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, 2019
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)
sflogoa01a19.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 every Interactive Data File required to be submitted 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 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.
Large accelerated filer
ý
Accelerated filer
o
 
 
 
 
Non-accelerated filer
o 
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 22, 2019 was 689,316,399.



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;
•
the “Bank” are to Synchrony Bank (a subsidiary of Synchrony);
•
the “Board of Directors” are to Synchrony's board of directors;
•
“GE” are to General Electric Company and its subsidiaries;
•
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; 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, 2018 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 “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, 2018 (our “2018 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 other legislative and regulatory developments 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 Relating to Our Business” in our 2018 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 2018 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, 2019, we financed $32.5 billion of purchase volume, and had 77.1 million average active accounts, and at March 31, 2019, we had $80.4 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, 2019, we had $64.1 billion in deposits, which represented 75% 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, active accounts and other sales metrics.
Beginning in the first quarter of 2019, our oil and gas retail credit programs, previously reported within our Retail Card sales platform, are now reported within our Payment Solutions sales platform. Payment Solutions now includes a broad range of automotive-related credit programs, comprising of these retail partners, our Synchrony Car Care program network and other automotive partners. We have recast all prior-period reported metrics for our Retail Card and Payment Solutions sales platforms to conform to the current-period presentation.



6


platformpies.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 24 national and regional retailers with which we have ongoing program agreements. The average length of our relationship with these Retail Card partners is 22 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 consumer choice for financing at the point of sale, including primarily private label credit cards, Dual 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, other than for our oil and gas retail partners, 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, veterinary and personal care procedures, services or products. 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, 2019.
 
 
 
Promotional Offer
 
 
Credit Product
Standard Terms Only
 
Deferred Interest
 
Other Promotional
 
Total
Credit cards
62.9
%
 
18.4
%
 
14.8
%
 
96.1
%
Commercial credit products
1.6

 
—

 
—

 
1.6

Consumer installment loans
—

 
—

 
2.3

 
2.3

Other
—

 
—

 
—

 
—

Total
64.5
%
 
18.4
%
 
17.1
%
 
100.0
%
Credit Cards
We typically 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. We offer either Dual Cards or general purpose co-branded credit cards across all of our sales platforms, spanning 21 ongoing credit partners and our CareCredit Dual Card.
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 2018 Form 10-K. For a discussion of how certain trends and conditions impacted the three months ended March 31, 2019, 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 at March 31, 2019 decreased compared to December 31, 2018 in excess of amounts attributable to the reclassification of the Walmart portfolio to loan receivables held for sale. In addition, our allowance for loan losses as a percentage of total loan receivables increased to 7.39% at March 31, 2019, from 6.90% at December 31, 2018. Both of these changes reflect the effects of the seasonal trends. Past due balances declined to $4.0 billion at March 31, 2019 from $4.4 billion at December 31, 2018, 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, 2019 compared to December 31, 2018, 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, 2019
Below are highlights of our performance for the three months ended March 31, 2019 compared to the three months ended March 31, 2018, as applicable, except as otherwise noted.
•
Net earnings increased 73.0% to $1,107 million for the three months ended March 31, 2019, driven by higher net interest income and a decrease in provision for loan losses, partially offset by increases in retailer share arrangements, other expense and provision for income taxes.
•
Loan receivables increased 3.3% to $80,405 million at March 31, 2019 compared to March 31, 2018, primarily driven by the PayPal Credit acquisition, higher purchase volume and average active account growth, partially offset by the reclassification of $8.1 billion of loan receivables associated with the Walmart portfolio to loan receivables held for sale.
•
Net interest income increased 10.0% to $4,226 million for the three months ended March 31, 2019, primarily due to higher average loan receivables growth, partially offset by increases in interest expense reflecting higher benchmark interest rates and growth.
•
Retailer share arrangements increased 32.5% to $954 million for the three months ended March 31, 2019, primarily due to lower reserve build, growth and improved performance of the programs in which we have retailer share arrangements.
•
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased 40 basis points to 4.92% at March 31, 2019 primarily due to the impact of reclassification of the Walmart portfolio to loan receivables held for sale, and the net charge-off rate decreased 8 basis points to 6.06% for the three months ended March 31, 2019.
•
Provision for loan losses decreased by $503 million, or 36.9%, for the three months ended March 31, 2019, substantially due to a $522 million reserve release following the reclassification of the Walmart portfolio to loan receivables held for sale. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) remained relatively flat at 7.39% at March 31, 2019, as compared to 7.37% at March 31, 2018.
•
Other expense increased by $55 million, or 5.6%, for the three months ended March 31, 2019, primarily driven by the PayPal Credit acquisition and business growth.
•
At March 31, 2019, deposits represented 75% of our total funding sources. Total deposits remained relatively flat at $64.1 billion at March 31, 2019, compared to December 31, 2018. Growth in our direct deposits of 4.9% to $51.8 billion, was offset by lower brokered deposits.
•
During the three months ended March 31, 2019, we repurchased $966 million of our outstanding common stock, and declared and paid cash dividends of $0.21 per share, or $150 million.
•
In March 2019, we announced our acquisition of Pets Best and entry into the pet health insurance industry as a managing general agent.
2019 Partner Agreements
•
We expanded our Synchrony Car Care program acceptance network and we also extended our Payment Solutions program agreements with P.C. Richard & Son, Rheem and Suzuki.
•
We expanded our CareCredit network through our new partnership with Simplee.

10


Summary Earnings
The following table sets forth our results of operations for the periods indicated.
 
Three months ended March 31,
($ in millions)
2019
 
2018
Interest income
$
4,786

 
$
4,244

Interest expense
560

 
402

Net interest income
4,226

 
3,842

Retailer share arrangements
(954
)
 
(720
)
Net interest income, after retailer share arrangements
3,272

 
3,122

Provision for loan losses
859

 
1,362

Net interest income, after retailer share arrangements and provision for loan losses
2,413

 
1,760

Other income
92

 
75

Other expense
1,043

 
988

Earnings before provision for income taxes
1,462

 
847

Provision for income taxes
355

 
207

Net earnings
$
1,107

 
$
640


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)
2019
 
2018
Financial Position Data (Average):
 
 
 
Loan receivables, including held for sale
$
89,903

 
$
79,090

Total assets
$
105,299

 
$
95,707

Deposits
$
64,062

 
$
56,656

Borrowings
$
22,299

 
$
21,205

Total equity
$
14,790

 
$
14,276

Selected Performance Metrics:
 
 
 
Purchase volume(1)(2)
$
32,513

 
$
29,626

Retail Card
$
24,660

 
$
22,141

Payment Solutions
$
5,249

 
$
5,064

CareCredit
$
2,604

 
$
2,421

Average active accounts (in thousands)(2)(3)
77,132

 
71,323

Net interest margin(4)
16.08
%
 
16.05
%
Net charge-offs
$
1,344

 
$
1,198

Net charge-offs as a % of average loan receivables, including held for sale
6.06
%
 
6.14
%
Allowance coverage ratio(5)
7.39
%
 
7.37
%
Return on assets(6)
4.3
%
 
2.7
%
Return on equity(7)
30.4
%
 
18.2
%
Equity to assets(8)
14.05
%
 
14.92
%
Other expense as a % of average loan receivables, including held for sale
4.71
%
 
5.07
%
Efficiency ratio(9)
31.0
%
 
30.9
%
Effective income tax rate
24.3
%
 
24.4
%
Selected Period-End Data:
 
 
 
Loan receivables
$
80,405

 
$
77,853

Allowance for loan losses
$
5,942

 
$
5,738

30+ days past due as a % of period-end loan receivables(10)
4.92
%
 
4.52
%
90+ days past due as a % of period-end loan receivables(10)
2.51
%
 
2.28
%
Total active accounts (in thousands)(2)(3)
74,812

 
68,891

______________________
(1)
Purchase volume, or net credit sales, represents the aggregate amount of charges incurred on credit cards or other credit product accounts less returns during the period.
(2)
Includes activity and accounts associated with loan receivables held for sale.
(3)
Active accounts represent credit card or installment loan accounts on which there has been a purchase, payment or outstanding balance in the current month.
(4)
Net interest margin represents net interest income divided by average interest-earning assets.
(5)
Allowance coverage ratio represents allowance for loan losses divided by total period-end loan receivables.
(6)
Return on assets represents net earnings as a percentage of average total assets.
(7)
Return on equity represents net earnings as a percentage of average total equity.
(8)
Equity to assets represents average equity as a percentage of average total assets.
(9)
Efficiency ratio represents (i) other expense, divided by (ii) net interest income, after retailer share arrangements, plus other income.
(10)
Based on customer statement-end balances extrapolated to the respective period-end date.

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.
 
