Synchrony 9.30.2014 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 September 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  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
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 October 30, 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 our ability to pay dividends and repurchase our capital stock and 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 and in the Registration Statement. 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 nine months ended September 30, 2014, we financed $26.0 billion and $73.1 billion of purchase volume, respectively, and at September 30, 2014, we had $56.8 billion of loan receivables and 60.5 million active accounts. For the three and nine months ended September 30, 2014, we had net earnings of $548 million and $1,578 million, respectively, representing a return on assets of 3.2% and 3.4%, 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 $32.7 billion in deposits at September 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”) in the third quarter of 2014 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 owned, and 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 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. Subsequent to the third quarter, on October 6, 2014, we increased our borrowings under the New Bank Term Loan Facility by $750 million, using the proceeds to prepay additional principal outstanding under the New GECC Term Loan Facility, and thereby reducing the principal amount outstanding of that facility to $655 million. See Funding, Liquidity and Capital Resources - Funding Sources - Third Party Debt for additional information on these facilities.

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 setting forth various matters governing our relationship with GE and GECC after the completion of the IPO. See Note 15. Related Party Transactions to our condensed consolidated and combined financial statements for additional information on these agreements with GE and GECC.
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 September 30,
 
Nine months ended September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Retail Card
$
1,694

67.2
%
 
$
1,544

66.6
%
 
$
5,057

68.3
%
 
$
4,709

68.0
%
Payment Solutions
403

16.0
%
 
382

16.5
%
 
1,149

15.5
%
 
1,112

16.1
%
CareCredit
422

16.8
%
 
391

16.9
%
 
1,204

16.2
%
 
1,101

15.9
%
 
$
2,519

100.0
%
 
$
2,317

100.0
%
 
$
7,410

100.0
%
 
$
6,922

100.0
%
______________________
(1)
For a definition of platform revenue, which is a non-GAAP measure, and its reconciliation to interest and fees on loans, see “Results of Operations - For the Three and Nine Months Ended September 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 nine months ended September 30, 2014 and our Retail Card loan receivables at September 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 September 30, 2014, Payment Solutions offered these products through approximately 62,000 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’ 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 September 30, 2014, we had a network of CareCredit providers that collectively have over 185,000 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.
Our Credit Products
Through our platforms, we offer three principal types of credit products: credit cards, commercial credit products and consumer installment loans.

5



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, 2014.
Credit Product
Standard Terms
 
Promotional Offer
 
Total
Credit cards
66.8

 
28.8

 
95.6

Commercial credit products
2.5

 

 
2.5

Consumer installment loans

 
1.9

 
1.9

Total
69.3
%
 
30.7
%
 
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 September 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
the significant increase in the amount of debt outstanding to fund the increase in the size of our liquidity portfolio
the replacement of our historical related party debt funding from GECC 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
Increases in other expense to operate as a fully independent company
Impact of regulatory developments
Increased capital and liquidity levels following our IPO and in preparation for our separation from GE

6



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. For a discussion of how these trends and conditions impacted the three and nine months ended September 30, 2014, see Results of Operations - For the Three and Nine Months Ended September 30, 2014.
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. These fluctuations are generally most evident between the fourth quarter and the first quarter of the following year.
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. 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. Because customers who were delinquent during the fourth quarter of a calendar year have a higher probability of returning to current status when compared to customers who are delinquent at the end of each of our interim reporting periods, we expect that a higher proportion of delinquent accounts outstanding at an interim period end will result in charge-offs, as compared to delinquent accounts outstanding at a year end. Consistent with this historical experience, we generally experience a higher allowance for loan losses as a percentage of total loan receivables at the end of an interim period, as compared to the end of a calendar year. In addition, despite improving credit metrics such as declining past due amounts, we may experience an increase in our allowance for loan losses at an interim period end compared to the prior year end, reflecting these same seasonal trends.
Results of Operations—For the Three and Nine Months Ended September 30, 2014 and 2013
The discussion below provides an analysis of our results of operations for the three and nine months ended September 30, 2014 and 2013.
Highlights for the Three and Nine Months Ended September 30, 2014
Below are highlights of our performance for the three and nine months ended September 30, 2014 compared to the three and nine months ended September 30, 2013, as applicable, except as otherwise noted.
Net earnings decreased 14.5% to $548 million for the three months ended September 30, 2014, driven by increases in other expenses, provision for loan losses and interest expense, partially offset by higher interest income. Net earnings increased 2.7% to $1,578 million for the nine months ended September 30, 2014, driven by higher net interest income and a reduction in our provision for loan losses, partially offset by increases in retailer share arrangements and other expenses.
Loan receivables increased 6.6% to $56,767 million at September 30, 2014 compared to September 30, 2013, primarily driven by higher purchase volume and average active account growth.
Net interest income increased 6.5% to $2,879 million and 8.0% to $8,342 million for the three and nine months ended September 30, 2014, respectively, primarily due to higher average loan receivables.
Payments to our partners under our retailer share arrangements increased 1.9% to $693 million and 9.7% to $1,877 million for the three and nine months ended September 30, 2014, respectively, primarily as a result of improved performance, including lower provision for loan losses for the nine months ended September 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 share arrangements for those partners with whom we extended program agreements in late 2013 and in 2014.

