Quarterly Report (10-q)

Date : 10/25/2019 @ 10:11AM
Source : Edgar (US Regulatory)
Stock : Synchrony Financial (SYF)
Quote : 36.2  0.0 (0.00%) @ 9:00AM

Quarterly Report (10-q)

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

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2019
OR
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)
SFLOGOA01A21.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
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common stock, par value $0.001 per share
SYF
New York Stock Exchange
 
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      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      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
Accelerated filer
 
 
 
 
Non-accelerated filer
Smaller reporting company
 
 
 
 
 
 
Emerging growth company
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  
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of October 21, 2019 was 646,192,751.




Synchrony Financial
PART I - FINANCIAL INFORMATION
Page
6
 
 
Item 1. Financial Statements:
 
 
 
33
 
 
34
 
 
35
 
 
36
 
 
38
 
 
39
 
 
59
 
 
59
 
 
PART II - OTHER INFORMATION
 
 
 
60
60
60
60
60
60
62
63


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” or “Board” are to Synchrony's board of directors;
“GE” are to General Electric Company and its subsidiaries; 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 AnalysisResults of OperationsOther 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” and “Risk Factors Relating to Regulation” 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 law.

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 and nine months ended September 30, 2019, we financed $38.4 billion and $109.2 billion of purchase volume, respectively, and had 76.7 million average active accounts for both periods, and at September 30, 2019, we had $83.2 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 September 30, 2019, we had $66.0 billion in deposits, which represented 76% 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 September 30, 2019.
 
 
 
Promotional Offer
 
 
Credit Product
Standard Terms Only
 
Deferred Interest
 
Other Promotional
 
Total
Credit cards
61.9
%
 
18.8
%
 
15.1
%
 
95.8
%
Commercial credit products
1.6

 

 

 
1.6

Consumer installment loans

 

 
2.5

 
2.5

Other
0.1

 

 

 
0.1

Total
63.6
%
 
18.8
%
 
17.6
%
 
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 and nine months ended September 30, 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.







9



Results of Operations
____________________________________________________________________________________________
Highlights for the Three and Nine Months Ended September 30, 2019
Below are highlights of our performance for the three and nine months ended September 30, 2019 compared to the three and nine months ended September 30, 2018, as applicable, except as otherwise noted.
Net earnings increased 57.4% to $1,056 million and 50.3% to $3,016 million for the three and nine months ended September 30, 2019, respectively, which included the impact of reductions in reserves related to the sale of the Walmart consumer portfolio of $248 million and $829 million, respectively. The increases in net earnings were also driven primarily by higher net interest income, partially offset by increases in retailer share arrangements, and other expense.
Loan receivables decreased 4.9% to $83,207 million at September 30, 2019 compared to September 30, 2018, primarily driven by the reclassification of $8.2 billion of loan receivables associated with the Walmart portfolio to loan receivables held for sale, partially offset by higher purchase volume and average active account growth.
Net interest income increased 4.4% to $4,389 million and 8.4% to $12,770 million for the three and nine months ended September 30, 2019, respectively, 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 16.6% to $1,016 million and 26.1% to $2,829 million for the three and nine months ended September 30, 2019, respectively, primarily due to improved performance of the programs in which we have retailer share arrangements and growth.
Over-30 day loan delinquencies as a percentage of period-end loan receivables decreased 12 basis points to 4.47% at September 30, 2019, and the net charge-off rate increased 38 basis points to 5.35% and 13 basis points to 5.80% for the three and nine months ended September 30, 2019, respectively.
Provision for loan losses decreased by $432 million, or 29.8%, and $1,017 million, or 24.8%, for the three and nine months ended September 30, 2019, respectively, primarily driven by reductions in reserves for loan losses related to the Walmart consumer portfolio sale which was completed in October 2019. These reductions totaled $326 million and $1,095 million for the three and nine months ended September 30, 2019, respectively. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) decreased to 6.74% at September 30, 2019, as compared to 7.11% at September 30, 2018.
Other expense increased by $10 million, or 0.9%, and $149 million, or 4.9%, for the three and nine months ended September 30, 2019, respectively. The increase in the three months ended September 30, 2019 was primarily driven by business growth, partially offset by cost savings executed in advance of the Walmart consumer portfolio sale. The increase in the nine months ended September 30, 2019 was primarily driven by the PayPal Credit acquisition and business growth.
At September 30, 2019, deposits represented 76% of our total funding sources. Total deposits increased 3.1% to $66.0 billion at September 30, 2019, compared to December 31, 2018. Growth in our direct deposits of 8.7% to $53.7 billion, was partially offset by lower brokered deposits.
On May 9, 2019, we announced that our Board approved a share repurchase program of up to $4.0 billion through June 30, 2020 and plans to increase our quarterly dividend to $0.22 per common share commencing in the third quarter of 2019. During the nine months ended September 30, 2019, we repurchased $2.2 billion of our outstanding common stock, and declared and paid cash dividends of $0.64 per share, or $440 million.
In March 2019, we announced our acquisition of Pets Best and entry into the pet health insurance industry as a managing general agent.

