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 March 31, 2018
OR
o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to         
001-36560
(Commission File Number)
sflogoa01a09.jpg
SYNCHRONY FINANCIAL
(Exact name of registrant as specified in its charter) 
Delaware
 
51-0483352
(State or other jurisdiction of
incorporation or organization)
 
(I.R.S. Employer
Identification No.)
777 Long Ridge Road
 
 
Stamford, Connecticut
 
06902
(Address of principal executive offices)
 
(Zip Code)
(Registrant’s telephone number, including area code) (203) 585-2400
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically 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, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (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
 
 
 
 
 
 
Emerging growth company
o


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  ý
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of April 23, 2018 was 754,756,608.



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


3


Certain Defined Terms
Except as the context may otherwise require in this report, references to:
•
“we,” “us,” “our” and the “Company” are to SYNCHRONY FINANCIAL and its subsidiaries;
•
“Synchrony” are to SYNCHRONY FINANCIAL only;
•
“GE” are to General Electric Company and its subsidiaries;
•
the “Bank” are to Synchrony Bank (a subsidiary of Synchrony);
•
the “Board of Directors” are to Synchrony's board of directors;
•
the “Tax Act” are to P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act, signed into law on December 22, 2017;
•
“Separation” are to Synchrony's separation from GE in November 2015 when Synchrony became a stand-alone savings and loan holding company following the completion of GE's exchange offer, in which GE exchanged shares of GE common stock for all the remaining shares of our common stock it owned; and
•
“FICO” are to a credit score developed by Fair Isaac & Co., which is widely used as a means of evaluating the likelihood that credit users will pay their obligations.
We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which, in our business and in this report, we refer to as our “partners.” The terms of the programs all require cooperative efforts between us and our partners of varying natures and degrees to establish and operate the programs. Our use of the term “partners” to refer to these entities is not intended to, and does not, describe our legal relationship with them, imply that a legal partnership or other relationship exists between the parties or create any legal partnership or other relationship. The “average length of our relationship” with respect to a specified group of partners or programs is measured on a weighted average basis by interest and fees on loans for the year ended December 31, 2017 for those partners or for all partners participating in a program, based on the date each partner relationship or program, as applicable, started.
Unless otherwise indicated, references to “loan receivables” do not include loan receivables held for sale.
For a description of certain other terms we use, including “active account” and “purchase volume,” see the notes to “Item 7. Management’s Discussion and Analysis—Results of Operations—Other Financial and Statistical Data” in our Annual Report on Form 10-K for the year ended December 31, 2017 (our “2017 Form 10-K”). There is no standard industry definition for many of these terms, and other companies may define them differently than we do.

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

4



Cautionary Note Regarding Forward-Looking Statements:
Various statements in this Quarterly Report on Form 10-Q may contain “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “targets,” “outlook,” “estimates,” “will,” “should,” “may” or words of similar meaning, but these words are not the exclusive means of identifying forward-looking statements.
Forward-looking statements are based on management’s current expectations and assumptions, and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, actual results could differ materially from those indicated in these forward-looking statements. Factors that could cause actual results to differ materially include global political, economic, business, competitive, market, regulatory and other factors and risks, such as: the impact of macroeconomic conditions and whether industry trends we have identified develop as anticipated; retaining existing partners and attracting new partners, concentration of our revenue in a small number of Retail Card partners, promotion and support of our products by our partners, and financial performance of our partners; cyber-attacks or other security breaches; higher borrowing costs and adverse financial market conditions impacting our funding and liquidity, and any reduction in our credit ratings; our ability to grow our deposits in the future; our ability to securitize our loan receivables, occurrence of an early amortization of our securitization facilities, loss of the right to service or subservice our securitized loan receivables, and lower payment rates on our securitized loan receivables; changes in market interest rates and the impact of any margin compression; effectiveness of our risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, our ability to manage our credit risk, the sufficiency of our allowance for loan losses and the accuracy of the assumptions or estimates used in preparing our financial statements; our ability to offset increases in our costs in retailer share arrangements; competition in the consumer finance industry; our concentration in the U.S. consumer credit market; our ability to successfully develop and commercialize new or enhanced products and services; our ability to realize the value of acquisitions and strategic investments; reductions in interchange fees; fraudulent activity; failure of third-parties to provide various services that are important to our operations; disruptions in the operations of our computer systems and data centers; international risks and compliance and regulatory risks and costs associated with international operations; alleged infringement of intellectual property rights of others and our ability to protect our intellectual property; litigation and regulatory actions; damage to our reputation; our ability to attract, retain and motivate key officers and employees; tax legislation initiatives or challenges to our tax positions and/or interpretations and state sales tax rules and regulations; a material indemnification obligation to GE under the Tax Sharing and Separation Agreement with GE if we cause the split-off from GE or certain preliminary transactions to fail to qualify for tax-free treatment or in the case of certain significant transfers of our stock following the split-off; regulation, supervision, examination and enforcement of our business by governmental authorities, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the impact of the Consumer Financial Protection Bureau's (the “CFPB”) regulation of our business; impact of capital adequacy rules and liquidity requirements; restrictions that limit our ability to pay dividends and repurchase our common stock and restrictions that limit the Bank’s ability to pay dividends to us; regulations relating to privacy, information security and data protection; use of third-party vendors and ongoing third-party business relationships; and failure to comply with anti-money laundering and anti-terrorism financing laws.
For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this report and in our public filings, including under the heading “Risk Factors” in our 2017 Form 10-K. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by the federal securities laws.

5


PART I. FINANCIAL INFORMATION
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report and in our 2017 Form 10-K. The discussion below contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. See “Cautionary Note Regarding Forward-Looking Statements.”
Introduction and Business Overview
____________________________________________________________________________________________
We are a premier consumer financial services company delivering customized financing programs across key industries including retail, health, auto, travel and home, along with award-winning consumer banking products. We provide a range of credit products through our financing programs which we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners.” For the three months ended March 31, 2018, we financed $29.6 billion of purchase volume and had 71.3 million average active accounts. At March 31, 2018, we had $77.9 billion of loan receivables.
We offer our credit products primarily through our wholly-owned subsidiary, the Bank. In addition, through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”), including certificates of deposit, individual retirement accounts (“IRAs”), money market accounts and savings accounts. We also take deposits at the Bank through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. We have significantly expanded our online direct banking operations in recent years and our deposit base serves as a source of stable and diversified low cost funding for our credit activities. At March 31, 2018, we had $56.6 billion in deposits, which represented 73% of our total funding sources.
Our Sales Platforms
_________________________________________________________________
We conduct our operations through a single business segment. Profitability and expenses, including funding costs, loan losses and operating expenses, are managed for the business as a whole. Substantially all of our operations are within the United States. We offer our credit products through three sales platforms (Retail Card, Payment Solutions and CareCredit). Those platforms are organized by the types of products we offer and the partners we work with, and are measured on interest and fees on loans, loan receivables, new accounts and other sales metrics.



6


platformpiesa37.jpg
Retail Card
Retail Card is a leading provider of private label credit cards, and also provides Dual Cards, general purpose co-branded credit cards and small- and medium-sized business credit products. We offer one or more of these products primarily through 29 national and regional retailers with which we have ongoing program agreements. The average length of our relationship with these Retail Card partners is 20 years. Retail Card’s revenue primarily consists of interest and fees on our loan receivables. Other income primarily consists of interchange fees earned when our Dual Card or general purpose co-branded credit cards are used outside of our partners' sales channels and fees paid to us by customers who purchase our debt cancellation products, less loyalty program payments. In addition, the majority of our retailer share arrangements, which generally provide for payment to our partner if the economic performance of the program exceeds a contractually-defined threshold, are with partners in the Retail Card sales platform. Substantially all of the credit extended in this platform is on standard terms.
Payment Solutions
Payment Solutions is a leading provider of promotional financing for major consumer purchases, offering primarily private label credit cards and installment loans. Payment Solutions offers these products through participating partners consisting of national and regional retailers, local merchants, manufacturers, buying groups and industry associations. Substantially all of the credit extended in this platform is promotional financing. Payment Solutions’ revenue primarily consists of interest and fees on our loan receivables, including “merchant discounts,” which are fees paid to us by our partners in almost all cases to compensate us for all or part of foregone interest income associated with promotional financing.
CareCredit
CareCredit is a leading provider of promotional financing to consumers for health and personal care procedures, products or services. We have a network of CareCredit providers and health-focused retailers, the vast majority of which are individual or small groups of independent healthcare providers, through which we offer a CareCredit branded private label credit card and our CareCredit Dual Card offering. Substantially all of the credit extended in this platform is promotional financing. CareCredit’s revenue primarily consists of interest and fees on our loan receivables, including merchant discounts.

7


Our Credit Products
____________________________________________________________________________________________
Through our platforms, we offer three principal types of credit products: credit cards, commercial credit products and consumer installment loans. We also offer a debt cancellation product.
The following table sets forth each credit product by type and indicates the percentage of our total loan receivables that are under standard terms only or pursuant to a promotional financing offer at March 31, 2018.
 
 
 
Promotional Offer
 
 
Credit Product
Standard Terms Only
 
Deferred Interest
 
Other Promotional
 
Total
Credit cards
66.6
%
 
15.4
%
 
14.4
%
 
96.4
%
Commercial credit products
1.6

 
—

 
—

 
1.6

Consumer installment loans
—

 
—

 
2.0

 
2.0

Other
—

 
—

 
—

 
—

Total
68.2
%
 
15.4
%
 
16.4
%
 
100.0
%
Credit Cards
We offer the following principal types of credit cards:
•
Private Label Credit Cards. Private label credit cards are partner-branded credit cards (e.g., Lowe’s or Amazon) or program-branded credit cards (e.g., Synchrony Car Care or CareCredit) that are used primarily for the purchase of goods and services from the partner or within the program network. In addition, in some cases, cardholders may be permitted to access their credit card accounts for cash advances. In Retail Card, credit under our private label credit cards typically is extended on standard terms only, and in Payment Solutions and CareCredit, credit under our private label credit cards typically is extended pursuant to a promotional financing offer.
•
Dual Cards and General Purpose Co-Brand Cards. Our patented Dual Cards are credit cards that function as private label credit cards when used to purchase goods and services from our partners and as general purpose credit cards when used elsewhere. We also offer general purpose co-branded credit cards that do not function as private label cards. Credit extended under our Dual Cards and general purpose co-branded credit cards typically is extended under standard terms only. Dual Cards and general purpose co-branded credit cards are primarily offered through our Retail Card platform. At March 31, 2018, we offered these credit cards through 21 of our 29 ongoing Retail Card programs, of which the majority are Dual Cards.
Commercial Credit Products
We offer private label cards and Dual Cards for commercial customers that are similar to our consumer offerings. We also offer a commercial pay-in-full accounts receivable product to a wide range of business customers. We offer our commercial credit products primarily through our Retail Card platform to the commercial customers of our Retail Card partners.
Installment Loans
In Payment Solutions, we originate installment loans to consumers (and a limited number of commercial customers) in the United States, primarily in the power products market (motorcycles, ATVs and lawn and garden). Installment loans are closed-end credit accounts where the customer pays down the outstanding balance in installments. Installment loans are assessed periodic finance charges using fixed interest rates.

8


Business Trends and Conditions
____________________________________________________________________________________________
We believe our business and results of operations will be impacted in the future by various trends and conditions. For a discussion of certain trends and conditions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Trends and Conditions” in our 2017 Form 10-K. For a discussion of how certain trends and conditions impacted the three months ended March 31, 2018, 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.
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.
The seasonal trends discussed above are most evident between the fourth quarter and the first quarter of the following year. Loan receivables decreased by $4.1 billion, or 5.0%, to $77.9 billion at March 31, 2018 compared to December 31, 2017, and our allowance for loan losses as a percentage of total loan receivables increased to 7.37% at March 31, 2018, from 6.80% at December 31, 2017, primarily reflecting the effects of these trends. Past due balances declined to $3.5 billion at March 31, 2018 from $3.8 billion at December 31, 2017, primarily due to collections from customers that were previously delinquent. The increase in the allowance for loan losses as a percentage of loan receivables at March 31, 2018 compared to December 31, 2017, despite a decrease in our past due balances, primarily reflects these same seasonal trends.





9


Results of Operations
____________________________________________________________________________________________
Highlights for the Three Months Ended March 31, 2018
Below are highlights of our performance for the three months ended March 31, 2018 compared to the three months ended March 31, 2017, as applicable, except as otherwise noted.
•
Net earnings increased 28.3% to $640 million for the three months ended March 31, 2018, driven by higher net interest income and lower provision for income taxes, partially offset by increases in other expense and provision for loan losses.
•
Loan receivables increased 6.1% to $77,853 million at March 31, 2018 compared to March 31, 2017, primarily driven by higher purchase volume and average active account growth.
•
Net interest income increased 7.1% to $3,842 million for the three months ended March 31, 2018, primarily due to higher average loan receivables.
•
Retailer share arrangements increased 5.3% to $720 million for the three months ended March 31, 2018, primarily as a result of growth and yield improvement of the programs in which we have retailer share arrangements, partially offset by higher program expenses.
•
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased 27 basis points to 4.52% at March 31, 2018 from 4.25% at March 31, 2017, and net charge-off rate increased 81 basis points to 6.14% for the three months ended March 31, 2018.
•
Provision for loan losses increased by $56 million, or 4.3%, for the three months ended March 31, 2018, primarily due to higher net charge-offs, partially offset by a lower loan loss reserve build. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) increased to 7.37% at March 31, 2018, as compared to 6.37% at March 31, 2017.
•
Other expense increased by $80 million, or 8.8%, for the three months ended March 31, 2018, primarily driven by business growth and marketing investments.
•
Provision for income taxes decreased by $76 million, or 26.9%, for the three months ended March 31, 2018, primarily due to the reduction in the corporate tax rate included in the Tax Act.
•
At March 31, 2018, deposits represented 73% of our total funding sources. Total deposits remained relatively flat at $56.6 billion at March 31, 2018, compared to December 31, 2017, driven primarily by growth in our direct deposits of 5.4% to $45.0 billion, offset by a reduction in our brokered deposits.
•
During the three months ended March 31, 2018, we repurchased $410 million of our outstanding common stock, and declared and paid cash dividends of $0.15 per share, or $114 million.
New and Extended Partner Agreements during the three months ended March 31, 2018
•
We announced our new partnership with Crate and Barrel in our Retail Card sales platform.
•
We extended our Payment Solutions program agreements with American Signature Furniture, Briggs & Stratton and Nationwide Marketing Group and announced our new partnership with Mahindra. In April 2018, we also announced our program with jtv.
•
In our CareCredit sales platform, we expanded our network to include American Med Spa Association, the Spa Industry Association and the American Veterinary Medical Association.

10


Summary Earnings
The following table sets forth our results of operations for the periods indicated.
 