7



Loan delinquencies as a percentage of receivables decreased with the over-30 day delinquency rate decreasing to 4.26% at September 30, 2014 from 4.32% at September 30, 2013, driven by continued improvement in the U.S. economy and employment rates. Net charge-off rates remained relatively stable for the three and nine months ended September 30, 2014, decreasing slightly to 4.05% for the three months ended September 30, 2014 from 4.07% for the three months ended September 30 2013, and increasing slightly to 4.57% for the nine months ended September 30, 2014 from 4.52% for the nine months ended September 30, 2013.
Provision for loan losses increased by $134 million, or 24.8%, for the three months ended September 30, 2014.  This increase was primarily driven by portfolio growth and the impact from the timing of enhancements made in 2013 to our allowance for loan losses methodology. Provision for loan losses decreased by $134 million, or 5.9%, for the nine months ended September 30, 2014.  This decrease was driven primarily as a result of an incremental provision of $538 million recorded in the first quarter of 2013 relating to the enhancements to our allowance for loan loss methodology, which was not repeated in the current period.  This decrease was partially offset by increased provisions primarily driven by portfolio growth.  Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) increased to 5.46% at September 30, 2014, as compared to 5.24% at September 30, 2013
Other expense increased to $728 million from $575 million and to $2,135 million from $1,677 million for the three and nine months ended September 30, 2014 and 2013, respectively, driven by business growth, increased marketing investments and incremental costs associated with building a standalone infrastructure.
We completed the initial public offering of a total of 128.5 million shares of our common stock and our new debt financings which increased our indebtedness with third parties and reduced our funding from GECC. The net proceeds from these transactions increased our liquidity portfolio by $7.3 billion. Our liquidity portfolio, including undrawn credit facilities was $19.7 billion at September 30, 2014.
We have invested in our direct banking activities to grow our deposit base. Total deposits have increased 27.1% to $32.7 billion at September 30, 2014, compared to December 31, 2013, driven primarily by growth in our direct deposits of 66.4% to $18.3 billion at September 30, 2014.
During the nine months ended September 30, 2014, we have extended five program agreements in Retail Card (American Eagle, Gap Inc., Lowe's, QVC and Sam’s Club), representing $18.8 billion in loan receivables at September 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, including loan receivables held for sale, at September 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 fourth quarter of 2014. The program agreements that were not extended will continue to be reported in our results of operations through their contractual expiration dates.
In our Payment Solutions sales platform, we increased the number of participating partners in our network by over 1,000 partners, compared to the number of partners at September 30, 2013. In our CareCredit network, we increased the number of provider locations by over 9,000 locations, compared to the number of locations at September 30, 2013.

8



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)
2014
 
2013
 
2014
 
2013
Interest income
$
3,123

 
$
2,886

 
$
8,982

 
$
8,276

Interest expense
244

 
183

 
640

 
554

Net interest income
2,879

 
2,703

 
8,342

 
7,722

Retailer share arrangements
(693
)
 
(680
)
 
(1,877
)
 
(1,711
)
Net interest income, after retailer share arrangements
2,186

 
2,023

 
6,465

 
6,011

Provision for loan losses
675

 
541

 
2,120

 
2,254

Net interest income, after retailer share arrangements and provision for loan losses
1,511

 
1,482

 
4,345

 
3,757

Other income
96

 
114

 
323

 
370

Other expense
728

 
575

 
2,135

 
1,677

Earnings before provision for income taxes
879

 
1,021

 
2,533

 
2,450

Provision for income taxes
331

 
380

 
955

 
914

Net earnings
$
548

 
$
641

 
$
1,578

 
$
1,536


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 September 30,
 
nine months ended September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Financial Position Data (Average):
 
 
 
 
 
 
 
Loan receivables, including held for sale
$
57,391

 
$
52,580

 
$
56,238

 
$
51,488

Total assets
$
68,300

 
$
54,906

 
$
63,332

 
$
55,235

Deposits
$
31,665

 
$
21,489

 
$
29,058

 
$
21,843

Borrowings
$
25,228

 
$
25,271

 
$
23,845

 
$
25,462

Total equity
$
8,199

 
$
5,266

 
$
7,157

 
$
5,193

Selected Performance Metrics:
 
 
 
 
 
 
 
Purchase volume(1)
$
26,004

 
$
23,499

 
$
73,068

 
$
66,856

Retail Card
$
20,991

 
$
18,840

 
$
58,736

 
$
53,540

Payment Solutions
$
3,226

 
$
2,963

 
$
9,028

 
$
8,249

CareCredit
$
1,787

 
$
1,696

 
$
5,304

 
$
5,067

Average active accounts (in thousands)(2)
59,907

 
56,171

 
59,394

 
55,523

Net interest margin(3)
17.11
%
 
19.69
%
 
17.80
%
 
18.74
%
Net charge-offs
$
579

 
$
533

 
$
1,910

 
$
1,736

Net charge-offs as a % of average loan receivables, including held for sale
4.05
%
 
4.07
%
 
4.57
%
 
4.52
%
Allowance coverage ratio(4)
5.46
%
 
5.24
%
 
5.46
%
 
5.24
%
Return on assets(5)
3.2
%
 
4.7
%
 
3.4
%
 
3.7
%
Return on equity(6)
26.8
%
 
48.8
%
 
29.7
%
 
39.7
%
Equity to assets(7)
13.53
%
 
10.06
%
 
13.53
%
 
10.06
%
Other expense as a % of average loan receivables, including held for sale
5.09
%
 