2019
 
2018
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)
$
11,033

 
$
65

 
2.39
%
 
$
12,434

 
$
47

 
1.53
%
Securities available for sale
5,640

 
34

 
2.44
%
 
5,584

 
25

 
1.82
%
Loan receivables(3):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale
86,768

 
4,611

 
21.55
%
 
76,181

 
4,099

 
21.82
%
Consumer installment loans
1,844

 
42

 
9.24
%
 
1,572

 
36

 
9.29
%
Commercial credit products
1,252

 
34

 
11.01
%
 
1,286

 
36

 
11.35
%
Other
39

 
—

 
—
%
 
51

 
1

 
NM

Total loan receivables
89,903

 
4,687

 
21.14
%
 
79,090

 
4,172

 
21.39
%
Total interest-earning assets
106,576

 
4,786

 
18.21
%
 
97,108

 
4,244

 
17.72
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
1,335

 
 
 
 
 
1,197

 
 
 
 
Allowance for loan losses
(6,341
)
 
 
 
 
 
(5,608
)
 
 
 
 
Other assets
3,729

 
 
 
 
 
3,010

 
 
 
 
Total non-interest-earning assets
(1,277
)
 
 
 
 
 
(1,401
)
 
 
 
 
Total assets
$
105,299

 
 
 
 
 
$
95,707

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
63,776

 
$
375

 
2.38
%
 
$
56,356

 
$
249

 
1.79
%
Borrowings of consolidated securitization entities
13,407

 
100

 
3.02
%
 
12,410

 
74

 
2.42
%
Senior unsecured notes
8,892

 
85

 
3.88
%
 
8,795

 
79

 
3.64
%
Total interest-bearing liabilities
86,075

 
560

 
2.64
%
 
77,561

 
402

 
2.10
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
286

 
 
 
 
 
300

 
 
 
 
Other liabilities
4,148

 
 
 
 
 
3,570

 
 
 
 
Total non-interest-bearing liabilities
4,434

 
 
 
 
 
3,870

 
 
 
 
Total liabilities
90,509

 
 
 
 
 
81,431

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
14,790

 
 
 
 
 
14,276

 
 
 
 
Total liabilities and equity
$
105,299

 
 
 
 
 
$
95,707

 
 
 
 
Interest rate spread(4)
 
 
 
 
15.57
%
 
 
 
 
 
15.62
%
Net interest income
 
 
$
4,226

 
 
 
 
 
$
3,842

 
 
Net interest margin(5)
 
 
 
 
16.08
%
 
 
 
 
 
16.05
%
 
 
 
 
 
 
 
 
 
 
 
 
______________________
(1)
Average yields/rates are based on total interest income/expense over average balances.
(2)
Includes average restricted cash balances of $989 million and $771 million for the three months ended March 31, 2019 and 2018, respectively.
(3)
Interest income on loan receivables includes fees on loans of $693 million and $644 million for the three months ended March 31, 2019 and 2018, 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 2018 Form 10-K.
Interest Income
Interest income increased by $542 million, or 12.8%, for the three months ended March 31, 2019, driven primarily by growth in our average loan receivables.
Average interest-earning assets
Three months ended March 31 ($ in millions)
2019
 
%
 
2018
 
%
Loan receivables, including held for sale
$
89,903

 
84.4
%
 
$
79,090

 
81.4
%
Liquidity portfolio and other
16,673

 
15.6
%
 
18,018

 
18.6
%
Total average interest-earning assets
$
106,576

 
100.0
%
 
$
97,108

 
100.0
%
 
 
 
 
 
 
 
 
The increase in average loan receivables of 13.7% for the three months ended March 31, 2019, was driven by the PayPal Credit acquisition, higher purchase volume and average active account growth. Purchase volume and average active accounts increased 9.7% and 8.1%, respectively, including the effects of the PayPal Credit acquisition.
Yield on average interest-earning assets
The yield on average interest-earning assets increased for the three months ended March 31, 2019, primarily due to an increase in the percentage of interest-earning assets attributable to loan receivables, partially offset by a decrease in the yield on our average loan receivables of 25 basis points to 21.14%. This decrease was primarily due to the impact of adding the PayPal Credit program.
Interest Expense
Interest expense increased by $158 million, or 39.3%, for the three months ended March 31, 2019, driven primarily by higher benchmark interest rates and growth. Our cost of funds increased to 2.64% for the three months ended March 31, 2019, compared to 2.10% for the three months ended March 31, 2018.
Average interest-bearing liabilities
Three months ended March 31 ($ in millions)
2019
 
%
 
2018
 
%
Interest-bearing deposit accounts
$
63,776

 
74.1
%
 
$
56,356

 
72.7
%
Borrowings of consolidated securitization entities
13,407

 
15.6
%
 
12,410

 
16.0
%
Third-party debt
8,892

 
10.3
%
 
8,795

 
11.3
%
Total average interest-bearing liabilities
$
86,075

 
100.0
%
 
$
77,561

 
100.0
%
 
 
 
 
 
 
 
 
The increase in average interest-bearing liabilities for the three months ended March 31, 2019 was driven primarily by growth in our direct deposits.
Net Interest Income
Net interest income increased by $384 million, or 10.0%, for the three months ended March 31, 2019, driven primarily by higher average loan receivables, partially offset by increases in interest expense reflecting higher benchmark interest rates and growth.

14


Retailer Share Arrangements
Retailer share arrangements increased by $234 million, or 32.5%, for the three months ended March 31, 2019, primarily due to lower reserve build, growth and improved performance of the programs in which we have retailer share arrangements.
Provision for Loan Losses
Provision for loan losses decreased by $503 million, or 36.9%, for the three months ended March 31, 2019, substantially due to a $522 million reserve release following the reclassification of the Walmart portfolio to loan receivables held for sale on our Condensed Consolidated Statement of Financial Position. Our allowance coverage ratio remained relatively flat at 7.39% at March 31, 2019, as compared to 7.37% at March 31, 2018.
Other Income
 
Three months ended March 31,
($ in millions)
2019
 
2018
Interchange revenue
$
165

 
$
158

Debt cancellation fees
68

 
66

Loyalty programs
(167
)
 
(155
)
Other
26

 
6

Total other income
$
92

 
$
75

Other income increased by $17 million, or 22.7%, for the three months ended March 31, 2019, primarily due to a reduction in certain contingent consideration obligations and higher investment gains in the current quarter. The increase in interchange revenue was fully offset by higher loyalty costs.
Other Expense
 
Three months ended March 31,
($ in millions)
2019
 
2018
Employee costs
$
353

 
$
358

Professional fees
232

 
166

Marketing and business development
123

 
121

Information processing
113

 
104

Other
222

 
239

Total other expense
$
1,043

 
$
988

Other expense increased by $55 million, or 5.6%, for the three months ended March 31, 2019, primarily due to an increase in professional fees. The increase in professional fees was primarily due to interim servicing costs associated with acquired portfolios, including the PayPal Credit portfolio.


15


Provision for Income Taxes
 
Three months ended March 31,
($ in millions)
2019
 
2018
Effective tax rate
24.3
%
 
24.4
%
Provision for income taxes
$
355

 
$
207

The effective tax rate for the three months ended March 31, 2019 decreased slightly compared to the same period in the prior year. 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, 2019, for each of our sales platforms.
Beginning in the first quarter of 2019, our oil and gas retail credit programs, previously reported within our Retail Card sales platform, are now reported within our Payment Solutions sales platform. We have recast all prior-period reported metrics for our Retail Card and Payment Solutions sales platforms to conform to the current-period presentation.
Retail Card
 
Three months ended March 31,
($ in millions)
2019
 
2018
Purchase volume
$
24,660

 
$
22,141

Period-end loan receivables
$
51,572

 
$
51,117

Average loan receivables, including held for sale
$
60,964

 
$
52,251

Average active accounts (in thousands)
58,632

 
53,463

 
 
 
 
Interest and fees on loans
$
3,454

 
$
3,015

Retailer share arrangements
$
(940
)
 
$
(708
)
Other income
$
76

 
$
69

Retail Card interest and fees on loans increased by $439 million, or 14.6%, for the three months ended March 31, 2019. The increase was primarily the result of growth in average loan receivables.
Retailer share arrangements increased by $232 million, or 32.8%, for the three months ended March 31, 2019, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Other income increased by $7 million, or 10.1%, for the three months ended March 31, 2019, primarily as a result of the factors discussed under the heading “Other Income” above.

16


Payment Solutions
 
Three months ended March 31,
($ in millions)
2019
 
2018
Purchase volume
$
5,249

 
$
5,064

Period-end loan receivables
$
19,379

 
$
17,927

Average loan receivables
$
19,497

 
$
18,051

Average active accounts (in thousands)
12,406

 
12,009

 
 
 
 
Interest and fees on loans
$
686

 
$
643

Retailer share arrangements
$
(12
)
 
$
(10
)
Other income
$
1

 
$
(2
)
Payment Solutions interest and fees on loans increased by $43 million, or 6.7%, for the three months ended March 31, 2019. The increase was primarily driven by growth in average loan receivables.
CareCredit
 
Three months ended March 31,
($ in millions)
2019
 
2018
Purchase volume
$
2,604

 
$
2,421

Period-end loan receivables
$
9,454

 
$
8,809

Average loan receivables
$
9,442

 
$
8,788

Average active accounts (in thousands)
6,094

 
5,851

 
 
 
 
Interest and fees on loans
$
547

 
$
514

Retailer share arrangements
$
(2
)
 
$
(2
)
Other income
$
15

 
$
8

CareCredit interest and fees on loans increased by $33 million, or 6.4%, for the three months ended March 31, 2019. The increase was primarily driven by growth in average loan receivables.
Loan Receivables
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our loan receivables portfolio.
Loan receivables are our largest category of assets and represent our primary source of revenue. The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.
($ in millions)
At March 31, 2019
 
(%)
 
At December 31, 2018
 
(%)
Loans
 
 
 
 
 
Credit cards
$
77,251

 
96.1
%
 
$
89,994

 
96.6
%
Consumer installment loans
1,860

 
2.3

 
1,845

 
2.0

Commercial credit products
1,256

 
1.6

 
1,260

 
1.4

Other
38

 
—

 
40

 
—

Total loans
$
80,405

 
100.0
%
 
$
93,139

 
100.0
%
Loan receivables decreased by $12.7 billion, or 13.7%, at March 31, 2019 compared to December 31, 2018, primarily driven by the reclassification of $8.1 billion of loan receivables associated with the Walmart portfolio to loan receivables held for sale and the seasonality of our business.