Three months ended March 31,
($ in millions)
2018
 
2017
Interest income
$
4,244

 
$
3,913

Interest expense
402

 
326

Net interest income
3,842

 
3,587

Retailer share arrangements
(720
)
 
(684
)
Net interest income, after retailer share arrangements
3,122

 
2,903

Provision for loan losses
1,362

 
1,306

Net interest income, after retailer share arrangements and provision for loan losses
1,760

 
1,597

Other income
75

 
93

Other expense
988

 
908

Earnings before provision for income taxes
847

 
782

Provision for income taxes
207

 
283

Net earnings
$
640

 
$
499


11


Other Financial and Statistical Data
The following table sets forth certain other financial and statistical data for the periods indicated.    
 
At and for the
 
Three months ended March 31,
($ in millions)
2018
 
2017
Financial Position Data (Average):
 
 
 
Loan receivables, including held for sale
$
79,090

 
$
74,132

Total assets
$
95,707

 
$
89,468

Deposits
$
56,656

 
$
52,069

Borrowings
$
21,205

 
$
20,081

Total equity
$
14,276

 
$
14,323

Selected Performance Metrics:
 
 
 
Purchase volume(1)
$
29,626

 
$
28,880

Retail Card
$
23,382

 
$
22,952

Payment Solutions
$
3,823

 
$
3,686

CareCredit
$
2,421

 
$
2,242

Average active accounts (in thousands)(2)
71,323

 
69,629

Net interest margin(3)
16.05
%
 
16.18
%
Net charge-offs
$
1,198

 
$
974

Net charge-offs as a % of average loan receivables, including held for sale
6.14
%
 
5.33
%
Allowance coverage ratio(4)
7.37
%
 
6.37
%
Return on assets(5)
2.7
%
 
2.3
%
Return on equity(6)
18.2
%
 
14.1
%
Equity to assets(7)
14.92
%
 
16.01
%
Other expense as a % of average loan receivables, including held for sale
5.07
%
 
4.97
%
Efficiency ratio(8)
30.9
%
 
30.3
%
Effective income tax rate
24.4
%
 
36.2
%
Selected Period-End Data:
 
 
 
Loan receivables
$
77,853

 
$
73,350

Allowance for loan losses
$
5,738

 
$
4,676

30+ days past due as a % of period-end loan receivables(9)
4.52
%
 
4.25
%
90+ days past due as a % of period-end loan receivables(9)
2.28
%
 
2.06
%
Total active accounts (in thousands)(2)
68,891

 
67,905

______________________
(1)
Purchase volume, or net credit sales, represents the aggregate amount of charges incurred on credit cards or other credit product accounts less returns during the period. Purchase volume includes activity related to our portfolios classified as held for sale.
(2)
Active accounts represent credit card or installment loan accounts on which there has been a purchase, payment or outstanding balance in the current month.
(3)
Net interest margin represents net interest income divided by average interest-earning assets.
(4)
Allowance coverage ratio represents allowance for loan losses divided by total period-end loan receivables.
(5)
Return on assets represents net earnings as a percentage of average total assets.
(6)
Return on equity represents net earnings as a percentage of average total equity.
(7)
Equity to assets represents average equity as a percentage of average total assets.
(8)
Efficiency ratio represents (i) other expense, divided by (ii) net interest income, after retailer share arrangements, plus other income.
(9)
Based on customer statement-end balances extrapolated to the respective period-end date.

12


Average Balance Sheet
The following tables set forth information for the periods indicated regarding average balance sheet data, which are used in the discussion of interest income, interest expense and net interest income that follows.
 
2018
 
2017
Three months ended March 31 ($ in millions)
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate(1)
 
Average
Balance
 
Interest
Income/
Expense
 
Average
Yield /
Rate(1)
Assets
 
 
 
 
 
 
 
 
 
 
 
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents(2)
$
12,434

 
$
47

 
1.53
%
 
$
10,552

 
$
21

 
0.81
%
Securities available for sale
5,584

 
25

 
1.82
%
 
5,213

 
15

 
1.17
%
Loan receivables(3):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale
76,181

 
4,099

 
21.82
%
 
71,365

 
3,811

 
21.66
%
Consumer installment loans
1,572

 
36

 
9.29
%
 
1,389

 
32

 
9.34
%
Commercial credit products
1,286

 
36

 
11.35
%
 
1,317

 
34

 
10.47
%
Other
51

 
1

 
NM

 
61

 
—

 
—
%
Total loan receivables
79,090

 
4,172

 
21.39
%
 
74,132

 
3,877

 
21.21
%
Total interest-earning assets
97,108

 
4,244

 
17.72
%
 
89,897

 
3,913

 
17.65
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
1,197

 
 
 
 
 
802

 
 
 
 
Allowance for loan losses
(5,608
)
 
 
 
 
 
(4,408
)
 
 
 
 
Other assets
3,010

 
 
 
 
 
3,177

 
 
 
 
Total non-interest-earning assets
(1,401
)
 
 
 
 
 
(429
)
 
 
 
 
Total assets
$
95,707

 
 
 
 
 
$
89,468

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
56,356

 
$
249

 
1.79
%
 
$
51,829

 
$
194

 
1.52
%
Borrowings of consolidated securitization entities
12,410

 
74

 
2.42
%
 
12,321

 
65

 
2.14
%
Senior unsecured notes
8,795

 
79

 
3.64
%
 
7,760

 
67

 
3.50
%
Total interest-bearing liabilities
77,561

 
402

 
2.10
%
 
71,910

 
326

 
1.84
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
300

 
 
 
 
 
240

 
 
 
 
Other liabilities
3,570

 
 
 
 
 
2,995

 
 
 
 
Total non-interest-bearing liabilities
3,870

 
 
 
 
 
3,235

 
 
 
 
Total liabilities
81,431

 
 
 
 
 
75,145

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
14,276

 
 
 
 
 
14,323

 
 
 
 
Total liabilities and equity
$
95,707

 
 
 
 
 
$
89,468

 
 
 
 
Interest rate spread(4)
 
 
 
 
15.62
%
 
 
 
 
 
15.81
%
Net interest income
 
 
$
3,842

 
 
 
 
 
$
3,587

 
 
Net interest margin(5)
 
 
 
 
16.05
%
 
 
 
 
 
16.18
%
 
 
 
 
 
 
 
 
 
 
 
 
______________________
(1)
Average yields/rates are based on total interest income/expense over average balances.
(2)
Includes average restricted cash balances of $771 million and $694 million for the three months ended March 31, 2018 and 2017, respectively.
(3)
Interest income on loan receivables includes fees on loans of $644 million and $628 million for the three months ended March 31, 2018 and 2017, respectively.
(4)
Interest rate spread represents the difference between the yield on total interest-earning assets and the rate on total interest-bearing liabilities.
(5)
Net interest margin represents net interest income divided by average total interest-earning assets.

13


For a summary description of the composition of our key line items included in our Statements of Earnings, see Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Form 10-K.
Interest Income
Interest income increased by $331 million, or 8.5%, for the three months ended March 31, 2018 driven primarily by growth in our average loan receivables.
Average interest-earning assets
Three months ended March 31 ($ in millions)
2018
 
%
 
2017
 
%
Loan receivables, including held for sale
$
79,090

 
81.4
%
 
$
74,132

 
82.5
%
Liquidity portfolio and other
18,018

 
18.6
%
 
15,765

 
17.5
%
Total average interest-earning assets
$
97,108

 
100.0
%
 
$
89,897

 
100.0
%
 
 
 
 
 
 
 
 
The increase in average loan receivables of 6.7% for the three months ended March 31, 2018 was driven primarily by higher purchase volume of 2.6% and average active account growth of 2.4%.
Average active accounts increased 2.4% to 71.3 million for the three months ended March 31, 2018, and the average balance per active account increased 4.2%.
Yield on average interest-earning assets
The yield on average interest-earning assets increased for the three months ended March 31, 2018, primarily due to an increase in the yield on our average loan receivables of 18 basis points to 21.39%, partially offset by a decrease in the percentage of interest-earning assets attributable to loan receivables for the three months ended March 31, 2018. The decrease was driven primarily by higher liquidity related to the pre-funding strategy for the PayPal credit portfolio acquisition.
Interest Expense
Interest expense increased by $76 million, or 23.3%, for the three months ended March 31, 2018, primarily driven by higher cost of funds and the growth in our deposit liabilities. Our cost of funds increased to 2.10% for the three months ended March 31, 2018, compared to 1.84% for the three months ended March 31, 2017, due to higher benchmark interest rates, increased competition for retail deposits and the pre-funding strategy for the PayPal credit portfolio acquisition.
Average interest-bearing liabilities
Three months ended March 31 ($ in millions)
2018
 
%
 
2017
 
%
Interest-bearing deposit accounts
$
56,356

 
72.7
%
 
$
51,829

 
72.1
%
Borrowings of consolidated securitization entities
12,410

 
16.0
%
 
12,321

 
17.1
%
Third-party debt
8,795

 
11.3
%
 
7,760

 
10.8
%
Total average interest-bearing liabilities
$
77,561

 
100.0
%
 
$
71,910

 
100.0
%
 
 
 
 
 
 
 
 
The increase in average interest-bearing liabilities for the three months ended March 31, 2018 was driven primarily by growth in our direct deposits.
Net Interest Income
Net interest income increased by $255 million, or 7.1%, for the three months ended March 31, 2018, primarily driven by higher average loan receivables.

14


Retailer Share Arrangements
Retailer share arrangements increased by $36 million, or 5.3%, for the three months ended March 31, 2018, driven primarily by growth and yield improvement of the programs in which we have retailer share arrangements, partially offset by higher program expenses.
Provision for Loan Losses
Provision for loan losses increased by $56 million, or 4.3%, for the three months ended March 31, 2018, primarily due to higher net charge-offs, partially offset by a lower loan loss reserve build.
Our allowance coverage ratio increased to 7.37% at March 31, 2018, as compared to 6.37% at March 31, 2017, reflecting the increase in forecasted losses inherent in our loan portfolio.
Other Income
 
Three months ended March 31,
($ in millions)
2018
 
2017
Interchange revenue
$
158

 
$
145

Debt cancellation fees
66

 
68

Loyalty programs
(155
)
 
(137
)
Other
6

 
17

Total other income
$
75

 
$
93

Other income decreased by $18 million, or 19.4%, for the three months ended March 31, 2018, primarily due to higher loyalty costs, partially offset by increased interchange revenue driven by increased purchase volume outside of our retail partners' sales channels.

Other Expense
 
Three months ended March 31,
($ in millions)
2018
 
2017
Employee costs
$
358

 
$
323

Professional fees
166

 
151

Marketing and business development
121

 
94

Information processing
104

 
90

Other
239

 
250

Total other expense
$
988

 
$
908

Other expense increased by $80 million, or 8.8%, for the three months ended March 31, 2018, primarily due to increases in employee costs and marketing and business development, as well as increases in professional fees and information processing.
The increase in employee costs was primarily due to new employees added to support the continued growth of the business. Marketing and business development expense increased primarily due to strategic investments in our sales platforms and increased marketing on retail deposits. Information processing costs and professional fees increased primarily due to both business growth and technology investments.

15


Provision for Income Taxes
 
Three months ended March 31,
($ in millions)
2018
 
2017
Effective tax rate
24.4
%
 
36.2
%
Provision for income taxes
$
207

 
$
283

The effective tax rate for the three months ended March 31, 2018 decreased compared to the same period in the prior year primarily due to the reduction in the corporate tax rate from 35% to 21%. In each period the effective tax rate differs from the applicable U.S. federal statutory rate primarily due to state income taxes.
Platform Analysis
As discussed above under “—Our Sales Platforms,” we offer our products through three sales platforms (Retail Card, Payment Solutions and CareCredit), which management measures based on their revenue-generating activities. The following is a discussion of certain supplemental information for the three months ended March 31, 2018, for each of our sales platforms.
Retail Card
 
Three months ended March 31,
($ in millions)
2018
 
2017
Purchase volume
$
23,382

 
$
22,952

Period-end loan receivables
$
52,531

 
$
49,905

Average loan receivables
$
53,673

 
$
50,644

Average active accounts (in thousands)
55,927

 
55,049

 
 
 
 
Interest and fees on loans
$
3,096

 
$
2,888

Retailer share arrangements
$
(714
)
 
$
(681
)
Other income
$
65

 
$
77

Retail Card interest and fees on loans increased by $208 million, or 7.2%, for the three months ended March 31, 2018. The increase was primarily the result of growth in average loan receivables.
Retailer share arrangements increased by $33 million, or 4.8%, for the three months ended March 31, 2018, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Other income decreased by $12 million, or 15.6%, for the three months ended March 31, 2018, primarily as a result of the factors discussed under the heading “Other Income” above.

16


Payment Solutions
 
Three months ended March 31,
($ in millions)
2018
 
2017
Purchase volume
$
3,823

 
$
3,686

Period-end loan receivables
$
16,513

 
$
15,320

Average loan receivables
$
16,629

 
$
15,424

Average active accounts (in thousands)
9,545

 
9,090

 
 
 
 
Interest and fees on loans
$
562

 
$
515

Retailer share arrangements
$
(4
)
 
$
(1
)
Other income
$
2

 
$
4

Payment Solutions interest and fees on loans increased by $47 million, or 9.1%, for the three months ended March 31, 2018. The increase was primarily driven by growth in average loan receivables.
CareCredit
 
Three months ended March 31,
($ in millions)
2018
 
2017
Purchase volume
$
2,421

 
$
2,242

Period-end loan receivables
$
8,809

 
$
8,125

Average loan receivables
$
8,788

 
$
8,064

Average active accounts (in thousands)
5,851

 
5,490

 
 
 
 
Interest and fees on loans
$
514

 
$
474

Retailer share arrangements
$
(2
)
 
$
(2
)
Other income
$
8

 
$
12

CareCredit interest and fees on loans increased by $40 million, or 8.4%, for the three months ended March 31, 2018. The increase was primarily driven by growth in average loan receivables.
Debt Securities
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our debt securities portfolio. All of our debt securities are classified as available-for-sale at March 31, 2018 and December 31, 2017, and are held to meet our liquidity objectives and to comply with the Community Reinvestment Act. Debt securities classified as available-for-sale are reported in our Condensed Consolidated Statements of Financial Position at fair value.