4.39
%
 
5.11
%
 
4.37
%
Efficiency ratio(8)
31.9
%
 
26.9
%
 
31.5
%
 
26.3
%
Effective income tax rate
37.7
%
 
37.2
%
 
37.7
%
 
37.3
%
Selected Period End Data:
 
 
 
 
 
 
 
Loan receivables
$
56,767

 
$
53,265

 
$
56,767

 
$
53,265

Allowance for loan losses
$
3,102

 
$
2,792

 
$
3,102

 
$
2,792

30+ days past due as a % of period-end loan receivables
4.26
%
 
4.32
%
 
4.26
%
 
4.32
%
90+ days past due as a % of period-end loan receivables
1.85
%
 
1.83
%
 
1.85
%
 
1.83
%
Total active accounts (in thousands)(2)
60,489

 
56,703

 
60,489

 
56,703

______________________
(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 equity as a percentage of 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 September 30 ($ in millions)
Average
Balance(1)
 
Interest
Income /
Expense
 
Average
Yield /
Rate(2)
 
Average
Balance(1)
 
Interest
Income/
Expense
 
Average
Yield /
Rate(2)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(3)
$
9,793

 
$
4

 
0.16
%
 
$
2,266

 
$
1

 
0.18
%
Securities available for sale
309

 
3

 
3.89
%
 
227

 
2

 
3.53
%
Loan receivables(4):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale(5)
54,891

 
3,054

 
22.32
%
 
49,790

 
2,812

 
22.65
%
Consumer installment loans
1,070

 
25

 
9.37
%
 
1,374

 
33

 
9.63
%
Commercial credit products
1,412

 
37

 
10.51
%
 
1,404

 
38

 
10.86
%
Other
18

 

 
%
 
12

 

 
%
Total loan receivables
57,391

 
3,116

 
21.78
%
 
52,580

 
2,883

 
21.99
%
Total interest-earning assets
67,493

 
3,123

 
18.56
%
 
55,073

 
2,886

 
21.02
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
1,260

 
 
 
 
 
535

 
 
 
 
Allowance for loan losses
(3,058
)
 
 
 
 
 
(2,799
)
 
 
 
 
Other assets
2,605

 
 
 
 
 
2,097

 
 
 
 
Total non-interest-earning assets
807

 
 
 
 
 
(167
)
 
 
 
 
Total assets
$
68,300

 
 
 
 
 
$
54,906

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
31,459

 
$
126

 
1.61
%
 
$
21,012

 
$
94

 
1.79
%
Borrowings of consolidated securitization entities
15,102

 
57

 
1.51
%
 
16,058

 
51

 
1.27
%
Related party debt
4,582

 
15

 
1.31
%
 
9,213

 
38

 
1.65
%
Third party debt
5,544

 
46

 
3.33
%
 

 

 
%
Total interest-bearing liabilities
56,687

 
244

 
1.73
%
 
46,283

 
183

 
1.59
%
Non-interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
206

 
 
 
 
 
477

 
 
 
 
Other liabilities
3,208

 
 
 
 
 
2,880

 
 
 
 
Total non-interest-bearing liabilities
3,414

 
 
 
 
 
3,357

 
 
 
 
Total liabilities
60,101

 
 
 
 
 
49,640

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
8,199

 
 
 
 
 
5,266

 
 
 
 
Total liabilities and equity
$
68,300

 
 
 
 
 
$
54,906

 
 
 
 
Interest rate spread(6)
 
 
 
 
16.83
%
 
 
 
 
 
19.43
%
Net interest income
 
 
$
2,879

 
 
 
 
 
$
2,703

 
 
Net interest margin(7)
 
 
 
 
17.11
%
 
 
 
 
 
19.69
%







11



 
2014
 
2013
Nine months ended September 30 ($ in millions)
Average
Balance(1)
 
Interest
Income /
Expense
 
Average
Yield /
Rate(2)
 
Average
Balance(1)
 
Interest
Income/
Expense
 
Average
Yield /
Rate(2)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(3)
$
6,587

 
$
9

 
0.18
%
 
$
3,589

 
$
7

 
0.26
%
Securities available for sale
281

 
9

 
4.31
%
 
209

 
6

 
3.85
%
Loan receivables(4):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale(5)
53,836

 
8,781

 
21.97
%
 
48,745

 
8,053

 
22.17
%
Consumer installment loans
1,012

 
72

 
9.58
%
 
1,382

 
99

 
9.61
%
Commercial credit products
1,374

 
111

 
10.88
%
 
1,350

 
111

 
11.03
%
Other
16

 

 
%
 
11

 

 
%
Total loan receivables
56,238

 
8,964

 
21.47
%
 
51,488

 
8,263

 
21.54
%
Total interest-earning assets
63,106

 
8,982

 
19.17
%
 
55,286

 
8,276

 
20.09
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
863

 
 
 
 
 
545

 
 
 
 
Allowance for loan losses
(2,997
)
 
 
 
 
 
(2,609
)
 
 
 
 
Other assets
2,360

 
 
 
 
 
2,013

 
 
 
 
Total non-interest-earning assets
226

 
 
 
 
 
(51
)
 
 
 
 
Total assets
$
63,332

 
 
 
 