10



2019 Partner Agreements
In our Retail Card sales platform, we extended and expanded our program with PayPal and will become the exclusive issuer of Venmo co-branded consumer credit card and extended our program agreement with Dick's Sporting Goods.
On October 11, 2019, we completed our sale and conversion of $8.2 billion of loan receivables associated with our Retail Card program agreement with Walmart.
In our Payment Solutions sales platform, we expanded our Synchrony Car Care program acceptance network, announced our new partnerships with Samsung HVAC and Zero Motorcycles, extended our program agreements with CCA Global Partners, Conn's HomePlus, La-Z-Boy, P.C. Richard & Son, Penske, Polaris, Rheem and Suzuki and launched our new program with Fanatics.
In our CareCredit sales platform, we expanded our network through our new partnerships with Baylor Scott & White Medical Center, Lehigh Valley Physician's Group, Loyale, Simplee and St. Luke's University Health Network, renewed our agreement with Bosley and launched our new program with Lighthouse.
Summary Earnings
The following table sets forth our results of operations for the periods indicated.
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Interest income
$
4,981

 
$
4,694

 
$
14,505

 
$
13,112

Interest expense
592

 
488

 
1,735

 
1,327

Net interest income
4,389

 
4,206

 
12,770

 
11,785

Retailer share arrangements
(1,016
)
 
(871
)
 
(2,829
)
 
(2,244
)
Provision for loan losses
1,019

 
1,451

 
3,076

 
4,093

Net interest income, after retailer share arrangements and provision for loan losses
2,354

 
1,884

 
6,865

 
5,448

Other income
85

 
63

 
267

 
201

Other expense
1,064

 
1,054

 
3,166

 
3,017

Earnings before provision for income taxes
1,375

 
893

 
3,966

 
2,632

Provision for income taxes
319

 
222

 
950

 
625

Net earnings
$
1,056

 
$
671

 
$
3,016

 
$
2,007


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
 
At and for the
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Financial Position Data (Average):
 
 
 
 
 
 
 
Loan receivables, including held for sale
$
90,556

 
$
86,783

 
$
89,752

 
$
81,270

Total assets
$
106,413

 
$
100,449

 
$
105,542

 
$
97,474

Deposits
$
65,898

 
$
60,398

 
$
64,826

 
$
58,223

Borrowings
$
21,117

 
$
21,858

 
$
21,577

 
$
21,334

Total equity
$
14,828

 
$
14,421

 
$
14,812

 
$
14,369

Selected Performance Metrics:
 
 
 
 
 
 
 
Purchase volume(1)(2)
$
38,395

 
$
36,443

 
$
109,199

 
$
100,337

Retail Card
$
29,282

 
$
27,863

 
$
83,472

 
$
75,930

Payment Solutions
$
6,281

 
$
6,007

 
$
17,478

 
$
16,773

CareCredit
$
2,832

 
$
2,573

 
$
8,249

 
$
7,634

Average active accounts (in thousands)(2)(3)
76,695

 
75,482

 
76,653

 
72,594

Net interest margin(4)
16.29
%
 
16.41
%
 
16.04
%
 
15.94
%
Net charge-offs
$
1,221

 
$
1,087

 
$
3,896

 
$
3,444

Net charge-offs as a % of average loan receivables, including held for sale
5.35
%
 
4.97
%
 
5.80
%
 
5.67
%
Allowance coverage ratio(5)
6.74
%
 
7.11
%
 
6.74
%
 
7.11
%
Return on assets(6)
3.9
%
 
2.7
%
 
3.8
%
 
2.8
%
Return on equity(7)
28.3
%
 
18.5
%
 
27.2
%
 
18.7
%
Equity to assets(8)
13.93
%
 
14.36
%
 
14.03
%
 
14.74
%
Other expense as a % of average loan receivables, including held for sale
4.66
%
 
4.82
%
 
4.72
%
 
4.96
%
Efficiency ratio(9)
30.8
%
 
31.0
%
 
31.0
%
 
31.0
%
Effective income tax rate
23.2
%
 
24.9
%
 
24.0
%
 
23.7
%
Selected Period-End Data:
 