17


The following table sets forth the amortized cost and fair value of our portfolio of debt securities at the dates indicated:
 
At March 31, 2018
 
At December 31, 2017
($ in millions)
Amortized
Cost
 
Estimated Fair Value
 
Amortized
Cost
 
Estimated Fair Value
U.S. government and federal agency
$
3,361

 
$
3,352

 
$
2,419

 
$
2,416

State and municipal
42

 
42

 
44

 
44

Residential mortgage-backed
1,239

 
1,194

 
1,258

 
1,231

Asset-backed
1,672

 
1,669

 
781

 
780

U.S. corporate debt
2

 
2

 
2

 
2

Total
$
6,316

 
$
6,259

 
$
4,504

 
$
4,473

Unrealized gains and losses, net of the related tax effects, on available-for-sale debt securities that are not other-than-temporarily impaired are excluded from earnings and are reported as a separate component of comprehensive income (loss) until realized. At March 31, 2018, our debt securities had gross unrealized gains of $1 million and gross unrealized losses of $58 million. At December 31, 2017, our debt securities had gross unrealized gains of $1 million and gross unrealized losses of $32 million.
Our debt securities portfolio had the following maturity distribution at March 31, 2018.
($ in millions)
Due in 1 Year
or Less
 
Due After 1
through
5 Years
 
Due After 5
through
10 Years
 
Due After
10 years
 
Total
U.S. government and federal agency
$
2,885

 
$
467

 
$
—

 
$
—

 
$
3,352

State and municipal
—

 
—

 
2

 
40

 
42

Residential mortgage-backed
—

 
—

 
56

 
1,138

 
1,194

Asset-backed
1,083

 
586

 
—

 
—

 
1,669

U.S. corporate debt
2

 
—

 
—

 
—

 
2

Total(1)
$
3,970

 
$
1,053

 
$
58

 
$
1,178

 
$
6,259

Weighted average yield(2)
1.8
%
 
2.0
%
 
2.8
%
 
2.8
%
 
2.0
%
______________________
(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 March 31, 2018, we did not hold investments in any single issuer with an aggregate book value that exceeded 10% of equity, excluding obligations of the U.S. government.

18


Loan Receivables
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our loan receivables portfolio.
Loan receivables are our largest category of assets and represent our primary source of revenue. The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.
($ in millions)
At March 31, 2018
 
(%)
 
At December 31, 2017
 
(%)
Loans
 
 
 
 
 
Credit cards
$
74,952

 
96.4
%
 
$
79,026

 
96.5
%
Consumer installment loans
1,590

 
2.0

 
1,578

 
1.9

Commercial credit products
1,275

 
1.6

 
1,303

 
1.6

Other
36

 
—

 
40

 
—

Total loans
$
77,853

 
100.0
%
 
$
81,947

 
100.0
%
Loan receivables decreased by $4,094 million, or 5.0%, at March 31, 2018 compared to December 31, 2017, primarily driven by the seasonality of our business.
Loan receivables increased by $4,503 million, or 6.1%, at March 31, 2018 compared to March 31, 2017, primarily driven by higher purchase volume and average active account growth.
Our loan receivables portfolio had the following geographic concentration at March 31, 2018.
($ in millions)
 
Loan Receivables
Outstanding
 
% of Total Loan
Receivables
Outstanding
State
 
Texas
 
$
8,027

 
10.3
%
California
 
$
7,966

 
10.2
%
Florida
 
$
6,529

 
8.4
%
New York
 
$
4,326

 
5.6
%
Pennsylvania
 
$
3,238

 
4.2
%
Impaired Loans and Troubled Debt Restructurings
Our loss mitigation strategy is intended to minimize economic loss and at times can result in rate reductions, principal forgiveness, extensions or other actions, which may cause the related loan to be classified as a Troubled Debt Restructuring (“TDR”) and also be impaired. We use long-term modification programs for borrowers experiencing financial difficulty as a loss mitigation strategy to improve long-term collectability of the loans that are classified as TDRs. The long-term program involves changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The long-term program does not normally provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. We also make loan modifications for some customers who request financial assistance through external sources, such as a consumer credit counseling agency program. The loans that are modified typically receive a reduced interest rate but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. The determination of whether these changes to the terms and conditions meet the TDR criteria includes our consideration of all relevant facts and circumstances.
Loans classified as TDRs are recorded at their present value with impairment measured as the difference between the loan balance and the discounted present value of cash flows expected to be collected, discounted at the original effective interest rate of the loan.

19


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

 
$
5

Loans contractually 90 days past-due and still accruing interest
1,772

 
1,864

Earning TDRs(1)
969

 
940

Non-accrual, past-due and restructured loan receivables
$
2,745

 
$
2,809

______________________
(1)
At March 31, 2018 and December 31, 2017, balances exclude $110 million and $103 million, respectively, of TDRs which are included in loans contractually 90 days past-due and still accruing interest on the balance. See Note 4. Loan Receivables and Allowance for Loan Losses to our condensed consolidated financial statements for additional information on the financial effects of TDRs for the three months ended March 31, 2018 and 2017.
 
Three months ended March 31,
($ in millions)
2018
 
2017
Gross amount of interest income that would have been recorded in accordance with the original contractual terms
$
62

 
$
51

Interest income recognized
12

 
12

Total interest income foregone
$
50

 
$
39

Delinquencies
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 4.52% at March 31, 2018 from 4.25% at March 31, 2017, and decreased from 4.67% at December 31, 2017. The 27 basis point increase compared to the same period in the prior year was primarily driven by the factors discussed in "Business Trends and Conditions — Asset Quality" in our 2017 Form 10-K. The decrease as compared to December 31, 2017 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 March 31,
 
2018
 
2017
Ratio of net charge-offs to average loan receivables, including held for sale
6.14
%
 
5.33
%

20


Allowance for Loan Losses
The allowance for loan losses totaled $5,738 million at March 31, 2018, compared with $5,574 million at December 31, 2017 and $4,676 million at March 31, 2017, representing our best estimate of probable losses inherent in the portfolio. Our allowance for loan losses as a percentage of total loan receivables increased to 7.37% at March 31, 2018, from 6.80% at December 31, 2017 and 6.37% at March 31, 2017, which reflects the increase in forecasted net charge-offs over the next twelve months. The increase from December 31, 2017 also includes the effects of the seasonality of our business. See "Business Trends and Conditions — Asset Quality" in our 2017 Form 10-K for discussion of the various factors that contribute to forecasted net charge-offs over the next twelve months.
The following tables provide changes in our allowance for loan losses for the periods presented:
 ($ in millions)
Balance at
January 1, 2018

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
March 31, 2018

 
 
 
 
 
 
 
 
 
 
Credit cards
$
5,483

 
$
1,334

 
$
(1,372
)
 
$
195

 
$
5,640

Consumer installment loans
40

 
16

 
(15
)
 
4

 
45

Commercial credit products
50

 
12

 
(12
)
 
2

 
52

Other
1

 
—

 
—

 
—

 
1

Total
$
5,574

 
$
1,362

 
$
(1,399
)
 
$
201

 
$
5,738

($ in millions)
Balance at
January 1, 2017

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
March 31, 2017

 
 
 
 
 
 
 
 
 
 
Credit cards
$
4,254

 
$
1,278

 
$
(1,184
)
 
$
237

 
$
4,585

Consumer installment loans
37

 
13

 
(14
)
 
4

 
40

Commercial credit products
52

 
15

 
(18
)
 
1

 
50

Other
1

 
—

 
—

 
—

 
$
1

Total
$
4,344

 
$
1,306

 
$
(1,216
)
 
$
242

 
$
4,676

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Funding, Liquidity and Capital Resources
____________________________________________________________________________________________
We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources to support our daily operations, our business growth, our credit ratings and our regulatory and policy requirements, in a cost effective and prudent manner through expected and unexpected market environments.
Funding Sources
Our primary funding sources include cash from operations, deposits (direct and brokered deposits), securitized financings and third-party debt.
The following table summarizes information concerning our funding sources during the periods indicated:

21


 
2018
 
2017
Three months ended March 31 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
56,356

 
72.7
%
 
1.8
%
 
$
51,829

 
72.1
%
 
1.5
%
Securitized financings
12,410

 
16.0

 
2.4

 
12,321

 
17.1

 
2.1

Senior unsecured notes
8,795

 
11.3

 
3.6

 
7,760

 
10.8

 
3.5

Total
$
77,561

 
100.0
%
 
2.1
%
 
$
71,910

 
100.0
%
 
1.8
%
 
 
 
 
 
 
 
 
 
 
 
 
______________________
(1)
Excludes $300 million and $240 million average balance of non-interest-bearing deposits for the three months ended March 31, 2018 and 2017, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended March 31, 2018 and 2017.

Deposits
We obtain deposits directly from retail and commercial customers (“direct deposits”) or through third-party brokerage firms that offer our deposits to their customers (“brokered deposits”). At March 31, 2018, we had $45.0 billion in direct deposits and $11.6 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger that channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to continue to expand our direct deposits base as a source of stable and diversified low cost funding.
Our direct deposits include a range of FDIC-insured deposit products, including certificates of deposit, IRAs, money market accounts and savings accounts.
Brokered deposits are primarily from retail customers of large brokerage firms. We have relationships with 10 brokers that offer our deposits through their networks. Our brokered deposits consist primarily of certificates of deposit that bear interest at a fixed rate and at March 31, 2018, had a weighted average remaining life of 3.0 years. These deposits generally are not subject to early withdrawal.
Our ability to attract deposits is sensitive to, among other things, the interest rates we pay, and therefore, we bear funding risk if we fail to pay higher rates, or interest rate risk if we are required to pay higher rates, to retain existing deposits or attract new deposits. To mitigate these risks, our funding strategy includes a range of deposit products, and we seek to maintain access to multiple other funding sources, including securitized financings (including our undrawn committed capacity) and unsecured debt.
The following table summarizes certain information regarding our interest-bearing deposits by type (all of which constitute U.S. deposits) for the periods indicated:
Three months ended March 31 ($ in millions)
2018
 
2017
Average
Balance
 
% of
Total
 
Average
Rate
 
Average
Balance
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
26,025

 
46.2
%
 
1.7
%
 
$
21,235

 
41.0
%
 
1.5
%
Savings accounts (including money market accounts)
17,813

 
31.6

 
1.5

 
17,345

 
33.5

 
1.0

Brokered deposits
12,518

 
22.2

 
2.4

 
13,249

 
25.5

 
2.1

Total interest-bearing deposits
$
56,356

 
100.0
%
 
1.8
%
 
$
51,829

 
100.0
%
 
1.5
%
 
 
 
 
 
 
 
 
 
 
 
 
Our deposit liabilities provide funding with maturities ranging from one day to ten years. At March 31, 2018, the weighted average maturity of our interest-bearing time deposits was 1.6 years. See Note 7. Deposits to our condensed consolidated financial statements for more information on their maturities.

22


The following table summarizes deposits by contractual maturity at March 31, 2018.
($ in millions)
3 Months or
Less
 
Over
3 Months
but within
6 Months
 
Over
6 Months
but within
12 Months
 
Over
12 Months
 
Total
U.S. deposits (less than $100,000)(1)
$
7,663

 
$
1,106

 
$
5,063

 
$
9,570

 
$
23,402

U.S. deposits ($100,000 or more)
 
 
 
 
 
 
 
 
 
Direct deposits:
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
2,391

 
1,646

 
7,713

 
5,607

 
17,357

Savings accounts (including money market accounts)
14,033

 
—

 
—

 
—

 
14,033

Brokered deposits:
 
 
 
 
 
 
 
 
 
Sweep accounts
1,778

 
—

 
—

 
—

 
1,778

Total
$
25,865

 
$
2,752

 
$
12,776

 
$
15,177

 
$
56,570

______________________
(1)
Includes brokered certificates of deposit for which underlying individual deposit balances are assumed to be less than $100,000.
Securitized Financings
We have been engaged in the securitization of our credit card receivables since 1997. We access the asset-backed securitization market using the Synchrony Credit Card Master Note Trust (“SYNCT”) through which we issue asset-backed securities through both public transactions and private transactions funded by financial institutions and commercial paper conduits. In addition, we issue asset-backed securities in private transactions through the Synchrony Sales Finance Master Trust (“SFT”) and the Synchrony Card Issuance Trust (“SYNIT”).
The following table summarizes expected contractual maturities of the investors’ interests in securitized financings, excluding debt premiums, discounts and issuance costs at March 31, 2018.
($ in millions)
Less Than
One Year
 
One Year
Through
Three
Years
 
After
Three
Through
Five
Years
 
After Five
Years
 
Total
Scheduled maturities of long-term borrowings—owed to securitization investors:
 
 
 
 
 
 
 
 
 
SYNCT(1)
$
2,528

 
$
3,957

 
$
1,590

 
$
—

 
$
8,075

SFT
—

 
2,850

 
—

 
—

 
2,850

SYNIT
—

 
1,300

 
—

 
—

 
1,300

Total long-term borrowings—owed to securitization investors
$
2,528

 
$
8,107

 
$
1,590

 
$
—

 
$
12,225

______________________
(1)
Excludes subordinated classes of SYNCT notes that we own.
We retain exposure to the performance of trust assets through: (i) in the case of SYNCT, SFT and SYNIT, subordinated retained interests in the receivables transferred to the trust in excess of the principal amount of the notes for a given series to provide credit enhancement for a particular series, as well as a pari passu seller’s interest in each trust and (ii) in the case of SYNCT, subordinated classes of notes that we own.

23


All of our securitized financings include early repayment triggers, referred to as early amortization events, including events related to material breaches of representations, warranties or covenants, inability or failure of the Bank to transfer loan receivables to the trusts as required under the securitization documents, failure to make required payments or deposits pursuant to the securitization documents, and certain insolvency-related events with respect to the related securitization depositor, Synchrony (solely with respect to SYNCT) or the Bank. In addition, an early amortization event will occur with respect to a series if the excess spread as it relates to a particular series or for the trust, as applicable, falls below zero. Following an early amortization event, principal collections on the loan receivables in the applicable trust are applied to repay principal of the trust's asset-backed securities rather than being available on a revolving basis to fund the origination activities of our business. The occurrence of an early amortization event also would limit or terminate our ability to issue future series out of the trust in which the early amortization event occurred. No early amortization event has occurred with respect to any of the securitized financings in SYNCT, SFT or SYNIT.
The following table summarizes for each of our trusts the three-month rolling average excess spread at March 31, 2018.
 
Note Principal Balance
($ in millions)
 
# of Series
Outstanding
 
Three-Month Rolling
Average Excess
Spread(1)
SYNCT(2)
$
9,331

 
16

 
~14.4% to 15.5%

SFT
$
2,850

 
10

 
12.4
%
SYNIT
$
1,300

 
3

 
~20.1% to 21.2%

______________________
(1)
Represents the excess spread (generally calculated as interest income collected from the applicable pool of loan receivables less applicable net charge-offs, interest expense and servicing costs, divided by the aggregate principal amount of loan receivables in the applicable pool) for each trust (or, in the case of SYNCT, represents a range of the excess spreads relating to the particular series issued within the trust), in each case calculated in accordance with the applicable trust or series documentation, for the three securitization monthly periods ended March 31, 2018.
(2)
Includes subordinated classes of SYNCT notes that we own.