 
$
55,235

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
28,799

 
$
331

 
1.55
%
 
$
21,355

 
$
281

 
1.77
%
Borrowings of consolidated securitization entities
14,888

 
158

 
1.43
%
 
16,560

 
162

 
1.31
%
Related party debt
6,739

 
105

 
2.10
%
 
8,902

 
111

 
1.67
%
Third party debt
2,218

 
46

 
2.79
%
 

 

 
%
Total interest-bearing liabilities
52,644

 
640

 
1.64
%
 
46,817

 
554

 
1.59
%
Non-interest-bearing liabilities
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
259

 
 
 
 
 
488

 
 
 
 
Other liabilities
3,272

 
 
 
 
 
2,737

 
 
 
 
Total non-interest-bearing liabilities
3,531

 
 
 
 
 
3,225

 
 
 
 
Total liabilities
56,175

 
 
 
 
 
50,042

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
7,157

 
 
 
 
 
5,193

 
 
 
 
Total liabilities and equity
$
63,332

 
 
 
 
 
$
55,235

 
 
 
 
Interest rate spread(6)
 
 
 
 
17.53
%
 
 
 
 
 
18.50
%
Net interest income
 
 
$
8,342

 
 
 
 
 
$
7,722

 
 
Net interest margin(7)
 
 
 
 
17.80
%
 
 
 
 
 
18.74
%
______________________
(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 $212 million and $53 million for the three months ended September 30, 2014 and 2013, respectively, and $152 million and $53 million for the nine months ended September 30, 2014 and 2013, respectively.
(4)
Non-accrual loans are included in the average loan receivables balances.

12



(5)
Interest income on credit cards includes fees on loans of $563 million and $542 million for the three months ended September 30, 2014 and 2013, respectively, and $1,589 million and $1,491 million for the nine months ended September 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 interest margin represents net interest income divided by average total interest-earning assets.
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 $237 million, or 8.2%, for the three months ended September 30, 2014. This increase was driven primarily by growth in our loan receivables.
Average interest-earning assets. Interest-earning assets are comprised primarily of loan receivables, as well as interest-earning cash and equivalents following the IPO and debt financings in the three months ended September 30, 2014. Average loan receivables, including loans held for sale, increased by $4,811 million, or 9.1%, for the three months ended September 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 59.9 million for the three months ended September 30, 2014 from 56.2 million for the three months ended September 30, 2013.
Yield on average interest-earning assets. The yield on interest-earning assets decreased to 18.56% for the three months ended September 30, 2014 from 21.02% for the three months ended September 30, 2013, driven primarily by an increase in our average interest-earning cash and equivalents following our IPO and increase in indebtedness, which earn a lower yield than our loan receivables. The yield on our average loan receivables decreased slightly to 21.78% for the three months ended September 30, 2014 from 21.99% for the three months ended September 30, 2013 reflecting a higher payment rate from our customers.

Interest income increased by $706 million, or 8.5%, for the nine months ended September 30, 2014. This increase was driven primarily by growth in our loan receivables.
Average interest-earning assets. Interest-earning assets are comprised primarily of loan receivables. Average loan receivables, including loans held for sale, increased by $4,750 million, or 9.2%, for the nine months ended September 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 59.4 million for the nine months ended September 30, 2014 from 55.5 million for the nine months ended September 30, 2013.
Yield on average interest-earning assets. The yield on interest-earning assets decreased to 19.17% for the nine months ended September 30, 2014 from 20.09% for the nine months ended September 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 decreased slightly to 21.47% for the nine months ended September 30, 2014 from 21.54% for the nine months ended September 30, 2013, reflecting the higher payment rate from our customers in the third quarter of 2014.
Interest Expense
Interest expense increased by $61 million, or 33.3%, and by $86 million, or 15.5%, for the three and nine months ended September 30, 2014, respectively, driven primarily by increases in average interest-bearing liabilities of $10,404 million, or 22.5%, and of $5,827 million, or 12.4%, respectively. The increases in average interest-bearing liabilities for the three and nine months ended September 30, 2014 were driven primarily by increases of $10.4 billion and $7.4 billion, respectively, in our average interest-bearing deposit accounts, as well as from the new third party debt incurred in connection with the IPO, partially offset by a reduction in average borrowings under our securitization programs and our related party debt. Our cost of funds increased to 1.73% for the three months ended September 30, 2014 from 1.59% for the three months ended September 30, 2013, primarily reflecting the impact from our new third party debt. Our cost of funds increased slightly to 1.64% for the nine months ended September 30, 2014 from 1.59% for the nine months ended September 30, 2013.

13



Net Interest Income
Net interest income increased by $176 million, or 6.5%, and by $620 million, or 8.0%, for the three and nine months ended September 30, 2014, respectively, driven by growth in loan 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 $13 million, or 1.9%, and by $166 million, or 9.7%, for the three and nine months ended September 30, 2014, respectively, driven by the growth and improved performance of the programs in which we have retailer share arrangements, partially offset by increases in provision for loan losses and other expense. The increase was also driven 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 nine months ended September 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.
Provision for Loan Losses
Provision for loan losses increased by $134 million, or 24.8%, for the three months ended September 30, 2014.  This increase was primarily driven by portfolio growth and the impact from the timing of enhancements made in 2013 to our allowance for loan losses methodology.
Provision for loan losses decreased by $134 million, or 5.9%, for the nine months ended September 30, 2014.  This decrease was driven primarily as a result of an incremental provision of $538 million recorded in the first quarter of 2013 relating to the enhancements to our allowance for loan loss methodology, which was not repeated in the current period.  This decrease was partially offset by increased provisions primarily related to portfolio growth.  Our allowance coverage ratio (allowance for loan losses as a percent of period-end loan receivables) increased to 5.46% at September 30, 2014, as compared to 5.24% at September 30, 2013.  This increase was primarily driven by the ongoing application of the enhancements to our allowance for loan loss methodology implemented during the fourth quarter of 2013.
Other Income
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Interchange revenue
$
101

