10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2015
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
ý
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o (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 28, 2015 was 833,825,875.




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 (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “targets,” “outlook,” “estimates,” “will,” “should,” “may” or words of similar meaning, but these words are not the exclusive means of identifying forward-looking statements.
Forward-looking statements are based on management’s current expectations and assumptions, and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, actual results could differ materially from those indicated in these forward-looking statements. Factors that could cause actual results to differ materially include global political, economic, business, competitive, market, regulatory and other factors and risks, such as: the impact of macroeconomic conditions and whether industry trends we have identified develop as anticipated; retaining existing partners and attracting new partners, concentration of our 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 Synchrony Bank (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; 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 regulation, supervision, examination and enforcement of our business by governmental authorities, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the impact of the Consumer Financial Protection Bureau's (the “CFPB”) regulation of our business; 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; use of third-party vendors and ongoing third-party business relationships; failure to comply with anti-money laundering and anti-terrorism financing laws; 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; any conditions of the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) approval required for us to continue to be a savings and loan holding company; our need to establish and significantly expand many aspects of our operations and infrastructure; 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; terms of our arrangements with GE may be more favorable than what 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 our Annual Report on Form 10-K for the year ended December 31, 2014 (our “2014 Form 10-K”). You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by the federal securities laws.

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 our 2014 Form 10-K. The discussion below contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. See “Cautionary Note Regarding Forward-Looking Statements.” 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 and Business Overview
____________________________________________________________________________________________
We are one of the premier consumer financial services companies in the United States. We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners.” For the three and nine months ended September 30, 2015, we financed $29.2 billion and $81.2 billion of purchase volume and had 62.2 million and 61.8 million average active accounts, respectively, and at September 30, 2015, we had $63.5 billion of loan receivables. For the three and nine months ended September 30, 2015, we had net earnings of $574 million and $1,667 million, respectively, representing a return on assets of 2.9% and 3.0%, 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 $40.5 billion in deposits at September 30, 2015.
In 2014, we closed the initial public offering (the "IPO") of 128.5 million shares of our common stock. Following the IPO, GE owned, and currently owns, approximately 84.6% of our common stock.
On October 14, 2015, we received approval from the Federal Reserve Board to become a standalone savings and loan holding company, to retain control of the Bank and to retain control of our nonbank subsidiaries following the completion of GE’s offer to exchange shares of GE common stock for all of our shares of our common stock owned by GE (the “exchange offer”). As part of our planned separation from GE, on October 19, 2015, GE commenced the exchange offer. In connection with the exchange offer, we filed a Registration Statement on Form S-4 (No. 333-207479) with the Securities and Exchange Commission.
Our Sales Platforms
_________________________________________________________________
We conduct our operations through a single business segment. Profitability and expenses, including funding costs, loan losses and operating expenses, are managed for the business as a whole. Substantially all of our operations are within the United States. We offer our 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.



4



______________________
(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 OperationsPlatform AnalysisNon-GAAP Measure”.
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 21 national and regional retailers with which we have ongoing program agreements. The average length of our relationship with these Retail Card partners is 17 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. Payment Solutions offers these products through participating partners consisting of national and regional retailers, local merchants, manufacturers, buying groups and industry associations. Substantially all of the credit extended in this platform is promotional financing. Payment Solutions’ 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. CareCredit offers financing through a CareCredit branded private label credit card that may be used across a network of providers in which the vast majority are individual or small groups of independent healthcare providers. 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 indicates the percentage of our total loan receivables that are under standard terms only or pursuant to a promotional financing offer at September 30, 2015.
Credit Product
Standard Terms
 
Promotional Offer
 
Total
Credit cards
66.1
%
 
29.8
%
 
95.9
%
Commercial credit products
2.2

 

 
2.2

Consumer installment loans

 
1.8

 
1.8

Other
0.1

 

 
0.1

Total
68.4
%
 
31.6
%
 
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, 2015, we offered Dual Cards through 15 of our 21 ongoing 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. 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 various trends and conditions, including the following:
Growth in loan receivables and interest income

6



Changing funding mix and increased funding costs, including:
continued growth in our direct deposits as a source of stable and low cost funding
the changing mix in our funding sources, as our historical related party debt was replaced during 2014 by higher cost funding primarily provided by third-party debt
a rising interest rate environment
Extended duration of program agreements
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
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 2014 Form 10-K. For a discussion of how these trends and conditions impacted the three and nine months ended September 30, 2015, see Results of Operations.
Seasonality
____________________________________________________________________________________________
In our Retail Card and Payment Solutions platforms, we experience fluctuations in transaction volumes and the level of loan receivables as a result of higher seasonal consumer spending and payment patterns that typically result in an increase in 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 down their balances.
The seasonal impact to transaction volumes and the loan receivables balance typically results in fluctuations in our results of operations, delinquency metrics and the allowance for loan losses as a percentage of total loan receivables between quarterly periods.
In addition to the seasonal variance in loan receivables discussed above, we also experience a seasonal increase in delinquency rates and delinquent loan receivables balances during the third and fourth quarters of each year due to lower customer payment rates. 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.