24


Third-Party Debt
Senior Unsecured Notes
The following table provides a summary of our outstanding senior unsecured notes at March 31, 2018.
($ in millions)
 
Maturity
 
Principal Amount Outstanding(1)
Fixed rate senior unsecured notes:
 
 
 
 
Synchrony Financial
 
 
 
 
2.600% senior unsecured notes
 
January, 2019
 
$
1,000

3.000% senior unsecured notes
 
August, 2019
 
1,100

2.700% senior unsecured notes
 
February, 2020
 
750

3.750% senior unsecured notes
 
August, 2021
 
750

4.250% senior unsecured notes
 
August, 2024
 
1,250

4.500% senior unsecured notes
 
July, 2025
 
1,000

3.700% senior unsecured notes

 
August, 2026
 
500

3.950% senior unsecured notes
 
December, 2027
 
1,000

Synchrony Bank
 
 
 
 
3.000% senior unsecured notes
 
June, 2022
 
750

Total fixed rate senior unsecured notes
 
 
 
$
8,100

 
 
 
 
 
Floating rate senior unsecured notes:
 
 
 
 
Synchrony Financial
 
 
 
 
Three-month LIBOR plus 1.23% senior unsecured notes
 
February, 2020
 
250

Synchrony Bank
 
 
 
 
Three-month LIBOR plus 0.625% senior unsecured notes
 
March, 2020
 
500

Total floating rate senior unsecured notes
 
 
 
$
750

______________________
(1)
The amounts shown exclude unamortized debt discount, premiums and issuance cost.
At March 31, 2018, the aggregate amount of outstanding senior unsecured notes was $8.8 billion and the weighted average interest rate was 3.48%.
Short-Term Borrowings
Except as described above, there were no material short-term borrowings for the periods presented.
Other
At March 31, 2018, we had more than $25.0 billion of unencumbered assets in the Bank available to be used to generate additional liquidity through secured borrowings or asset sales or to be pledged to the Federal Reserve Board for credit at the discount window.
Covenants
The indenture pursuant to which our senior unsecured notes have been issued includes various covenants. If we do not satisfy any of these covenants, the maturity of amounts outstanding thereunder may be accelerated and become payable. We were in compliance with all of these covenants at March 31, 2018.
At March 31, 2018, we were not in default under any of our credit facilities or senior unsecured notes.

25


Credit Ratings
Our borrowing costs and capacity in certain funding markets, including securitizations and senior and subordinated debt, may be affected by the credit ratings of the Company, the Bank and the ratings of our asset-backed securities.
Synchrony's senior unsecured debt is rated BBB- (stable outlook) by Fitch and BBB- (stable outlook) by S&P. The Bank’s senior unsecured debt is rated BBB- (stable outlook) by Fitch and BBB (stable outlook) by S&P. In addition, certain of the asset-backed securities issued by SYNCT are rated by Fitch, S&P and/or Moody’s. A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. Downgrades in these credit ratings could materially increase the cost of our funding from, and restrict our access to, the capital markets.
Liquidity
____________________________________________________________________________________________
We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth, satisfy debt obligations and to meet regulatory expectations under normal and stress conditions.
We maintain policies outlining the overall framework and general principles for managing liquidity risk across our business, which is the responsibility of our Asset and Liability Management Committee, a subcommittee of our Risk Committee. We employ a variety of metrics to monitor and manage liquidity. We perform regular liquidity stress testing and contingency planning as part of our liquidity management process. We evaluate a range of stress scenarios including Company specific and systemic events that could impact funding sources and our ability to meet liquidity needs.
We maintain a liquidity portfolio, which at March 31, 2018 had $18.6 billion of liquid assets, primarily consisting of cash and equivalents and short-term obligations of the U.S. Treasury, less cash in transit which is not considered to be liquid, compared to $15.1 billion of liquid assets at December 31, 2017. The increase in liquid assets was primarily due to the retention of excess cash flows from operations within our Company as part of our pre-funding strategy for the PayPal credit portfolio acquisition.
As additional sources of liquidity, at March 31, 2018, we had an aggregate of $5.5 billion of undrawn committed capacity on our securitized financings, subject to customary borrowing conditions, from private lenders under our securitization programs and $0.5 billion of undrawn committed capacity under our unsecured revolving credit facility with private lenders, and we had more than $25.0 billion of unencumbered assets in the Bank available to be used to generate additional liquidity through secured borrowings or asset sales or to be pledged to the Federal Reserve Board for credit at the discount window.
As a general matter, investments included in our liquidity portfolio are expected to be highly liquid, giving us the ability to readily convert them to cash. The level and composition of our liquidity portfolio may fluctuate based upon the level of expected maturities of our funding sources as well as operational requirements and market conditions.
We rely significantly on dividends and other distributions and payments from the Bank for liquidity; however, bank regulations, contractual restrictions and other factors limit the amount of dividends and other distributions and payments that the Bank may pay to us. For a discussion of regulatory restrictions on the Bank’s ability to pay dividends, see “Item 1A. Risk Factors—Risks Relating to Regulation—We are subject to restrictions that limit our ability to pay dividends and repurchase our common stock; the Bank is subject to restrictions that limit its ability to pay dividends to us, which could limit our ability to pay dividends, repurchase our common stock or make payments on our indebtedness” and “Item 1A. Business—Regulation—Savings Association Regulation—Dividends and Stock Repurchases” in our 2017 Form 10-K.

26


Capital
____________________________________________________________________________________________
Our primary sources of capital have been earnings generated by our business and existing equity capital. We seek to manage capital to a level and composition sufficient to support the risks of our business, meet regulatory requirements, adhere to rating agency targets and support future business growth. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives and legislative and regulatory developments. Within these constraints, we are focused on deploying capital in a manner that will provide attractive returns to our stockholders.
Synchrony and the Bank are required to conduct stress tests on an annual basis. Under the Office of the Comptroller of the Currency of the U.S. Treasury's (the “OCC”) and the Federal Reserve Board's stress test regulations, the Bank and Synchrony are required to use stress-testing methodologies providing for results under various scenarios of economic and financial market stress. In addition, while as a savings and loan holding company and a financial holding company, we currently are not subject to the Federal Reserve Board's capital planning rule, we submitted a capital plan to the Federal Reserve Board in 2018.
Dividend and Share Repurchases
Cash Dividends Declared
 
Month of Payment
 
Amount per Common Share
 
Amount
($ in millions, except per share data)
 
 
 
 
 
 
Three months ended March 31, 2018
 
February 2018
 
$
0.15

 
$
114

Total dividends declared
 
 
 
$
0.15

 
$
114

 
 
 
 
 
 
 
The declaration and payment of future dividends to holders of our common stock will be at the discretion of the Board and will depend on many factors. For a discussion of regulatory and other restrictions on our ability to pay dividends and repurchase stock, see “Risk Factors—Risks Relating to Regulation—We are subject to restrictions that limit its ability to pay dividends and repurchase its common stock; the Bank is subject to restrictions that limit its ability to pay dividends to Synchrony, which could limit Synchrony's ability to pay dividends, repurchase its common stock or make payments on its indebtedness” in our 2017 Form 10-K.
Shares Repurchased Under Publicly Announced Programs
 
Total Number of Shares Purchased
 
Dollar Value of Share Purchased
 
 
 
 
 
($ and shares in millions)
 
 
 
 
Three months ended March 31, 2018
 
10.4

 
$
410

Total
 
10.4

 
$
410

 
 
 
 
 
On May 18, 2017, the Company approved a share repurchase program of up to $1.64 billion through June 30, 2018. Through the end of the first quarter of 2018, we have repurchased approximately $1.43 billion of common stock as part of the share repurchase program and expect to complete the share repurchase program by the end of the second quarter of 2018. We made, and expect to continue to make, share repurchases subject to market conditions and other factors, including legal and regulatory restrictions and required approvals.
Regulatory Capital Requirements - Synchrony Financial
As a savings and loan holding company, we are required to maintain minimum capital ratios, under the applicable U.S. Basel III capital rules. For more information, see “Regulation—Savings and Loan Holding Company Regulation” in our 2017 Form 10-K.

27


For Synchrony Financial to be a well-capitalized savings and loan holding company, Synchrony Bank must be well-capitalized and Synchrony Financial must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal Reserve Board to meet and maintain a specific capital level for any capital measure. As of March 31, 2018, Synchrony Financial met all the requirements to be deemed well-capitalized.
The following table sets forth at March 31, 2018 and December 31, 2017 the composition of our capital ratios for the Company calculated under the Basel III regulatory capital standards, respectively.
 
Basel III
 
At March 31, 2018(1)
 
At December 31, 2017(2)
($ in millions)
Amount
 
Ratio(3)
 
Amount
 
Ratio(3)
Total risk-based capital
$
13,878

 
18.1
%
 
$
13,954

 
17.3
%
Tier 1 risk-based capital
$
12,863

 
16.8
%
 
$
12,890

 
16.0
%
Tier 1 leverage
$
12,863

 
13.7
%
 
$
12,890

 
13.8
%
Common equity Tier 1 capital
$
12,863

 
16.8
%
 
$
12,890

 
16.0
%
Risk-weighted assets
$
76,509

 
 
 
$
80,669

 
 
______________________
(1)
Amounts presented do not reflect certain modifications to the regulatory capital rules proposed by the federal banking agencies in September 2017, which among other things, may increase the risk weighting of certain deferred tax assets from 100% to 250% if the proposed rule becomes effective.
(2)
Amounts at December 31, 2017 are presented in accordance with applicable transition guidelines.
(3)
Tier 1 leverage ratio represents total tier 1 capital as a percentage of total average assets, after certain adjustments. All other ratios presented above represent the applicable capital measure as a percentage of risk-weighted assets.
The increase in our Common equity Tier 1 capital ratio was primarily due to the seasonal decline in loan receivables which resulted in a corresponding decrease in risk-weighted assets in the three months ended March 31, 2018.
Regulatory Capital Requirements - Synchrony Bank
At March 31, 2018 and December 31, 2017, the Bank met all applicable requirements to be deemed well-capitalized pursuant to OCC regulations and for purposes of the Federal Deposit Insurance Act. The following table sets forth the composition of the Bank’s capital ratios calculated under the Basel III rules at March 31, 2018 and December 31, 2017.
 
At March 31, 2018
 
At December 31, 2017
 
Minimum to be Well-
Capitalized under 
Prompt Corrective Action Provisions - Basel III
($ in millions)
Amount
 
Ratio
 
Amount
 
Ratio
 
Amount
 
Ratio
Total risk-based capital
$
11,054

 
17.4
%
 
$
10,842

 
16.2
%
 
$
6,364

 
10.0
%
Tier 1 risk-based capital
$
10,205

 
16.0
%
 
$
9,958

 
14.9
%
 
$
5,091

 
8.0
%
Tier 1 leverage
$
10,205

 
13.1
%
 
$
9,958

 
12.9
%
 
$
3,909

 
5.0
%
Common equity Tier 1 capital
$
10,205

 
16.0
%
 
$
9,958

 
14.9
%
 
$
4,136

 
6.5
%
Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a material adverse effect on our business, results of operations and financial condition. See “Risk Factors—Risks Relating to Regulation—Failure by Synchrony and the Bank to meet applicable capital adequacy and liquidity requirements could have a material adverse effect on us” in our 2017 Form 10-K.

28


Off-Balance Sheet Arrangements and Unfunded Lending Commitments
____________________________________________________________________________________________
We do not have any significant off-balance sheet arrangements, including guarantees of third-party obligations. Guarantees are contracts or indemnification agreements that contingently require us to make a guaranteed payment or perform an obligation to a third-party based on certain trigger events. At March 31, 2018, we had not recorded any contingent liabilities in our Condensed Consolidated Statement of Financial Position related to any guarantees.
We extend credit, primarily arising from agreements with customers for unused lines of credit on our credit cards, in the ordinary course of business. See Note 4 - Loan Receivables and Allowance for Loan Losses to our condensed consolidated financial statements for more information on our unfunded lending commitments.
Critical Accounting Estimates
____________________________________________________________________________________________
In preparing our condensed consolidated financial statements, we have identified certain accounting estimates and assumptions that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. The critical accounting estimates we have identified relate to allowance for loan losses, income taxes and fair value measurements. All of these estimates reflect our best judgment about current, and for some estimates future, economic and market conditions and their effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that these judgments and estimates could change, which may result in incremental losses on loan receivables and the establishment of valuation allowances on deferred tax assets and increases in our tax liabilities, among other effects. See “Management's Discussion and Analysis—Critical Accounting Estimates” in our 2017 Form 10-K, for a detailed discussion of these critical accounting estimates.
New Accounting Standards
____________________________________________________________________________________________
See Note 2. Basis of Presentation and Summary of Significant Accounting Policies — New Accounting Standards, for additional information related to recent accounting pronouncements.
Regulation and Supervision
____________________________________________________________________________________________
Our business, including our relationships with our customers, is subject to regulation, supervision and examination under U.S. federal, state and foreign laws and regulations. These laws and regulations cover all aspects of our business, including lending practices, treatment of our customers, safeguarding deposits, customer privacy and information security, capital structure, liquidity, dividends and other capital distributions, transactions with affiliates, and conduct and qualifications of personnel.
As a savings and loan holding company and a financial holding company, Synchrony is subject to regulation, supervision and examination by the Federal Reserve Board. As a large provider of consumer financial services, we are also subject to regulation, supervision and examination by the CFPB.
The Bank is a federally chartered savings association. As such, the Bank is subject to regulation, supervision and examination by the OCC, which is its primary regulator, and by the CFPB. In addition, the Bank, as an insured depository institution, is supervised by the FDIC.
See “Regulation” in our 2017 Form 10-K for additional information. See also “—Capital” above, for discussion of the impact of regulations and supervision on our capital and liquidity, including our ability to pay dividends and repurchase stock.

29


ITEM 1. FINANCIAL STATEMENTS
Synchrony Financial and subsidiaries
Condensed Consolidated Statements of Earnings
(Unaudited)
____________________________________________________________________________________________
 
Three months ended March 31,
($ in millions, except per share data)
2018
 
2017
Interest income:
 
 
 
Interest and fees on loans (Note 4)
$
4,172

 
$
3,877

Interest on debt securities
72

 
36

Total interest income
4,244

 
3,913

Interest expense:
 
 
 
Interest on deposits
249

 
194

Interest on borrowings of consolidated securitization entities
74

 
65

Interest on third-party debt
79

 
67

Total interest expense
402

 
326

Net interest income
3,842

 
3,587

Retailer share arrangements
(720
)
 
(684
)
Net interest income, after retailer share arrangements
3,122

 
2,903

Provision for loan losses (Note 4)
1,362

 
1,306

Net interest income, after retailer share arrangements and provision for loan losses
1,760

 
1,597

Other income:
 
 
 
Interchange revenue
158

 
145

Debt cancellation fees
66

 
68

Loyalty programs
(155
)
 
(137
)
Other
6

 
17

Total other income
75

 
93

Other expense:
 
 
 
Employee costs
358

 
323

Professional fees
166

 
151

Marketing and business development
121

 
94

Information processing
104

 
90

Other
239

 
250

Total other expense
988

 
908

Earnings before provision for income taxes
847

 
782

Provision for income taxes (Note 12)
207

 
283

Net earnings
$
640

 
$
499

 
 
 
 
Earnings per share
 
 
 
Basic
$
0.84

 
$
0.61

Diluted
$
0.83

 
$
0.61

 
 
 
 
Dividends declared per common share
$
0.15

 
$
0.13


See accompanying notes to condensed consolidated financial statements.

