Document
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 June 30, 2016
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 July 25, 2016 was 833,925,364.




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


2



Certain Defined Terms
Except as the context may otherwise require in this report, references to:
“we,” “us,” “our” and the “Company” are to SYNCHRONY FINANCIAL and its subsidiaries;
“Synchrony” are to SYNCHRONY FINANCIAL only;
“GE” are to General Electric Company and its subsidiaries;
“GECC” are to General Electric Capital Corporation (a subsidiary of GE) and its subsidiaries;
the “Bank” are to Synchrony Bank (a subsidiary of Synchrony);
the “Bank Term Loan” are to the term loan agreement, dated as of July 30, 2014, among Synchrony, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto, as amended;
the “GECC Term Loan” are to the term loan agreement, dated as of July 30, 2014, among Synchrony, as borrower, GECC, as administrative agent, and the other Lenders party thereto, as amended;
“FICO” score are to a credit score developed by Fair Isaac & Co., which is widely used as a means of evaluating the likelihood that credit users will pay their obligations; and
“EMV” are to new security technology that utilizes embedded security chips in our credit cards.
For a description of certain other terms we use, including “active account” and “purchase volume,” see the notes to “Item 7. Management’s Discussion and AnalysisOther Financial and Statistical Data” in our Annual Report on Form 10-K for the year ended December 31, 2015 (our “2015 Form 10-K”). There is no standard industry definition for many of these terms, and other companies may define them differently than we do.
We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which, in our business and in this report, we refer to as our “partners.” The terms of the programs all require cooperative efforts between us and our partners of varying natures and degrees to establish and operate the programs. Our use of the term “partners” to refer to these entities is not intended to, and does not, describe our legal relationship with them, imply that a legal partnership or other relationship exists between the parties or create any legal partnership or other relationship. The “average length of our relationship” with respect to a specified partner, group of partners or programs is measured on a weighted average basis by interest and fees on loans for the year ended December 31, 2015 for those partners or for all partners participating in a program, based on the date each partner relationship or program, as applicable, started.
Unless otherwise indicated, references to “loan receivables” do not include loan receivables held for sale.

“Synchrony” and its logos and other trademarks referred to in this report, including, CareCredit®, Quickscreen®, Dual Card™ and eQuickscreen™ belong to us. Solely for convenience, we refer to our trademarks in this report without the ™ and ® symbols, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks. Other service marks, trademarks and trade names referred to in this report are the property of their respective owners.
On our website at www.synchronyfinancial.com, we make available under the "Investors-SEC Filings" menu selection, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports or amendments are electronically filed with, or furnished to, the SEC. Materials that we file or furnish to the SEC may also be read and copied at the SEC's Public Reference Room at 100 F Street, N.E., Washington, DC 20549. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information that we file electronically with the SEC.

3




Cautionary Note Regarding Forward-Looking Statements:
Various statements in this Quarterly Report on Form 10-Q may contain “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “targets,” “outlook,” “estimates,” “will,” “should,” “may” or words of similar meaning, but these words are not the exclusive means of identifying forward-looking statements.
Forward-looking statements are based on management’s current expectations and assumptions, and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, actual results could differ materially from those indicated in these forward-looking statements. Factors that could cause actual results to differ materially include global political, economic, business, competitive, market, regulatory and other factors and risks, such as: the impact of macroeconomic conditions and whether industry trends we have identified develop as anticipated; retaining existing partners and attracting new partners, concentration of our revenue in a small number of Retail Card partners, promotion and support of our products by our partners, and financial performance of our partners; higher borrowing costs and adverse financial market conditions impacting our funding and liquidity, and any reduction in our credit ratings; our ability to securitize our loans, occurrence of an early amortization of our securitization facilities, loss of the right to service or subservice our securitized loans, and lower payment rates on our securitized loans; our ability to grow our deposits in the future; changes in market interest rates and the impact of any margin compression; effectiveness of our risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, our ability to manage our credit risk, the sufficiency of our allowance for loan losses and the accuracy of the assumptions or estimates used in preparing our financial statements; our ability to offset increases in our costs in retailer share arrangements; competition in the consumer finance industry; our concentration in the U.S. consumer credit market; our ability to successfully develop and commercialize new or enhanced products and services; our ability to realize the value of strategic investments; reductions in interchange fees; fraudulent activity; cyber-attacks or other security breaches; failure of third parties to provide various services that are important to our operations; our transition to a replacement third-party vendor to manage the technology platform for our online retail deposits; disruptions in the operations of our computer systems and data centers; international risks and compliance and regulatory risks and costs associated with international operations; alleged infringement of intellectual property rights of others and our ability to protect our intellectual property; litigation and regulatory actions; damage to our reputation; our ability to attract, retain and motivate key officers and employees; tax legislation initiatives or challenges to our tax positions and state sales tax rules and regulations; a material indemnification obligation to GE under the tax sharing and separation agreement with GE (the "TSSA") if we cause the split-off from GE or certain preliminary transactions to fail to qualify for tax-free treatment or in the case of certain significant transfers of our stock following the split-off; obligations associated with being an independent public company; 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 and liquidity requirements; restrictions that limit our ability to pay dividends and repurchase our common stock, and restrictions that limit Synchrony Bank’s ability to pay dividends to us; regulations relating to privacy, information security and data protection; use of third-party vendors and ongoing third-party business relationships; and failure to comply with anti-money laundering and anti-terrorism financing laws.
For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this report and in our public filings, including under the heading “Risk Factors” in our 2015 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.