17


Loan receivables increased by $2.6 billion, or 3.3%, at March 31, 2019 compared to March 31, 2018, primarily driven by the PayPal Credit acquisition, higher purchase volume and average active account growth, partially offset by the reclassification of the Walmart portfolio to loan receivables held for sale.
Our loan receivables portfolio had the following geographic concentration at March 31, 2019.
($ in millions)
 
Loan Receivables
Outstanding
 
% of Total Loan
Receivables
Outstanding
State
 
California
 
$
8,565

 
10.7
%
Texas
 
$
7,982

 
9.9
%
Florida
 
$
6,767

 
8.4
%
New York
 
$
4,614

 
5.7
%
Pennsylvania
 
$
3,331

 
4.1
%
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. Our allowance for loan losses on TDRs is generally measured based on the difference between the recorded loan receivable and the present value of the expected future cash flows.
Interest income from loans accounted for as TDRs is accounted for in the same manner as other accruing loans. We accrue interest on credit card balances until the accounts are charged-off in the period the accounts become 180 days past due. The following table presents the amount of loan receivables that are not accruing interest, loans that are 90 days or more past-due and still accruing interest, and earning TDRs for the periods presented.
($ in millions)
At March 31, 2019
 
At December 31, 2018
Non-accrual loan receivables(1)
$
4

 
$
5

Loans contractually 90 days past-due and still accruing interest
2,004

 
2,116

Earning TDRs(2)
920

 
1,085

Non-accrual, past-due and restructured loan receivables
$
2,928

 
$
3,206

______________________
(1)
Excludes purchase credit impaired (“PCI”) loan receivables.
(2)
At March 31, 2019 and December 31, 2018, balances exclude $144 million and $122 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, 2019 and 2018.

18


 
Three months ended March 31,
($ in millions)
2019
 
2018
Gross amount of interest income that would have been recorded in accordance with the original contractual terms
$
64

 
$
62

Interest income recognized
11

 
12

Total interest income foregone
$
53

 
$
50

Delinquencies
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased to 4.92% at March 31, 2019 from 4.52% at March 31, 2018, and increased from 4.76% at December 31, 2018. These increases were driven by the reclassification of loan receivables related to the Walmart portfolio to loan receivables held for sale. The increase as compared to December 31, 2018 was partially offset by the seasonality of our business.
Net Charge-Offs
Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine are uncollectible, net of recovered amounts. We exclude accrued and unpaid finance charges and fees and third-party fraud losses from charge-offs. Charged-off and recovered finance charges and fees are included in interest and fees on loans while third-party fraud losses are included in other expense. Charge-offs are recorded as a reduction to the allowance for loan losses and subsequent recoveries of previously charged-off amounts are credited to the allowance for loan losses. Costs incurred to recover charged-off loans are recorded as collection expense and included in other expense in our Condensed Consolidated 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,
 
2019
 
2018
Ratio of net charge-offs to average loan receivables, including held for sale
6.06
%
 
6.14
%
Allowance for Loan Losses
The allowance for loan losses totaled $5,942 million at March 31, 2019, compared with $6,427 million at December 31, 2018 and $5,738 million at March 31, 2018, representing our best estimate of probable losses inherent in the portfolio. Our allowance for loan losses as a percentage of total loan receivables increased to 7.39% at March 31, 2019, from 6.90% at December 31, 2018 and remained relatively flat compared to March 31, 2018. The increase from December 31, 2018 was primarily driven by the effects of the seasonality of our business. See "Business Trends and Conditions — Asset Quality" in our 2018 Form 10-K for discussion of the various factors that contribute to forecasted net charge-offs over the next twelve months.
The following tables provide changes in our allowance for loan losses for the periods presented:
 ($ in millions)
Balance at January 1, 2019

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
March 31, 2019

 
 
 
 
 
 
 
 
 
 
Credit cards
$
6,327

 
$
832

 
$
(1,594
)
 
$
275

 
$
5,840

Consumer installment loans
44

 
15

 
(17
)
 
5

 
47

Commercial credit products
55

 
12

 
(14
)
 
1

 
54

Other
1

 
—

 
—

 
—

 
1

Total
$
6,427

 
$
859

 
$
(1,625
)
 
$
281

 
$
5,942


19


($ 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
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:
 
2019
 
2018
Three months ended March 31 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
63,776

 
74.1
%
 
2.4
%
 
$
56,356

 
72.7
%
 
1.8
%
Securitized financings
13,407

 
15.6

 
3.0

 
12,410

 
16.0

 
2.4

Senior unsecured notes
8,892

 
10.3

 
3.9

 
8,795

 
11.3

 
3.6

Total
$
86,075

 
100.0
%
 
2.6
%
 
$
77,561

 
100.0
%
 
2.1
%
______________________
(1)
Excludes $286 million and $300 million average balance of non-interest-bearing deposits for the three months ended March 31, 2019 and 2018, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended March 31, 2019 and 2018.
 
 
 
 
 
 
 
 
 
 
 
 

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, 2019, we had $51.8 billion in direct deposits and $12.3 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger that channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to continue to expand our direct deposits base as a source of stable and diversified low-cost funding.
Our direct deposits include a range of FDIC-insured deposit products, including certificates of deposit, IRAs, money market accounts and savings accounts.

20


Brokered deposits are primarily from retail customers of large brokerage firms. We have relationships with 11 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, 2019, had a weighted average remaining life of 2.4 years. These deposits generally are not subject to early withdrawal.
Our ability to attract deposits is sensitive to, among other things, the interest rates we pay, and therefore, we bear funding 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, such as 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)
2019
 
2018
Average
Balance
 
% of
Total
 
Average
Rate
 
Average
Balance
 
% of
Total
 
Average
Rate
Direct deposits:
 
 
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
$
31,822

 
49.9
%
 
2.4
%
 
$
26,025

 
46.2
%
 
1.7
%
Savings accounts (including money market accounts)
18,389

 
28.8

 
2.2

 
17,813

 
31.6

 
1.5

Brokered deposits
13,565

 
21.3

 
2.7

 
12,518

 
22.2

 
2.4

Total interest-bearing deposits
$
63,776

 
100.0
%
 
2.4
%
 
$
56,356

 
100.0
%
 
1.8
%
 
 
 
 
 
 
 
 
 
 
 
 
Our deposit liabilities provide funding with maturities ranging from one day to ten years. At March 31, 2019, the weighted average maturity of our interest-bearing time deposits was 1.2 years. See Note 7. Deposits to our condensed consolidated financial statements for more information on their maturities.
The following table summarizes deposits by contractual maturity at March 31, 2019.
($ 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)
$
10,123

 
$
2,737

 
$
5,448

 
$
9,476

 
$
27,784

U.S. deposits ($100,000 or more)
 
 
 
 
 
 
 
 
 
Direct deposits:
 
 
 
 
 
 
 
 
 
Certificates of deposit (including IRA certificates of deposit)
2,518

 
4,194

 
8,927

 
5,573

 
21,212

Savings accounts (including money market accounts)
13,410

 
—

 
—

 
—

 
13,410

Brokered deposits:
 
 
 
 
 
 
 
 
 
Sweep accounts
1,654

 
—

 
—

 
—

 
1,654

Total
$
27,705

 
$
6,931

 
$
14,375

 
$
15,049

 
$
64,060

______________________
(1)
Includes brokered certificates of deposit for which underlying individual deposit balances are assumed to be less than $100,000.

21


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”) and the Synchrony Card Issuance Trust (“SYNIT”) 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”).
The following table summarizes expected contractual maturities of the investors’ interests in securitized financings, excluding debt premiums, discounts and issuance costs at March 31, 2019.
($ 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)
$
2,153

 
$
3,485

 
$
1,591

 
$
—

 
$
7,229

SFT
350

 
1,525

 
—

 
—

 
1,875

SYNIT(1)
—

 
3,000

 
—

 
—

 
3,000

Total long-term borrowings—owed to securitization investors
$
2,503

 
$
8,010

 
$
1,591

 
$
—

 
$
12,104

______________________
(1)
Excludes subordinated classes of SYNCT notes and SYNIT 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 loan 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 and SYNIT, subordinated classes of notes that we own.
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.

22


The following table summarizes for each of our trusts the three-month rolling average excess spread at March 31, 2019.
 