30


Synchrony Financial and subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Unaudited)
____________________________________________________________________________________________
 
Three months ended March 31,
($ in millions)
2018
 
2017
 
 
 
 
Net earnings
$
640

 
$
499

 
 
 
 
Other comprehensive income (loss)
 
 
 
Debt securities
(20
)
 
(1
)
Currency translation adjustments
(3
)
 
(1
)
Employee benefit plans
1

 
—

Other comprehensive income (loss)
(22
)
 
(2
)
 
 
 
 
Comprehensive income
$
618

 
$
497

Amounts presented net of taxes.




































See accompanying notes to condensed consolidated financial statements.


31


Synchrony Financial and subsidiaries
Condensed Consolidated Statements of Financial Position
____________________________________________________________________________________________
($ in millions)
At March 31, 2018
 
At December 31, 2017
 
(Unaudited)
 
 
Assets
 
 
 
Cash and equivalents
$
13,044

 
$
11,602

Debt securities (Note 3)
6,259

 
4,473

Loan receivables: (Notes 4 and 5)
 
 
 
Unsecuritized loans held for investment
52,469

 
55,526

Restricted loans of consolidated securitization entities
25,384

 
26,421

Total loan receivables
77,853

 
81,947

Less: Allowance for loan losses
(5,738
)
 
(5,574
)
Loan receivables, net
72,115

 
76,373

Goodwill
991

 
991

Intangible assets, net (Note 6)
780

 
749

Other assets
2,370

 
1,620

Total assets
$
95,559

 
$
95,808

 
 
 
 
Liabilities and Equity
 
 
 
Deposits: (Note 7)
 
 
 
Interest-bearing deposit accounts
$
56,285

 
$
56,276

Non-interest-bearing deposit accounts
285

 
212

Total deposits
56,570

 
56,488

Borrowings: (Notes 5 and 8)
 
 
 
Borrowings of consolidated securitization entities
12,214

 
12,497

Senior unsecured notes
8,801

 
8,302

Total borrowings
21,015

 
20,799

Accrued expenses and other liabilities
3,618

 
4,287

Total liabilities
$
81,203

 
$
81,574

 
 
 
 
Equity:
 
 
 
Common Stock, par share value $0.001 per share; 4,000,000,000 shares authorized; 833,984,684 shares issued at both March 31, 2018 and December 31, 2017; 760,278,930 and 770,531,433 shares outstanding at March 31, 2018 and December 31, 2017, respectively
$
1

 
$
1

Additional paid-in capital
9,470

 
9,445

Retained earnings
7,334

 
6,809

Accumulated other comprehensive income (loss):
 
 
 
Debt securities
(39
)
 
(19
)
Currency translation adjustments
(20
)
 
(17
)
Other
(27
)
 
(28
)
Treasury Stock, at cost; 73,705,754 and 63,453,251 shares at March 31, 2018 and December 31, 2017, respectively
(2,363
)
 
(1,957
)
Total equity
14,356

 
14,234

Total liabilities and equity
$
95,559

 
$
95,808


See accompanying notes to condensed consolidated financial statements.

32


Synchrony Financial and subsidiaries
Condensed Consolidated Statements of Changes in Equity
(Unaudited)
____________________________________________________________________________________________
 
Common Stock
 
 
 
 
 
 
 
 
 
 
($ in millions, shares in thousands)
Shares Issued
 
Amount
 
Additional Paid-in Capital
 
Retained Earnings
 
Accumulated Other Comprehensive Income (Loss)
 
Treasury Stock
 
Total Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2017
833,985

 
$
1

 
$
9,393

 
$
5,330

 
$
(53
)
 
$
(475
)
 
$
14,196

Net earnings
—

 
—

 
—

 
499

 
—

 
—

 
499

Other comprehensive income
—

 
—

 
—

 
—

 
(2
)
 
—

 
(2
)
Purchases of treasury stock
—

 
—

 
—

 
—

 
—

 
$
(238
)
 
(238
)
Stock-based compensation
—

 
—

 
12

 
—

 
—

 
1

 
13

Dividends - common stock
—

 
—

 
—

 
(105
)
 
—

 
—

 
(105
)
Balance at March 31, 2017
833,985

 
$
1

 
$
9,405

 
$
5,724

 
$
(55
)
 
$
(712
)
 
$
14,363

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2018
833,985

 
$
1

 
$
9,445

 
$
6,809

 
$
(64
)
 
$
(1,957
)
 
$
14,234

Net earnings
—

 
—

 
—

 
640

 
—

 
—

 
640

Other comprehensive income
—

 
—

 
—

 
—

 
(22
)
 
—

 
(22
)
Purchases of treasury stock
—

 
—

 
—

 
—

 
—

 
(410
)
 
(410
)
Stock-based compensation
—

 
—

 
25

 
(1
)
 
—

 
4

 
28

Dividends - common stock
—

 
—

 
—

 
(114
)
 
—

 
—

 
(114
)
Balance at March 31, 2018
833,985

 
$
1

 
$
9,470

 
$
7,334

 
$
(86
)
 
$
(2,363
)
 
$
14,356
























See accompanying notes to condensed consolidated financial statements.

33


Synchrony Financial and subsidiaries
Condensed Consolidated Statements of Cash Flows
(Unaudited)
____________________________________________________________________________________________
 
Three months ended March 31,
($ in millions)
2018
 
2017
Cash flows - operating activities
 
 
 
Net earnings
$
640

 
$
499

Adjustments to reconcile net earnings to cash provided from operating activities
 
 
 
Provision for loan losses
1,362

 
1,306

Deferred income taxes
19

 
19

Depreciation and amortization
71

 
59

(Increase) decrease in interest and fees receivable
16

 
40

(Increase) decrease in other assets
148

 
231

Increase (decrease) in accrued expenses and other liabilities
(511
)
 
(846
)
All other operating activities
170

 
172

Cash provided from (used for) operating activities
1,915

 
1,480

 
 
 
 
Cash flows - investing activities
 
 
 
Maturity and sales of debt securities
718

 
399

Purchases of debt securities
(2,546
)
 
(622
)
Acquisition of loan receivables
—

 
(73
)
Net (increase) decrease in loan receivables
2,659

 
1,918

All other investing activities
(76
)
 
(242
)
Cash provided from (used for) investing activities
755

 
1,380

 
 
 
 
Cash flows - financing activities
 
 
 
Borrowings of consolidated securitization entities
 
 
 
Proceeds from issuance of securitized debt
1,417

 
750

Maturities and repayment of securitized debt
(1,701
)
 
(708
)
Third-party debt
 
 
 
Proceeds from issuance of third-party debt
497

 
—

Net increase (decrease) in deposits
(3
)
 
(528
)
Purchases of treasury stock
(410
)
 
(238
)
Dividends paid on common stock
(114
)
 
(105
)
All other financing activities
1

 
—

Cash provided from (used for) financing activities
(313
)
 
(829
)
 
 
 
 
Increase (decrease) in cash and equivalents, including restricted amounts
2,357

 
2,031

Cash and equivalents, including restricted amounts, at beginning of period
11,817

 
9,668

Cash and equivalents at end of period:
 
 
 
Cash and equivalents
13,044

 
11,392

Restricted cash and equivalents included in other assets
1,130

 
307

Total cash and equivalents, including restricted amounts, at end of period
$
14,174

 
$
11,699


See accompanying notes to condensed consolidated financial statements.

34


Synchrony Financial and subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
____________________________________________________________________________________________
NOTE 1.    BUSINESS DESCRIPTION
Synchrony Financial (the “Company”) provides a range of credit products through programs it has established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers. We primarily offer private label, Dual Card and general purpose co-branded credit cards, promotional financing and installment lending, loyalty programs and FDIC-insured savings products through Synchrony Bank (the “Bank”).
References to the “Company”, “we”, “us” and “our” are to Synchrony Financial and its consolidated subsidiaries unless the context otherwise requires.
NOTE 2.    BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).
Preparing financial statements in conformity with U.S. GAAP requires us to make estimates based on assumptions about current, and for some estimates, future, economic and market conditions (for example, unemployment, housing, interest rates and market liquidity) which affect reported amounts and related disclosures in our condensed consolidated financial statements. Although our current estimates contemplate current conditions and how we expect them to change in the future, as appropriate, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially affect our results of operations and financial position. Among other effects, such changes could result in incremental losses on loan receivables, future impairments of debt securities, goodwill and intangible assets, increases in reserves for contingencies, establishment of valuation allowances on deferred tax assets and increases in our tax liabilities.
We primarily conduct our operations within the United States and Canada. Substantially all of our revenues are from U.S. customers. The operating activities conducted by our non-U.S. affiliates use the local currency as their functional currency. The effects of translating the financial statements of these non-U.S. affiliates to U.S. dollars are included in equity. Asset and liability accounts are translated at period-end exchange rates, while revenues and expenses are translated at average rates for the respective periods.
Consolidated Basis of Presentation
The Company’s financial statements have been prepared on a consolidated basis. Under this basis of presentation, our financial statements consolidate all of our subsidiaries – i.e., entities in which we have a controlling financial interest, most often because we hold a majority voting interest.
To determine if we hold a controlling financial interest in an entity, we first evaluate if we are required to apply the variable interest entity (“VIE”) model to the entity, otherwise the entity is evaluated under the voting interest model. Where we hold current or potential rights that give us the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance (“power”) combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses (“significant economics”), we have a controlling financial interest in that VIE. Rights held by others to remove the party with power over the VIE are not considered unless one party can exercise those rights unilaterally. We consolidate certain securitization entities under the VIE model because we have both power and significant economics. See Note 5. Variable Interest Entities.
We have reclassified certain prior-period amounts to conform to current-period presentation.

35


Interim Period Presentation
The condensed consolidated financial statements and notes thereto are unaudited. These statements include all adjustments (consisting of normal recurring accruals) that we considered necessary to present a fair statement of our results of operations, financial position and cash flows. The results reported in these condensed consolidated financial statements should not be considered as necessarily indicative of results that may be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with our 2017 annual consolidated financial statements and the related notes in our Annual Report on Form 10-K for the year ended December 31, 2017 (our "2017 Form 10-K").
New Accounting Standards
Newly Adopted Accounting Standards
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new revenue recognition guidance became effective January 1, 2018 for the Company. The scope of ASU 2014-09 excludes interest and fee income on loans and as a result, the majority of the Company's revenue is not in the scope of the standard. The new guidance did not impact the timing or measurement of the Company's revenues, and as a result, the Company did not present any restated prior period results as a result of the standard becoming effective.
In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted cash and restricted cash equivalents to be included within beginning and ending total cash amounts reported in the consolidated statements of cash flows. Disclosure of the nature of the restrictions on cash balances is required under the guidance. This standard is effective for annual and interim reporting periods for fiscal years beginning after December 15, 2017. We adopted the guidance retrospectively effective as of January 1, 2018. Upon adoption, changes in restricted cash, which had previously been presented as investing activities, are now included within beginning and ending cash and equivalents, including restricted amounts, balances in our Consolidated Statements of Cash Flows. Additionally, in August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provided guidance on certain cash flow issues. This standard is effective for annual and interim reporting periods for fiscal years beginning after December 15, 2017. We adopted the guidance retrospectively effective as of January 1, 2018, which did not have a material impact on our consolidated financial statements.
Effective January 1, 2018, we have adopted the provisions of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which require equity investments (except those accounted for under the equity method of accounting or that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in the Consolidated Statements of Earnings. However, in accordance with the new guidance, the company has elected to measure certain equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes for similar investments of the issuer. The adoption of this new guidance did not have a material impact on the consolidated financial statements.
Recently Issued But Not Yet Adopted Accounting Standards
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires lessees to recognize most leases on their balance sheet. Leases which are identified as capital leases currently, will generally be identified as financing leases under the new guidance but otherwise their accounting treatment will remain relatively unchanged. Leases identified as operating leases currently, will generally remain in that category under the new standard, but both a right-of-use asset and a liability for remaining lease payments will now be required to be recognized on the balance sheet. This guidance will be effective for the Company on January 1, 2019. Management does not expect this guidance to have a material impact on the consolidated financial statements.

36


In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU replaces the existing incurred loss impairment guidance with a new impairment model known as the Current Expected Credit Loss ("CECL") model, which is based on expected credit losses. The CECL model requires, upon origination of a loan, the recognition of all expected credit losses over the life of the loan based on historical experience, current conditions and reasonable and supportable forecasts. This standard is effective for annual and interim reporting periods for fiscal years beginning after December 15, 2019, with early adoption permitted for annual and interim periods for fiscal years beginning after December 15, 2018. The amendments in this standard will be recognized through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. While we are evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures, this standard is expected to result in an increase to the Company's allowance for loan losses given the change to expected losses for the estimated life of the financial asset. The extent of the increase will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.
See Note 2. Basis of Presentation and Summary of Significant Accounting Policies to our 2017 annual consolidated financial statements in our 2017 Form 10-K, for additional information on our significant accounting policies, including discussion of the nature of the restrictions on our cash balances.
NOTE 3.    DEBT SECURITIES
All of our debt securities are classified as available-for-sale and are held to meet our liquidity objectives or to comply with the Community Reinvestment Act. Our debt securities consist of the following:
 
March 31, 2018
 
December 31, 2017
 
 
 
Gross

 
Gross

 
 
 
 
 
Gross

 
Gross

 
 
 
Amortized

 
unrealized

 
unrealized

 
Estimated

 
Amortized

 
unrealized

 
unrealized

 
Estimated

 ($ in millions)
cost

 
gains

 
losses

 
fair value

 
cost

 
gains

 
losses

 
fair value

U.S. government and federal agency
$
3,361

 
$
—

 
$
(9
)
 
$
3,352

 
$
2,419

 
$
—

 
$
(3
)
 
$
2,416

State and municipal
42

 
—

 
—

 
42

 
44

 
—

 
—

 
44

Residential mortgage-backed(a)
1,239

 
1

 
(46
)
 
1,194

 
1,258

 
1

 
(28
)
 
1,231

Asset-backed(b)
1,672

 
—

 
(3
)
 
1,669

 
781

 
—

 
(1
)
 
780

U.S. corporate debt
2

 
—

 
—

 
2

 
2

 
—

 
—

 
2

Total
$
6,316

 
$
1

 
$
(58
)
 
$
6,259

 
$
4,504

 
$
1

 
$
(32
)
 
$
4,473

_______________________
(a)
All of our residential mortgage-backed securities have been issued by government-sponsored entities and are collateralized by U.S. mortgages. At March 31, 2018 and December 31, 2017, $342 million and $344 million, respectively, are pledged by the Bank as collateral to the Federal Reserve to secure Federal Reserve Discount Window advances.
(b)
All of our asset-backed securities are collateralized by credit card loans.