 
 
 
 
 
 
Loan receivables
$
83,207

 
$
87,521

 
$
83,207

 
$
87,521

Allowance for loan losses
$
5,607

 
$
6,223

 
$
5,607

 
$
6,223

30+ days past due as a % of period-end loan receivables(10)
4.47
%
 
4.59
%
 
4.47
%
 
4.59
%
90+ days past due as a % of period-end loan receivables(10)
2.07
%
 
2.09
%
 
2.07
%
 
2.09
%
Total active accounts (in thousands)(2)(3)
77,094

 
75,457

 
77,094

 
75,457

______________________
(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) sum of net interest income, plus other income, less retailer share arrangements.
(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 September 30 ($ 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)
$
10,947

 
$
59

 
2.14
%
 
$
7,901

 
$
39

 
1.96
%
Securities available for sale
5,389

 
32

 
2.36
%
 
7,022

 
38

 
2.15
%
Loan receivables(3):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale
87,156

 
4,807

 
21.88
%
 
83,609

 
4,538

 
21.53
%
Consumer installment loans
2,022

 
48

 
9.42
%
 
1,753

 
41

 
9.28
%
Commercial credit products
1,329

 
35

 
10.45
%
 
1,355

 
37

 
10.83
%
Other
49

 

 
%
 
66

 
1

 
NM

Total loan receivables
90,556

 
4,890

 
21.42
%
 
86,783

 
4,617

 
21.11
%
Total interest-earning assets
106,892

 
4,981

 
18.49
%
 
101,706

 
4,694

 
18.31
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
1,374

 
 
 
 
 
1,217

 
 
 
 
Allowance for loan losses
(5,773
)
 
 
 
 
 
(5,956
)
 
 
 
 
Other assets
3,920

 
 
 
 
 
3,482

 
 
 
 
Total non-interest-earning assets
(479
)
 
 
 
 
 
(1,257
)
 
 
 
 
Total assets
$
106,413

 
 
 
 
 
$
100,449

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
65,615

 
$
411

 
2.49
%
 
$
60,123

 
$
314

 
2.07
%
Borrowings of consolidated securitization entities
11,770

 
88

 
2.97
%
 
12,306

 
86

 
2.77
%
Senior unsecured notes
9,347

 
93

 
3.95
%
 
9,552

 
88

 
3.66
%
Total interest-bearing liabilities
86,732

 
592

 
2.71
%
 
81,981

 
488

 
2.36
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
283

 
 
 
 
 
275

 
 
 
 
Other liabilities
4,570

 
 
 
 
 
3,772

 
 
 
 
Total non-interest-bearing liabilities
4,853

 
 
 
 
 
4,047

 
 
 
 
Total liabilities
91,585

 
 
 
 
 
86,028

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
Total equity
14,828

 
 
 
 
 
14,421

 
 
 
 
Total liabilities and equity
$
106,413

 
 
 
 
 
$
100,449

 
 
 
 
Interest rate spread(4)
 
 
 
 
15.78
%
 
 
 
 
 
15.95
%
Net interest income
 
 
$
4,389

 
 
 
 
 
$
4,206

 
 
Net interest margin(5)
 
 
 
 
16.29
%
 
 
 
 
 
16.41
%

13



 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
2018
Nine months ended September 30 ($ 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)
$
10,989

 
$
190

 
2.31
%
 
$
11,128

 
$
145

 
1.74
%
Securities available for sale
5,679

 
102

 
2.40
%
 
6,475

 
97

 
2.00
%
Loan receivables(3):
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale
86,471

 
13,975

 
21.61
%
 
78,227

 
12,647

 
21.62
%
Consumer installment loans
1,931

 
134

 
9.28
%
 
1,658

 
114

 
9.19
%
Commercial credit products
1,304

 
103

 
10.56
%
 
1,329

 
107

 
10.76
%
Other
46

 
1

 
2.91
%
 
56

 
2

 
4.77
%
Total loan receivables
89,752

 
14,213

 
21.17
%
 
81,270

 
12,870

 
21.17
%
Total interest-earning assets
106,420

 
14,505

 
18.22
%
 
98,873

 
13,112

 
17.73
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
1,327

 
 
 
 
 
1,192

 
 
 
 
Allowance for loan losses
(6,006
)
 
 
 
 
 
(5,779
)
 
 
 
 
Other assets
3,801

 
 
 
 
 
3,188

 
 
 
 
Total non-interest-earning assets
(878
)
 
 
 
 
 
(1,399
)
 