Note Principal Balance
($ in millions)
 
# of Series
Outstanding
 
Three-Month Rolling
Average Excess
Spread(1)
SYNCT(2)
$
7,928

 
12

 
~14.1% to 15.5%

SFT
$
1,875

 
10

 
12.8
%
SYNIT(2)
$
3,015

 
5

 
~14.9% to 15.9%

______________________
(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 SFT or, in the case of SYNCT and SYNIT, a range of the excess spreads relating to the particular series issued within each trust and omitting any series that have not been outstanding for at least three full monthly periods, in each case calculated in accordance with the applicable trust or series documentation, for the three securitization monthly periods ended March 31, 2019.
(2)
Includes subordinated classes of SYNCT and SYNIT notes that we own.

23


Third-Party Debt
Senior Unsecured Notes
The following table provides a summary of our outstanding senior unsecured notes at March 31, 2019, which includes $1.25 billion of senior unsecured notes issued during the three months ended March 31, 2019.
Issuance Date
 
Interest Rate(1)
 
Maturity
 
Principal Amount Outstanding(2)
($ in millions)
 
 
 
 
 
 
Fixed rate senior unsecured notes:
 
 
 
 
 
 
Synchrony Financial
 
 
 
 
 
 
August 2014
 
3.000%
 
August 2019
 
$
1,100

August 2014
 
3.750%
 
August 2021
 
750

August 2014
 
4.250%
 
August 2024
 
1,250

February 2015
 
2.700%
 
February 2020
 
750

July 2015
 
4.500%
 
July 2025
 
1,000

August 2016
 
3.700%
 
August 2026
 
500

December 2017
 
3.950%
 
December 2027
 
1,000

March 2019
 
4.375%
 
March 2024
 
600

March 2019
 
5.150%
 
March 2029
 
650

Synchrony Bank
 
 
 
 
 
 
June 2017
 
3.000%
 
June 2022
 
750

May 2018
 
3.650%
 
May 2021
 
750

Total fixed rate senior unsecured notes
 
 
 
 
 
$
9,100

 
 
 
 
 
 
 
Floating rate senior unsecured notes:
 
 
 
 
 
 
Synchrony Financial
 
 
 
 
 
 
February 2015
 
Three-month LIBOR plus 1.23%
 
February 2020
 
$
250

Synchrony Bank
 
 
 
 
 
 
January 2018
 
Three-month LIBOR plus 0.625%
 
March 2020
 
500

Total floating rate senior unsecured notes
 
 
 
 
 
$
750

______________________
(1)
Weighted average interest rate of all senior unsecured notes at March 31, 2019 was 3.79%.
(2)
The amounts shown exclude unamortized debt discount, premiums and issuance cost.
Short-Term Borrowings
Except as described above, there were no material short-term borrowings for the periods presented.
Other
At March 31, 2019, 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, 2019.
At March 31, 2019, we were not in default under any of our credit facilities or senior unsecured notes.

24


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.
The table below reflects our current credit ratings and outlooks:
 
 
S&P
 
Fitch Ratings
Synchrony Financial
 
 
 
 
Senior unsecured debt
 
BBB-
 
BBB-
Outlook for Synchrony Financial senior unsecured debt
 
Stable
 
Stable
Synchrony Bank
 
 
 
 
Senior unsecured debt
 
BBB
 
BBB-
Outlook for Synchrony Bank senior unsecured debt
 
Stable
 
Stable
 
 
 
 
 
In addition, certain of the asset-backed securities issued by SYNCT and SYNIT 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, 2019 had $17.4 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 $14.8 billion of liquid assets at December 31, 2018. The increase in liquid assets was primarily due to the retention of excess cash flows from operations and the seasonality of our business, partially offset by the deployment of capital through the execution of our capital plan.
As additional sources of liquidity, at March 31, 2019, we had an aggregate of $5.6 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 “Regulation—Risk Factors 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 “Regulation—Regulation Relating to Our Business—Savings Association Regulation—Dividends and Stock Repurchases” in our 2018 Form 10-K.
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, 2019 and December 31, 2018, 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.
The following table sets forth the amortized cost and fair value of our portfolio of debt securities at the dates indicated:
 
At March 31, 2019
 
At December 31, 2018
($ in millions)
Amortized
Cost
 
Estimated Fair Value
 
Amortized
Cost
 
Estimated Fair Value
U.S. government and federal agency
$
2,284

 
$
2,285

 
$
2,889

 
$
2,888

State and municipal
48

 
47

 
50

 
48

Residential mortgage-backed
1,148

 
1,123

 
1,180

 
1,139

Asset-backed
2,049

 
2,049

 
1,988

 
1,985

U.S. corporate debt
2

 
2

 
2

 
2

Total
$
5,531

 
$
5,506

 
$
6,109

 
$
6,062


25


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, 2019, our debt securities had gross unrealized gains of $4 million and gross unrealized losses of $29 million. At December 31, 2018, our debt securities had gross unrealized gains of $1 million and gross unrealized losses of $48 million.
Our debt securities portfolio had the following maturity distribution at March 31, 2019.
($ 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
$
2,285

 
$
—

 
$
—

 
$
—

 
$
2,285

State and municipal
—

 
1

 
4

 
42

 
47

Residential mortgage-backed
—

 
—

 
150

 
973

 
1,123

Asset-backed
1,583

 
466

 
—

 
—

 
2,049

U.S. corporate debt
2

 
—

 
—

 
—

 
2

Total(1)
$
3,870

 
$
467

 
$
154

 
$
1,015

 
$
5,506

Weighted average yield(2)
2.5
%
 
2.7
%
 
3.2
%
 
2.9
%
 
2.6
%
______________________
(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, 2019, 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.
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 is not currently required to conduct stress tests. See “Regulation—Regulation Relating to Our Business—Legislative and Regulatory Developments” in our 2018 Form 10-K. In addition, while as a savings and loan 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 2019.
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, 2019
 
February, 2019
 
$
0.21

 
$
150

Total dividends declared
 
 
 
$
0.21

 
$
150

 
 
 
 
 
 
 
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 “Regulation—Risk Factors 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” in our 2018 Form 10-K.

26


Shares Repurchased Under Publicly Announced Programs
 
Total Number of Shares Purchased
 
Dollar Value of Shares Purchased
 
 
 
 
 
($ and shares in millions)
 
 
 
 
Three months ended March 31, 2019
 
30.9

 
$
966

Total
 
30.9

 
$
966

 
 
 
 
 
During the first quarter of 2019, we repurchased $966 million of common stock and completed the remaining repurchases under our 2018 Share Repurchase Program of $2.2 billion. 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. We will not make any more share repurchases until a new repurchase plan is approved.
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 2018 Form 10-K.
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, 2019, Synchrony Financial met all the requirements to be deemed well-capitalized.
The following table sets forth the composition of our capital ratios for the Company calculated under the Basel III Standardized Approach rules at March 31, 2019 and December 31, 2018, respectively.
 
Basel III
 
At March 31, 2019
 
At December 31, 2018
($ in millions)
Amount
 
Ratio(1)
 
Amount
 
Ratio(1)
Total risk-based capital
$
13,813

 
15.8
%
 
$
14,013

 
15.3
%
Tier 1 risk-based capital
$
12,661

 
14.5
%
 
$
12,801

 
14.0
%
Tier 1 leverage
$
12,661

 
12.3
%
 
$
12,801

 
12.3
%
Common equity Tier 1 capital
$
12,661

 
14.5
%
 
$
12,801

 
14.0
%
Risk-weighted assets
$
87,331

 
 
 
$
91,742

 
 
______________________
(1)
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 $522 million release of reserves for loan losses associated with the Walmart portfolio, as well as the seasonal decrease in loan receivables and a corresponding decrease in risk-weighted assets in the three months ended March 31, 2019.
Regulatory Capital Requirements - Synchrony Bank
At March 31, 2019 and December 31, 2018, 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 Standardized Approach rules at March 31, 2019 and December 31, 2018.

27


 
At March 31, 2019
 
At December 31, 2018
 
Minimum to be Well-
Capitalized
under Prompt Corrective Action Provisions
($ in millions)
Amount
 
Ratio
 
Amount
 
Ratio
 
Ratio
Total risk-based capital
$
12,244

 
16.1
%
 
$
12,258

 
15.4
%
 
10.0%
Tier 1 risk-based capital
$
11,239

 
14.8
%
 
$
11,207

 
14.1
%
 
8.0%
Tier 1 leverage
$
11,239

 
12.5
%
 
$
11,207

 
12.4
%
 
5.0%
Common equity Tier 1 capital
$
11,239

 
14.8
%
 
$
11,207

 
14.1
%
 
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 “Regulation—Risk Factors 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 2018 Form 10-K.
Off-Balance Sheet Arrangements and Unfunded Lending Commitments
____________________________________________________________________________________________
We do not have any material 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, 2019, we had not recorded any contingent liabilities in our Condensed Consolidated Statement of Financial Position related to any guarantees. See Note 9 - Fair Value Measurements to our condensed consolidated financial statements for information on contingent consideration liabilities related to business acquisitions.
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.