7



Results of Operations
____________________________________________________________________________________________
Highlights for the Three and Nine Months Ended September 30, 2015
Below are highlights of our performance for the three and nine months ended September 30, 2015 compared to the three and nine months ended September 30, 2014, as applicable, except as otherwise noted.
Net earnings increased 4.7% to $574 million and 5.6% to $1,667 million for the three and nine months ended September 30, 2015, respectively, driven by higher net interest income, partially offset by increases in retailer share arrangements, provision for loan losses and other expenses.
Loan receivables increased 11.9% to $63,520 million at September 30, 2015 compared to September 30, 2014, primarily driven by higher purchase volume and average active account growth, and included growth associated with the BP portfolio, acquired in the second quarter of 2015.
Net interest income increased 7.8% to $3,103 million and 6.5% to $8,885 million for the three and nine months ended September 30, 2015, respectively, primarily due to higher average loan receivables, partially offset by higher interest expense driven by liquidity, funding mix and growth.
Retailer share arrangements increased 4.3% to $723 million and 6.8% to $2,004 million for the three and nine months ended September 30, 2015, respectively, primarily as a result of growth and improved performance of the programs in which we have retailer share arrangements, partially offset with increased other expense and loyalty costs associated with these programs.
Loan delinquencies as a percentage of receivables decreased with the over-30 day delinquency rate decreasing to 4.02% at September 30, 2015 from 4.26% at September 30, 2014, primarily driven by improving asset quality trends and general improvement in the U.S. economy. Net charge-off rates decreased 3 basis points to 4.02% and 20 basis points to 4.37% for the three and nine months ended September 30, 2015, respectively, reflecting these same trends.
Provision for loan losses increased by $27 million, or 4.0%, and $9 million, or 0.4%, for the three and nine months ended September 30, 2015, respectively, primarily due to portfolio growth, partially offset by improving asset quality trends. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) decreased to 5.31% at September 30, 2015, as compared to 5.46% at September 30, 2014, reflecting a stable credit outlook, despite the recent improvements in our asset quality trends.
Other expense increased by $115 million, or 15.8%, and by $259 million, or 12.1%, for the three and nine months ended September 30, 2015, respectively, driven by investments in growth and infrastructure build in preparation for separation from GE and also included expenses for the completion of the EMV card rollout for active Dual Card accounts.
We continue to invest in our direct banking activities to grow our deposit base. Total deposits increased 16.0% to $40.5 billion at September 30, 2015, compared to December 31, 2014, driven primarily by growth in our direct deposits of 40.1% to $27.6 billion, partially offset by a reduction in our brokered deposits.
During the nine months ended September 30, 2015;
We extended our Retail Card program agreements with Amazon, Chevron and PayPal, launched our new program with BP, and announced our new partnerships with Citgo, The Container Store and Stash Hotel Rewards.
We entered into new program agreements in our Payment Solutions sales platform with Guitar Center, Mattress Firm and Newegg and extended our program agreements with Sleepy's and MEGA Group USA, a national home furnishings buying group of independent retailers.

8



In our CareCredit sales platform, we added Rite Aid to our network of providers, added a new endorsement with VSP, the nation’s largest vision insurance provider, and renewed our endorsement with the American Society of Plastic Surgeons.
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)
2015
 
2014
 
2015
 
2014
Interest income
$
3,392

 
$
3,123

 
$
9,719

 
$
8,982

Interest expense
289

 
244

 
834

 
640

Net interest income
3,103

 
2,879

 
8,885

 
8,342

Retailer share arrangements
(723
)
 
(693
)
 
(2,004
)
 
(1,877
)
Net interest income, after retailer share arrangements
2,380

 
2,186

 
6,881

 
6,465

Provision for loan losses
702

 
675

 
2,129

 
2,120

Net interest income, after retailer share arrangements and provision for loan losses
1,678

 
1,511

 
4,752

 
4,345

Other income
84

 
96

 
305

 
323

Other expense
843

 
728

 
2,394

 
2,135

Earnings before provision for income taxes
919

 
879

 
2,663

 
2,533

Provision for income taxes
345

 
331

 
996

 
955

Net earnings
$
574

 
$
548

 
$
1,667

 
$
1,578


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)
2015
 
2014
 
2015
 
2014
Financial Position Data (Average):
 
 
 
 
 
 
 
Loan receivables, including held for sale
$
62,504

 
$
57,391

 
$
60,946

 
$
56,238

Total assets
$
77,995

 
$
68,300

 
$
75,551

 
$
63,332

Deposits
$
39,285

 
$
31,665

 
$
36,921

 
$
29,058

Borrowings
$
23,971

 
$
25,228

 
$
24,474

 
$
23,845

Total equity
$
11,880

 
$
8,199

 
$
11,310

 
$
7,157

Selected Performance Metrics:
 
 
 
 
 
 
 
Purchase volume(1)
$
29,206

 
$
26,004

 
$
81,155

 
$
73,068

Retail Card
$
23,560

 
$
20,991

 
$
65,422

 
$
58,736

Payment Solutions
$
3,635

 
$
3,226

 
$
9,954

 
$
9,028

CareCredit
$
2,011

 
$
1,787

 
$
5,779

 
$
5,304

Average active accounts (in thousands)(2)
62,247

 
59,907

 
61,762

 
59,394

Net interest margin(3)
15.97
%
 
17.11
%
 
15.81
%
 
17.80
%
Net charge-offs
$
633

 
$
579

 
$
1,994

 
$
1,910

Net charge-offs as a % of average loan receivables, including held for sale
4.02
%
 