37


The following table presents the estimated fair values and gross unrealized losses of our available-for-sale debt securities:
 
In loss position for
 
Less than 12 months
 
12 months or more
 
 
 
Gross

 
 
 
Gross

 
Estimated

 
unrealized

 
Estimated

 
unrealized

 ($ in millions)
fair value

 
losses

 
fair value

 
losses

At March 31, 2018
 
 
 
 
 
 
 
U.S. government and federal agency
$
2,904

 
$
(9
)
 
$
150

 
$
—

State and municipal
10

 
—

 
28

 
—

Residential mortgage-backed
275

 
(4
)
 
895

 
(42
)
Asset-backed
1,463

 
(3
)
 
—

 
—

Total
$
4,652

 
$
(16
)
 
$
1,073

 
$
(42
)
 
 
 
 
 
 
 
 
At December 31, 2017
 
 
 
 
 
 
 
U.S. government and federal agency
$
2,416

 
$
(3
)
 
$
—

 
$
—

State and municipal
—

 
—

 
29

 
—

Residential mortgage-backed
142

 
(1
)
 
1,026

 
(27
)
 Asset-backed
626

 
(1
)
 
—

 
—

Total
$
3,184

 
$
(5
)
 
$
1,055

 
$
(27
)
We regularly review debt securities for impairment using both qualitative and quantitative criteria. We presently do not intend to sell our debt securities that are in an unrealized loss position and believe that it is not more likely than not that we will be required to sell these securities before recovery of our amortized cost.
There were no other-than-temporary impairments recognized during the three months ended March 31, 2018 and 2017.
Contractual Maturities of Investments in Available-for-Sale Debt Securities
 
Amortized

 
Estimated

At March 31, 2018 ($ in millions)
cost

 
fair value

 
 
 
 
Due
 
 
 
Within one year
$
3,975

 
$
3,970

After one year through five years
$
1,061

 
$
1,053

After five years through ten years
$
58

 
$
58

After ten years
$
1,222

 
$
1,178

We expect actual maturities to differ from contractual maturities because borrowers have the right to prepay certain obligations.
There were no material realized gains or losses recognized for the three months ended March 31, 2018 and 2017.
Although we generally do not have the intent to sell any specific securities held at March 31, 2018, in the ordinary course of managing our debt securities portfolio, we may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield, liquidity requirements and funding obligations.

38


NOTE 4.    LOAN RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES
($ in millions)
March 31, 2018
 
December 31, 2017
 
 
 
 
Credit cards
$
74,952

 
$
79,026

Consumer installment loans
1,590

 
1,578

Commercial credit products
1,275

 
1,303

Other
36

 
40

Total loan receivables, before allowance for losses(a)(b)
$
77,853

 
$
81,947

_______________________
(a)
Total loan receivables include $25.4 billion and $26.4 billion of restricted loans of consolidated securitization entities at March 31, 2018 and December 31, 2017, respectively. See Note 5. Variable Interest Entities for further information on these restricted loans.
(b)
At March 31, 2018 and December 31, 2017, loan receivables included deferred expense, net of deferred income, of $107 million and $97 million, respectively.
Allowance for Loan Losses
 ($ in millions)
Balance at January 1, 2018

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
March 31, 2018

 
 
 
 
 
 
 
 
 
 
Credit cards
$
5,483

 
$
1,334

 
$
(1,372
)
 
$
195

 
$
5,640

Consumer installment loans
40

 
16

 
(15
)
 
4

 
45

Commercial credit products
50

 
12

 
(12
)
 
2

 
52

Other
1

 
—

 
—

 
—

 
$
1

Total
$
5,574

 
$
1,362

 
$
(1,399
)
 
$
201

 
$
5,738

($ in millions)
Balance at January 1, 2017

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
March 31, 2017

 
 
 
 
 
 
 
 
 
 
Credit cards
$
4,254

 
$
1,278

 
$
(1,184
)
 
$
237

 
$
4,585

Consumer installment loans
37

 
13

 
(14
)
 
4

 
40

Commercial credit products
52

 
15

 
(18
)
 
1

 
50

Other
1

 
—

 
—

 
—

 
$
1

Total
$
4,344

 
$
1,306

 
$
(1,216
)
 
$
242

 
$
4,676

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Delinquent and Non-accrual Loans
At March 31, 2018 ($ in millions)
30-89 days delinquent

 
90 or more days delinquent

 
Total past due

 
90 or more days delinquent and accruing

 
Total non-accruing

 
 
 
 
 
 
 
 
 
 
Credit cards
$
1,692

 
$
1,754

 
$
3,446

 
$
1,754

 
$
—

Consumer installment loans
18

 
4

 
22

 
—

 
4

Commercial credit products
35

 
18

 
53

 
18

 
—

Total delinquent loans
$
1,745

 
$
1,776

 
$
3,521

 
$
1,772

 
$
4

Percentage of total loan receivables
2.2
%
 
2.3
%
 
4.5
%
 
2.3
%
 
—
%

39


At December 31, 2017 ($ in millions)
30-89 days delinquent

 
90 or more days delinquent

 
Total past due

 
90 or more days delinquent and accruing

 
Total non-accruing

 
 
 
 
 
 
 
 
 
 
Credit cards
$
1,906

 
$
1,849

 
$
3,755

 
$
1,849

 
$
—

Consumer installment loans
25

 
5

 
30

 
—

 
5

Commercial credit products
31

 
15

 
46

 
15

 
—

Total delinquent loans
$
1,962

 
$
1,869

 
$
3,831

 
$
1,864

 
$
5

Percentage of total loan receivables
2.4
%
 
2.3
%
 
4.7
%
 
2.3
%
 
—
%
Impaired Loans and Troubled Debt Restructurings
Most of our non-accrual loan receivables are smaller balance loans evaluated collectively, by portfolio, for impairment and therefore are outside the scope of the disclosure requirements for impaired loans. Accordingly, impaired loans represent restructured smaller balance homogeneous loans meeting the definition of a Troubled Debt Restructuring (“TDR”). We use certain loan modification programs for borrowers experiencing financial difficulties. These loan modification programs include interest rate reductions and payment deferrals in excess of three months, which were not part of the terms of the original contract.
We have both internal and external loan modification programs. We use long-term modification programs for borrowers experiencing financial difficulty as a loss mitigation strategy to improve long-term collectability of the loans that are classified as TDRs. The long-term program involves changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The long-term program does not normally provide for the forgiveness of unpaid principal but may allow for the reversal of certain unpaid interest or fee assessments. We also make loan modifications for customers who request financial assistance through external sources, such as consumer credit counseling agency programs. These loans 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 following table provides information on loans that entered a loan modification program during the periods presented:
 
Three months ended March 31,
($ in millions)
2018
 
2017
Credit cards
$
221

 
$
172

Consumer installment loans
—

 
—

Commercial credit products
1

 
1

Total
$
222

 
$
173

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, discounted at the original effective interest rate of the loan. Interest income from loans accounted for as TDRs is accounted for in the same manner as other accruing loans.
The following table provides information about loans classified as TDRs and specific reserves. We do not evaluate credit card loans for impairment on an individual basis but instead estimate an allowance for loan losses on a collective basis. As a result, there are no impaired loans for which there is no allowance.
At March 31, 2018 ($ in millions)
Total recorded
investment

 
Related allowance

 
Net recorded investment

 
Unpaid principal balance

Credit cards
$
1,074

 
$
(466
)
 
$
608

 
$
960

Consumer installment loans
—

 
—

 
—

 
—

Commercial credit products
5

 
(3
)
 
2

 
5

Total
$
1,079

 
$
(469
)
 
$
610

 
$
965


40


At December 31, 2017 ($ in millions)
Total recorded
investment

 
Related allowance

 
Net recorded investment

 
Unpaid principal balance

Credit cards
$
1,038

 
$
(444
)
 
$
594

 
$
925

Consumer installment loans
—

 
—

 
—

 
—

Commercial credit products
5

 
(2
)
 
3

 
5

Total
$
1,043

 
$
(446
)
 
$
597

 
$
930

Financial Effects of TDRs
As part of our loan modifications for borrowers experiencing financial difficulty, we may provide multiple concessions to minimize our economic loss and improve long-term loan performance and collectability. The following table presents the types and financial effects of loans modified and accounted for as TDRs during the periods presented:
Three months ended March 31,
2018
 
2017
($ in millions)
Interest income recognized during period when loans were impaired

Interest income that would have been recorded with original terms

Average recorded investment

 
Interest income recognized during period when loans were impaired

Interest income that would have been recorded with original terms

Average recorded investment

Credit cards
$
12

$
62

$
1,056

 
$
12

$
51

$
878

Consumer installment loans
—

—

—

 
—

—

—

Commercial credit products
—

—

5

 
—

—

6

Total
$
12

$
62

$
1,061

 
$
12

$
51

$
884

 
 
 
 
 
 
 
 
Payment Defaults
The following table presents the type, number and amount of loans accounted for as TDRs that enrolled in a modification plan within the previous 12 months from the applicable balance sheet date and experienced a payment default during the periods presented. A customer defaults from a modification program after two consecutive missed payments.
Three months ended March 31,
2018
 
2017
($ in millions)
Accounts defaulted

 
Loans defaulted

 
Accounts defaulted

 
Loans defaulted

Credit cards
23,701

 
$
53

 
19,755

 
$
40

Consumer installment loans
—

 
—

 
—

 
—

Commercial credit products
68

 
1

 
32

 
—

Total
23,769

 
$
54

 
19,787

 
$
40

 
 
 
 
 
 
 
 

41


Credit Quality Indicators
Our loan receivables portfolio includes both secured and unsecured loans. Secured loan receivables are largely comprised of consumer installment loans secured by equipment. Unsecured loan receivables are largely comprised of our open-ended consumer and commercial revolving credit card loans. As part of our credit risk management activities, on an ongoing basis, we assess overall credit quality by reviewing information related to the performance of a customer’s account with us, as well as information from credit bureaus, such as a Fair Isaac Corporation (“FICO”) or other credit scores, relating to the customer’s broader credit performance. FICO scores are generally obtained at origination of the account and are refreshed, at a minimum quarterly, but could be as often as weekly, to assist in predicting customer behavior. We categorize these credit scores into the following three credit score categories: (i) 661 or higher, which are considered the strongest credits; (ii) 601 to 660, considered moderate credit risk; and (iii) 600 or less, which are considered weaker credits. There are certain customer accounts for which a FICO score is not available where we use alternative sources to assess their credit and predict behavior. The following table provides the most recent FICO scores available for our customers at March 31, 2018 and December 31, 2017, respectively, as a percentage of each class of loan receivable. The table below excludes 0.8%, 0.6% and 0.6% of our total loan receivables balance at March 31, 2018, December 31, 2017 and March 31, 2017, respectively, which represents those customer accounts for which a FICO score is not available.
 
March 31, 2018
 
December 31, 2017
 
March 31, 2017
 
661 or

 
601 to

 
600 or

 
661 or

 
601 to

 
600 or

 
661 or

 
601 to

 
600 or

 
higher

 
660

 
less

 
higher

 
660

 
less

 
higher

 
660

 
less

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit cards
73
%
 
19
%
 
8
%
 
73
%
 
19
%
 
8
%
 
71
%
 
21
%
 
8
%
Consumer installment loans
79
%
 
15
%
 
6
%
 
79
%
 
15
%
 
6
%
 
78
%
 
16
%
 
6
%
Commercial credit products
88
%
 
7
%
 
5
%
 
88
%
 
7
%
 
5
%
 
86
%
 
9
%
 
5
%
Unfunded Lending Commitments
We manage the potential risk in credit commitments by limiting the total amount of credit, both by individual customer and in total, by monitoring the size and maturity of our portfolios and by applying the same credit standards for all of our credit products. Unused credit card lines available to our customers totaled approximately $373 billion and $370 billion at March 31, 2018 and December 31, 2017, respectively. While these amounts represented the total available unused credit card lines, we have not experienced and do not anticipate that all of our customers will access their entire available line at any given point in time.
Interest Income by Product
The following table provides additional information about our interest and fees on loans, including merchant discounts, from our loan receivables, including held for sale:
 
Three months ended March 31,
($ in millions)
2018
 
2017
Credit cards
$
4,099

 
$
3,811

Consumer installment loans
36

 
32

Commercial credit products
36

 
34

Other
1

 
—

Total
$
4,172

 
$
3,877


42


NOTE 5.    VARIABLE INTEREST ENTITIES
We use VIEs to securitize loan receivables and arrange asset-backed financing in the ordinary course of business. Investors in these entities only have recourse to the assets owned by the entity and not to our general credit. We do not have implicit support arrangements with any VIE and we did not provide non-contractual support for previously transferred loan receivables to any VIE in the three months ended March 31, 2018 and 2017. Our VIEs are able to accept new loan receivables and arrange new asset-backed financings, consistent with the requirements and limitations on such activities placed on the VIE by existing investors. Once an account has been designated to a VIE, the contractual arrangements we have require all existing and future loan receivables originated under such account to be transferred to the VIE. The amount of loan receivables held by our VIEs in excess of the minimum amount required under the asset-backed financing arrangements with investors may be removed by us under random removal of accounts provisions. All loan receivables held by a VIE are subject to claims of third-party investors.
In evaluating whether we have the power to direct the activities of a VIE that most significantly impact its economic performance, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.
In determining whether we have the right to receive benefits or the obligation to absorb losses that could potentially be significant to a VIE, we evaluate all of our economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity’s design, including: the entity’s capital structure, contractual rights to earnings or losses, subordination of our interests relative to those of other investors, as well as any other contractual arrangements that might exist that could have the potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of our economic interests is a matter that requires the exercise of professional judgment.
We consolidate VIEs where we have the power to direct the activities that significantly affect the VIEs' economic performance, typically because of our role as either servicer or administrator for the VIEs. The power to direct exists because of our role in the design and conduct of the servicing of the VIEs’ assets as well as directing certain affairs of the VIEs, including determining whether and on what terms debt of the VIEs will be issued.
The loan receivables in these entities have risks and characteristics similar to our other financing receivables and were underwritten to the same standard. Accordingly, the performance of these assets has been similar to our other comparable loan receivables, and the blended performance of the pools of receivables in these entities reflects the eligibility criteria that we apply to determine which receivables are selected for transfer. Contractually, the cash flows from these financing receivables must first be used to pay third-party debt holders, as well as other expenses of the entity. Excess cash flows, if any, are available to us. The creditors of these entities have no claim on our other assets.