4



PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report and in our 2015 Form 10-K. The discussion below contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. See “Cautionary Note Regarding Forward-Looking Statements.”
Introduction and Business Overview
____________________________________________________________________________________________
We are one of the premier consumer financial services companies in the United States. We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners.” For the three and six months ended June 30, 2016, we financed $31.5 billion and $58.5 billion of purchase volume and had 65.5 million and 66.0 million average active accounts, respectively, and at June 30, 2016, we had $68.3 billion of loan receivables. For the three and six months ended June 30, 2016, we had net earnings of $489 million and $1,071 million, respectively, representing a return on assets of 2.4% and 2.6%, respectively.
We offer our credit products primarily through our wholly-owned subsidiary, the Bank. Through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”), including certificates of deposit, individual retirement accounts (“IRAs”), money market accounts and savings accounts. We also take deposits at the Bank through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. We have expanded and continue to expand our online direct banking operations to increase our deposit base as a source of stable and diversified low cost funding for our credit activities. At June 30, 2016 we had $46.4 billion in deposits, which represented 71% of our total funding sources.
In November 2015, Synchrony Financial became a stand-alone savings and loan holding company following the completion of GE's exchange offer, in which GE exchanged shares of GE common stock for all of the shares of our common stock it owned (the “Separation”).
Our Sales Platforms
_________________________________________________________________
We conduct our operations through a single business segment. Our revenue activities are managed for the business as a whole. Substantially all of our operations are within the United States. We offer our credit products through three sales platforms (Retail Card, Payment Solutions and CareCredit). Those platforms are organized by the types of products we offer and the partners we work with, and are measured on interest and fees, loan receivables, new accounts and other sales metrics.



5



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 24 national and regional retailers with which we have ongoing program agreements. The average length of our relationships with these Retail Card partners is 19 years. Retail Card’s revenue primarily consists of interest and fees on our loan receivables. Other income earned by the Retail Card sales platform 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. In addition, the Retail Card sales platform includes the majority of our retailer share arrangements, which generally provide for payment to our partner if the economic performance of the program exceeds a contractually-defined threshold. 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 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 Payment Solutions is promotional financing. Payment Solutions’ revenue primarily consists of interest and fees on our loan receivables, including “merchant discounts,” which are fees paid to us by our partners in almost all cases to compensate us for all or part of foregone interest revenue associated with promotional financing.
CareCredit
CareCredit is a leading provider of promotional financing to consumers for elective healthcare procedures, products 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 our network of CareCredit 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 revenue primarily consists of interest and fees on our credit products and from merchant discounts. We also process general purpose card transactions for some providers as their acquiring bank within most of the credit card network associations, for which we obtain an interchange fee.

6



Our Credit Products
____________________________________________________________________________________________
Through our platforms, we offer three principal types of credit products: credit cards, commercial credit products and consumer installment loans. We also offer a debt cancellation product.
The following table sets forth each credit product by type and indicates the percentage of our total loan receivables that are under standard terms only or pursuant to a promotional financing offer at June 30, 2016.
 
 
 
Promotional Offer
 
 
Credit Product
Standard Terms Only
 
Deferred Interest
 
Other Promotional
 
Total
Credit cards
66.3
%
 
16.9
%
 
12.8
%
 
96.0
%
Commercial credit products
2.0

 

 

 
2.0

Consumer installment loans

 

 
1.9

 
1.9

Other
0.1

 

 

 
0.1

Total
68.4
%
 
16.9
%
 
14.7
%
 
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 addition, in some cases, cardholders may be permitted to access their credit card accounts for cash advances. In Retail Card, credit under our private label credit cards typically is extended on standard terms only, and in Payment Solutions and CareCredit, credit under our private label credit cards typically is extended pursuant to a promotional financing offer.
Dual Cards. Our patented Dual Cards are co-branded general purpose 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 our Retail Card platform offers Dual Cards. At June 30, 2016, we offered Dual Cards or co-branded credit cards through 17 of our 24 ongoing Retail Card programs.
Commercial Credit Products
We offer private label cards and Dual Cards for commercial customers that are similar to our consumer offerings. We also offer a commercial pay-in-full accounts receivable product to a wide range of business customers. We offer 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.

7



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
Extended duration of our Retail Card program agreements
Increases in retailer share arrangement payments and other expense under extended program agreements
Growth in interchange revenues and loyalty program costs
Impact of regulatory developments
Capital and liquidity levels; We continue to expect to maintain sufficient capital and liquidity resources to support our daily operations, our business growth, and our credit ratings as well as regulatory and compliance requirements in a cost effective and prudent manner through expected and unexpected market environments. As discussed in our 2015 Form 10-K, our Board of Directors (the "Board") intended to establish both dividend and share repurchase programs, and accordingly, on July 7, 2016, they approved a $0.13 quarterly common stock dividend as well as a share repurchase program of up to $952 million for the four quarters ending June 30, 2017. Our Board also declared our first quarterly cash dividend of $0.13 per share, payable on August 25, 2016 to holders of record at the close of business on August 12, 2016. While these programs have now been established, we continue to expect to maintain capital ratios well in excess of minimum regulatory requirements.
Stable asset quality; During 2016, we have continued to note general improvement in the U.S. economy and our actual net charge-off rates have remained relatively stable, decreasing slightly by 14 basis points to 4.49% for the three months ended June 30, 2016, compared to 4.63% for the three months ended June 30, 2015. The assessment of our credit profile includes the evaluation of portfolio mix, account maturation, as well as broader consumer trends, such as payment behavior and overall indebtedness. During the second quarter of 2016, these factors contributed to an increase in our delinquent accounts and we are now estimating a 20-30 basis point increase in our net charge-off rate over the next twelve months. Accordingly, we also experienced a corresponding increase in our allowance coverage ratio, as we reserved for these forecasted losses inherent in our loan portfolio.
For a further 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 2015 Form 10-K. For a discussion of how these trends and conditions impacted the three and six months ended June 30, 2016, see Results of Operations.
Seasonality
____________________________________________________________________________________________
In our Retail Card and Payment Solutions platforms, we experience fluctuations in transaction volumes and the level of loan receivables as a result of higher seasonal consumer spending and payment patterns that typically result in an increase of loan receivables from August through a peak in late December, with reductions in loan receivables occurring over the first and second quarters of the following year as customers pay their balances down.
The seasonal impact to transaction volumes and the loan receivables balance typically results in fluctuations in our results of operations, delinquency metrics and the allowance for loan losses as a percentage of total loan receivables between quarterly periods.