4.05
%
 
4.37
%
 
4.57
%
Allowance coverage ratio(4)
5.31
%
 
5.46
%
 
5.31
%
 
5.46
%
Return on assets(5)
2.9
%
 
3.2
%
 
3.0
%
 
3.4
%
Return on equity(6)
19.2
%
 
26.8
%
 
19.7
%
 
29.7
%
Equity to assets(7)
15.23
%
 
12.00
%
 
14.97
%
 
11.30
%
Other expense as a % of average loan receivables, including held for sale
5.35
%
 
5.09
%
 
5.25
%
 
5.11
%
Efficiency ratio(8)
34.2
%
 
31.9
%
 
33.3
%
 
31.5
%
Effective income tax rate
37.5
%
 
37.7
%
 
37.4
%
 
37.7
%
Selected Period End Data:
 
 
 
 
 
 
 
Loan receivables
$
63,520

 
$
56,767

 
$
63,520

 
$
56,767

Allowance for loan losses
$
3,371

 
$
3,102

 
$
3,371

 
$
3,102

30+ days past due as a % of period-end loan receivables
4.02
%
 
4.26
%
 
4.02
%
 
4.26
%
90+ days past due as a % of period-end loan receivables
1.73
%
 
1.85
%
 
1.73
%
 
1.85
%
Total active accounts (in thousands)(2)
62,831

 
60,489

 
62,831

 
60,489

______________________
(1)
Purchase volume, or net credit sales, represents the aggregate amount of charges incurred on credit cards or other credit product accounts less returns during the period. Purchase volume includes activity related to our portfolios classified as held for sale.
(2)
Active accounts represent credit card or installment loan accounts on which there has been a purchase, payment or outstanding balance in the current month.
(3)
Net interest margin represents net interest income divided by average interest-earning assets.
(4)
Allowance coverage ratio represents allowance for loan losses divided by total period-end loan receivables.
(5)
Return on assets represents net earnings as a percentage of average total assets.
(6)
Return on equity represents net earnings as a percentage of average total equity.
(7)
Equity to assets represents average equity as a percentage of average total assets.
(8)
Efficiency ratio represents (i) other expense, divided by (ii) net interest income, after retailer share arrangements, plus other income.


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.
 
2015
 
2014
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)
$
11,059

 
$
7

 
0.25
%
 
$
9,793

 
$
4

 
0.16
%
Securities available for sale
3,534

 
6

 
0.67
%
 
309

 
3

 
3.89
%
Loan receivables(4):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale(5)
59,890

 
3,315

 
21.96
%
 
54,891

 
3,054

 
22.32
%
Consumer installment loans
1,160

 
27

 
9.23
%
 
1,070

 
25

 
9.37
%
Commercial credit products
1,400

 
36

 
10.20
%
 
1,412

 
37

 
10.51
%
Other
54

 
1

 
NM

 
18

 

 
%
Total loan receivables
62,504

 
3,379

 
21.45
%
 
57,391

 
3,116

 
21.78
%
Total interest-earning assets
77,097

 
3,392

 
17.46
%
 
67,493

 
3,123

 
18.56
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
1,216

 
 
 
 
 
1,260

 
 
 
 
Allowance for loan losses
(3,341
)
 
 
 
 
 
(3,058
)
 
 
 
 
Other assets
3,023

 
 
 
 
 
2,605

 
 
 
 
Total non-interest-earning assets
898

 
 
 
 
 
807

 
 
 
 
Total assets
$
77,995

 
 
 
 
 
$
68,300

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
39,136

 
$
159

 
1.61
%
 
$
31,459

 
$
126

 
1.61
%
Borrowings of consolidated securitization entities
13,730

 
54

 
1.56
%
 
15,102

 
57

 
1.51
%
Bank term loan
4,901

 
29

 
2.35
%
 
3,747

 
28

 
3.00
%
Senior unsecured notes
5,340

 
47

 
3.49
%
 
1,797

 
18

 
4.02
%
Related party debt

 

 
%
 
4,582

 
15

 
1.31
%
Total interest-bearing liabilities
63,107

 
289

 
1.82
%
 
56,687

 
244

 
1.73
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
149

 
 
 
 
 
206

 
 
 
 
Other liabilities
2,859

 
 
 
 
 
3,208

 
 
 
 
Total non-interest-bearing liabilities
3,008

 
 
 
 
 
3,414

 
 
 
 
Total liabilities
66,115

 
 
 
 
 
60,101

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
11,880

 
 
 
 
 
8,199

 
 
 
 
Total liabilities and equity
$
77,995

 
 
 
 
 
$
68,300

 
 
 
 
Interest rate spread(6)
 
 
 
 
15.64
%
 
 
 
 
 
16.83
%
Net interest income
 
 
$
3,103

 
 
 
 
 
$
2,879

 
 
Net interest margin(7)
 
 
 
 
15.97
%
 
 
 
 
 
17.11
%

11



 
2015
 
2014
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)
$
11,144

 
$
19

 
0.23
%
 
$
6,587

 
$
9

 
0.18
%
Securities available for sale
3,066

 
15

 
0.65
%
 
281

 
9

 
4.31
%
Loan receivables(4):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale(5)
58,442

