volume per account
$
465

 
$
458

 
$
864

 
$
855

Average loan receivable balance per account
$
1,612

 
$
1,652

 
$
1,607

 
$
1,654

 
 
 
 
 
 
 
 
Interest and fees on loans
$
379

 
$
356

 
$
751

 
$
724

Other income
8

 
10

 
16

 
23

Retailer share arrangements
(12
)
 
(10
)
 
(21
)
 
(17
)
Platform revenue
$
375

 
$
356

 
$
746

 
$
730

Payment Solutions platform revenue increased by $19 million, or 5.3%, and by $16 million, or 2.2%, for the three and six months ended June 30, 2014, respectively. These increases were primarily the result of higher interest and fees on loans due to an increase in average loan receivables.

16



CareCredit
The following table sets forth supplemental information relating to our CareCredit platform for the periods indicated.
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions, except per account data)
2014
 
2013
 
2014
 
2013
Purchase volume
$
1,831

 
$
1,758

 
$
3,517

 
$
3,371

Period-end loan receivables
$
6,621

 
$
6,187

 
$
6,621

 
$
6,187

Average loan receivables
$
6,531

 
$
6,067

 
$
6,521

 
$
6,012

Average active accounts (in thousands)
4,446

 
4,127

 
4,444

 
4,113

Average purchase volume per account
$
412

 
$
426

 
$
791

 
$
820

Average loan receivable balance per account
$
1,469

 
$
1,470

 
$
1,467

 
$
1,462

 
 
 
 
 
 
 
 
Interest and fees on loans
$
383

 
$
351

 
$
761

 
$
692

Other income
12

 
9

 
23

 
22

Retailer share arrangements
(1
)
 
(2
)
 
(2
)
 
(4
)
Platform revenue
$
394

 
$
358

 
$
782

 
$
710

CareCredit platform revenue increased by $36 million, or 10.1%, and by $72 million, or 10.1% for the three and six months ended June 30, 2014, respectively. These increases were primarily the result of an increase in interest and fees on loans driven by an increase in average loan receivables.
Separation from GE and Related Financial Arrangements
In connection with the IPO, we entered into a Transitional Services Agreement (the “TSA”) and various other agreements with GE and its affiliates that, together with a number of existing agreements relating to our securitized financings that remain in effect following our IPO, govern the relationship between GECC, GE and us after the completion of the IPO. See Note 15. Subsequent Events to our condensed consolidated and combined financial statements for additional information on the agreements entered into in connection with the IPO. We also repaid all of our existing related party debt owed to GECC, outstanding on the closing date of the IPO, totaling $8.0 billion (of which $7.9 billion was outstanding at June 30, 2014), and entered into the New GECC Term Loan Facility, pursuant to which GECC provided us with a term loan of $1.5 billion, of which $0.1 billion was prepaid with a portion of the net proceeds from our issuance of $3.6 billion of unsecured senior notes.
Prior to the IPO, GE and its subsidiaries, including GECC, provided a variety of services and funding to us. All of the related party costs and expenses incurred by us for the three and six months ended June 30, 2014 and 2013 disclosed in the table below relate to these historical arrangements. The principal financial implications of these arrangements are discussed below.
The costs and expenses related to the services and funding provided by GE and GECC include:
direct costs associated with services provided directly to us;
indirect costs related to GE corporate overhead allocation and assessments; and
interest expense for related party debt.

17



The following table sets forth our direct costs, indirect costs, and interest expenses related to services and funding provided by GE for the periods indicated.
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Direct costs(1)
$
62