8



In addition to the seasonal variance in loan receivables discussed above, we also experience a seasonal increase in delinquency rates and delinquent loan receivables balances during the third and fourth quarters of each year due to lower customer payment rates resulting in higher net charge-off rates in the first and second quarters. Our delinquency rates and delinquent loan receivables balances typically decrease during the subsequent first and second quarters as customers begin to pay down their loan balances and return to current status resulting in lower net charge-off rates in the third and fourth quarters. Because customers who were delinquent during the fourth quarter of a calendar year have a higher probability of returning to current status when compared to customers who are delinquent at the end of each of our interim reporting periods, we expect that a higher proportion of delinquent accounts outstanding at an interim period end will result in charge-offs, as compared to delinquent accounts outstanding at a year end. Consistent with this historical experience, we generally experience a higher allowance for loan losses as a percentage of total loan receivables at the end of an interim period, as compared to the end of a calendar year. In addition, despite improving credit metrics such as declining past due amounts, we may experience an increase in our allowance for loan losses at an interim period end compared to the prior year end, reflecting these same seasonal trends.
Results of Operations
____________________________________________________________________________________________
Highlights for the Three and Six Months Ended June 30, 2016
Below are highlights of our performance for the three and six months ended June 30, 2016 compared to the three and six months ended June 30, 2015, as applicable, except as otherwise noted.
Net earnings decreased 9.6% to $489 million and 2.0% to $1,071 million for the three and six months ended June 30, 2016, respectively, driven by increases in provision for loan losses and other expense, partially offset by higher net interest income.
Loan receivables increased 11.2% to $68,282 million at June 30, 2016 compared to June 30, 2015, primarily driven by higher purchase volume and average active account growth.
Net interest income increased 10.5% to $3,212 million and 11.1% to $6,421 million for three and six months ended June 30, 2016, respectively, primarily due to higher average loan receivables.
Retailer share arrangements increased 6.9% to $664 million and 4.1% to $1,334 million for the three and six months ended June 30, 2016, respectively, primarily as a result of growth and improved performance of the programs in which we have retailer share arrangements, partially offset by higher provision for loan losses and loyalty costs associated with these programs.
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 3.79% at June 30, 2016 from 3.53% at June 30, 2015, and the net charge-off rate decreased 14 basis points to 4.49% and increased 3 basis points to 4.59% for the three and six months ended June 30, 2016, respectively.
Provision for loan losses increased by $281 million, or 38.0%, and $497 million or 34.8% for the three and six months ended June 30, 2016, respectively, due to a higher loan loss reserve build and receivable growth. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) increased to 5.70% at June 30, 2016, as compared to 5.38% at June 30, 2015.
Other expense increased by $34 million, or 4.2%, and $88 million or 5.7% for three and six months ended June 30, 2016, respectively, driven by business growth.
We continue to invest in our direct banking activities to grow our deposit base. Total deposits increased 7.1% to $46.4 billion at June 30, 2016, compared to December 31, 2015, driven primarily by growth in our direct deposits of 14.8% to $34.1 billion, partially offset by a reduction in our brokered deposits.

9



On July 7, 2016, our Board approved a $0.13 quarterly common stock dividend as well as a share repurchase program of up to $952 million for the four quarters ending June 30, 2017. Our Board also declared our first quarterly cash dividend of $0.13 per share, payable on August 25, 2016 to holders of record at the close of business on August 12, 2016.
New and Extended Partner Agreements during the six months ended June 30, 2016
We extended our Retail Card program agreement with Stein Mart, launched our new programs with Citgo and Marvel and announced our new partnerships with Cathay Pacific and Fareportal.
We extended our Payment Solutions program agreements with La-Z-Boy, Ashley Homestore and Suzuki and launched our new program with Mattress Firm.
In our CareCredit sales platform, we renewed our endorsements with the American Society of Plastic Surgeons and VCA Animal Hospitals.
Summary Earnings
The following table sets forth our results of operations for the periods indicated.
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Interest income
$
3,515

 
$
3,177

 
$
7,035

 
$
6,327

Interest expense
303

 
270

 
614

 
545

Net interest income
3,212

 
2,907

 
6,421

 
5,782

Retailer share arrangements
(664
)
 
(621
)
 
(1,334
)
 
(1,281
)
Net interest income, after retailer share arrangements
2,548

 
2,286

 
5,087

 
4,501

Provision for loan losses
1,021

 
740

 
1,924

 
1,427

Net interest income, after retailer share arrangements and provision for loan losses
1,527

 
1,546

 
3,163

 
3,074

Other income
83

 
120

 
175

 
221

Other expense
839

 
805

 
1,639

 
1,551

Earnings before provision for income taxes
771

 
861

 
1,699

 
1,744

Provision for income taxes
282

 
320

 
628

 
651

Net earnings
$
489

 
$
541

 
$
1,071

 
$
1,093


10



Other Financial and Statistical Data(1) 
The following table sets forth certain other financial and statistical data for the periods indicated.    
 
At and for the
 
At and for the
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Financial Position Data (Average):
 
 
 
 
 
 
 
Loan receivables, including held for sale
$
66,943

 
$
60,094

 
$
66,963

 
$
60,124

Total assets
$
81,694

 
$
73,985

 
$
82,351

 
$
74,023

Deposits
$
45,707

 
$
35,982

 
$
45,024

 
$
35,598

Borrowings
$
19,474

 
$
23,953

 
$
20,815

 
$
24,582

Total equity
$
13,467

 
$
11,300

 
$
13,181

 
$
11,023

Selected Performance Metrics:
 
 
 
 
 
 
 
Purchase volume(2)
$
31,507

 
$
28,810

 
$
58,484

 
$
51,949

Retail Card
$
25,411

 
$
23,452

 
$
46,961

 
$
41,862

Payment Solutions
$
3,903

 
$
3,371

 
$
7,295

 
$
6,319

CareCredit
$
2,193

 
$
1,987

 
$
4,228

 
$
3,768

Average active accounts (in thousands)(3)
65,531

 
60,923

 
65,996

 
61,478

Net interest margin(4)
15.86
%
 
15.77
%
 
15.80
%
 
15.75
%
Net charge-offs
$
747

 
$
693

 
$
1,527

 
$
1,361

Net charge-offs as a % of average loan receivables, including held for sale
4.49
%
 
4.63
%
 
4.59
%
 
4.56
%
Allowance coverage ratio(5)
5.70
%
 
5.38
%
 
5.70
%
 
5.38
%
Return on assets(6)
2.4
%
 
2.9
%
 
2.6
%
 
3.0
%
Return on equity(7)
14.6
%
 
19.2
%
 
16.3
%
 
20.0
%
Equity to assets(8)
16.48
%
 
15.27
%
 
16.01
%
 
14.89
%
Other expense as a % of average loan receivables, including held for sale
5.04
%
 