43


The table below summarizes the assets and liabilities of our consolidated securitization VIEs described above.
($ in millions)
March 31, 2018
 
December 31, 2017
Assets
 
 
 
Loan receivables, net(a)
$
23,911

 
$
24,990

Other assets(b)
1,056

 
62

Total
$
24,967

 
$
25,052

 
 
 
 
Liabilities
 
 
 
Borrowings
$
12,214

 
$
12,497

Other liabilities
30

 
30

Total
$
12,244

 
$
12,527

_______________________
(a)
Includes $1.5 billion and $1.4 billion of related allowance for loan losses resulting in gross restricted loans of $25.4 billion and $26.4 billion at March 31, 2018 and December 31, 2017, respectively.
(b)
Includes $1.0 billion and $55 million of segregated funds held by the VIEs at March 31, 2018 and December 31, 2017, respectively, which are classified as restricted cash and equivalents and included as a component of other assets in our Condensed Consolidated Statements of Financial Position.
The balances presented above are net of intercompany balances and transactions that are eliminated in our condensed consolidated financial statements.
We provide servicing for all of our consolidated VIEs. Collections are required to be placed into segregated accounts owned by each VIE in amounts that meet contractually specified minimum levels. These segregated funds are invested in cash and cash equivalents and are restricted as to their use, principally to pay maturing principal and interest on debt and the related servicing fees. Collections above these minimum levels are remitted to us on a daily basis.
Income (principally, interest and fees on loans) earned by our consolidated VIEs was $1.2 billion and $1.0 billion for the three months ended March 31, 2018 and 2017, respectively. Related expenses consisted primarily of provision for loan losses of $316 million and $298 million for the three months ended March 31, 2018 and 2017, respectively, and interest expense of $74 million and $65 million for the three months ended March 31, 2018 and 2017, respectively.
NOTE 6.    INTANGIBLE ASSETS
 
 
March 31, 2018
 
December 31, 2017
($ in millions)
 
Gross carrying amount

 
Accumulated amortization

 
Net

 
Gross carrying amount

 
Accumulated amortization

 
Net

Customer-related
 
$
1,237

 
$
(696
)
 
$
541

 
$
1,242

 
$
(679
)
 
$
563

Capitalized software
 
444

 
(205
)
 
239

 
368

 
(182
)
 
186

Total
 
$
1,681

 
$
(901
)
 
$
780

 
$
1,610

 
$
(861
)
 
$
749

During the three months ended March 31, 2018, we recorded additions to intangible assets subject to amortization of $89 million, primarily related to capitalized software expenditures, as well as customer-related intangible assets.
Customer-related intangible assets primarily relate to retail partner contract acquisitions and extensions, as well as purchased credit card relationships. During the three months ended March 31, 2018 and 2017, we recorded additions to customer-related intangible assets subject to amortization of $12 million and $147 million, respectively, primarily related to payments made to acquire and extend certain retail partner relationships. These additions had a weighted average amortizable life of 5 years and 11 years for the three months ended March 31, 2018 and 2017, respectively.

44


Amortization expense related to retail partner contracts was $29 million and $27 million for the three months ended March 31, 2018 and 2017, respectively, and is included as a component of marketing and business development expense in our Condensed Consolidated Statements of Earnings. All other amortization expense was $27 million and $18 million for the three months ended March 31, 2018 and 2017, respectively, and is included as a component of other expense in our Condensed Consolidated Statements of Earnings.
NOTE 7.    DEPOSITS
 
March 31, 2018
 
December 31, 2017
($ in millions)
Amount

 
Average rate(a)

 
Amount

 
Average rate(a)

 
 
 
 
 
 
 
 
Interest-bearing deposits
$
56,285

 
1.8
%
 
$
56,276

 
1.6
%
Non-interest-bearing deposits
285

 
—

 
212

 
—

Total deposits
$
56,570

 
 
 
$
56,488

 
 
____________________
(a)
Based on interest expense for the three months ended March 31, 2018 and the year ended December 31, 2017 and average deposits balances.
At March 31, 2018 and December 31, 2017, interest-bearing deposits included $17.4 billion and $16.2 billion of certificates of deposit of $100,000 or more, respectively. Of the total certificates of deposit of $100,000 or more, $5.8 billion and $5.3 billion were certificates of deposit of $250,000 or more at March 31, 2018 and December 31, 2017, respectively.
At March 31, 2018, our interest-bearing time deposits maturing for the remainder of 2018 and over the next four years and thereafter were as follows:
($ in millions)
2018

 
2019

 
2020

 
2021

 
2022

 
Thereafter

Deposits
$
12,239

 
$
12,209

 
$
3,554

 
$
2,334

 
$
2,442

 
$
1,995

The above maturity table excludes $18.4 billion of demand deposits with no defined maturity, of which $16.9 billion are savings accounts. In addition, at March 31, 2018, we had $3.1 billion of broker network deposit sweeps procured through a program arranger who channels brokerage account deposits to us that are also excluded from the above maturity table. Unless extended, the contracts associated with these broker network deposit sweeps will terminate between 2019 and 2021.

45


NOTE 8.    BORROWINGS
 
March 31, 2018
 
December 31, 2017
($ in millions)
Maturity date
 
Interest Rate
 
Weighted average interest rate
 
Outstanding Amount(a)
 
Outstanding Amount(a)
 
 
 
 
 
 
 
 
 
 
Borrowings of consolidated securitization entities:
 
 
 
 
 
 
 
 
 
Fixed securitized borrowings
2018 - 2022
 
1.58% - 3.36%

 
2.16
%
 
$
8,064

 
$
8,347

Floating securitized borrowings
2019 - 2020
 
1.97% - 2.82%

 
2.33
%
 
4,150

 
4,150

Total borrowings of consolidated securitization entities
 
 
 
 
2.22
%
 
12,214

 
12,497

 
 
 
 
 
 
 
 
 
 
Synchrony Financial senior unsecured notes:
 
 
 
 
 
 
 
 
 
Fixed senior unsecured notes
2019 - 2027
 
2.60% - 4.50%

 
3.59
%
 
7,311

 
7,310

Floating senior unsecured notes
2020
 
3.02
%
 
3.02
%
 
249

 
250

 
 
 
 
 
 
 
 
 
 
Synchrony Bank senior unsecured notes:
 
 
 
 
 
 
 
 
 
Fixed senior unsecured notes
2022
 
3.00
%
 
3.00
%
 
743

 
742

Floating senior unsecured notes
2020
 
2.93
%
 
2.93
%
 
498

 
—

Total senior unsecured notes
 
 
 
 
3.48
%
 
8,801

 
8,302

 
 
 
 
 
 
 
 
 
 
Total borrowings
 
 
 
 
 
 
$
21,015

 
$
20,799

___________________
(a)
The amounts presented above for outstanding borrowings include unamortized debt premiums, discounts and issuance cost.
Debt Maturities
The following table summarizes the maturities of the principal amount of our borrowings of consolidated securitization entities and senior unsecured notes for the remainder of 2018 and over the next four years and thereafter:
($ in millions)
2018

 
2019

 
2020

 
2021

 
2022

 
Thereafter

Borrowings
$
1,106

 
$
6,027

 
$
6,483

 
$
2,075

 
$
1,634

 
$
3,750

Third-Party Debt
On January 2, 2018, the Bank issued a total of $500 million principal amount of three-month LIBOR plus 0.625% senior unsecured notes due 2020.
 
 
 
 
 
 
Credit Facilities
As additional sources of liquidity, we have undrawn committed capacity under credit facilities, primarily related to our securitization programs.
At March 31, 2018, we had an aggregate of $5.5 billion of undrawn committed capacity under our securitization financings, subject to customary borrowing conditions, from private lenders under our securitization programs, and an aggregate of $0.5 billion of undrawn committed capacity under our unsecured revolving credit facility with private lenders.

46


NOTE 9.    FAIR VALUE MEASUREMENTS
For a description of how we estimate fair value, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies in our 2017 annual consolidated financial statements in our 2017 Form 10-K.
The following tables present our assets and liabilities measured at fair value on a recurring basis.
Recurring Fair Value Measurements
The following tables present our assets measured at fair value on a recurring basis.
At March 31, 2018 ($ in millions)
Level 1

 
Level 2

 
Level 3

 
Total

 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Debt securities
 
 
 
 
 
 
 
U.S. Government and Federal Agency
$
—

 
$
3,352

 
$
—

 
$
3,352

State and municipal
—

 
—

 
42

 
42

Residential mortgage-backed
—

 
1,194

 
—

 
1,194

Asset-backed
—

 
1,669

 
—

 
1,669

U.S. corporate debt
—

 
—

 
2

 
2

Other assets(a)
15

 
—

 
7

 
22

Total
$
15

 
$
6,215

 
$
51

 
$
6,281

 
 
 
 
 
 
 
 
At December 31, 2017 ($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Debt securities
 
 
 
 
 
 
 
U.S. Government and Federal Agency
$
—

 
$
2,416

 
$
—

 
$
2,416

State and municipal
—

 
—

 
44

 
44

Residential mortgage-backed
—

 
1,231

 
—

 
1,231

Asset-backed
—

 
780

 
—

 
780

U.S. corporate debt
—

 
—

 
2

 
2

Other assets(a)
15

 
—

 
—

 
15

Total
$
15

 
$
4,427

 
$
46

 
$
4,488

_______________________
(a)
Other assets primarily relate to equity investments measured at fair value.
For the three months ended March 31, 2018, there were no securities transferred between Level 1 and Level 2 or between Level 2 and Level 3. At March 31, 2018 and December 31, 2017, we did not have any significant liabilities measured at fair value on a recurring basis.
Our Level 3 recurring fair value measurements primarily relate to state and municipal debt instruments which are valued using non-binding broker quotes or other third-party sources. For a description of our process to evaluate third-party pricing servicers, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies in our 2017 annual consolidated financial statements in our 2017 Form 10-K. Our state and municipal debt securities are classified as available-for-sale with changes in fair value included in accumulated other comprehensive income.
The changes in our Level 3 assets that are measured on a recurring basis for the three months ended March 31, 2018 and 2017 were not material.


47


Financial Assets and Financial Liabilities Carried at Other than Fair Value
 
Carrying

 
Corresponding fair value amount
At March 31, 2018 ($ in millions)
value

 
Total

 
Level 1

 
Level 2

 
Level 3

Financial Assets
 
 
 
 
 
 
 
 
 
Financial assets for which carrying values equal or approximate fair value:
 
 
 
 
 
 
 
 
 
Cash and equivalents(a)
$
13,044

 
$
13,044

 
$
13,044

 
$
—

 
$
—

Other assets(a)(b)
$
1,130

 
$
1,130

 
$
1,130

 
$
—

 
$
—

Financial assets carried at other than fair value:
 
 
 
 
 
 
 
 
 
Loan receivables, net(c)
$
72,115

 
$
81,169

 
$
—

 
$
—

 
$
81,169

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
Financial liabilities carried at other than fair value:
 
 
 
 
 
 
 
 
 
Deposits
$
56,570

 
$
56,662

 
$
—

 
$
56,662

 
$
—

Borrowings of consolidated securitization entities
$
12,214

 
$
12,137

 
$
—

 
$
7,986

 
$
4,151

Senior unsecured notes
$
8,801

 
$
8,745

 
$
—

 
$
8,745

 
$
—

 
 
 
 
 
 
 
 
 
 
 
Carrying

 
Corresponding fair value amount
At December 31, 2017 ($ in millions)
value

 
Total

 
Level 1

 
Level 2

 
Level 3

Financial Assets
 
 
 
 
 
 
 
 
 
Financial assets for which carrying values equal or approximate fair value:
 
 
 
 
 
 
 
 
 
Cash and equivalents(a)
$
11,602

 
$
11,602

 
$
11,602

 
$
—

 
$
—

Other assets(a)(b)
$
215

 
$
215

 
$
215

 
$
—

 
$
—

Financial assets carried at other than fair value:
 
 
 
 
 
 
 
 
 
Loan receivables, net(c)
$
76,373

 
$
85,871

 
$
—

 
$
—

 
$
85,871

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
Financial liabilities carried at other than fair value:
 
 
 
 
 
 
 
 
 
Deposits
$
56,488

 
$
56,754

 
$
—

 
$
56,754

 
$
—

Borrowings of consolidated securitization entities
$
12,497

 
$
12,475

 
$
—

 
$
8,323

 
$
4,152

Senior unsecured notes
$
8,302

 
$
8,471

 
$
—

 
$
8,471

 
$
—

_______________________
(a)
For cash and equivalents and restricted cash and equivalents, carrying value approximates fair value due to the liquid nature and short maturity of these instruments.
(b)
This balance relates to restricted cash and equivalents, which is included in other assets.
(c)
Under certain retail partner program agreements, the expected sales proceeds related to the sale of their credit card portfolio may be limited to the amounts owed by our customers, which may be less than the fair value indicated above.

48


NOTE 10.    REGULATORY AND CAPITAL ADEQUACY
As a savings and loan holding company and a financial holding company, we are subject to regulation, supervision and examination by the Federal Reserve Board and subject to the capital requirements as prescribed by Basel III capital rules and the requirements of the Dodd-Frank Act. The Bank is a federally chartered savings association. As such, the Bank is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency of the U.S. Treasury (the “OCC”), which is its primary regulator, and by the Consumer Financial Protection Bureau (“CFPB”). In addition, the Bank, as an insured depository institution, is supervised by the Federal Deposit Insurance Corporation.
Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a material adverse effect on our consolidated financial statements. Under capital adequacy guidelines, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.
Quantitative measures established by regulation to ensure capital adequacy require us and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined).
For Synchrony Financial to be a well-capitalized savings and loan holding company, the Bank must be well-capitalized and Synchrony Financial must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal Reserve Board to meet and maintain a specific capital level for any capital measure.
At March 31, 2018 and December 31, 2017, Synchrony Financial met all applicable requirements to be deemed well-capitalized pursuant to Federal Reserve Board regulations. At March 31, 2018 and December 31, 2017, the Bank also met all applicable requirements to be deemed well-capitalized pursuant to OCC regulations and for purposes of the Federal Deposit Insurance Act. There are no conditions or events subsequent to March 31, 2018 that management believes have changed the Company's or the Bank’s capital category.
The actual capital amounts, ratios and the applicable required minimums of the Company and the Bank are as follows:
Synchrony Financial
At March 31, 2018 ($ in millions)
Actual
 
Minimum for capital
adequacy purposes
 
Amount
 
Ratio(a)

 
Amount

 
Ratio(b)

 
 
 
 
 
 
 
 
Total risk-based capital
$
13,878

 
18.1
%
 
$
6,121

 
8.0
%
Tier 1 risk-based capital
$
12,863

 
16.8
%
 
$
4,591

 
6.0
%
Tier 1 leverage
$
12,863

 
13.7
%
 
$
3,766

 
4.0
%
Common equity Tier 1 Capital
$
12,863

 
16.8
%
 
$
3,443

 
4.5
%
At December 31, 2017 ($ in millions)
Actual
 
Minimum for capital
adequacy purposes
 
Amount
 
Ratio(a)

 
Amount

 
Ratio(b)

 
 
 
 
 
 
 
 
Total risk-based capital
$
13,954

 
17.3
%
 
$
6,454

 
8.0
%
Tier 1 risk-based capital
$
12,890

 
16.0
%
 
$
4,840

 
6.0
%
Tier 1 leverage
$
12,890

 
13.8
%
 
$
3,724

 
4.0
%
Common equity Tier 1 Capital
$
12,890

 
16.0
%
 
$
3,630

 
4.5
%

49


Synchrony Bank
At March 31, 2018 ($ in millions)
Actual
 
Minimum for capital
adequacy purposes
 
Minimum to be well-capitalized under prompt corrective action provisions
 
Amount
 
Ratio(a)
 
Amount

 
Ratio(b)