 
$
82

 
$
269

 
$
235

Debt cancellation fees
68

 
74

 
208

 
236

Loyalty programs
(84
)
 
(58
)
 
(190
)
 
(156
)
Other
11

 
16

 
36

 
55

Total other income
$
96

 
$
114

 
$
323

 
$
370

Other income decreased by $18 million, or 15.8%, and by $47 million, or 12.7%, for the three and nine months ended September 30, 2014, respectively. These decreases were primarily due to higher loyalty costs arising from the launch of new rewards programs with our partners and lower debt cancellation fees driven by fewer customers being enrolled in the product, partially offset by increased interchange revenue driven by increased purchase volume outside of our retail partners' sales channels.

14



Other Expense
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Employee costs
$
239

 
$
173

 
$
639

 
$
508

Professional fees
159

 
120

 
455

 
329

Marketing and business development
115

 
54

 
295

 
152

Information processing
47

 
47

 
152

 
141

Other
168

 
181

 
594

 
547

Total other expense
$
728

 
$
575

 
$
2,135

 
$
1,677

Other expense increased by $153 million and by $458 million, for the three and nine months ended September 30, 2014, respectively, due to increases in most 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 for our programs, investments in our brand, including the launch of our new advertising campaign, and increased amortization expense associated with program acquisitions and extensions.
The “other” component decreased for the three months ended September 30, 2014 primarily due to lower corporate overhead allocations and assessments from GECC. Following the IPO, we no longer receive corporate overhead allocations and assessments from GECC. In connection with the IPO, we entered into various agreements with GE and its affiliates, including the Transitional Services Agreement (the “TSA”), pursuant to which, among other things, we and GECC provide each other, on a transitional basis, certain administrative and support services and other assistance consistent with the services we and GECC provided to each other before the IPO. As a result, all services provided by GECC to us following the IPO are directly billed to us in accordance with the terms of the relevant agreement, and are included in the appropriate cost categories (e.g., employee benefit costs are included in employee costs above). See Note 15. Related Party Transactions to our condensed consolidated and combined financial statements for additional information on our transactions with GE and GECC.
The increase in the "other" component for the nine months ended September 30, 2014 includes the effects of the $42 million increase in our reserves in the second quarter of 2014 for a self-identified consumer remediation.
Provision for Income Taxes
Our effective tax rate increased to 37.7% from 37.2% for the three months ended September 30, 2014 and 2013, respectively, and increased to 37.7% from 37.3% for the nine months ended September 30, 2014 and 2013, respectively. The effective tax rate for the three and nine months ended September 30, 2014 differs from the effective tax rate in the same periods in the previous year primarily due to certain non-deductible expenses in the current year periods, as well as an item related to an internal corporate reorganization in the nine months ended September 30, 2014. 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.

15



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 September 30,
 
Nine months ended September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Interest and fees on loans
$
3,116

 
$
2,883

 
$
8,964

 
$
8,263

Other income
96

 
114

 
323

 
370

Retailer share arrangements
(693
)
 
(680
)
 
(1,877
)
 
(1,711
)
Platform revenue
$
2,519

 
$
2,317

 
$
7,410

 
$
6,922

Retail Card
The following table sets forth supplemental information related to our Retail Card platform for the periods indicated.
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Purchase volume
$
20,991

 
$
18,840

 
$
58,736

 
$
53,540

Period-end loan receivables
$
38,466

 
$
36,137

 
$
38,466

 
$
36,137

Average loan receivables, including held for sale
$
39,411

 
$
35,754

 
$
38,685

 
$
35,037

Average active accounts (in thousands)
48,433

 
45,617

 
48,116

 
45,128

 
 
 
 
 
 
 
 
Platform revenue:
 
 
 
 
 
 
 
Interest and fees on loans
$
2,299

 
$
2,119

 
$
6,635

 
$
6,083

Other income
78

 
95

 
266

 
306

Retailer share arrangements
(683
)
 
(670
)
 
(1,844
)
 
(1,680
)
Platform revenue
$
1,694

 
$
1,544

 
$
5,057

 
$
4,709

Retail Card platform revenue increased by $150 million, or 9.7%, and by $348 million, or 7.4%, for the three and nine months ended September 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, partially offset by 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.