5.37
%
 
4.92
%
 
5.20
%
Efficiency ratio(9)
31.9
%
 
33.5
%
 
31.1
%
 
32.8
%
Effective income tax rate
36.6
%
 
37.2
%
 
37.0
%
 
37.3
%
Selected Period End Data:
 
 
 
 
 
 
 
Loan receivables
$
68,282

 
$
61,431

 
$
68,282

 
$
61,431

Allowance for loan losses
$
3,894

 
$
3,302

 
$
3,894

 
$
3,302

30+ days past due as a % of period-end loan receivables(10)
3.79
%
 
3.53
%
 
3.79
%
 
3.53
%
90+ days past due as a % of period-end loan receivables(10)
1.67
%
 
1.52
%
 
1.67
%
 
1.52
%
Total active accounts (in thousands)(3)
66,491

 
61,718

 
66,491

 
61,718

______________________
(1)
Certain balance sheet amounts and related metrics have been updated to reflect the adoption of ASU 2015-03. See “Management's Discussion and Analysis—New Accounting Standards” for a more detailed discussion.
(2)
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.
(3)
Active accounts represent credit card or installment loan accounts on which there has been a purchase, payment or outstanding balance in the current month.
(4)
Net interest margin represents net interest income divided by average interest-earning assets.
(5)
Allowance coverage ratio represents allowance for loan losses divided by total period-end loan receivables.
(6)
Return on assets represents net earnings as a percentage of average total assets.
(7)
Return on equity represents net earnings as a percentage of average total equity.
(8)
Equity to assets represents average equity as a percentage of average total assets.
(9)
Efficiency ratio represents (i) other expense, divided by (ii) net interest income, after retailer share arrangements, plus other income.
(10)
Based on customer statement-end balances extrapolated to the respective period-end date.


11



Average Balance Sheet
The following table 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.
 
2016
 
2015
Three months ended June 30 ($ in millions)
Average
Balance(1)
 
Interest
Income /
Expense
 
Average
Yield /
Rate(2)
 
Average
Balance(1)
 
Interest
Income/
Expense
 
Average
Yield /
Rate(2)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(3)
$
11,692

 
$
14

 
0.48
%
 
$
10,728

 
$
6

 
0.22
%
Securities available for sale
2,805

 
7

 
1.00
%
 
3,107

 
5

 
0.65
%
Loan receivables:
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale(4)
64,269

 
3,432

 
21.48
%
 
57,588

 
3,106

 
21.63
%
Consumer installment loans
1,235

 
28

 
9.12
%
 
1,101

 
26

 
9.47
%
Commercial credit products
1,373

 
33

 
9.67
%
 
1,372

 
34

 
9.94
%
Other
66

 
1

 
NM

 
33

 

 
%
Total loan receivables
66,943

 
3,494

 
20.99
%
 
60,094

 
3,166

 
21.13
%
Total interest-earning assets
81,440

 
3,515

 
17.36
%
 
73,929

 
3,177

 
17.24
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
774

 
 
 
 
 
583

 
 
 
 
Allowance for loan losses
(3,729
)
 
 
 
 
 
(3,285
)
 
 
 
 
Other assets
3,209

 
 
 
 
 
2,758

 
 
 
 
Total non-interest-earning assets
254

 
 
 
 
 
56

 
 
 
 
Total assets
$
81,694

 
 
 
 
 
$
73,985

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
45,490

 
$
179

 
1.58
%
 
$
35,816

 
$
146

 
1.64
%
Borrowings of consolidated securitization entities
12,291

 
59

 
1.93
%
 
14,011

 
53

 
1.52
%
Bank term loan
374

 
7

 
7.53
%
 
5,374

 
32

 
2.39
%
Senior unsecured notes
6,809

 
58

 
3.43
%
 
4,568

 
39

 
3.42
%
Related party debt

 

 
%
 

 

 
%
Total interest-bearing liabilities
64,964

 
303

 
1.88
%
 
59,769

 
270

 
1.81
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
217

 
 
 
 
 
166

 
 
 
 
Other liabilities
3,046

 
 
 
 
 
2,750

 
 
 
 
Total non-interest-bearing liabilities
3,263

 
 
 
 
 
2,916

 
 
 
 
Total liabilities
68,227

 
 
 
 
 
62,685

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
13,467

 
 
 
 
 
11,300

 
 
 
 
Total liabilities and equity
$
81,694

 
 
 
 
 
$
73,985

 
 
 
 
Interest rate spread(5)
 
 
 
 
15.48
%
 
 
 
 
 
15.43
%
Net interest income
 
 
$
3,212

 
 
 
 
 
$
2,907

 
 
Net interest margin(6)
 
 
 
 
15.86
%
 
 
 
 
 
15.77
%

12



 
2016
 
2015
Six months ended June 30 ($ in millions)
Average
Balance(1)
 
Interest
Income /
Expense
 
Average
Yield /
Rate(2)
 
Average
Balance(1)
 
Interest
Income/
Expense
 
Average
Yield /
Rate(2)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(3)
$
11,874

 
$
30

 
0.51
%
 
$
11,006

 
$
12

 
0.22
%
Securities available for sale
2,893

 
13

 
0.90
%
 
2,887

 
9

 
0.63
%
Loan receivables:
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale(4)
64,363

 
6,868

 
21.46
%
 
57,670

 
6,185

 
21.63
%
Consumer installment loans
1,199

 
55

 
9.22
%
 
1,081

 
51

 
9.51
%
Commercial credit products
1,346

 
68

 
10.16
%
 
1,345

 
70

 
10.50
%
Other
55

 
1

 
NM

 
28

 

 
%
Total loan receivables
66,963

 
6,992

 
21.00
%
 
60,124

 
6,306

 
21.15
%
Total interest-earning assets
81,730

 
7,035

 
17.31
%
 
74,017

 
6,327

 
17.24
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
1,036

 
 
 
 
 
578

 
 
 
 
Allowance for loan losses
(3,661
)
 
 
 
 
 
(3,282
)
 
 
 
 
Other assets
3,246

 
 
 
 
 
2,710

 
 
 
 
Total non-interest-earning assets
621

 
 
 
 
 
6

 
 
 
 
Total assets
$
82,351

 
 
 
 