 
Amount

 
Ratio

 
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital
$
11,054

 
17.4
%
 
$
5,091

 
8.0
%
 
$
6,364

 
10.0
%
Tier 1 risk-based capital
$
10,205

 
16.0
%
 
$
3,818

 
6.0
%
 
$
5,091

 
8.0
%
Tier 1 leverage
$
10,205

 
13.1
%
 
$
3,127

 
4.0
%
 
$
3,909

 
5.0
%
Common equity Tier I capital
$
10,205

 
16.0
%
 
$
2,864

 
4.5
%
 
$
4,136

 
6.5
%
At December 31, 2017 ($ in millions)
Actual
 
Minimum for capital
adequacy purposes
 
Minimum to be well-capitalized under prompt corrective action provisions
 
Amount
 
Ratio(a)
 
Amount
 
Ratio(b)
 
Amount
 
Ratio
 
 
 
 
 
 
 
 
 
 
 
 
Total risk-based capital
$
10,842

 
16.2
%
 
$
5,340

 
8.0
%
 
$
6,675

 
10.0
%
Tier 1 risk-based capital
$
9,958

 
14.9
%
 
$
4,005

 
6.0
%
 
$
5,340

 
8.0
%
Tier 1 leverage
$
9,958

 
12.9
%
 
$
3,083

 
4.0
%
 
$
3,854

 
5.0
%
Common equity Tier I capital
$
9,958

 
14.9
%
 
$
3,004

 
4.5
%
 
$
4,339

 
6.5
%
_______________________
(a)
Capital ratios are calculated based on the Basel III Standardized Approach rules which, at December 31, 2017, also included applicable transition provisions.
(b)
At March 31, 2018 and at December 31, 2017, Synchrony Financial and the Bank also must maintain a capital conservation buffer of common equity Tier 1 capital in excess of minimum risk-based capital ratios by at least 1.875 percentage points and 1.25 percent percentage points, respectively, to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees.
The Bank may pay dividends on its stock, with consent or non-objection from the OCC and the Federal Reserve Board, among other things, if its regulatory capital would not thereby be reduced below the applicable regulatory capital requirements.
NOTE 11.    EARNINGS PER SHARE
Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the assumed conversion of all dilutive securities.
The following table presents the calculation of basic and diluted earnings per share:
 
Three months ended March 31,
(in millions, except per share data)
2018
 
2017
 
 
 
 
Net earnings
$
640

 
$
499

 
 
 
 
Weighted average common shares outstanding, basic
763.7

 
813.1

Effect of dilutive securities
6.6

 
4.0

Weighted average common shares outstanding, dilutive
770.3

 
817.1

 


 
 
Earnings per basic common share
$
0.84

 
$
0.61

Earnings per diluted common share
$
0.83

 
$
0.61


50


We have issued certain stock based awards under the Synchrony Financial 2014 Long-Term Incentive Plan. A total of 1 million shares related to these awards, were considered anti-dilutive and therefore were excluded from the computation of diluted earnings per share for both the three months ended March 31, 2018 and 2017, respectively.
NOTE 12.    INCOME TAXES
We file consolidated U.S. federal and state income tax returns separate and apart from GE. For periods up to and including the date of Separation, we were included in the consolidated U.S. federal and state income tax returns of GE, where applicable, but also filed certain separate state and foreign income tax returns. The tax provision is presented on a separate company basis as if we were a separate filer for tax purposes for all periods. The effects of tax adjustments and settlements from taxing authorities are presented in our condensed consolidated financial statements in the period in which they occur. Our current obligations for taxes are settled with the relevant tax authority, or GE, as applicable, on an estimated basis and adjusted in later periods as appropriate and are reflected in our consolidated financial statements in the periods in which those settlements occur. We recognize the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. In calculating the provision for interim period income taxes, in accordance with Accounting Standards Codification 740, Income Taxes, we estimate the effective tax rate expected to be applicable for the full fiscal year and apply that estimated annual effective tax rate to year-to-date ordinary income. Adjustments to tax expense are made for year-to-date discrete items. The effective tax rate for the three months ended March 31, 2018 decreased to 24.4%, compared to 36.2% in the same period in the prior year, primarily due to the reduction in the corporate tax rate from 35% to 21% included in the Tax Act. See “Management's Discussion and Analysis—Critical Accounting Estimates” in our 2017 Form 10-K, for a discussion of the significant judgments and estimates related to income taxes.
For periods prior to Separation, we are under continuous examination by the Internal Revenue Service (“IRS”) and the tax authorities of various states as part of their audit of GE’s tax returns. The IRS is currently auditing GE's consolidated U.S. income tax returns for 2012 to 2015. We are under examination in various states going back to 2008 as part of their audit of GE’s tax returns. We are not currently under audit with respect to any post-Separation periods. We believe that there are no issues or claims that are likely to significantly impact our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties that could result from such examinations.
Unrecognized Tax Benefits
($ in millions)
March 31, 2018
 
December 31, 2017
Unrecognized tax benefits, excluding related interest expense and penalties(a)
$
218

 
$
255

Portion that, if recognized, would reduce tax expense and effective tax rate(b)
179

 
173

____________________
(a)
Interest and penalties related to unrecognized tax benefits were not material for all periods presented.
(b)
Includes gross state and local unrecognized tax benefits net of the effects of associated U.S. federal income taxes. Excludes amounts attributable to any related valuation allowances resulting from associated increases in deferred tax assets.
We compute our unrecognized tax benefits on a separate return basis. For unrecognized tax benefits associated with periods prior to 2014, we will settle our liabilities, as required, in accordance with the Tax Sharing and Separation Agreement with GE, which we entered into in connection with our initial public offering in 2014. The amount of unrecognized tax benefits that is reasonably possible to be resolved in the next twelve months is expected to be $51 million, of which $40 million, if recognized, would reduce the Company's tax expense and effective tax rate.

51


NOTE 13.    LEGAL PROCEEDINGS AND REGULATORY MATTERS
In the normal course of business, from time to time, we have been named as a defendant in various legal proceedings, including arbitrations, class actions and other litigation, arising in connection with our business activities. Certain of the legal actions include claims for substantial compensatory and/or punitive damages, or claims for indeterminate amounts of damages. We are also involved, from time to time, in reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding our business (collectively, “regulatory matters”), which could subject us to significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses, diminished income and damage to our reputation. We contest liability and/or the amount of damages as appropriate in each pending matter. In accordance with applicable accounting guidance, we establish an accrued liability for legal and regulatory matters when those matters present loss contingencies which are both probable and reasonably estimable.
Legal proceedings and regulatory matters are subject to many uncertain factors that generally cannot be predicted with assurance, and we may be exposed to losses in excess of any amounts accrued.
For some matters, we are able to determine that an estimated loss, while not probable, is reasonably possible. For other matters, including those that have not yet progressed through discovery and/or where important factual information and legal issues are unresolved, we are unable to make such an estimate. We currently estimate that the reasonably possible losses for legal proceedings and regulatory matters, whether in excess of a related accrued liability or where there is no accrued liability, and for which we are able to estimate a possible loss, are immaterial. This represents management’s estimate of possible loss with respect to these matters and is based on currently available information. This estimate of possible loss does not represent our maximum loss exposure. The legal proceedings and regulatory matters underlying the estimate will change from time to time and actual results may vary significantly from current estimates.
Our estimate of reasonably possible losses involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to be resolved issues, the breadth of the claims (often spanning multiple years), unspecified damages and/or the novelty of the legal issues presented. Based on our current knowledge, we do not believe that we are a party to any pending legal proceeding or regulatory matters that would have a material adverse effect on our condensed consolidated financial condition or liquidity. However, in light of the uncertainties involved in such matters, the ultimate outcome of a particular matter could be material to our operating results for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of our earnings for that period, and could adversely affect our business and reputation.
Below is a description of certain of our regulatory matters and legal proceedings.

52


Regulatory Matters
On October 30, 2014, the United States Trustee, which is part of the Department of Justice, filed an application in In re Nyree Belton, a Chapter 7 bankruptcy case pending in the U.S. Bankruptcy Court for the Southern District of New York for orders authorizing discovery of the Bank pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure, related to an investigation of the Bank’s credit reporting. The discovery, which is ongoing, concerns allegations made in Belton et al. v. GE Capital Consumer Lending, a putative class action adversary proceeding pending in the same Bankruptcy Court. In the Belton adversary proceeding, which was filed on April 30, 2014, plaintiff alleges that the Bank violates the discharge injunction under Section 524(a)(2) of the Bankruptcy Code by attempting to collect discharged debts and by failing to update and correct credit information to credit reporting agencies to show that such debts are no longer due and owing because they have been discharged in bankruptcy. Plaintiff seeks declaratory judgment, injunctive relief and an unspecified amount of damages. On December 15, 2014, the Bankruptcy Court entered an order staying the adversary proceeding pending an appeal to the District Court of the Bankruptcy Court’s order denying the Bank’s motion to compel arbitration. On October 14, 2015, the District Court reversed the Bankruptcy Court and on November 4, 2015, the Bankruptcy Court granted the Bank's motion to compel arbitration.
On October 15, 2015, the Bank received a Civil Investigative Demand from the CFPB seeking information related to the Bank’s credit bureau reporting with respect to sold accounts. The information sought by the CFPB generally relates to the allegations made in Belton et al. v. GE Capital Consumer Lending. On May 9, 2016, the Bank received a NORA (Notice of Opportunity to Respond and Advise) letter from the CFPB indicating that the CFPB Office of Enforcement is considering whether to recommend that the CFPB take legal action relating to this matter.
On May 9, 2017, the Bank received a Civil Investigative Demand from the CFPB seeking information related to the marketing and servicing of deferred interest promotions.
Other Matters
The Bank or the Company is, or has been, defending a number of putative class actions alleging claims under the federal Telephone Consumer Protection Act (“TCPA”) as a result of phone calls made by the Bank. The complaints generally have alleged that the Bank or the Company placed calls to consumers by an automated telephone dialing system or using a pre-recorded message or automated voice without their consent and seek up to $1,500 for each violation, without specifying an aggregate amount. Campbell et al. v. Synchrony Bank was filed on January 25, 2017 in the U.S. District Court for the Northern District of New York. The original complaint named only J.C. Penney Company, Inc. and J.C. Penney Corporation, Inc. as the defendants but was amended on April 7, 2017 to replace those defendants with the Bank. Neal et al. v. Wal-Mart Stores, Inc. and Synchrony Bank, for which the Bank is indemnifying Wal-Mart, was filed on January 17, 2017 in the U.S. District Court for the Western District of North Carolina. The original complaint named only Wal-Mart Stores, Inc. as a defendant but was amended on March 30, 2017 to add Synchrony Bank as an additional defendant. Mott et al. v. Synchrony Bank was filed on February 2, 2018 in the U.S. District Court for the Middle District of Florida.
In addition to the TCPA class action lawsuits related to phone calls, the Company is a defendant in a putative class action lawsuit alleging claims under the TCPA relating to facsimiles. In Michael W. Kincaid, DDS et al. v. Synchrony Financial, plaintiff alleges that the Company violated the TCPA by sending fax advertisements without consent and without required notices, and seeks up to $1,500 for each violation. The amount of damages sought in the aggregate is unspecified. The original complaint was filed in U.S. District Court for the Northern District of Illinois on January 20, 2016. On August 11, 2016, the Court granted the Company’s motion to dismiss based on the lack of personal jurisdiction. On August 15, 2016, the plaintiff re-filed the case in the Southern District of Ohio.


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ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, correlations or other market factors will result in losses for a position or portfolio. We are exposed to market risk primarily from changes in interest rates.
We borrow money from a variety of depositors and institutions in order to provide loans to our customers. Changes in market interest rates cause our net interest income to increase or decrease, as some of our assets and liabilities carry interest rates that fluctuate with market benchmarks. The interest rate benchmark for our floating rate assets is generally the prime rate, and the interest rate benchmark for our floating rate liabilities is generally either LIBOR or the federal funds rate. The prime rate and the LIBOR or federal funds rate could reset at different times or could diverge, leading to mismatches in the interest rates on our floating rate assets and floating rate liabilities.
As of March 31, 2018, assuming an immediate 100 basis point increase in the interest rates affecting all interest rate sensitive assets and liabilities, we estimate that net interest income over the following 12-month period would increase by approximately $70 million. This estimate projects net interest income over the following 12-month period and takes into consideration future growth and balance sheet composition.
For a more detailed discussion of our exposure to market risk, refer to “Management's Discussion and Analysis—Quantitative and Qualitative Disclosures about Market Risk” in our 2017 Form 10-K.
ITEM 4. CONTROLS AND PROCEDURES
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures, and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of March 31, 2018.

No change in internal control over financial reporting occurred during the quarter ended March 31, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.


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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
For a description of legal proceedings, see Note 13. Legal Proceedings and Regulatory Matters to our condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.
ITEM 1A. RISK FACTORS
There have been no material changes to the risk factors included in our 2017 Form 10-K under the heading “Risk Factors”.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The table below sets forth information regarding purchases of our common stock primarily related to our share repurchase program that were made by us or on our behalf during the three months ended March 31, 2018.
($ in millions, except per share data)
Total Number of Shares Purchased(a)

 
Average Price Paid Per Share(b)

 
Total Number of Shares Purchased as Part of Publicly Announced Programs(c)

 
Maximum Dollar Value of Shares That May Yet Be Purchased Under the Programs(b)

 
 
 
 
 
 
 
 
January 1 - 31, 2018
7,244,799

 
$
39.78

 
7,241,511

 
$
331.9

February 1 - 28, 2018
3,157,902

 
38.64

 
3,154,690

 
210.0

March 1 - 31, 2018
1,957

 
35.20

 
—

 
210.0

Total
10,404,658

 
$
39.44

 
10,396,201

 
$
210.0

 
 
 
 
 
 
 
 
_______________________
(a)
Primarily represents repurchases of shares of common stock under our publicly announced share repurchase programs of up to $1.64 billion of our outstanding shares of common stock through June 30, 2018 (the "2017 Share Repurchase Program"). Also includes 3,288 shares, 3,212 shares and 1,957 shares withheld in January, February and March, respectively, to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock awards or upon the exercise of stock options.
(b)
Amounts exclude commission costs.
(c)
On May 18, 2017, the Board of Directors approved the 2017 Share Repurchase Program.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
None.

ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.

ITEM 5. OTHER INFORMATION
None.

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ITEM 6. EXHIBITS
EXHIBIT INDEX

Exhibit Number
Description
101
The following materials from Synchrony Financial’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Earnings for the three months ended March 31, 2018 and 2017, (ii) Condensed Consolidated Statements of Comprehensive Income for the three months and three months ended March 31, 2018 and 2017, (iii) Condensed Consolidated Statements of Financial Position at March 31, 2018 and December 31, 2017, (iv) Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2018 and 2017, (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2018 and 2017, and (vi) Notes to Condensed Consolidated Financial Statements.
______________________ 
(*)
Pursuant to Item 601(4)(iii) of Regulation S-K, the Company is not required to file any instrument with respect to long-term debt not being registered if the total amount of securities authorized thereunder does not exceed 10 percent of the total assets of the Company and its subsidiaries on a consolidated basis. The Company hereby agrees to furnish a copy of any such instrument to the SEC upon request.


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Signatures

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Synchrony Financial
(Registrant)

April 26, 2018
 
/s/ Brian D. Doubles
Date
 
Brian D. Doubles
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)


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