16



Payment Solutions
The following table sets forth supplemental information relating to our Payment Solutions platform for the periods indicated.
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Purchase volume
$
3,226

 
$
2,963

 
$
9,028

 
$
8,249

Period-end loan receivables
$
11,514

 
$
10,731

 
$
11,514

 
$
10,731

Average loan receivables
$
11,267

 
$
10,526

 
$
10,965

 
$
10,342

Average active accounts (in thousands)
6,892

 
6,310

 
6,784

 
6,234

 
 
 
 
 
 
 
 
Platform revenue:
 
 
 
 
 
 
 
Interest and fees on loans
$
405

 
$
383

 
$
1,156

 
$
1,107

Other income
7

 
9

 
23

 
32

Retailer share arrangements
(9
)
 
(10
)
 
(30
)
 
(27
)
Platform revenue
$
403

 
$
382

 
$
1,149

 
$
1,112

Payment Solutions platform revenue increased by $21 million, or 5.5%, and by $37 million, or 3.3%, for the three and nine months ended September 30, 2014, respectively. These increases were primarily the result of higher interest and fees on loans due to an increase in average loan receivables.
CareCredit
The following table sets forth supplemental information relating to our CareCredit platform for the periods indicated.
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2014
 
2013
 
2014
 
2013
Purchase volume
$
1,787

 
$
1,696

 
$
5,304

 
$
5,067

Period-end loan receivables
$
6,787

 
$
6,397

 
$
6,787

 
$
6,397

Average loan receivables
$
6,713

 
$
6,300

 
$
6,588

 
$
6,109

Average active accounts (in thousands)
4,582

 
4,244

 
4,494

 
4,161

 
 
 
 
 
 
 
 
Platform revenue:
 
 
 
 
 
 
 
Interest and fees on loans
$
412

 
$
381

 
$
1,173

 
$
1,073

Other income
11

 
10

 
34

 
32

Retailer share arrangements
(1
)
 

 
(3
)
 
(4
)
Platform revenue
$
422

 
$
391

 
$
1,204

 
$
1,101

CareCredit platform revenue increased by $31 million, or 7.9%, and by $103 million, or 9.4% for the three and nine months ended September 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 and higher yield.
Separation from GE and Related Financial Arrangements
Services provided by GE
Following the IPO, GE owns approximately 84.6% of our common stock and continues to provide a variety of services to us, which are governed by the TSA and various other agreements with GE and GECC that we entered into in connection with the IPO. The services provided include, among other things, employee benefits and benefit administration, information technology, telecommunication services and leases for vehicles, equipment and facilities. Under the TSA, all of the costs billed to us by GE subsequent to the IPO are at GE’s cost in accordance with historic billing methodologies. We expect the majority of the services provided by GE will be replaced within two years from the closing date of the IPO.

17



For periods prior to the IPO, we were an indirect wholly owned subsidiary of GE and GECC and in addition to the services discussed above, we also received a corporate overhead allocation and assessment from GE and GECC for corporate activities that either directly or indirectly benefited our business.
Funding provided by GECC
Following the IPO, the primary funding provided to us by GECC is the New GECC Term Loan Facility, for which $655 million was outstanding following the additional prepayment made on October 6, 2014. Prior to the IPO, GECC was a key source of funding for our business.
See Note 15. Related Party Transactions to our condensed consolidated and combined financial statements for additional information on our transactions with GE and GECC, and see Funding, Liquidity and Capital Resources - Funding Sources - Related Party Debt for additional information on the funding provided by GECC to us and the related interest expense.
Investment Securities
The following discussion provides supplemental information regarding our investment securities portfolio. All of our investment securities are classified as available-for-sale at September 30, 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 September 30, 2014
 
At December 31, 2013
($ in millions)
Amortized
Cost
 
Estimated Fair Value
 
Amortized
Cost
 
Estimated Fair Value
Debt:
 
 
 
 
 
 
 
State and municipal
$
57

 
$
55

 
$
53

 
$
46

Residential mortgage-backed
256

 
252

 
183

 
175

US corporate debt
3

 
3

 

 

Equity
15

 
15

 
15

 
15

Total
$
331

 
$
325

 
$
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 September 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 $16 million.
Our investment securities portfolio had the following maturity distribution at September 30, 2014. Equity securities have been excluded from the table because they do not have a maturity.
($ 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

 
$
54

 
$
55

Residential mortgage-backed

 

 

 
252

 
252

US corporate debt
3

 

 

 

 
3

Total(1)
$
3

 
$

 
$
1

 
$
306

 
$
310

Weighted average yield(2)
6.3
%
 
%
 
3.9
%
 
3.6
%
 
3.4
%
______________________
(1)
Amounts stated represent estimated fair value.
(2)
Weighted average yield is calculated based on the amortized cost of each security. In calculating yield, no adjustment has been made with respect to any tax exempt obligations.

18



At September 30, 2014, we did not hold investments in any single issuer with an aggregate book value that exceeded 10% of equity.
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 September 30, 2014
 
(%)
 
At December 31, 2013
 
(%)
Loans
 
 
 
 
 
Credit cards
$
54,263

 
95.6
%
 
$
54,958

 
96.0
%
Consumer installment loans
1,081

 
1.9

 
965

 
1.7

Commercial credit products
1,404

 
2.5

 
1,317

 
2.3

Other
19

 

 
14

 

Total loans
$
56,767

 
100.0
%
 
$
57,254

 
100.0
%
Loan receivables decreased by $487 million, or 0.9%, at September 30, 2014 compared to December 31, 2013. The decrease was driven primarily by the reclassification of loan receivables totaling $1,493 million at September 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. Excluding the impact from the reclassification of these two portfolios to loan receivables held for sale, loan receivables increased by $1,006 million, or 1.8%, driven by higher purchase volume, partially offset by the seasonality of our business as customers paid their balances down in the first and second quarter.
Loan receivables increased $3,502 million, or 6.6%, at September 30, 2014 compared to September 30, 2013, driven by a 9.3% increase in purchase volume driven primarily by a 7.0% increase in average active accounts. This increase was partially offset by the reclassification of loan receivables to loan receivables held for sale discussed above.
Our loan receivables portfolio had the following maturity distribution at September 30, 2014.
($ in millions)
Within 1
Year(1)
 