 
$
74,023

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
44,807

 
$
351

 
1.58
%
 
$
35,445

 
$
283

 
1.61
%
Borrowings of consolidated securitization entities
12,648

 
117

 
1.86
%
 
14,085

 
105

 
1.50
%
Bank term loan
1,466

 
31

 
4.25
%
 
5,981

 
79

 
2.66
%
Senior unsecured notes
6,701

 
115

 
3.45
%
 
4,284

 
74

 
3.48
%
Related party debt

 

 
%
 
232

 
4

 
3.48
%
Total interest-bearing liabilities
65,622

 
614

 
1.88
%
 
60,027

 
545

 
1.83
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
217

 
 
 
 
 
153

 
 
 
 
Other liabilities
3,331

 
 
 
 
 
2,820

 
 
 
 
Total non-interest-bearing liabilities
3,548

 
 
 
 
 
2,973

 
 
 
 
Total liabilities
69,170

 
 
 
 
 
63,000

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
13,181

 
 
 
 
 
11,023

 
 
 
 
Total liabilities and equity
$
82,351

 
 
 
 
 
$
74,023

 
 
 
 
Interest rate spread(5)
 
 
 
 
15.43
%
 
 
 
 
 
15.41
%
Net interest income
 
 
$
6,421

 
 
 
 
 
$
5,782

 
 
Net interest margin(6)
 
 
 
 
15.80
%
 
 
 
 
 
15.75
%
______________________
(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 $586 million and $692 million for the three months ended June 30, 2016 and 2015, respectively, and $529 million and $775 million for the six months ended June 30, 2016 and 2015, respectively.
(4)
Interest income on credit cards includes fees on loans of $570 million and $526 million for the three months ended June 30, 2016 and 2015, respectively, and $1,154 million and $1,060 million for the six months ended June 30, 2016 and 2015, respectively.


13



(5)
Interest rate spread represents the difference between the yield on total interest-earning assets and the rate on total interest-bearing liabilities.
(6)
Net interest margin represents net interest income divided by average total interest-earning assets.
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 2015 Form 10-K.
Interest Income
Interest income increased by $338 million, or 10.6%, and by $708 million, or 11.2%, for the three and six months ended June 30, 2016, driven primarily by growth in our average loan receivables.
Average interest-earning assets
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Loan receivables, including held for sale
$
66,943

 
$
60,094

 
$
66,963

 
$
60,124

Liquidity portfolio and other
14,497

 
13,835

 
14,767

 
13,893

Total average interest-earning assets
$
81,440

 
$
73,929

 
$
81,730

 
$
74,017

The increases in average loan receivables of 11.4% for both current year periods was driven primarily by higher purchase volume of 9.4% and 12.6% for the three and six months ended June 30, 2016, respectively, as a result of average active account growth and higher purchase volume per account. Average active accounts increased 7.6% to 65.5 million and 7.3% to 66.0 million for the three and six months ended June 30, 2016, respectively, from 60.9 million and 61.5 million for the three and six months ended June 30, 2015, respectively.
Yield on average interest-earning assets
 
Three months ended
 
Six months ended
 
 
 
 
Yield on average interest-earning assets for the period ended June 30, 2015
17.24
 %
 
17.24
 %
Yield on loan receivables, including held for sale
(0.14
)
 
(0.15
)
Liquidity portfolio and other
0.26

 
0.22

Yield on average interest-earning assets for the period ended June 30, 2016
17.36
 %
 
17.31
 %
 
 
 
 
The yield on interest-earning assets increased for the three and six months ended June 30, 2016 as lower average liquidity as a percentage of interest-earning assets and improved rates earned on our liquidity portfolio were partially offset by the decline in yield on our average loan receivables. The yield on our average loan receivables decreased to 20.99% for the three months ended June 30, 2016, and decreased to 21.00% for the six months ended June 30, 2016, reflecting the growth in promotional balances.
Interest Expense
Interest expense increased by $33 million, or 12.2%, and by $69 million, or 12.7%, for the three and six months ended June 30, 2016, respectively, driven primarily by the increases in our deposit liabilities. Our cost of funds increased to 1.88% for both the three and six months ended June 30, 2016, compared to 1.81% and 1.83% for the three and six months ended June 30, 2015, respectively, primarily due to higher short-term benchmark rates.

14



Average interest-bearing liabilities
 
Three months ended June 30,
Six months ended June 30,
($ in millions)
2016
 
2015
2016
 
2015
Interest-bearing deposit accounts
$
45,490

 
$
35,816

$
44,807

 
$
35,445

Borrowings of consolidated securitization entities
12,291

 
14,011

12,648

 
14,085

Third-party debt
7,183

 
9,942

8,167

 
10,265

Related party debt

 


 
232

Total average interest-bearing liabilities
$
64,964

 
$
59,769

$
65,622

 
$
60,027

The increases in average interest-bearing liabilities for the three and six months ended June 30, 2016 was driven primarily by growth in our direct deposits partially offset by the repayment of third-party debt and lower securitized financings.
Net Interest Income
Net interest income increased by $305 million, or 10.5%, and by $639 million, or 11.1%, for the three and six months ended June 30, 2016, respectively, driven by higher average loan receivables.
Retailer Share Arrangements
Retailer share arrangements increased by $43 million, or 6.9%, and by $53 million, or 4.1%, for the three and six months ended June 30, 2016, respectively, driven primarily by the growth and improved performance of the programs in which we have retailer share arrangements, partially offset by higher provision for loan losses and loyalty costs associated with these programs.
Provision for Loan Losses
Provision for loan losses increased by $281 million, or 38.0%, and by $497 million, or 34.8%, for the three and six months ended June 30, 2016, respectively, primarily due to higher expected losses and receivables growth. The increases in expected losses were primarily driven by an increase in our delinquent accounts, which occurred during the second quarter of 2016, and we are now estimating a 20-30 basis point increase in our forecasted net charge-off rate over the next twelve months.
Our allowance coverage ratio increased to 5.70% at June 30, 2016, as compared to 5.38% at June 30, 2015 reflecting this increase in forecasted losses inherent in our loan portfolio.
Other Income
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Interchange revenue
$
151

 
$
123

 
$
281

 
$
223

Debt cancellation fees
63

 
61

 
127

 
126

Loyalty programs
(135
)
 
(94
)
 
(245
)
 
(172
)
Other
4

 
30

 
12

 
44

Total other income
$
83

 
$
120

 
$
175

 
$
221

Other income decreased by $37 million, or 30.8%, and by $46 million, or 20.8%, for the three and six months ended June 30, 2016, respectively. These decreases were primarily due to a pre-tax gain of $20 million associated with the sale of certain loan portfolios in the three and six months ended June 30, 2015 and higher loyalty costs in the three and six months ended June 30, 2016, partially offset by increased interchange revenue driven by increased purchase volume outside of our retail partners' sales channels.