28


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 and fair value measurements. 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, or material changes to our Condensed Consolidated Statement of Financial Position, among other effects. See “Management's Discussion and Analysis—Critical Accounting Estimates” in our 2018 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 2018 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)
2019
 
2018
Interest income:
 
 
 
Interest and fees on loans (Note 4)
$
4,687

 
$
4,172

Interest on debt securities
99

 
72

Total interest income
4,786

 
4,244

Interest expense:
 
 
 
Interest on deposits
375

 
249

Interest on borrowings of consolidated securitization entities
100

 
74

Interest on third-party debt
85

 
79

Total interest expense
560

 
402

Net interest income
4,226

 
3,842

Retailer share arrangements
(954
)
 
(720
)
Net interest income, after retailer share arrangements
3,272

 
3,122

Provision for loan losses (Note 4)
859

 
1,362

Net interest income, after retailer share arrangements and provision for loan losses
2,413

 
1,760

Other income:
 
 
 
Interchange revenue
165

 
158

Debt cancellation fees
68

 
66

Loyalty programs
(167
)
 
(155
)
Other
26

 
6

Total other income
92

 
75

Other expense:
 
 
 
Employee costs
353

 
358

Professional fees
232

 
166

Marketing and business development
123

 
121

Information processing
113

 
104

Other
222

 
239

Total other expense
1,043

 
988

Earnings before provision for income taxes
1,462

 
847

Provision for income taxes (Note 12)
355

 
207

Net earnings
$
1,107

 
$
640

 
 
 
 
Earnings per share
 
 
 
Basic
$
1.57

 
$
0.84

Diluted
$
1.56

 
$
0.83

 
 
 
 

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)
2019
 
2018
 
 
 
 
Net earnings
$
1,107

 
$
640

 
 
 
 
Other comprehensive income (loss)
 
 
 
Debt securities
17

 
(20
)
Currency translation adjustments
2

 
(3
)
Employee benefit plans
—

 
1

Other comprehensive income (loss)
19

 
(22
)
 
 
 
 
Comprehensive income
$
1,126

 
$
618

Amounts presented net of taxes.




































See accompanying notes to condensed consolidated financial statements.


31


Synchrony Financial and subsidiaries
Condensed Consolidated Statements of Financial Position (Unaudited)
____________________________________________________________________________________________
($ in millions)
At March 31, 2019
 
At December 31, 2018
Assets
 
 
 
Cash and equivalents
$
12,963

 
$
9,396

Debt securities (Note 3)
5,506

 
6,062

Loan receivables: (Notes 4 and 5)
 
 
 
Unsecuritized loans held for investment
54,907

 
64,969

Restricted loans of consolidated securitization entities
25,498

 
28,170

Total loan receivables
80,405

 
93,139

Less: Allowance for loan losses
(5,942
)
 
(6,427
)
Loan receivables, net
74,463

 
86,712

Loan receivables held for sale (Note 4)
8,052

 
—

Goodwill
1,076

 
1,024

Intangible assets, net (Note 6)
1,259

 
1,137

Other assets
2,065

 
2,461

Total assets
$
105,384

 
$
106,792

 
 
 
 
Liabilities and Equity
 
 
 
Deposits: (Note 7)
 
 
 
Interest-bearing deposit accounts
$
63,787

 
$
63,738

Non-interest-bearing deposit accounts
273

 
281

Total deposits
64,060

 
64,019

Borrowings: (Notes 5 and 8)
 
 
 
Borrowings of consolidated securitization entities
12,091

 
14,439

Senior unsecured notes
9,800

 
9,557

Total borrowings
21,891

 
23,996

Accrued expenses and other liabilities
4,724

 
4,099

Total liabilities
$
90,675

 
$
92,114

 
 
 
 
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, 2019 and December 31, 2018; 688,837,684 and 718,758,598 shares outstanding at March 31, 2019 and December 31, 2018, respectively
$
1

 
$
1

Additional paid-in capital
9,489

 
9,482

Retained earnings
9,939

 
8,986

Accumulated other comprehensive income (loss):
 
 
 
Debt securities
(20
)
 
(32
)
Currency translation adjustments
(26
)
 
(25
)
Other
(10
)
 
(5
)
Treasury Stock, at cost; 145,147,000 and 115,226,086 shares at March 31, 2019 and December 31, 2018, respectively
(4,664
)
 
(3,729
)
Total equity
14,709

 
14,678

Total liabilities and equity
$
105,384

 
$
106,792


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, 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 ($0.15 per share)
—

 
—

 
—

 
(114
)
 
—

 
—

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

 
$
1

 
$
9,470

 
$
7,334

 
$
(86
)
 
$
(2,363
)
 
$
14,356

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Balance at January 1, 2019
833,985

 
$
1

 
$
9,482

 
$
8,986

 
$
(62
)
 
$
(3,729
)
 
$
14,678

Net earnings
—

 
—

 
—

 
1,107

 
—

 
—

 
1,107

Other comprehensive income
—

 
—

 
—

 
—

 
19

 
—

 
19

Purchases of treasury stock
—

 
—

 
—

 
—

 
—

 
(967
)
 
(967
)
Stock-based compensation
—

 
—

 
7

 
(17
)
 
—

 
32

 
22

Dividends - common stock ($0.21 per share)
—

 
—

 
—

 
(150
)
 
—

 
—

 
(150
)
Other
—

 
—

 
—

 
13

 
(13
)
 
—

 
—

Balance at March 31, 2019
833,985

 
$
1

 
$
9,489

 
$
9,939

 
$
(56
)
 
$
(4,664
)
 
$
14,709
























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)
2019
 
2018
Cash flows - operating activities
 
 
 
Net earnings
$
1,107

 
$
640

Adjustments to reconcile net earnings to cash provided from operating activities
 
 
 
Provision for loan losses
859

 
1,362

Deferred income taxes
145

 
19

Depreciation and amortization
87

 
71

(Increase) decrease in interest and fees receivable
80

 
16

(Increase) decrease in other assets
118

 
148

Increase (decrease) in accrued expenses and other liabilities
(251
)
 
(511
)
All other operating activities
144

 
170

Cash provided from (used for) operating activities
2,289

 
1,915

 
 
 
 
Cash flows - investing activities
 
 
 
Maturity and sales of debt securities
2,214

 
718

Purchases of debt securities
(1,963
)
 
(2,546
)
Net (increase) decrease in loan receivables, including held for sale
3,760

 
2,659

All other investing activities
(201
)
 
(76
)
Cash provided from (used for) investing activities
3,810

 
755

 
 
 
 
Cash flows - financing activities
 
 
 
Borrowings of consolidated securitization entities
 
 
 
Proceeds from issuance of securitized debt
1,498

 
1,417

Maturities and repayment of securitized debt
(3,847
)
 
(1,701
)
Third-party debt
 
 
 
Proceeds from issuance of third-party debt
1,240

 
497

Maturities and repayment of third-party debt
(1,000
)
 
—

Net increase (decrease) in deposits
36

 
(3
)
Purchases of treasury stock
(967
)
 
(410
)
Dividends paid on common stock
(150
)
 
(114
)
All other financing activities
8

 
1

Cash provided from (used for) financing activities
(3,182
)
 
(313
)
 
 
 
 
Increase (decrease) in cash and equivalents, including restricted amounts
2,917

 
2,357

Cash and equivalents, including restricted amounts, at beginning of period
10,376

 
11,817

Cash and equivalents at end of period:
 
 
 
Cash and equivalents
12,963

 
13,044

Restricted cash and equivalents included in other assets
330

 
1,130

Total cash and equivalents, including restricted amounts, at end of period
$
13,293

 
$
14,174


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 financing 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, 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.

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 2018 annual consolidated financial statements and the related notes in our Annual Report on Form 10-K for the year ended December 31, 2018 (our "2018 Form 10-K").
New Accounting Standards
Newly 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, are now generally identified as financing leases under the new guidance but otherwise their accounting treatment remains relatively unchanged. Leases identified as operating leases generally remain in that category under the new standard, but both a right-of-use asset and a liability for remaining lease payments is required to be recognized on our statement of financial position. We adopted this guidance retrospectively in the current year as of January 1, 2019, which did not have a material impact on our consolidated financial statements.
Recently Issued But Not Yet Adopted Accounting Standards
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 permits the use of judgment in determining an approach which is most appropriate for the Company, based on their facts and circumstances. 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. Upon origination, the Company will record its estimate of expected credit losses through a charge to earnings, with subsequent updates to this estimate recorded through the loss provision expense.
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. We plan to adopt the standard on its effective date, which for us is January 1, 2020. Upon adoption, the amendments in this standard will be recognized through a cumulative-effect adjustment to retained earnings.
We have created a company-wide approach to evaluating the effects of implementing this standard. We are in the process of testing and refining the related estimation models to meet the requirements of the standard. We are finalizing the evaluation of key accounting interpretations and the period for which reasonable and supportable forecasts can be made, prior to reverting to historical loss experience for the remaining life of the loan. We continue to assess and develop our internal processes and systems, in addition to assessing the impact on our disclosures. Given the change to expected losses for the estimated life of the financial asset and other significant differences compared to existing GAAP, this standard is expected to result in a material increase to the Company’s allowance for loan losses and a decrease in the Company's regulatory capital. An estimate of the impact is in process of being developed, as it is contingent upon continued testing and refinement of models, methodologies and judgments. Further, the extent of the impact of adoption of CECL 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 2018 annual consolidated financial statements in our 2018 Form 10-K, for additional information on our significant accounting policies.