1-5 Years
 
After
5 Years
 
Total
Loans
 
 
 
 
 
 
 
Credit cards
$
54,263

 
$

 
$

 
$
54,263

Consumer installment loans
27

 
577

 
477

 
1,081

Commercial credit products
1,404

 

 

 
1,404

Other
1

 
10

 
8

 
19

Total loans
$
55,695

 
$
587

 
$
485

 
$
56,767

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

 
$
587

 
$
485

 
$
1,072

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

 

 

 

Total loans due after one year
N/A

 
$
587

 
$
485

 
$
1,072

______________________
(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 September 30, 2014.

19



Our loan receivables portfolio had the following geographic concentration at September 30, 2014.
($ in millions)
 
Loan Receivables
Outstanding(1)
 
% of Total Loan
Receivables
Outstanding
State
 
Texas
 
$
5,668

 
10.0
%
California
 
5,532

 
9.7
%
Florida
 
4,295

 
7.6
%
New York
 
3,329

 
5.9
%
Pennsylvania
 
2,532

 
4.5
%
______________________
(1)
Based on September 2014 customer statement-end balances extrapolated to September 30, 2014. Individual customer balances at September 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, discounted at the original effective interest rate of the loan. Our allowance for loan losses on TDRs is generally measured based on the difference between the recorded loan receivable and the present value of the expected future cash flows.
Interest income from loans accounted for as TDRs is accounted for in the same manner as other accruing loans. We accrue interest on credit card balances until the accounts are charged-off in the period the accounts become 180 days past due. The following table presents the amount of loan receivables that are not accruing interest, loans that are 90 days or more past-due and still accruing interest, and earning TDRs for the periods presented.
($ in millions)
At September 30, 2014
 
At December 31, 2013
Non-accrual loan receivables
$
2

 
$
2

Loans contractually 90 days past-due and still accruing interest
1,049

 
1,119

Earning TDRs(1)
669

 
741

Non-accrual, past due and restructured loan receivables
$
1,720

 
$
1,862

______________________
(1)
At September 30, 2014 and December 31, 2013 balances exclude $49 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 nine months ended September 30, 2014 and 2013, respectively.


20



Delinquencies
Loan delinquencies as a percentage of receivables decreased with the over-30 day delinquency rate decreasing to 4.26% at September 30, 2014, as compared to 4.32% at September 30, 2013 and 4.35% at December 31, 2013. The six basis point decrease compared to the same period in prior year was primarily driven by continued improvement in the U.S. economy and employment rates. The decrease as compared to December 31, 2013 was primarily driven by the same economic factors, as well as 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 and Combined 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,
 
2014
 
2013
 
2014
 
2013
Ratio of net charge-offs to average loan receivables, including held for sale
4.05
%
 
4.07
%
 
4.57
%
 
4.52
%

Allowance for Loan Losses
The allowance for loan losses totaled $3,102 million at September 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 
July 1,
2014
 
Provision
Charged to
Operations
 
Gross Charge- 
Offs(2)
 
Recoveries(2) 
 
Balance at 
September 30,
2014
($ in millions)
 
Credit cards
$
2,939

 
$
663

 
$
(711
)
 
$
145

 
$
3,036

Consumer installment loans
20

 
7

 
(7
)
 
3

 
23

Commercial credit products
47

 
5

 
(11
)
 
2

 
43

Total
$
3,006

 
$
675

 
$
(729
)
 
$
150

 
$
3,102

 
Balance at 
July 1,
2013
 
Provision
Charged to
Operations
 
Gross Charge- 
Offs(2)
 
Recoveries(2) 
 
Balance at 
September 30,
2013
($ in millions)
 
Credit cards
$
2,674

 
$
528

 
$
(646
)
 
$
129

 
$
2,685

Consumer installment loans
62

 
4

 
(11
)
 
4

 
59

Commercial credit products
48

 
9

 
(10
)
 
1

 
48

Total
$
2,784

 
$
541

 
$
(667
)
 
$
134

 
$
2,792

 

21



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

 
$
2,077

(1) 
$
(2,284
)
 
$
416

 
$
3,036

Consumer installment loans
19

 
16

 
(21
)
 
9

 
23

Commercial credit products
46

 
27

 
(36
)
 
6

 
43

Total
$
2,892

 
$
2,120

 
$
(2,341
)
 
$
431

 
$
3,102

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

 
$
2,192

 
$
(2,085
)
 
$
404

 
$
2,685

Consumer installment loans
62

 
19

 
(37
)
 
15

 
59

Commercial credit products
38

 
43

 
(39
)
 
6

 
48

Total
$
2,274

 
$
2,254

 
$
(2,161
)
 