 
9,500

 
21.73
%
 
53,836

 
8,781

 
21.97
%
Consumer installment loans
1,107

 
78

 
9.42
%
 
1,012

 
72

 
9.58
%
Commercial credit products
1,361

 
106

 
10.41
%
 
1,374

 
111

 
10.88
%
Other
36

 
1

 
NM

 
16

 

 
%
Total loan receivables
60,946

 
9,685

 
21.25
%
 
56,238

 
8,964

 
21.47
%
Total interest-earning assets
75,156

 
9,719

 
17.29
%
 
63,106

 
8,982

 
19.17
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
782

 
 
 
 
 
863

 
 
 
 
Allowance for loan losses
(3,304
)
 
 
 
 
 
(2,997
)
 
 
 
 
Other assets
2,917

 
 
 
 
 
2,360

 
 
 
 
Total non-interest-earning assets
395

 
 
 
 
 
226

 
 
 
 
Total assets
$
75,551

 
 
 
 
 
$
63,332

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
36,768

 
$
442

 
1.61
%
 
$
28,799

 
$
331

 
1.55
%
Borrowings of consolidated securitization entities
13,966

 
159

 
1.52
%
 
14,888

 
158

 
1.43
%
Bank term loan
5,653

 
108

 
2.55
%
 
1,499

 
28

 
2.52
%
Senior unsecured notes
4,692

 
121

 
3.45
%
 
719

 
18

 
3.37
%
Related party debt
163

 
4

 
3.28
%
 
6,739

 
105

 
2.10
%
Total interest-bearing liabilities
61,242

 
834

 
1.82
%
 
52,644

 
640

 
1.64
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
153

 
 
 
 
 
259

 
 
 
 
Other liabilities
2,846

 
 
 
 
 
3,272

 
 
 
 
Total non-interest-bearing liabilities
2,999

 
 
 
 
 
3,531

 
 
 
 
Total liabilities
64,241

 
 
 
 
 
56,175

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
11,310

 
 
 
 
 
7,157

 
 
 
 
Total liabilities and equity
$
75,551

 
 
 
 
 
$
63,332

 
 
 
 
Interest rate spread(6)
 
 
 
 
15.47
%
 
 
 
 
 
17.53
%
Net interest income
 
 
$
8,885

 
 
 
 
 
$
8,342

 
 
Net interest margin(7)
 
 
 
 
15.81
%
 
 
 
 
 
17.80
%
______________________
NM - Not meaningful
(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 currently 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 and equivalents balances of $308 million and $212 million for the three months ended September 30, 2015 and 2014, respectively, and $636 million and $152 million for the nine months ended September 30, 2015 and 2014, 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 $586 million and $563 million for the three months ended September 30, 2015 and 2014, respectively, and $1,646 million and $1,589 million for the nine months ended September 30, 2015 and 2014, 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 composition of our key line items included in our Statements of Earnings, see Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2014 Form 10-K.
Interest Income
Interest income increased by $269 million, or 8.6%, and by $737 million, or 8.2%, for the three and nine months ended September 30, 2015, respectively, driven primarily by growth in average loan receivables.
Average interest-earning assets
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Loan receivables, including held for sale
$
62,504

 
$
57,391

 
$
60,946

 
$
56,238

Liquidity portfolio and other
14,593

 
10,102

 
14,210

 
6,868

Total average interest-earning assets
$
77,097

 
$
67,493

 
$
75,156

 
$
63,106

The increases in average loan receivables were driven primarily by higher purchase volume of 12.3% and 11.1% for the three and nine months ended September 30, 2015, respectively, as a result of average active account growth and higher purchase volume per account. Average active accounts increased 3.9% to 62.2 million and 4.0% to 61.8 million for the three and nine months ended September 30, 2015, respectively.
We have continued to grow our liquidity portfolio since our IPO in the third quarter of 2014, and our liquidity portfolio is comprised primarily of cash and equivalents and obligations of the U.S. Treasury maturing in less than 12 months, which results in a significantly lower yield than our loan receivables.
Yield on average interest-earning assets
 
Three months ended September 30
 
Nine months ended September 30
 
 
 
 
Yield on average interest-earning assets for periods ended
September 30, 2014
18.56
 %
 
19.17
 %
Increase in liquidity portfolio invested in cash and short-term U.S. Treasuries
(0.77
)%
 
(1.66
)%
Decrease in yield on loan receivables, including held for sale
(0.33
)%
 
(0.22
)%
Yield on average interest-earning assets for the periods ended
September 30, 2015
17.46
 %
 
17.29
 %
 
 
 
 
The decreases in yield on interest-earning assets for the three and nine months ended September 30, 2015 were driven primarily by the growth in our liquidity portfolio, which earns a lower yield than our loan receivables. The yield on our average loan receivables, including loans held for sale, decreased to 21.45% for the three months ended September 30, 2015, and decreased to 21.25% for the nine months ended September 30, 2015 reflecting the impact of slightly higher payment rates from our customers and growth in promotional balances.