36


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 (“CRA”). Our debt securities consist of the following:
 
March 31, 2019
 
December 31, 2018
 
 
 
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
$
2,284

 
$
1

 
$
—

 
$
2,285

 
$
2,889

 
$
—

 
$
(1
)
 
$
2,888

State and municipal
48

 
—

 
(1
)
 
47

 
50

 
—

 
(2
)
 
48

Residential mortgage-backed(a)
1,148

 
2

 
(27
)
 
1,123

 
1,180

 
1

 
(42
)
 
1,139

Asset-backed(b)
2,049

 
1

 
(1
)
 
2,049

 
1,988

 
—

 
(3
)
 
1,985

U.S. corporate debt
2

 
—

 
—

 
2

 
2

 
—

 
—

 
2

Total
$
5,531

 
$
4

 
$
(29
)
 
$
5,506

 
$
6,109

 
$
1

 
$
(48
)
 
$
6,062

_______________________
(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, 2019 and December 31, 2018, $307 million and $313 million of residential mortgage-backed securities, 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.
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, 2019
 
 
 
 
 
 
 
U.S. government and federal agency
$
499

 
$
—

 
$
150

 
$
—

State and municipal
—

 
—

 
30

 
(1
)
Residential mortgage-backed
34

 
—

 
910

 
(27
)
Asset-backed
737

 
(1
)
 
188

 
—

Total
$
1,270

 
$
(1
)
 
$
1,278

 
$
(28
)
 
 
 
 
 
 
 
 
At December 31, 2018
 
 
 
 
 
 
 
U.S. government and federal agency
$
2,838

 
$
(1
)
 
$
—

 
$
—

State and municipal
23

 
(1
)
 
8

 
(1
)
Residential mortgage-backed
102

 
—

 
933

 
(42
)
 Asset-backed
1,665

 
(2
)
 
114

 
(1
)
Total
$
4,628

 
$
(4
)
 
$
1,055

 
$
(44
)
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, 2019 and 2018.

37


Contractual Maturities of Investments in Available-for-Sale Debt Securities
 
Amortized

 
Estimated

At March 31, 2019 ($ in millions)
cost

 
fair value

 
 
 
 
Due
 
 
 
Within one year
$
3,870

 
$
3,870

After one year through five years
$
467

 
$
467

After five years through ten years
$
153

 
$
154

After ten years
$
1,041

 
$
1,015

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, 2019 and 2018.
Although we generally do not have the intent to sell any specific securities held at March 31, 2019, 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.
NOTE 4.    LOAN RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES
($ in millions)
March 31, 2019
 
December 31, 2018
 
 
 
 
Credit cards
$
77,251

 
$
89,994

Consumer installment loans
1,860

 
1,845

Commercial credit products
1,256

 
1,260

Other
38

 
40

Total loan receivables, before allowance for losses(a)(b)
$
80,405

 
$
93,139

_______________________
(a)
Total loan receivables include $25.5 billion and $28.2 billion of restricted loans of consolidated securitization entities at March 31, 2019 and December 31, 2018, respectively. See Note 5. Variable Interest Entities for further information on these restricted loans.
(b)
At March 31, 2019 and December 31, 2018, loan receivables included deferred costs, net of deferred income, of $104 million and $105 million, respectively.
Loan Receivables Held for Sale
During the first quarter of 2019, we entered into an agreement to sell loan receivables associated with our Retail Card program agreement with Walmart. As a result, at March 31, 2019, $8.1 billion of loan receivables are classified as loan receivables held for sale on our Condensed Consolidated Statement of Financial Position and we recorded a $522 million reserve release in our provision for loan losses during the three months ended March 31, 2019 following the reclassification of the Walmart portfolio to loan receivables held for sale. Approximately $1.1 billion of the loan receivables held for sale are restricted loans of our consolidated securitization entities. See Note 5. Variable Interest Entities for further information. The sale of the portfolio, which is subject to customary closing conditions, is expected to be completed late in the third quarter or early fourth quarter of 2019.


38


Allowance for Loan Losses
 ($ in millions)
Balance at January 1, 2019

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
March 31, 2019

 
 
 
 
 
 
 
 
 
 
Credit cards
$
6,327

 
$
832

 
$
(1,594
)
 
$
275

 
$
5,840

Consumer installment loans
44

 
15

 
(17
)
 
5

 
47

Commercial credit products
55

 
12

 
(14
)
 
1

 
54

Other
1

 
—

 
—

 
—

 
1

Total
$
6,427

 
$
859

 
$
(1,625
)
 
$
281

 
$
5,942

($ 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

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

Delinquent and Non-accrual Loans
At March 31, 2019 ($ in millions)
30-89 days delinquent

 
90 or more days delinquent

 
Total past due

 
90 or more days delinquent and accruing

 
Total non-accruing(a)

 
 
 
 
 
 
 
 
 
 
Credit cards
$
1,878

 
$
1,995

 
$
3,873

 
$
1,984

 
$
—

Consumer installment loans
21

 
4

 
25

 
—

 
4

Commercial credit products
39

 
20

 
59

 
20

 
—

Total delinquent loans
$
1,938

 
$
2,019

 
$
3,957

 
$
2,004

 
$
4

Percentage of total loan receivables
2.4
%
 
2.5
%
 
4.9
%
 
2.5
%
 
—
%
At December 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(a)

 
 
 
 
 
 
 
 
 
 
Credit cards
$
2,229

 
$
2,113

 
$
4,342

 
$
2,099

 
$
—

Consumer installment loans
28

 
5

 
33

 
—

 
5

Commercial credit products
38

 
17

 
55

 
17

 
—

Total delinquent loans
$
2,295

 
$
2,135

 
$
4,430

 
$
2,116

 
$
5

Percentage of total loan receivables
2.5
%
 
2.3
%
 
4.8
%
 
2.3
%
 
0.1
%
_______________________
(a)
Excludes purchase credit impaired loan receivables.
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. Our TDR loans do not include loans that are classified as loan receivables held for sale.

39


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)
2019
 
2018
Credit cards
$
215

 
$
221

Consumer installment loans
—

 
—

Commercial credit products
1

 
1

Total
$
216

 
$
222

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, 2019 ($ in millions)
Total recorded
investment

 
Related allowance

 
Net recorded investment

 
Unpaid principal balance

Credit cards
$
1,060

 
$
(518
)
 
$
542

 
$
962

Consumer installment loans
—

 
—

 
—

 
—

Commercial credit products
4

 
(2
)
 
2

 
4

Total
$
1,064

 
$
(520
)
 
$
544

 
$
966

At December 31, 2018 ($ in millions)
Total recorded
investment

 
Related allowance

 
Net recorded investment

 
Unpaid principal balance

Credit cards
$
1,203

 
$
(546
)
 
$
657

 
$
1,086

Consumer installment loans
—

 
—

 
—

 
—

Commercial credit products
4

 
(2
)
 
2

 
4

Total
$
1,207

 
$
(548
)
 
$
659

 
$
1,090


40


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,
2019
 
2018
($ 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
$
11

$
64

$
1,132

 
$
12

$
62

$
1,056

Consumer installment loans
—

—

—

 
—

—

—

Commercial credit products
—

—

4

 
—

—

5

Total
$
11

$
64

$
1,136

 
$
12

$
62

$
1,061

 
 
 
 
 
 
 
 
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,
2019
 
2018
($ in millions)
Accounts defaulted

 
Loans defaulted

 
Accounts defaulted

 
Loans defaulted

Credit cards
18,981

 
$
44

 
23,701

 
$
53

Consumer installment loans
—

 
—

 
—

 
—

Commercial credit products
47

 
—

 
68

 
1

Total
19,028

 
$
44

 
23,769

 
$
54

 
 
 
 
 
 
 
 

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, 2019 and December 31, 2018, respectively, as a percentage of each class of loan receivable. The table below excludes 0.6%, 0.5% and 0.8% of our total loan receivables balance at each of March 31, 2019, December 31, 2018 and March 31, 2018, respectively, which represents those customer accounts for which a FICO score is not available.
 
March 31, 2019
 
December 31, 2018
 
March 31, 2018
 
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
74
%
 
18
%
 
8
%
 
74
%
 
18
%
 
8
%
 
73
%
 
19
%
 
8
%
Consumer installment loans
80
%
 
14
%
 
6
%
 
80
%
 
14
%
 
6
%
 
79
%
 
15
%
 
6
%
Commercial credit products
91
%
 
5
%
 
4
%
 
90
%
 
5
%
 
5
%
 
88
%
 
7
%
 
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 $418 billion at both March 31, 2019 and December 31, 2018, 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)
2019
 
2018
Credit cards
$
4,611

 
$
4,099

Consumer installment loans
42

 
36

Commercial credit products
34

 
36

Other
—

 
1

Total
$
4,687

 
$
4,172


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, 2019 and 2018. 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 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, 2019
 
December 31, 2018
Assets
 
 
 
Loan receivables, net(a)
$
23,934

 
$
26,454

Loan receivables held for sale
1,084

 
—

Other assets(b)
76

 
813

Total
$
25,094

 
$
27,267

 
 
 
 
Liabilities
 
 
 
Borrowings
$
12,091

 
$
14,439

Other liabilities
32

 
36

Total
$
12,123

 
$
14,475

_______________________
(a)
Includes $1.6 billion and $1.7 billion of related allowance for loan losses resulting in gross restricted loans of $25.5 billion and $28.2 billion at March 31, 2019 and December 31, 2018, respectively.
(b)
Includes $68 million and $803 million of segregated funds held by the VIEs at March 31, 2019 and December 31, 2018, 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 for both the three months ended March 31, 2019 and 2018, respectively. Related expenses consisted primarily of provision for loan losses of $188 million and $316 million for the three months ended March 31, 2019 and 2018, respectively, and interest expense of $100 million and $74 million for the three months ended March 31, 2019 and 2018, respectively.
NOTE 6.    INTANGIBLE ASSETS
 