 
 
 
Total assets
$
105,542

 
 
 
 
 
$
97,474

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
64,546

 
$
1,183

 
2.45
%
 
$
57,941

 
$
836

 
1.93
%
Borrowings of consolidated securitization entities
12,315

 
278

 
3.02
%
 
12,178

 
240

 
2.63
%
Senior unsecured notes
9,262

 
274

 
3.96
%
 
9,156

 
251

 
3.67
%
Total interest-bearing liabilities
86,123

 
1,735

 
2.69
%
 
79,275

 
1,327

 
2.24
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
280

 
 
 
 
 
282

 
 
 
 
Other liabilities
4,327

 
 
 
 
 
3,548

 
 
 
 
Total non-interest-bearing liabilities
4,607

 
 
 
 
 
3,830

 
 
 
 
Total liabilities
90,730

 
 
 
 
 
83,105

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity
14,812

 
 
 
 
 
14,369

 
 
 
 
Total liabilities and equity
$
105,542

 
 
 
 
 
$
97,474

 
 
 
 
Interest rate spread(4)
 
 
 
 
15.53
%
 
 
 
 
 
15.49
%
Net interest income
 
 
$
12,770

 
 
 
 
 
$
11,785

 
 
Net interest margin(5)
 
 
 
 
16.04
%
 
 
 
 
 
15.94
%
______________________
(1)
Average yields/rates are based on total interest income/expense over average balances.
(2)
Includes average restricted cash balances of $1,219 million and $480 million for the three months ended September 30, 2019 and 2018, respectively and $879 million and $538 million for the nine months ended September 30, 2019 and 2018, respectively.
(3)
Interest income on loan receivables includes fees on loans of $737 million and $732 million for the three months ended September 30, 2019 and 2018, respectively and $2,091 million and $1,971 million for the nine months ended September 30, 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.

14



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 $287 million, or 6.1%, and $1,393 million, or 10.6%, for the three and nine months ended September 30, 2019, driven primarily by growth in our average loan receivables.
Average interest-earning assets
Three months ended September 30 ($ in millions)
2019
 
%
 
2018
 
%
Loan receivables, including held for sale
$
90,556

 
84.7
%
 
$
86,783

 
85.3
%
Liquidity portfolio and other
16,336

 
15.3
%
 
14,923

 
14.7
%
Total average interest-earning assets
$
106,892

 
100.0
%
 
$
101,706

 
100.0
%
 
 
 
 
 
 
 
 
Nine months ended September 30 ($ in millions)
2019
 
%
 
2018
 
%
Loan receivables, including held for sale
$
89,752

 
84.3
%
 
$
81,270

 
82.2
%
Liquidity portfolio and other
16,668

 
15.7
%
 
17,603

 
17.8
%
Total average interest-earning assets
$
106,420

 
100.0
%
 
$
98,873

 
100.0
%
The increase in average loan receivables of 4.3% and 10.4% for the three and nine months ended September 30, 2019, respectively, was driven by higher purchase volume and average active account growth. The increase in the nine months ended September 30, 2019 was also driven by the PayPal Credit acquisition. Purchase volume increased 5.4% and 8.8%, and average active accounts increased 1.6% and 5.6%, for the three and nine months ended September 30, 2019, respectively, including the effects of the PayPal Credit acquisition in the nine months ended September 30, 2019.
Yield on average interest-earning assets
The yield on average interest-earning assets increased for the three and nine months ended September 30, 2019. The increase for the three months ended September 30, 2019 is primarily due to an increase in the yield on our average loan receivables, partially offset by a decrease in the percentage of interest-earnings assets attributable to loan receivables. The increase in the nine months ended September 30, 2019 was primarily due to an increase in the percentage of interest-earning assets attributable to loan receivables. The increase in yield was 31 basis points to 21.42% for the three months ended September 30, 2019, which included the purchase accounting impact related to the PayPal Credit program in the prior year and remained flat at 21.17% for the nine months ended September 30, 2019, respectively.
Interest Expense
Interest expense increased by $104 million, or 21.3%, and $408 million, or 30.7%, for the three and nine months ended September 30, 2019, respectively, driven primarily by higher benchmark interest rates and growth in our deposit liabilities. Our cost of funds increased to 2.71% and 2.69% for the three and nine months ended September 30, 2019, respectively, compared to 2.36% and 2.24% for the three and nine months ended September 30, 2018, respectively.