13



Interest Expense
Interest expense increased by $45 million, or 18.4%, and by $194 million, or 30.3%, for the three and nine months ended September 30, 2015, respectively, driven primarily by increases in average interest-bearing liabilities of $6,420 million, or 11.3%, and $8,598 million, or 16.3%, respectively, and an increase of 9 basis points and 18 basis points, respectively, in our cost of funds arising from the changes in our funding mix.
Average interest-bearing liabilities
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Interest-bearing deposit accounts
$
39,136

 
$
31,459

 
$
36,768

 
$
28,799

Borrowings of consolidated securitization entities
13,730

 
15,102

 
13,966

 
14,888

Third-party debt
10,241

 
5,544

 
10,345

 
2,218

Related party debt

 
4,582

 
163

 
6,739

Total average interest-bearing liabilities
$
63,107

 
$
56,687

 
$
61,242

 
$
52,644

The increases in average interest-bearing liabilities for the three and nine months ended September 30, 2015 were driven primarily by growth in our direct deposits and the issuance of third-party debt to replace our related party funding from GECC.
Our cost of funds increased to 1.82% for the three months ended September 30, 2015 from 1.73% for the three months ended September 30, 2014 reflecting the higher cost of our third-party debt. Our cost of funds increased to 1.82% for the nine months ended September 30, 2015 from 1.64% for the nine months ended September 30, 2014. See “Funding, Liquidity and Capital Resources—Funding Sources” for more information.
Net Interest Income
Net interest income increased by $224 million, or 7.8%, and by $543 million, or 6.5%, for the three and nine months ended September 30, 2015, respectively, driven by higher average loan receivables, partially offset by higher interest expense driven by liquidity, funding mix and growth.
Retailer Share Arrangements
Retailer share arrangements increased by $30 million, or 4.3%, and by $127 million, or 6.8%, for the three and nine months ended September 30, 2015, respectively, driven primarily by the growth and improved performance of the programs in which we have retailer share arrangements, partially offset with increased other expense and loyalty costs associated with these programs.
Provision for Loan Losses
Provision for loan losses increased by $27 million, or 4.0%, for the three months ended September 30, 2015, primarily due to portfolio growth, partially offset by asset quality improvement.
Provision for loan losses increased slightly by $9 million, or 0.4%, for the nine months ended September 30, 2015. Our allowance coverage ratio decreased to 5.31% at September 30, 2015, as compared to 5.46% at September 30, 2014, as our credit outlook remains fairly stable despite the recent improvements in our asset quality trends.

14



Other Income
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Interchange revenue
$
135

 
$
101

 
$
358

 
$
269

Debt cancellation fees
61

 
68

 
187

 
208

Loyalty programs
(122
)
 
(84
)
 
(294
)
 
(190
)
Other
10

 
11

 
54

 
36

Total other income
$
84

 
$
96

 
$
305

 
$
323

Other income decreased by $12 million, or 12.5%, and by $18 million, or 5.6%, for the three and nine months ended September 30, 2015, respectively. These decreases were primarily due to higher loyalty costs arising from the launch of new rewards programs with our partners, partially offset by increased interchange revenue driven by increased purchase volume outside of our retail partners' sales channels.
Other Expense
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Employee costs
$
268

 
$
239

 
$
757

 
$
639

Professional fees
162

 
149

 
480

 
424

Marketing and business development
115

 
115

 
305

 
295

Information processing
77

 
47

 
214

 
152

Other
221

 
178

 
638

 
625

Total other expense
$
843

 
$
728

 
$
2,394

 
$
2,135

Other expense increased by $115 million, or 15.8%, and by $259 million, or 12.1%, for the three and nine months ended September 30, 2015, respectively, primarily due to increases in employee costs, professional fees and information processing.
Employee costs increased primarily due to additional compensation expenses for new employees related to the building of our standalone infrastructure and to support business growth. Professional fees increased due to third-party costs related to the EMV card rollout for active Dual Card accounts in the three months ended September 30, 2015, as well as increases in both current year periods in expenses related to our planned separation from GE and business growth. Information processing costs increased primarily due to higher information technology investment and higher transaction volume.
The “other” component also increased for the three months ended September 30, 2015 primarily due to investments in growth and infrastructure build in preparation for separation from GE and also included expenses related to the completion of the EMV card rollout for active Dual Card accounts. The "other" component increased slightly for the nine months ended September 30, 2015 as these same increases were largely offset by the impact of corporate overhead costs allocations no longer being billed to us by GE following our IPO and a $42 million increase in reserves for a self-identified consumer remediation in the prior year period.

Provision for Income Taxes
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Effective tax rate
37.5
%
 
37.7
%
 
37.4
%
 
37.7
%
Provision for income taxes
$
345

 
$
331

 
$
996

 
$
955


15



The effective tax rates for the three and nine months ended September 30, 2015 decreased slightly compared to the same periods in the prior year. These decreases were due to a reduction in certain non-deductible expenses partially offset by increases in state tax expense, and the decrease for the nine months ended September 30, 2015 was also due to a tax expense incurred in the prior year 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 “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 September 30,
 
Nine months ended September 30,
($ in millions)
2015
 
2014
 
2015
 
2014
Interest and fees on loans
$
3,379

 
$
3,116

 
$
9,685

 
$
8,964

Other income
84

 
96

 
305

 
323

Retailer share arrangements
(723
)
 
(693
)
 
(2,004
)
 
(1,877
)
Platform revenue
$
2,740

 
$
2,519

 
$
7,986

 
$
7,410


16



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)
2015
 
2014
 
2015
 
2014
Purchase volume
$
23,560

 
$
20,991

 
$
65,422

 
$
58,736

Period-end loan receivables
$
43,432

 
$
38,466

 
$
43,432

 
$
38,466

Average loan receivables, including held for sale
$
42,933

 
$
39,411

 
$
41,853

 
$
38,685

Average active accounts (in thousands)
49,953

 
48,433

 
49,671

 
48,116

 
 