 
March 31, 2019
 
December 31, 2018
($ in millions)
 
Gross carrying amount

 
Accumulated amortization

 
Net

 
Gross carrying amount

 
Accumulated amortization

 
Net

Customer-related
 
$
1,727

 
$
(840
)
 
$
887

 
$
1,630

 
$
(803
)
 
$
827

Capitalized software and other
 
655

 
(283
)
 
372

 
562

 
(252
)
 
310

Total
 
$
2,382

 
$
(1,123
)
 
$
1,259

 
$
2,192

 
$
(1,055
)
 
$
1,137

During the three months ended March 31, 2019, we recorded additions to intangible assets subject to amortization of $193 million, primarily related to customer-related intangible assets, as well as capitalized software expenditures.
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, 2019 and 2018, we recorded additions to customer-related intangible assets subject to amortization of $99 million and $12 million, respectively, primarily related to payments made to extend certain retail partner relationships. These additions had a weighted average amortizable life of 7 years and 5 years for the three months ended March 31, 2019 and 2018, respectively.

44


Amortization expense related to retail partner contracts was $33 million and $29 million for the three months ended March 31, 2019 and 2018, 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 $37 million and $27 million for the three months ended March 31, 2019 and 2018, respectively, and is included as a component of other expense in our Condensed Consolidated Statements of Earnings.
NOTE 7.    DEPOSITS
 
March 31, 2019
 
December 31, 2018
($ in millions)
Amount

 
Average rate(a)

 
Amount

 
Average rate(a)

 
 
 
 
 
 
 
 
Interest-bearing deposits
$
63,787

 
2.4
%
 
$
63,738

 
2.0
%
Non-interest-bearing deposits
273

 
—

 
281

 
—

Total deposits
$
64,060

 
 
 
$
64,019

 
 
____________________
(a)
Based on interest expense for the three months ended March 31, 2019 and the year ended December 31, 2018 and average deposits balances.
At March 31, 2019 and December 31, 2018, interest-bearing deposits included $21.2 billion and $20.2 billion of certificates of deposit of $100,000 or more, respectively. Of the total certificates of deposit of $100,000 or more, $7.3 billion and $6.9 billion were certificates of deposit of $250,000 or more at March 31, 2019 and December 31, 2018, respectively.
At March 31, 2019, our interest-bearing time deposits maturing for the remainder of 2019 and over the next four years and thereafter were as follows:
($ in millions)
2019

 
2020

 
2021

 
2022

 
2023

 
Thereafter

Deposits
$
16,442

 
$
16,708

 
$
3,281

 
$
2,553

 
$
1,206

 
$
1,536

The above maturity table excludes $18.6 billion of demand deposits with no defined maturity, of which $17.5 billion are savings accounts. In addition, at March 31, 2019, we had $3.4 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 2020 and 2025.

45


NOTE 8.    BORROWINGS
 
March 31, 2019
 
December 31, 2018
($ in millions)
Maturity date
 
Interest Rate
 
Weighted average interest rate
 
Outstanding Amount(a)
 
Outstanding Amount(a)
 
 
 
 
 
 
 
 
 
 
Borrowings of consolidated securitization entities:
 
 
 
 
 
 
 
 
 
Fixed securitized borrowings
2019 - 2023
 
1.58% - 3.87%

 
2.58
%
 
$
7,991

 
$
8,664

Floating securitized borrowings
2019 - 2022
 
3.08% - 3.37%

 
3.21
%
 
4,100

 
5,775

Total borrowings of consolidated securitization entities
 
 
 
 
2.79
%
 
12,091

 
14,439

 
 
 
 
 
 
 
 
 
 
Senior unsecured notes:
 
 
 
 
 
 
 
 
 
Synchrony Financial senior unsecured notes:
 
 
 
 
 
 
 
 
 
Fixed senior unsecured notes
2019 - 2029
 
2.70% - 5.15%

 
3.91
%
 
7,560

 
7,318

Floating senior unsecured notes
2020
 
3.97
%
 
3.97
%
 
250

 
250

 
 
 
 
 
 
 
 
 
 
Synchrony Bank senior unsecured notes:
 
 
 
 
 
 
 
 
 
Fixed senior unsecured notes
2021 - 2022
 
3.00% - 3.65%

 
3.33
%
 
1,491

 
1,490

Floating senior unsecured notes
2020
 
3.23
%
 
3.23
%
 
499

 
499

Total senior unsecured notes
 
 
 
 
3.79
%
 
9,800

 
9,557

 
 
 
 
 
 
 
 
 
 
Total borrowings
 
 
 
 
 
 
$
21,891

 
$
23,996

___________________
(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 2019 and over the next four years and thereafter:
($ in millions)
2019

 
2020

 
2021

 
2022

 
2023

 
Thereafter

Borrowings
$
2,664

 
$
5,450

 
$
5,250

 
$
2,883

 
$
707

 
$
5,000

Third-Party Debt
 
 
 
 
 
 
2019 Issuances ($ in millions):
 
 
 
 
 
Synchrony Financial
 
 
 
 
 
Issuance Date
Principal Amount
 
Maturity
 
Interest Rate
March 2019
$
600

 
2024
 
4.375
%
March 2019
$
650

 
2029
 
5.150
%
Credit Facilities
As additional sources of liquidity, we have undrawn committed capacity under credit facilities, primarily related to our securitization programs.
At March 31, 2019, we had an aggregate of $5.6 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 2018 annual consolidated financial statements in our 2018 Form 10-K.
The following tables present our assets and liabilities measured at fair value on a recurring basis.
Recurring Fair Value Measurements
At March 31, 2019 ($ in millions)
Level 1

 
Level 2

 
Level 3

 
Total(a)

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

 
$
2,285

 
$
—

 
$
2,285

State and municipal
—

 
—

 
47

 
47

Residential mortgage-backed
—

 
1,123

 
—

 
1,123

Asset-backed
—

 
2,049

 
—

 
2,049

U.S. corporate debt
—

 
—

 
2

 
2

Other assets(b)
15

 
—

 
14

 
29

Total
$
15

 
$
5,457

 
$
63

 
$
5,535

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Contingent consideration
—

 
—

 
25

 
25

Total
$
—

 
$
—

 
$
25

 
$
25

 
 
 
 
 
 
 
 
At December 31, 2018 ($ in millions)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Assets
 
 
 
 
 
 
 
Debt securities
 
 
 
 
 
 
 
U.S. Government and Federal Agency
$
—

 
$
2,888

 
$
—

 
$
2,888

State and municipal
—

 
—

 
48

 
48

Residential mortgage-backed
—

 
1,139

 
—

 
1,139

Asset-backed
—

 
1,985

 
—

 
1,985

U.S. corporate debt
—

 
—

 
2

 
2

Other assets(b)
15

 
—

 
13

 
28

Total
$
15

 
$
6,012

 
$
63

 
$
6,090

 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
Contingent consideration
—

 
—

 
26

 
26

Total
$
—

 
$
—

 
$
26

 
$
26

 
 
 
 
 
 
 
 
_______________________
(a)
For the three months ended March 31, 2019, there were no fair value measurements transferred between levels.
(b)
Other assets primarily relate to equity investments measured at fair value.


47


Level 3 Fair Value Measurements
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, CRA investments, which are valued using net asset values, as well as contingent consideration obligations. See Note 2. Basis of Presentation and Summary of Significant Accounting Policies and Note 9. Fair Value Measurements in our 2018 annual consolidated financial statements in our 2018 Form 10-K for a description of our process to evaluate third-party pricing servicers and a description of our contingent consideration and compensation arrangements, respectively. 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 and liabilities that are measured on a recurring basis for the three months ended March 31, 2019 and 2018 were not material.