15



Other Expense
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Employee costs
$
301

 
$
250

 
$
581

 
$
489

Professional fees
154

 
156

 
300

 
318

Marketing and business development
107

 
108

 
201

 
190

Information processing
81

 
74

 
163

 
137

Other
196

 
217

 
394

 
417

Total other expense
$
839

 
$
805

 
$
1,639

 
$
1,551

Other expense increased by $34 million, or 4.2%, for the three months ended June 30, 2016, primarily due to an increase in employee costs, partially offset by a reduction in the "other" component of other expense. Employee costs increased primarily due to new employees added to support the continued growth of the business and build the necessary infrastructure for Separation. The decrease in "other" was primarily driven by EMV benefits and lower payments due to GE due to the replacement of certain services that were previously provided to us under the Transition Services Agreement ("TSA").
Other expense increased by $88 million, or 5.7%, for the six months ended June 30, 2016, primarily due to increases in employee costs and information processing, partially offset by a decrease in the "other" component of other expense. Employee costs increased primarily due to the same factors attributable to the increase for the three months ended June 30, 2016. Information processing costs increased in the six months ended June 30, 2016 primarily due to higher information technology investment and higher transaction volume. The decrease in "other" was primarily due to the same factors attributable to the decrease for the three months ended June 30, 2016.
Provision for Income Taxes
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Effective tax rate
36.6
%
 
37.2
%
 
37.0
%
 
37.3
%
Provision for income taxes
$
282

 
$
320

 
$
628

 
$
651

The effective tax rate for the three and six months ended June 30, 2016 decreased compared to the same periods in the prior year primarily due to the discrete impact of a change in state tax rates, a research and development credit and an additional tax benefit that is reimbursable to GE under the terms of the TSSA. In each period, the effective tax rate differs from the U.S. federal statutory tax rate of 35.0%, primarily due to these discrete items and state income taxes.
Platform Analysis
As discussed above under “—Our Sales Platforms,” we offer our products through three sales platforms (Retail Card, Payment Solutions and CareCredit), which management measures based on their revenue-generating activities. The following is a discussion of certain supplemental information for the three and six months ended June 30, 2016, for each of our sales platforms.


16



Retail Card
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Purchase volume
$
25,411

 
$
23,452

 
$
46,961

 
$
41,862

Period-end loan receivables
$
46,705

 
$
42,315

 
$
46,705

 
$
42,315

Average loan receivables, including held for sale
$
45,861

 
$
41,303

 
$
45,990

 
$
41,302

Average active accounts (in thousands)
52,314

 
48,981

 
52,798

 
49,513

 
 
 
 
 
 
 
 
Interest and fees on loans
$
2,585

 
$
2,335

 
$
5,199

 
$
4,672

Retailer share arrangements
$
(656
)
 
$
(606
)
 
$
(1,317
)
 
$
(1,257
)
Other income
$
69

 
$
107

 
$
148

 
$
193

Retail Card interest and fees on loans increased by $250 million, or 10.7%, and by $527 million, or 11.3%, for the three and six months ended June 30, 2016, respectively. These increases were primarily the result of increases in average loan receivables.
Retailer share arrangements increased by $50 million, or 8.3%, and by $60 million, or 4.8%, for the three and six months ended June 30, 2016, respectively, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Other income decreased by $38 million, or 35.5%, and by $45 million, or 23.3%, for the three and six months ended June 30, 2016, respectively. These decreases were primarily as a result of the factors discussed under the heading “Other Income” above.
Payment Solutions
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Purchase volume
$
3,903

 
$
3,371

 
$
7,295

 
$
6,319

Period-end loan receivables
$
13,997

 
$
12,194

 
$
13,997

 
$
12,194

Average loan receivables
$
13,644

 
$
11,971

 
$
13,584

 
$
11,990

Average active accounts (in thousands)
8,153

 
7,231

 
8,148

 
7,251

 
 
 
 
 
 
 
 
Interest and fees on loans
$
467

 
$
412

 
$
924

 
$
815

Retailer share arrangements
$
(7
)
 
$
(14
)
 
$
(14
)
 
$
(22
)
Other income
$
3

 
$
4

 
$
7

 
$
9

Payment Solutions interest and fees on loans increased by $55 million, or 13.3%, and by $109 million, or 13.4%, for the three and six months ended June 30, 2016, respectively. These increases were primarily driven by increases in average loan receivables.

17



CareCredit
 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Purchase volume
$
2,193

 
$
1,987

 
$
4,228

 
$
3,768

Period-end loan receivables
$
7,580

 
$
6,922

 
$
7,580

 
$
6,922

Average loan receivables
$
7,438

 
$
6,820

 
$
7,389

 
$
6,832

Average active accounts (in thousands)
5,064

 
4,711

 
5,050

 
4,714

 
 
 
 
 
 
 
 
Interest and fees on loans
$
442

 
$
419

 
$
869

 
$
819

Retailer share arrangements
$
(1
)
 
$
(1
)
 
$
(3
)
 
$
(2
)
Other income
$
11

 
$
9

 
$
20

 
$
19

CareCredit interest and fees on loans increased by $23 million, or 5.5%, and by $50 million, or 6.1%, for the three and six months ended June 30, 2016, respectively. These increases were primarily the result of increases in average loan receivables, partially offset with a reduction in receivable yield.
Investment Securities
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our investment securities portfolio. All of our investment securities are classified as available-for-sale at June 30, 2016 and December 31, 2015, and are held to meet our liquidity objectives and to comply with the Community Reinvestment Act. Investment securities classified as available-for-sale are reported in our Condensed Consolidated Statements of Financial Position at fair value.
The following table sets forth the amortized cost and fair value of our portfolio of investment securities at the dates indicated:
 
At June 30, 2016
 
At December 31, 2015
($ in millions)
Amortized
Cost
 
Estimated Fair Value
 
Amortized
Cost
 
Estimated Fair Value
Debt:
 
 
 
 
 
 
 
U.S. government and federal agency
$
1,800

 
$
1,803

 
$
2,768

 
$
2,761

State and municipal
49

 
49

 
51

 
49

Residential mortgage-backed
848

 
856

 
323

 
317

Equity
15

 
15

 
15

 
15

Total
$
2,712

 
$
2,723

 
$
3,157

 
$
3,142

Unrealized gains and losses, net of the related tax effect, on available-for-sale securities that are not other-than-temporarily impaired are excluded from earnings and are reported as a separate component of comprehensive income (loss) until realized. At June 30, 2016, our investment securities had gross unrealized gains of $12 million and gross unrealized losses of $1 million. At December 31, 2015, our investment securities had gross unrealized gains of $2 million and gross unrealized losses of $17 million.