 
 
 
 
 
 
Platform revenue:
 
 
 
 
 
 
 
Interest and fees on loans
$
2,508

 
$
2,299

 
$
7,180

 
$
6,635

Other income
70

 
78

 
263

 
266

Retailer share arrangements
(708
)
 
(683
)
 
(1,965
)
 
(1,844
)
Platform revenue
$
1,870

 
$
1,694

 
$
5,478

 
$
5,057

Retail Card platform revenue increased by $176 million, or 10.4%, and by $421 million, or 8.3%, for the three and nine months ended September 30, 2015, respectively. The increase in each case was 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.
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)
2015
 
2014
 
2015
 
2014
Purchase volume
$
3,635

 
$
3,226

 
$
9,954

 
$
9,028

Period-end loan receivables
$
12,933

 
$
11,514

 
$
12,933

 
$
11,514

Average loan receivables
$
12,523

 
$
11,267

 
$
12,183

 
$
10,965

Average active accounts (in thousands)
7,468

 
6,892

 
7,335

 
6,784

 
 
 
 
 
 
 
 
Platform revenue:
 
 
 
 
 
 
 
Interest and fees on loans
$
442

 
$
405

 
$
1,257

 
$
1,156

Other income
5

 
7

 
14

 
23

Retailer share arrangements
(13
)
 
(9
)
 
(35
)
 
(30
)
Platform revenue
$
434

 
$
403

 
$
1,236

 
$
1,149

Payment Solutions platform revenue increased by $31 million, or 7.7%, and by $87 million, or 7.6%, for the three and nine months ended September 30, 2015, respectively. The increase in each case was primarily the result of higher interest and fees on loans driven primarily by an increase in average loan receivables, partially offset with a reduction in receivable yield.

17



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)
2015
 
2014
 
2015
 
2014
Purchase volume
$
2,011

 
$
1,787

 
$
5,779

 
$
5,304

Period-end loan receivables
$
7,155

 
$
6,787

 
$
7,155

 
$
6,787

Average loan receivables
$
7,048

 
$
6,713

 
$
6,910

 
$
6,588

Average active accounts (in thousands)
4,826

 
4,582

 
4,756

 
4,494

 
 
 
 
 
 
 
 
Platform revenue:
 
 
 
 
 
 
 
Interest and fees on loans
$
429

 
$
412

 
$
1,248

 
$
1,173

Other income
9

 
11

 
28

 
34

Retailer share arrangements
(2
)
 
(1
)
 
(4
)
 
(3
)
Platform revenue
$
436

 
$
422

 
$
1,272

 
$
1,204

CareCredit platform revenue increased by $14 million, or 3.3%, and by $68 million, or 5.6%, for the three and nine months ended September 30, 2015, respectively. The increase in each case was primarily the result of an increase in interest and fees on loans driven primarily by an increase in average loan receivables.
Services and Funding Provided by GE and GECC
____________________________________________________________________________________________
Services provided by GE
GE currently owns approximately 84.6% of our common stock and has provided or continues to provide a variety of services to us, which are governed by the Transitional Services Agreement ("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. While some of these services will continue to be provided by GE subsequent to our separation from GE, we expect the majority of the services provided by GE will be replaced within two years from the closing date of the IPO.
In addition to the services described above, certain of our U.S. employees currently accrue benefits or participate in various GE pension and health and welfare benefit plans. Following our separation from GE, our eligible employees will fully vest in accrued benefits under the GE retirement plans and cease to accrue any further benefits under these plans. While we will establish our own benefit plans for our employees, GE will continue to be responsible for future payments to our eligible employees under these existing GE benefit plans, and we will have certain reimbursement obligations to GE related to such payments.
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. We no longer receive such corporate overhead cost allocations and assessments.
Funding provided by GECC
GECC no longer provides funding to our business. In connection with the IPO, in August 2014, all of the historical related party debt outstanding was repaid, and GECC provided transitional funding pursuant to the $1.5 billion GECC Term Loan Facility ("GECC Term Loan"). In March 2015, we prepaid all of the remaining outstanding indebtedness provided by the GECC Term Loan. Prior to the IPO, GECC was a key source of funding for our business pursuant to various intercompany funding arrangements.

18



See Note 13. 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 that has been 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 were classified as available-for-sale at September 30, 2015 and December 31, 2014, and were primarily obligations of the U.S. Treasury or investments held to comply with the Community Reinvestment Act. Investment securities classified as available-for-sale are reported in our Condensed Consolidated Statements of Financial Position at fair value.
The following table sets forth the amortized cost and fair value of our investment securities at the dates indicated:
 
At September 30, 2015
 
At December 31, 2014
($ in millions)
Amortized
Cost
 
Estimated Fair Value
 
Amortized
Cost
 
Estimated Fair Value
Debt:
 
 
 
 
 
 
 
U.S. government and federal agency
$
3,197

 
$
3,199

 
$
1,252

 
$
1,252

State and municipal
51

 
50

 
57

 
57

Residential mortgage-backed
335

 
332

 
271

 
271

U.S. corporate debt

 