48


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

 
Corresponding fair value amount
At March 31, 2019 ($ 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)
$
12,963

 
$
12,963

 
$
12,963

 
$
—

 
$
—

Other assets(a)(b)
$
330

 
$
330

 
$
330

 
$
—

 
$
—

Financial assets carried at other than fair value:
 
 
 
 
 
 
 
 
 
Loan receivables, net(c)
$
74,463

 
$
82,739

 
$
—

 
$
—

 
$
82,739

       Loan receivables held for sale(c)
$
8,052

 
$
8,052

 
$
—

 
$
—

 
$
8,052

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
Financial liabilities carried at other than fair value:
 
 
 
 
 
 
 
 
 
Deposits
$
64,060

 
$
64,097

 
$
—

 
$
64,097

 
$
—

Borrowings of consolidated securitization entities
$
12,091

 
$
12,105

 
$
—

 
$
8,008

 
$
4,097

Senior unsecured notes
$
9,800

 
$
9,809

 
$
—

 
$
9,809

 
$
—

 
 
 
 
 
 
 
 
 
 
 
Carrying

 
Corresponding fair value amount
At December 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)
$
9,396

 
$
9,396

 
$
9,396

 
$
—

 
$
—

Other assets(a)(b)
$
980

 
$
980

 
$
980

 
$
—

 
$
—

Financial assets carried at other than fair value:
 
 
 
 
 
 
 
 
 
Loan receivables, net(c)
$
86,712

 
$
95,305

 
$
—

 
$
—

 
$
95,305

 
 
 
 
 
 
 
 
 
 
Financial Liabilities
 
 
 
 
 
 
 
 
 
Financial liabilities carried at other than fair value:
 
 
 
 
 
 
 
 
 
Deposits
$
64,019

 
$
63,942

 
$
—

 
$
63,942

 
$
—

Borrowings of consolidated securitization entities
$
14,439

 
$
14,400

 
$
—

 
$
8,626

 
$
5,774

Senior unsecured notes
$
9,557

 
$
9,062

 
$
—

 
$
9,062

 
$
—

_______________________
(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.

49


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, 2019 and December 31, 2018, Synchrony Financial met all applicable requirements to be deemed well-capitalized pursuant to Federal Reserve Board regulations. At March 31, 2019 and December 31, 2018, 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, 2019 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, 2019 ($ in millions)
Actual
 
Minimum for capital
adequacy purposes
 
Amount
 
Ratio(a)

 
Amount

 
Ratio(b)

 
 
 
 
 
 
 
 
Total risk-based capital
$
13,813

 
15.8
%
 
$
6,986

 
8.0
%
Tier 1 risk-based capital
$
12,661

 
14.5
%
 
$
5,240

 
6.0
%
Tier 1 leverage
$
12,661

 
12.3
%
 
$
4,130

 
4.0
%
Common equity Tier 1 Capital
$
12,661

 
14.5
%
 
$
3,930

 
4.5
%
At December 31, 2018 ($ in millions)
Actual
 
Minimum for capital
adequacy purposes
 
Amount
 
Ratio(a)

 
Amount

 
Ratio(b)

 
 
 
 
 
 
 
 
Total risk-based capital
$
14,013

 
15.3
%
 
$
7,339

 
8.0
%
Tier 1 risk-based capital
$
12,801

 
14.0
%
 
$
5,505

 
6.0
%
Tier 1 leverage
$
12,801

 
12.3
%
 
$
4,157

 
4.0
%
Common equity Tier 1 Capital
$
12,801

 
14.0
%
 
$
4,128

 
4.5
%

50


Synchrony Bank
At March 31, 2019 ($ 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
$
12,244

 
16.1
%
 
$
6,080

 
8.0
%
 
$
7,599

 
10.0
%
Tier 1 risk-based capital
$
11,239

 
14.8
%
 
$
4,560

 
6.0
%
 
$
6,080

 
8.0
%
Tier 1 leverage
$
11,239

 
12.5
%
 
$
3,601

 
4.0
%
 
$
4,501

 
5.0
%
Common equity Tier I capital
$
11,239

 
14.8
%
 
$
3,420

 
4.5
%
 
$
4,940

 
6.5
%
At December 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
$
12,258

 
15.4
%
 
$
6,348

 
8.0
%
 
$
7,934

 
10.0
%
Tier 1 risk-based capital
$
11,207

 
14.1
%
 
$
4,761

 
6.0
%
 
$
6,348

 
8.0
%
Tier 1 leverage
$
11,207

 
12.4
%
 
$
3,612

 
4.0
%
 
$
4,515

 
5.0
%
Common equity Tier I capital
$
11,207

 
14.1
%
 
$
3,570

 
4.5
%
 
$
5,157

 
6.5
%
_______________________
(a)
Capital ratios are calculated based on the Basel III Standardized Approach rules.
(b)
At March 31, 2019 and at December 31, 2018, 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 2.5 percentage points and 1.875 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.

51


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)
2019
 
2018
 
 
 
 
Net earnings
$
1,107

 
$
640

 
 
 
 
Weighted average common shares outstanding, basic
706.3

 
763.7

Effect of dilutive securities
2.6

 
6.6

Weighted average common shares outstanding, dilutive
708.9

 
770.3

 


 
 
Earnings per basic common share
$
1.57

 
$
0.84

Earnings per diluted common share
$
1.56

 
$
0.83

We have issued certain stock based awards under the Synchrony Financial 2014 Long-Term Incentive Plan. A total of 5 million and 1 million shares for the three months ended March 31, 2019 and 2018, respectively, related to these awards, were considered anti-dilutive and therefore were excluded from the computation of diluted earnings per share.
NOTE 12.    INCOME TAXES
Unrecognized Tax Benefits
($ in millions)
March 31, 2019
 
December 31, 2018
Unrecognized tax benefits, excluding related interest expense and penalties(a)
$
224

 
$
251

Portion that, if recognized, would reduce tax expense and effective tax rate(b)
$
166

 
$
164

____________________
(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 establish a liability that represents the difference between a tax position taken (or expected to be taken) on an income tax return and the amount of taxes recognized in our financial statements. The liability associated with the unrecognized tax benefits is adjusted periodically when new information becomes available. The amount of unrecognized tax benefits that is reasonably possible to be resolved in the next twelve months is expected to be $53 million, of which $24 million, if recognized, would reduce the Company's tax expense and effective tax rate.
For periods prior to separation from GE, we filed tax returns on a consolidated basis with GE and 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. In addition to the audits of GE's tax returns, we are under examination in various states going back to 2011. 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.

52


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.
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 March 4, 2019, on plaintiff’s motion for reconsideration, the District Court vacated its decision reversing the Bankruptcy Court and affirmed the Bankruptcy Court’s decision denying the Bank’s motion to compel arbitration.
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.

53


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.
On November 2, 2018, a putative class action lawsuit, Retail Wholesale Department Store Union Local 338 Retirement Fund v. Synchrony Financial, et al., was filed in the U.S. District Court for the District of Connecticut, naming as defendants the Company and two of its officers. The lawsuit asserts violations of the Exchange Act for allegedly making materially misleading statements and/or omitting material information concerning the Company’s underwriting practices and private-label card business, and was filed on behalf of a putative class of persons who purchased or otherwise acquired the Company’s common stock between October 21, 2016 and November 1, 2018. The complaint seeks an award of unspecified compensatory damages, costs and expenses. On February 5, 2019, the court appointed Stichting Depositary APG Developed Markets Equity Pool as lead plaintiff for the putative class. On April 5, 2019, an amended complaint was filed, asserting a new claim for violations of the Securities Act in connection with statements in the offering materials for the Company’s December 1, 2017 note offering. The Securities Act claims are filed on behalf of persons who purchased or otherwise acquired Company bonds in or traceable to the December 1, 2017 note offering between December 1, 2017 and November 1, 2018. The amended complaint names as additional defendants two additional Company officers, the Company’s board of directors, and the underwriters of the December 1, 2017 note offering. The amended complaint is captioned Stichting Depositary APG Developed Markets Equity Pool and Stichting Depositary APG Fixed Income Credit Pool v. Synchrony Financial et al.
On January 28, 2019, a purported shareholder derivative action, Gilbert v. Keane, et al., was filed in the U.S. District Court for the District of Connecticut against the Company as a nominal defendant, and certain of the Company’s officers and directors. The lawsuit alleges breach of fiduciary duty claims based on the allegations raised by the plaintiff in the Stichting Depositar APG class action, unjust enrichment, waste of corporate assets, and that the defendants made materially misleading statements and/or omitted material information in violation of the Exchange Act.  The complaint seeks a declaration that the defendants breached and/or aided and abetted the breach of their fiduciary duties to the Company, unspecified monetary damages with interest, restitution, a direction that the defendants take all necessary actions to reform and improve corporate governance and internal procedures, and attorneys’ and experts’ fees. On March 11, 2019, a second purported shareholder derivative action, Aldridge v. Keane, et al., was filed in the U.S. District Court for the District of Connecticut. The allegations in the Aldridge complaint are substantially similar to those in the Gilbert complaint.

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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.
At March 31, 2019, 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 $75 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 2018 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, 2019.

No change in internal control over financial reporting occurred during the quarter ended March 31, 2019 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 2018 Form 10-K under the heading “Risk Factors Relating to Our Business” and “Risk Factors Relating to Regulation”.

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, 2019.
($ 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, 2019
6,885,064

 
$
30.01

 
6,658,078

 
$
766.0

February 1 - 28, 2019
14,116,496

 
31.08

 
14,115,904

 
327.2

March 1 - 31, 2019
10,131,946

 
32.32

 
10,123,347

 
—

Total
31,133,506

 
$
31.25

 
30,897,329

 
$
—

 
 
 
 
 
 
 
 
_______________________
(a)
Includes 226,986 shares, 592 shares and 8,599 shares withheld in January, February and March, respectively, to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying performance stock awards, restricted stock awards or upon the exercise of stock options.
(b)
Amounts exclude commission costs.
(c)
On May 17, 2018, the Board of Directors approved the 2018 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, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Earnings for the three months ended March 31, 2019 and 2018, (ii) Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, 2019 and 2018, (iii) Condensed Consolidated Statements of Financial Position at March 31, 2019 and December 31, 2018, (iv) Condensed Consolidated Statements of Changes in Equity for the three months ended March 31, 2019 and 2018, (v) Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2019 and 2018, and (vi) Notes to Condensed Consolidated Financial Statements.
______________________ 



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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 25, 2019
 
/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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