18



Our investment securities portfolio had the following maturity distribution at June 30, 2016. 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
$
1,101

 
$
702

 
$

 
$

 
$
1,803

State and municipal

 
1

 

 
48

 
49

Residential mortgage-backed

 

 

 
856

 
856

Total(1)
$
1,101

 
$
703

 
$

 
$
904

 
$
2,708

Weighted average yield(2)
0.6
%
 
0.8
%
 
%
 
3.0
%
 
1.4
%
______________________
(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.
At June 30, 2016, we did not hold investments in any single issuer with an aggregate book value that exceeded 10% of equity, excluding obligations of the U.S. government.
Loan Receivables
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our loan receivables portfolio.
Loan receivables are our largest category of assets and represent our primary source of revenues. The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.
($ in millions)
At June 30, 2016
 
(%)
 
At December 31, 2015
 
(%)
Loans
 
 
 
 
 
Credit cards
$
65,511

 
96.0
%
 
$
65,773

 
96.3
%
Consumer installment loans
1,293

 
1.9

 
1,154

 
1.7

Commercial credit products
1,389

 
2.0

 
1,323

 
1.9

Other
89

 
0.1

 
40

 
0.1

Total loans
$
68,282

 
100.0
%
 
$
68,290

 
100.0
%
Loan receivables remained relatively flat at June 30, 2016 compared to December 31, 2015, primarily driven by the seasonality of our business.
Loan receivables increased by $6,851 million, or 11.2%, at June 30, 2016 compared to June 30, 2015, primarily driven by higher purchase volume and average active account growth.

19



Our loan receivables portfolio had the following geographic concentration at June 30, 2016.
($ in millions)
 
Loan Receivables
Outstanding(1)
 
% of Total Loan
Receivables
Outstanding
State
 
Texas
 
$
6,783

 
9.9
%
California
 
$
6,644

 
9.7
%
Florida
 
$
5,421

 
7.9
%
New York
 
$
3,793

 
5.6
%
Pennsylvania
 
$
2,987

 
4.4
%
______________________
(1)
Based on June 2016 customer statement-end balances extrapolated to June 30, 2016. Individual customer balances at June 30, 2016 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 primarily use 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 June 30, 2016
 
At December 31, 2015
Non-accrual loan receivables
$
2

 
$
3

Loans contractually 90 days past-due and still accruing interest
1,141

 
1,270

Earning TDRs(1)
734

 
712

Non-accrual, past-due and restructured loan receivables
$
1,877

 
$
1,985

______________________
(1)
At June 30, 2016 and December 31, 2015, balances exclude $47 million and $51 million, respectively, of TDRs which are included in loans contractually 90 days past-due and still accruing interest on the balance. See Note 4. Loan Receivables and Allowance for Loan Losses to our condensed consolidated financial statements for additional information on the financial effects of TDRs for the three and six months ended June 30, 2016 and 2015.

20



 
Three months ended June 30,
 
Six months ended June 30,
($ in millions)
2016
 
2015
 
2016
 
2015
Gross amount of interest income that would have been recorded in accordance with the original contractual terms
$
43

 
$
37

 
$
85

 
$
73

Interest income recognized
12

 
12

 
24

 
25

Total interest income foregone
$
31

 
$
25

 
$
61

 
$
48

Delinquencies
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 3.79% at June 30, 2016 from 3.53% at June 30, 2015, and decreased from 4.06% at December 31, 2015. The 26 basis point increase compared to the same period in the prior year was driven by the factors discussed in "Business Trends and Conditions — Stable Asset Quality" above. The decrease as compared to December 31, 2015 was primarily driven by the seasonality of our business, partially offset by the various factors referenced above.
Net Charge-Offs
Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine are uncollectible, net of recovered amounts. We exclude accrued and unpaid finance charges and fees and third-party fraud losses from charge-offs. Charged-off and recovered finance charges and fees are included in interest and fees on loans while third-party fraud losses are included in other expense. Charge-offs are recorded as a reduction to the allowance for loan losses and subsequent recoveries of previously charged-off amounts are credited to the allowance for loan losses. Costs incurred to recover charged-off loans are recorded as collection expense and included in other expense in our Condensed Consolidated Statements of Earnings.
The table below sets forth the ratio of net charge-offs to average loan receivables, including held for sale, for the periods indicated.
 
Three months ended June 30,
 
Six months ended June 30,
 
2016
 
2015
 
2016
 
2015
Ratio of net charge-offs to average loan receivables, including held for sale
4.49
%
 
4.63
%
 
4.59
%
 
4.56
%
Allowance for Loan Losses
The allowance for loan losses totaled $3,894 million at June 30, 2016 compared with $3,497 million at December 31, 2015 and $3,302 million at June 30, 2015 representing our best estimate of probable losses inherent in the portfolio. Our allowance for loan losses as a percentage of total loan receivables increased to 5.70% at June 30, 2016, from 5.12% at December 31, 2015 and 5.38% at June 30, 2015, which reflects the current quarter increase in forecasted net charge-offs over the next twelve months.
The following tables provide changes in our allowance for loan losses for the periods presented:
 ($ in millions)
Balance at April 1, 2016

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
June 30, 2016

 
 
 
 
 
 
 
 
 
 
Credit cards
$
3,543

 
$
988

 
$
(947
)
 
$
216

 
$
3,800

Consumer installment loans
31

 
14

 
(9
)
 
3

 
39

Commercial credit products
44

 
19

 
(13
)
 
3

 
53

Other
2

 

 

 

 
2

Total
$
3,620

 
$
1,021

 
$
(969
)
 