 
3

 
3

Equity
15

 
15

 
15

 
15

Total
$
3,598

 
$
3,596

 
$
1,598

 
$
1,598


19



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, 2015, our investment securities had gross unrealized gains of $4 million and gross unrealized losses of $6 million. At December 31, 2014, our investment securities had gross unrealized gains of $4 million and gross unrealized losses of $4 million.
Our investment securities portfolio had the following maturity distribution at September 30, 2015. Equity securities have been excluded from the table because they do not have a maturity.
($ in millions)
Due in 1 Year
or Less
 
Due After 1
through
5 Years
 
Due After 5
through
10 Years
 
Due After
10 years
 
Total
Debt:
 
 
 
 
 
 
 
 
 
U.S. government and federal agency
$
1,398

 
$
1,801

 
$

 
$

 
$
3,199

State and municipal

 
1

 

 
49

 
50

Residential mortgage-backed

 

 

 
332

 
332

Total(1)
$
1,398

 
$
1,802

 
$

 
$
381

 
$
3,581

Weighted average yield(2)
0.2
%
 
0.6
%
 
%
 
3.5
%
 
0.8
%
______________________
(1)
Amounts stated represent estimated fair value.
(2)
Weighted average yield is calculated based on the amortized cost of each security. In calculating yield, no adjustment has been made with respect to any tax exempt obligations.
At September 30, 2015, we did not hold investments in any single issuer, other than investments in U.S. government and federal agencies, 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 table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.
($ in millions)
At September 30, 2015
 
(%)
 
At December 31, 2014
 
(%)
Loans
 
 
 
 
 
Credit cards
$
60,920

 
95.9
%
 
$
58,880

 
96.1
%
Consumer installment loans
1,171

 
1.8

 
1,063

 
1.7

Commercial credit products
1,380

 
2.2

 
1,320

 
2.2

Other
49

 
0.1

 
23

 

Total loans
$
63,520

 
100.0
%
 
$
61,286

 
100.0
%
Loan receivables increased by $2,234 million, or 3.6%, at September 30, 2015 compared to December 31, 2014 primarily driven by higher purchase volume, average active account growth, and the acquisition of the BP portfolio. These increases were largely offset by the impact from the seasonality of our business.
Loan receivables increased by $6,753 million, or 11.9%, at September 30, 2015 compared to September 30, 2014, primarily driven by higher purchase volume and average active account growth, and also included the acquisition of the BP portfolio.

20



Our loan receivables portfolio had the following maturity distribution at September 30, 2015.
($ in millions)
Within 1 Year(1)
 
1-5 Years
 
After 5 Years
 
Total
Loans
 
 
 
 
 
 
 
Credit cards
$
60,920

 
$

 
$

 
$
60,920

Consumer installment loans
19

 
605

 
547

 
1,171

Commercial credit products
1,380

 

 

 
1,380

Other
22

 
26

 
1

 
49

Total loans
$
62,341

 
$
631

 
$
548

 
$
63,520

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

 
$
631

 
$
548

 
$
1,179

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

 

 

 

Total loans due after one year
N/A

 
$
631

 
$
548

 
$
1,179

______________________
(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, 2015.
Our loan receivables portfolio had the following geographic concentration at September 30, 2015.
($ in millions)
 
Loan Receivables
Outstanding(1)
 
% of Total Loan
Receivables
Outstanding
State
 
Texas
 
$
6,274

 
9.9
%
California
 
$
6,116

 
9.6
%
Florida
 
$
4,968

 
7.8
%
New York
 
$
3,552

 
5.6
%
Pennsylvania
 
$
2,803

 
4.4
%
______________________
(1)
Based on September 2015 customer statement-end balances extrapolated to September 30, 2015. Individual customer balances at September 30, 2015 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.

21



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, 2015
 
At December 31, 2014
Non-accrual loan receivables
$
2

 
$
2

Loans contractually 90 days past-due and still accruing interest
1,100

 
1,160

Earning TDRs(1)
691

 
670

Non-accrual, past-due and restructured loan receivables
$
1,793

 
$
1,832

______________________
(1)
At September 30, 2015 and December 31, 2014, balances exclude $45 million and $54 million, respectively, of TDRs which are included in loans contractually 90 days past-due and still accruing interest on the balance. See Note 4. Loan Receivables and Allowance for Loan Losses to our condensed consolidated and combined financial statements for additional information on the financial effects of TDRs for the three and nine months ended September 30, 2015 and 2014.
Delinquencies
Loan delinquencies as a percentage of period-end loan receivables decreased with the over-30 day delinquency rate decreasing to 4.02% at September 30, 2015, as compared to 4.26% at September 30, 2014 and 4.14% at December 31, 2014. The 24 basis point decrease compared to the same period in prior year was primarily driven by general improvement in the U.S. economy. The decrease as compared to December 31, 2014 was primarily driven by improvement in the U.S. economy, offset by the seasonality of our business.
Net Charge-Offs
Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine are uncollectible, net of recovered amounts. We exclude accrued and unpaid finance charges and fees and third-party fraud losses from charge-offs. Charged-off and recovered finance charges and fees are included in interest and fees on loans while third party fraud losses are included in other expense. Charge-offs are recorded as a reduction to the allowance for loan losses and subsequent recoveries of previously charged-off amounts are credited to the allowance for loan losses. Costs incurred to recover charged-off loans are recorded as collection expense and included in other expense in our Condensed Consolidated 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,
 