 
$
56

 
$
126

 
$
103

Indirect costs(1)
73

 
56

 
134

 
109

Interest expense(2)
43

 
30

 
90

 
73

Total expenses for services and funding provided by GE
$
178

 
$
142

 
$
350

 
$
285

______________________
(1)
Direct costs and indirect costs are included in the other expense line items in our Condensed Consolidated and Combined Statements of Earnings.
(2)
Included in the interest expense line item in our Condensed Consolidated and Combined Statements of Earnings.
Direct Costs. Certain functions and services, such as employee benefits and insurance, are centralized at GE. In addition, certain third-party contracts for goods and services, such as technology licenses and telecommunication contracts, from which we benefit are entered into by GE. GE allocated the costs associated with these goods and services to us using established allocation methodologies (e.g., pension costs are allocated using an actuarially determined percentage applied to the total compensation of employees who participate in such pension plans). Below is a description of the services resulting in the most significant direct costs.
Employee benefits and benefit administration. Historically, we have reimbursed GE for benefits provided to our employees under various U.S. GE employee benefit plans, including costs associated with our employees’ participation in GE’s retirement plans (pension, retiree health and life insurance, and savings benefit plans) and active health and life insurance benefit plans. We incurred expenses (including administrative costs) associated with these plans of $39 million and $37 million for the three months ended June 30, 2014 and 2013, respectively, and $80 million and $65 million for the six months ended June 30, 2014 and 2013, respectively. GE will continue to provide these benefits to our employees at our cost as long as GE owns at least 50% of our outstanding common stock.
Information technology. GE provided us with certain information technology infrastructure (e.g., data centers), applications and support services. We have incurred expenses for these services of $10 million and $7 million for the three months ended June 30, 2014 and 2013, respectively, and $19 million and $15 million for the six months ended June 30, 2014 and 2013, respectively.
Telecommunication costs. GE provided us with telecommunication services. These third-party costs are allocated to our business based on the number of phone lines used by our business. We have incurred expenses for these services of $9 million for each of the three months ended June 30, 2014 and 2013, and $19 million and $17 million for the six months ended June 30, 2014 and 2013, respectively.
Other including leases for vehicles, equipment and facilities. GE and GE affiliates provided us with certain vehicle and equipment leases. In addition, we have certain facilities shared with GE and GE affiliates for which we are allocated our share of the cost based on space occupied by our business and employees. With respect to these other costs, we have incurred $4 million and $3 million for the three months ended June 30, 2014 and 2013, respectively, and $8 million and $6 million for the six months ended June 30, 2014 and 2013, respectively.
In addition to the allocations for the direct costs of the described services, there were expenses for certain items, such as payroll for our employees, corporate credit card bills and freight expenses, which we incurred directly but for which GE advanced the payment through a centralized payment system on our behalf and we reimbursed GE in full for amounts paid. These expenses are reflected in the relevant line items of our financial statements, but are not included in the direct costs identified above.
Under the TSA, direct costs billed to us subsequent to our IPO will be at GE’s cost in accordance with historic allocation methodologies. We expect the majority of the services provided by GE will be replaced within two years from the completion of our IPO.

18



Indirect Costs. GE and GECC allocated costs to us related to corporate overhead that directly or indirectly benefits our business. These assessments related to information technology, insurance coverage, tax services provided, executive incentive payments, advertising and branding and other functional support. These allocations were determined primarily using our percentage of GECC’s relevant expenses. Following our IPO, any assessment made by GE will be made under the TSA in respect of specified services.
Interest Expense. Historically, we have had access to funding provided by GECC. We used related party debt provided by GECC to meet our funding requirements after taking into account deposits held at the Bank, funding from securitized financings and cash generated from our operations. We incurred borrowing costs for related party debt of $43 million and $30 million for the three months ended June 30, 2014 and 2013, respectively, and $90 million and $73 million, for the six months ended June 30, 2014 and 2013, respectively. Our average cost of funds for related party debt was 2.2% and 1.4% for the three months ended June 30, 2014 and 2013, respectively, and 2.2% and 1.7% for the six months ended June 30, 2014 and 2013, respectively.
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 June 30, 2014 and December 31, 2013, and are held primarily to comply with the Community Reinvestment Act. Investment securities classified as available-for-sale are reported in our Condensed Consolidated and Combined Statements of Financial Position at fair value. Our portfolio of investment securities consisted primarily of state and municipal bonds and residential mortgage backed securities.
The following table sets forth the amortized cost and fair value of our investment securities at the dates indicated.
 
At June 30, 2014
 
At December 31, 2013
($ in millions)
Amortized
Cost
 
Fair
Value
 
Amortized
Cost
 
Fair
Value
Debt:
 
 
 
 
 
 
 
State and municipal
$
59

 
$
56

 
$
53

 
$
46

Residential mortgage-backed
230

 
227

 
183

 
175

Equity
15

 
15

 
15

 
15

Total
$
304

 
$
298

 
$
251

 
$
236

Unrealized gains and losses, net of the related tax effect, on available-for-sale securities that are not other-than-temporarily impaired are excluded from earnings and are reported as a separate component of comprehensive income (loss) until realized. At June 30, 2014, our investment securities had gross unrealized gains of $3 million and gross unrealized losses of $9 million. At December 31, 2013, our investment securities had gross unrealized gains of $1 million and gross unrealized losses of $16 million.
Our investment securities portfolio had the following maturity distribution at June 30, 2014. Equity securities have been excluded from the table because they do not have a maturity.
($ 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:
 
 
 
 
 
 
 
 
 
State and municipal
$

 
$
1

 
$
1

 
$
54

 
$
56

Residential mortgage-backed

 

 

 
227

 
227

Total
$

 
$
1

 
$
1

 
$
281

 
$
283

Weighted average yield(1)

 
3.7
%
 
3.9
%
 
3.6
%
 
3.6
%
______________________
(1)
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 June 30, 2014, we did not hold investments in any single issuer with an aggregate book value that exceeded 10% of equity.