$
222

 
$
3,894


21



($ in millions)
Balance at April 1, 2015

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at June 30, 2015

 
 
 
 
 
 
 
 
 
 
Credit cards
$
3,184

 
$
723

 
$
(814
)
 
$
136

 
$
3,229

Consumer installment loans
24

 
2

 
(7
)
 
4

 
23

Commercial credit products
47

 
14

 
(13
)
 
1

 
49

Other

 
1

 

 

 
$
1

Total
$
3,255

 
$
740

 
$
(834
)
 
$
141

 
$
3,302

($ in millions)
Balance at January 1, 2016

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
June 30, 2016

 
 
Credit cards
$
3,420

 
$
1,872

 
$
(1,901
)
 
$
409

 
$
3,800

Consumer installment loans
26

 
27

 
(20
)
 
6

 
39

Commercial credit products
50

 
24

 
(26
)
 
5

 
53

Other
1

 
1

 

 

 
2

Total
$
3,497

 
$
1,924

 
$
(1,947
)
 
$
420

 
$
3,894

 
Balance at
January 1, 2015

 
Provision
Charged to
Operations

 
Gross Charge- 
Offs

 
Recoveries

 
Balance at
June 30, 
2015

($ in millions)
 
Credit cards
$
3,169

 
$
1,392

 
$
(1,648
)
 
$
316

 
$
3,229

Consumer installment loans
22

 
9

 
(16
)
 
8

 
23

Commercial credit products
45

 
25

 
(24
)
 
3

 
49

Other

 
1

 

 

 
1

Total
$
3,236

 
$
1,427

 
$
(1,688
)
 
$
327

 
$
3,302


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.

22



The following table summarizes information concerning our funding sources during the periods indicated:
 
2016
 
2015
Three months ended June 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
45,490

 
70.0
%
 
1.6
%
 
$
35,816

 
59.9
%
 
1.6
%
Securitized financings
12,291

 
18.9

 
1.9

 
14,011

 
23.4

 
1.5

Senior unsecured notes
6,809

 
10.5

 
3.4

 
4,568

 
7.7

 
3.4

Bank term loan
374

 
0.6

 
7.5

 
5,374

 
9.0

 
2.4

Total
$
64,964

 
100.0
%
 
1.9
%
 
$
59,769

 
100.0
%
 
1.8
%
______________________
(1)
Excludes $217 million and $166 million average balance of non-interest-bearing deposits for the three months ended June 30, 2016 and June 30, 2015, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended June 30, 2016 and 2015.

 
2016
 
2015
Six months ended June 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
44,807

 
68.3
%
 
1.6
%
 
$
35,445

 
59.0
%
 
1.6
%
Securitized financings
12,648

 
19.3

 
1.9

 
14,085

 
23.5

 
1.5

Senior unsecured notes
6,701

 
10.2

 
3.5

 
4,284

 
7.1

 
3.5

Bank term loan
1,466

 
2.2

 
4.3

 
5,981

 
10.0

 
2.7

Related party debt(2)

 

 

 
232

 
0.4

 
3.5

Total
$
65,622

 
100.0
%
 
1.9
%
 
$
60,027

 
100.0
%
 
1.8
%
 
 
 
 
 
 
 
 
 
 
 
 
______________________
(1)
Excludes $217 million and $153 million average balance of non-interest-bearing deposits for the six months ended June 30, 2016 and June 30, 2015, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the six months ended June 30, 2016 and 2015.
(2)
Represents amounts outstanding under GECC Term Loan, which were fully repaid in the six months ended June 30, 2015.

Deposits
We obtain deposits directly from retail and commercial customers (“direct deposits”) or through third-party brokerage firms that offer our deposits to their customers (“brokered deposits”). At June 30, 2016, we had $34.1 billion in direct deposits (which includes deposits from banks and financial institutions) and $12.3 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger that channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to continue to expand our direct deposits base as a source of stable and diversified low cost funding.
Our direct deposits include a range of FDIC-insured deposit products, including certificates of deposit, IRAs, money market accounts and savings accounts.
Brokered deposits are primarily from retail customers of large brokerage firms. We have relationships with 10 brokers that offer our deposits through their networks. Our brokered deposits consist primarily of certificates of deposit that bear interest at a fixed rate and at June 30, 2016, had a weighted average remaining life of 3.2 years. These deposits generally are not subject to early withdrawal.
Our ability to attract deposits is sensitive to, among other things, the interest rates we pay, and therefore, we bear funding and interest rate risk if we fail, or are required to pay higher rates, to attract new deposits or retain existing deposits. To mitigate these risks, we pursue a funding strategy that seeks to match our assets and liabilities by interest rate and expected maturity characteristics, and we seek to maintain access to multiple other funding sources, including securitized financings (including our undrawn committed capacity) and unsecured debt.

23



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 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 June 30 ($ in millions)
2016
 
2015
Average
Balance
 
% of
Total
 
Average
Rate
 
Average
Balance
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
19,379

 
42.6
%
 
1.5
%
 
$
14,966

 
41.8
%
 
1.4
%
Savings accounts (including money market accounts)
13,682

 
30.1

 
1.0

 
7,438

 
20.8

 
1.0

Brokered deposits
12,429

 
27.3

 
2.2

 
13,412

 
37.4

 
2.3

Total interest-bearing deposits
$
45,490

 
100.0
%
 
1.6
%
 
$
35,816

 
100.0
%
 
1.6
%
 
 
 
 
 
 
 
 
 
 
 
 
Six months ended June 30 ($ in millions)
2016
 
2015
Average
Balance
 
% of
Total
 
Average
Rate
 
Average
Balance
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
18,815

 
42.0
%
 
1.5
%
 
$
14,414

 
40.7
%
 
1.4
%
Savings accounts (including money market accounts)
13,131

 
29.3

 
1.0

 
6,981

 
19.7
%
 
1.0

Brokered deposits
12,861

 
28.7

 
2.2

 
14,050

 
39.6
%
 
2.2

Total interest-bearing deposits
$
44,807

 
100.0
%
 
1.6
%
 
$
35,445

 
100.0
%
 
1.6
%
Our deposit liabilities provide funding with maturities ranging from one day to ten years. At June 30, 2016, the weighted average maturity of our interest-bearing time deposits was 2.1 years. See Note 7. Deposits&