2015
 
2014
 
2015
 
2014
Ratio of net charge-offs to average loan receivables, including held for sale
4.02
%
 
4.05
%
 
4.37
%
 
4.57
%

22



Allowance for Loan Losses
The allowance for loan losses totaled $3,371 million at September 30, 2015 compared with $3,236 million at December 31, 2014, representing our best estimate of probable losses inherent in the portfolio. Our allowance for loan losses as a percentage of total loan receivables increased to 5.31% at September 30, 2015, from 5.28% at December 31, 2014 reflecting the seasonality of our business and a stable credit outlook, despite the recent improvements in our asset quality trends.
The following tables provide changes in our allowance for loan losses for the periods presented:
 ($ in millions)
Balance at July 1, 2015

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at September 30, 2015

 
 
 
 
 
 
 
 
 
 
Credit cards
$
3,229

 
$
691

 
$
(765
)
 
$
147

 
$
3,302

Consumer installment loans
23

 
6

 
(8
)
 
2

 
23

Commercial credit products
49

 
5

 
(11
)
 
2

 
45

Other
1

 

 

 

 
$
1

Total
$
3,302

 
$
702

 
$
(784
)
 
$
151

 
$
3,371

($ in millions)
Balance at July 1, 2014

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at September 30, 2014

 
 
 
 
 
 
 
 
 
 
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
January 1, 2015

 
Provision
Charged to
Operations

 
Gross Charge- 
Offs

 
 Recoveries

 
Balance at September 30, 
2015

($ in millions)
 
Credit cards
$
3,169

 
$
2,083

 
$
(2,413
)
 
$
463

 
$
3,302

Consumer installment loans
22

 
15

 
(24
)
 
10

 
23

Commercial credit products
45

 
30

 
(35
)
 
5

 
45

Other

 
1

 

 

 
1

Total
$
3,236

 
$
2,129

 
$
(2,472
)
 
$
478

 
$
3,371

 
Balance at
January 1, 2014

 
Provision
Charged to
Operations

 
Gross Charge- 
Offs

 
Recoveries

 
Balance at
September 30, 
2014

($ in millions)
 
Credit cards
$
2,827

 
$
2,077

 
$
(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

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.

23



Funding Sources
Our primary funding sources include cash from operations, deposits (direct and brokered deposits), third-party debt and securitized financings.
The following table summarizes information concerning our funding sources during the periods indicated:
 
2015
 
2014
Three months ended September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
39,136

 
62.0
%
 
1.6
%
 
$
31,459

 
55.5
%
 
1.6
%
Securitized financings
13,730

 
21.7

 
1.6

 
15,102

 
26.6

 
1.5

Bank term loan
4,901

 
7.8

 
2.3

 
3,747

 
6.6

 
3.0

Senior unsecured notes
5,340

 
8.5

 
3.5

 
1,797

 
3.2

 
4.0

Related party debt

 

 

 
4,582

 
8.1

 
1.3

Total
$
63,107

 
100.0
%
 
1.8
%
 
$
56,687

 
100.0
%
 
1.7
%
______________________
(1)
Excludes $149 million and $206 million average balance of non-interest-bearing deposits for the three months ended September 30, 2015 and September 30, 2014, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended September 30, 2015 and 2014.
 
2015
 
2014
Nine months ended September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
36,768

 
60.0
%
 
1.6
%
 
$
28,799

 
54.7
%
 
1.6
%
Securitized financings
13,966

 
22.8

 
1.5

 
14,888

 
28.3

 
1.4

Bank term loan
5,653

 
9.2

 
2.6

 
1,499

 
2.8

 
2.5

Senior unsecured notes
4,692

 
7.7

 
3.4

 
719

 
1.4

 
3.4

Related party debt
163

 
0.3

 
3.3

 
6,739

 
12.8

 
2.1

Total
$
61,242

 
100.0
%
 
1.8
%
 
$
52,644

 
100.0
%
 
1.6
%
______________________
(1)
Excludes $153 million and $259 million average balance of non-interest-bearing deposits for the nine months ended September 30, 2015 and September 30, 2014, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the nine months ended September 30, 2015 and 2014.
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, 2015, we had $27.6 billion in direct deposits (which includes deposits from banks and financial institutions) and $12.9 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger that channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to continue to 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.
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, 2015, had a weighted average remaining life of 3.4 years. These deposits generally are not subject to early withdrawal.

24



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 to attract new deposits or retain existing deposits, or are required to pay higher rates. 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 continue to increase our direct deposits through further investing in our direct deposit programs and capabilities. The growth of direct deposits will be supported by a continued investment in marketing and brand awareness.
The following table summarizes certain information regarding our interest-bearing deposits by type (all of which constitute U.S. deposits) for the periods indicated:
Three months ended September 30 ($ in millions)
2015
 
2014
Average
Balance(1)
 
% of
Total
 
Average
Rate
 
Average
Balance(1)
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
16,195

 
41.4
%
 
1.4
%
 
$
11,833

 
37.6
%
 
1.3
%
Savings accounts (including money market accounts)
9,774

 
25.0

 
1.0

 
5,023

 
16.0

 
0.9

Brokered deposits
13,167

 
33.6

 
2.3

 
14,603

 
46.4

 
2.1

Total interest-bearing deposits
$
39,136

 
100.0
%