19



Loan Receivables
The following discussion provides supplemental information regarding our loan receivables portfolio.
Loan receivables are our largest category of assets and represent our primary source of revenues. The following tables set forth the composition of our loan receivables portfolio by product type at the dates indicated.
($ in millions)
At June 30, 2014
 
(%)
 
At December 31, 2013
 
(%)
Loans
 
 
 
 
 
Credit cards
$
52,406

 
95.5
%
 
$
54,958

 
96.0
%
Consumer installment loans
1,047

 
1.9

 
965

 
1.7

Commercial credit products
1,405

 
2.6

 
1,317

 
2.3

Other
15

 

 
14

 

Total loans
$
54,873

 
100.0
%
 
$
57,254

 
100.0
%
Loan receivables decreased by $2,381 million, or 4.2%, at June 30, 2014 compared to December 31, 2013. The decrease was driven primarily by the reclassification of loan receivables, totaling $1,458 million at June 30, 2014, to loan receivables held for sale, for two portfolios relating to programs that are not being extended and that we plan to sell in the fourth quarter of 2014, as well as the seasonality of our business as customers paid their balances down in the first quarter. Loan receivables increased $3,167 million, or 6.1%, at June 30, 2014 compared to June 30, 2013, driven by an 8.9% increase in loan receivables primarily resulting from higher purchase volume. This increase was partially offset by the reclassification of $1,458 million of loan receivables to loan receivables held for sale.
Our loan receivables portfolio had the following maturity distribution at June 30, 2014.
($ in millions)
Within 1
Year(1)
 
1-5 Years
 
After
5 Years
 
Total
Loans
 
 
 
 
 
 
 
Credit cards
$
52,406

 
$

 
$

 
$
52,406

Consumer installment loans
25

 
577

 
445

 
1,047

Commercial credit products
1,405

 

 

 
1,405

Other
1

 
6

 
8

 
15

Total loans
$
53,837

 
$
583

 
$
453

 
$
54,873

Loans due after one year at fixed interest rates
N/A

 
$
583

 
$
453

 
$
1,036

Loans due after one year at variable interest rates
N/A

 

 

 

Total loans due after one year
N/A

 
$
583

 
$
453

 
$
1,036

______________________
(1)
Credit card loans have minimum payment requirements but no stated maturity and therefore are included in the due within one year category. However, many of our credit card holders will revolve their balances, which may extend their repayment period beyond one year for balances at June 30, 2014.

20



Our loan receivables portfolio (including loan receivables held for sale) had the following geographic concentration at June 30, 2014.
($ in millions)
 
Loan Receivables
Outstanding(1)
 
% of Total Loan
Receivables
Outstanding
State
 
Texas
 
$
5,751

 
10.2
%
California
 
5,387

 
9.6
%
Florida
 
4,247

 
7.5
%
New York
 
3,216

 
5.7
%
Pennsylvania
 
2,458

 
4.4
%
______________________
(1)
Based on June 2014 customer statement-end balances extrapolated to June 30, 2014. Individual customer balances at June 30, 2014 are not available without undue burden and expense.
Impaired Loans and Troubled Debt Restructurings
Our loss mitigation strategy is intended to minimize economic loss and at times can result in rate reductions, principal forgiveness, extensions or other actions, which may cause the related loan to be classified as a Troubled Debt Restructuring (“TDR”) and also be impaired. We use short term (3 to 12 months) or long term (12 to 60 months) modification programs for borrowers experiencing financial difficulty as a loss mitigation strategy to improve long-term collectability of the loans that are classified as TDRs. For our credit card customers, the short term program primarily consists of a reduced minimum payment and an interest rate reduction, both lasting for a period no longer than 12 months. The long term program involves changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The long term program does not normally provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. We also make loan modifications for some customers who request financial assistance through external sources, such as a consumer credit counseling agency program. The loans that are modified typically receive a reduced interest rate but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. The determination of whether these changes to the terms and conditions meet the TDR criteria includes our consideration of all relevant facts and circumstances.
Loans classified as TDRs are recorded at their present value with impairment measured as the difference between the loan balance and the discounted present value of cash flows expected to be collected. Consistent with our measurement of impairment of modified loans on a collective basis, the discount rate used for credit card loans is the original effective interest rate.
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 June 30, 2014
 
At December 31, 2013
Non-accrual loan receivables
$
1

 
$
2

Loans contractually 90 days past-due and still accruing interest
907

 
1,119

Earning TDRs(1)
687

 
741

Non-accrual, past due and restructured loan receivables
$
1,595

 
$
1,862

______________________
(1)
At June 30, 2014 and December 31, 2013 balances exclude $46 million and $70 million, respectively, of TDRs which are included in loans contractually 90 days past-due and still accruing interest balance. See Note 5. Loan Receivables and Allowance for Loan Losses to our condensed consolidated and combined financial statements for additional information on the financial effects of TDRs for the three and six months ended June 30, 2014 and 2013, respectively.