$
425

 
$
2,792

______________________
(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.

Funding, Liquidity and Capital Resources
We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources to support our daily operations, our business growth, our credit ratings and our regulatory and policy requirements, in a cost effective and prudent manner through expected and unexpected market environments.
Funding Sources
Our primary funding sources include cash from operations, deposits (direct and brokered deposits), third party debt and securitized financings. Prior to the IPO, we also utilized related party debt provided by GECC and its affiliates as a primary funding source. As part of the Transactions, we repaid the related party debt outstanding at the date of the IPO and entered into new long-term debt arrangements with both third parties and GECC.
The following tables summarize information concerning our funding sources during the periods indicated:
 
2014
 
2013
Three months ended September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
31,459

 
55.5
%
 
1.6
%
 
$
21,012

 
45.4
%
 
1.8
%
Securitized financings
15,102

 
26.6

 
1.5

 
16,058

 
34.7

 
1.3

Related party debt
4,582

 
8.1

 
1.3

 
9,213

 
19.9

 
1.7

Third party debt
5,544

 
9.8

 
3.3

 

 

 

Total
$
56,687

 
100.0
%
 
1.7
%
 
$
46,283

 
100.0
%
 
1.6
%
______________________
(1)
Excludes $206 million and $477 million average balance of non-interest-bearing deposits for the three months ended September 30, 2014 and September 30, 2013, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended September 30, 2014 and 2013.

22



 
2014
 
2013
Nine months ended September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
28,799

 
54.7
%
 
1.5
%
 
$
21,355

 
45.6
%
 
1.8
%
Securitized financings
14,888

 
28.3

 
1.4

 
16,560

 
35.4

 
1.3

Related party debt
6,739

 
12.8

 
2.1

 
8,902

 
19.0

 
1.7

Third party debt
2,218

 
4.2

 
2.8

 

 

 

Total
$
52,644

 
100.0
%
 
1.6
%
 
$
46,817

 
100.0
%
 
1.6
%
______________________
(1)
Excludes $259 million and $488 million average balance of non-interest-bearing deposits for the nine months ended September 30, 2014 and September 30, 2013, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the nine months ended September 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 September 30, 2014, we had $18.3 billion in direct deposits (which includes deposits from banks and financial institutions) and $14.4 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger that channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to significantly expand our direct deposits base as a source of stable and diversified low cost funding.
Our direct deposits include a range of FDIC-insured deposit products, including certificates of deposit, IRAs, money market accounts and savings accounts, which we offer under our Optimizer+Plus brand.
Brokered deposits are primarily from retail customers of large brokerage firms. We have relationships with eight brokers that offer our deposits through their networks. Our brokered deposits consist primarily of certificates of deposit that bear interest at a fixed rate and at September 30, 2014, had a weighted average remaining life of 3.4 years. These deposits generally are not subject to early withdrawal.
Our ability to attract deposits is sensitive to, among other things, the interest rates we pay, and therefore, we bear funding and interest rate risk if we fail, or are required to pay higher rates, to attract new deposits or retain existing deposits. To mitigate these risks, we pursue a funding strategy that seeks to match our assets and liabilities by interest rate and expected maturity characteristics, and we seek to maintain access to multiple other funding sources, including securitized financings (including our undrawn committed capacity) and unsecured debt.
Over the next several years, we are seeking to increase our direct deposits through investing in our direct deposit programs and capabilities. The growth of direct deposits will be supported by a significant investment in marketing and brand awareness.
The following tables summarize certain information regarding our interest-bearing deposits by type (all of which constitute U.S. deposits) for the periods indicated.
Three months ended September 30 ($ 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)
$
11,833

 
37.6
%
 
1.3
%
 
$
5,928

 
28.2
%
 
0.9
%
Savings accounts (including money market accounts)
5,023

 
16.0

 
0.9

 
2,220

 
10.6

 
0.8

Brokered deposits
14,603

 
46.4

 
2.1

 
12,864

 
61.2

 
2.3

Total interest-bearing deposits
$
31,459

 
100.0
%
 
1.6
%
 
$
21,012

 
100.0
%
 
1.8
%


23



Nine months ended September 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)
$
10,330

 
35.9
%
 
1.2
%
 
$
4,838

 
22.6
%
 
0.9
%
Savings accounts (including money market accounts)
3,901

 
13.5

 
0.9

 
1,893

 
8.9

 
0.9

Brokered deposits
14,568

 
50.6

 
2.0

 
14,624

 
68.5

 
2.2

Total interest-bearing deposits
$
28,799

 
100.0
%
 
1.5
%
 
$
21,355

 
100.0
%
 
1.8
%
______________________
(1)
Average balances are based on monthly balances. Calculation of daily averages at this time involves undue burden and expense. We believe our average balance data is representative of our operations.
Our deposit liabilities provide funding with maturities ranging from one day to ten years. At September 30, 2014, the weighted average maturity of our certificates of deposit was 29.3 months. See Note 8. Deposits to our condensed consolidated and combined financial statements.
The following table summarizes deposits of $100,000 or more, by contractual maturity at September 30, 2014.
($ in millions)
3 Months or
Less
 
Over
3 Months
but within
6 Months
 
Over
6 Months
but within
12 Months
 
Over
12 Months
 
Total
U.S. deposits ($100,000 or more)
 
 
 
 
 
 
 
 
 
Direct deposits:
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
862

 
$
1,668

 
$
2,941

 
$
3,359

 
$
8,830

Savings accounts (including money market accounts)
4,147

 

 

 

 
4,147

Brokered deposits:
 
 
 
 
 
 
 
 
 
Certificates of deposit
833