21



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 accrued and unpaid 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 and Combined Statements of Earnings.
The allowance for loan losses totaled $3,006 million at June 30, 2014 compared with $2,892 million at December 31, 2013, representing our best estimate of probable losses inherent in the portfolio. The increase in allowance for loan losses was primarily driven by an increase in our expected losses driven by growth in loan receivables.
The following tables provide changes in our allowance for loan losses for the periods presented:
 
 Balance at 
April 1,
2014
 
Provision
Charged to
Operations
 
Gross Charge- 
Offs(2)
 
Recoveries(2) 
 
Balance at 
June 30,
2014
($ in millions)
 
Credit cards
$
2,935

 
$
662

(1) 
$
(792
)
 
$
134

 
$
2,939

Consumer installment loans
17

 
7

 
(7
)
 
3

 
20

Commercial credit products
46

 
12

 
(13
)
 
2

 
47

Total
$
2,998

 
$
681

 
$
(812
)
 
$
139

 
$
3,006

 
Balance at 
April 1,
2013
 
Provision
Charged to
Operations
 
Gross Charge- 
Offs(2)
 
Recoveries(2) 
 
Balance at 
June 30,
2013
($ in millions)
 
Credit cards
$
2,606

 
$
648

 
$
(707
)
 
$
127

 
$
2,674

Consumer installment loans
63

 
7

 
(13
)
 
5

 
62

Commercial credit products
49

 
11

 
(14
)
 
2

 
48

Total
$
2,718

 
$
666

 
$
(734
)
 
$
134

 
$
2,784

 
 
Balance at
January 1, 
2014
 
Provision
Charged to
Operations
 
Gross Charge- 
Offs(2)
 
 Recoveries(2) 
 
Balance at
June 30, 
2014
($ in millions)
 
Credit cards
$
2,827

 
$
1,414

(1) 
$
(1,573
)
 
$
271

 
$
2,939

Consumer installment loans
19

 
9

 
(14
)
 
6

 
20

Commercial credit products
46

 
22

 
(25
)
 
4

 
47

Total
$
2,892

 
$
1,445

 
$
(1,612
)
 
$
281

 
$
3,006


22



 
Balance at
January 1, 
2013
 
Provision
Charged to
Operations
 
Gross Charge- 
Offs(2)
 
Recoveries(2) 
 
Balance at
June 30, 
2013
($ in millions)
 
Credit cards
$
2,174

 
$
1,664

 
$
(1,439
)
 
$
275

 
$
2,674

Consumer installment loans
62

 
15

 
(26
)
 
11

 
62

Commercial credit products
38

 
34

 
(29
)
 
5

 
48

Total
$
2,274

 
$
1,713

 
$
(1,494
)
 
$
291

 
$
2,784

______________________
(1)
Includes a $57 million reduction in provision for loan losses associated with the classification of certain loan receivables as held for sale.
(2)
Net charge-offs (gross charge-offs less recoveries) in certain portfolios may exceed the beginning allowance for loan losses as our revolving credit portfolios turn over more than once per year or, in all portfolios, can reflect losses that are incurred subsequent to the beginning of the period due to information becoming available during the period, which may identify further deterioration of existing loan receivables.
The table below sets forth the ratio of net charge-offs to average loan receivables outstanding for the periods indicated.
 
Six months ended June 30,
 
2014
 
2013
Ratio of net charge-offs to average loan receivables outstanding(1)
4.9
%
 
4.8
%
______________________
(1)
Calculated based on monthly average loan receivables outstanding, except that where monthly balances are unavailable, quarter-end balances are used.
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 compliance requirements, in a cost effective and prudent manner through expected and unexpected market environments.
Funding Sources
Our primary funding sources prior to the IPO have included cash from operations, deposits (direct and brokered deposits), securitized financings and related party debt provided by GECC and its affiliates. As part of the Transactions, we repaid the existing related party debt and entered into new long-term debt arrangements with both third parties and GECC.
New Debt Financings
On August 5, 2014, we borrowed the full amount under the New Bank Term Loan Facility with third party lenders that provided $8.0 billion principal amount of unsecured term loans maturing in 2019. We also repaid all of our existing related party debt owed to GECC outstanding on the closing date of the IPO, totaling $8.0 billion (of which $7.9 billion was outstanding at June 30, 2014), and borrowed the full amount under the New GECC Term Loan Facility with GECC that provided $1.5 billion principal amount of unsecured term loan maturing in 2019. We expect that, in connection with our application to the Federal Reserve Board to continue to be a savings and loan holding company and to retain ownership of the Bank following our separation from GE, we will prepay part or substantially all of the New GECC Term Loan Facility. On August 11, 2014, we issued a total of $3.6 billion of unsecured senior notes with various maturities ranging from 2017 through 2024, and used $0.6 billion of the net proceeds from this issuance to prepay, on a pro rata basis, $0.5 billion of the New Bank Term Loan Facility and $0.1 billion of the New GECC Term Loan Facility.

23



Historical Funding Sources
The following tables summarize information concerning our funding sources during the periods indicated:
 
2014
 
2013
Three months ended June 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
28,568

 
55.7
%
 
1.5
%
 
$
20,972

 
45.2
%
 
1.8
%
Securitized financings
14,727

 
28.7

 
1.5

 
16,609

 
35.8

 
1.3

Related party debt
7,959

 
15.6

 
2.2

 
8,773

 
19.0

 
1.4

Total
$
51,254

 
100.0
%
 
1.6
%
 
$
46,354

 
100.0
%
 
1.5
%
______________________
(1)
Excludes $221 million and $467 million average balance of non-interest bearing deposits for the three months ended June 30, 2014 and June 30, 2013, respectively. Non-interest bearing deposits comprise less than 10% of total deposits for the three months ended June 30, 2014 and 2013.
 
2014
 
2013
Six months ended June 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
27,488

 
54.5
%
 
1.5
%
 
$
21,435

 
45.6
%
 
1.8
%
Securitized financings
14,799

 
29.4

 
1.4

 
16,809

 
35.8

 
1.3

Related party debt
8,131

 
16.1

 
2.2

 
8,744

 
18.6

 
1.7

Total
$
50,418

 
100.0
%
 
1.6
%
 
$
46,988

 
100.0
%
 
1.6
%
______________________
(1)
Excludes $282 million and $492 million average balance of non-interest bearing deposits for the six months ended June 30, 2014 and June 30, 2013, respectively. Non-interest bearing deposits comprise less than 10% of total deposits for the six months ended June 30, 2014 and 2013.
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 June 30, 2014, we had $15.7 billion in direct deposits (which includes deposits from banks and financial institutions) and $14.8 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger who channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to significantly 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, which we offer under our Optimizer+Plus brand.
Brokered deposits are primarily from retail customers of large brokerage firms. We have relationships with eight 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 June 30, 2014, had a weighted average remaining life of 3.2 years. These deposits generally are not subject to early withdrawal.
Our ability to attract deposits is sensitive to, among other things, the interest rates we pay, and therefore, we bear funding and interest rate risk if we fail, or are required to pay higher rates to attract new deposits or retain existing deposits. To mitigate these risks, we pursue a funding strategy that seeks to match our assets and liabilities by interest rate and expected maturity characteristics, and we seek to maintain access to multiple other funding sources, including securitized financings (including our undrawn committed capacity) and unsecured debt.
Over the next several years, we are seeking to increase our direct deposits. The growth of direct deposits will be supported by a significant investment in marketing and brand awareness.

24



The following tables summarize certain information regarding our interest bearing deposits by type (all of which constitute U.S. deposits) for the periods indicated.
Three months ended June 30 ($ in millions)
2014
 
2013
Average
Balance(1)
 
% of
Total
 
Average
Rate
 
Average
Balance(1)
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
10,335

 
36.2
%
 
1.2
%
 
$
5,116

 
24.4
%
 
0.8
%
Savings accounts (including money market accounts)
3,796

 
13.3

 
0.9

 
2,037

 
9.7

 
0.8

Brokered deposits
14,437

 
50.5

 
1.9

 
13,819

 
65.9

 
2.3

Total interest-bearing deposits
$
28,568

 
100.0
%
 
1.5
%
 
$
20,972

 
100.0
%
 
1.8
%

Six months ended June 30 ($ in millions)
2014
 
2013
Average
Balance(1)
 
% of
Total
 
Average
Rate
 
Average
Balance(1)
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
9,567

 
34.8
%
 
1.2
%
 
$
4,302

 
20.1
%
 
0.8