15



Average interest-bearing liabilities
Three months ended September 30 ($ in millions)
2019
 
%
 
2018
 
%
Interest-bearing deposit accounts
$
65,615

 
75.6
%
 
$
60,123

 
73.3
%
Borrowings of consolidated securitization entities
11,770

 
13.6
%
 
12,306

 
15.0
%
Senior unsecured notes
9,347

 
10.8
%
 
9,552

 
11.7
%
Total average interest-bearing liabilities
$
86,732

 
100.0
%
 
$
81,981

 
100.0
%
 
 
 
 
 
 
 
 
Nine months ended September 30 ($ in millions)
2019
 
%
 
2018
 
%
Interest-bearing deposit accounts
$
64,546

 
74.9
%
 
$
57,941

 
73.1
%
Borrowings of consolidated securitization entities
12,315

 
14.3
%
 
12,178

 
15.4
%
Senior unsecured notes
9,262

 
10.8
%
 
9,156

 
11.5
%
Total average interest-bearing liabilities
$
86,123

 
100.0
%
 
$
79,275

 
100.0
%
The increases in average interest-bearing liabilities for the three and nine months ended September 30, 2019 were driven primarily by growth in our direct deposits.
Net Interest Income
Net interest income increased by $183 million, or 4.4%, and $985 million, or 8.4%, for the three and nine months ended September 30, 2019, respectively, primarily driven by higher average loan receivables, partially offset by increases in interest expense reflecting higher benchmark interest rates and growth in our deposit liabilities.
Retailer Share Arrangements
Retailer share arrangements increased by $145 million, or 16.6%, and $585 million, or 26.1%, for the three and nine months ended September 30, 2019, respectively, primarily due to improved performance of the programs in which we have retailer share arrangements and growth. The increase in the nine months ended September 30, 2019 also included the effects of the PayPal Credit acquisition.
Provision for Loan Losses
Provision for loan losses decreased by $432 million, or 29.8%, and $1,017 million, or 24.8%, for the three and nine months ended September 30, 2019, respectively, primarily driven by reductions in reserves for loan losses related to the Walmart consumer portfolio sale which was completed in October 2019. These reductions totaled $326 million and $1,095 million for the three and nine months ended September 30, 2019, respectively. The reduction for the nine months ended September 30, 2019 includes 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 in the first quarter of 2019. Our allowance coverage ratio decreased to 6.74% at September 30, 2019, as compared to 7.11% at September 30, 2018.
Other Income
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Interchange revenue
$
197

 
$
182

 
$
556

 
$
517

Debt cancellation fees
64

 
65

 
201

 
197

Loyalty programs
(203
)
 
(196
)
 
(562
)
 
(543
)
Other
27

 
12

 
72

 
30

Total other income
$
85

 
$
63

 
$
267

 
$
201


16



Other income increased by $22 million, or 34.9%, and $66 million, or 32.8%, for the three and nine months ended September 30, 2019, respectively. The increases for the three and nine months ended September 30, 2019 were primarily due to an increase in interchange revenue and reductions in certain contingent consideration obligations, partially offset by higher loyalty costs. The increases in interchange revenue were driven by increased purchase volume outside of our retail partners' sales channels.
Other Expense
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Employee costs
$
359

 
$
365

 
$
1,070

 
$
1,074

Professional fees
205

 
232

 
668

 
575

Marketing and business development
139

 
131

 
397

 
362

Information processing
127

 
105

 
363

 
308

Other
234

 
221

 
668

 
698

Total other expense
$
1,064

 
$
1,054

 
$
3,166

 
$
3,017

Other expense increased by $10 million, or 0.9%, for the three months ended September 30, 2019. The increase in the three months ended September 30, 2019 was primarily due to an increase in information processing costs, partially offset by a decrease in professional fees and cost savings executed in advance of the Walmart portfolio sale. The increase in information processing costs was primarily due to business growth, including strategic investments. In June 2019 we completed the conversion of the PayPal Credit portfolio, which also contributed to both the increase in information processing costs and the decrease in professional fees.
Other expense increased by $149 million, or 4.9%, for the nine months ended September 30, 2019, primarily due to increases in professional fees and information processing costs. The increase in professional fees was primarily due to interim servicing costs associated with acquired portfolios, including the PayPal Credit portfolio prior to the conversion in June 2019 and the increase in information processing costs was primarily due to business growth, including strategic investments.


17



Provision for Income Taxes
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Effective tax rate
23.2
%
 
24.9
%
 
24.0
%
 
23.7
%
Provision for income taxes
$
319

 
$
222

 
$
950

 
$
625

The effective tax rate for the three months ended September 30, 2019 decreased compared to the same period in the prior year primarily due to the impact of research and development credits recorded in the current year. The effective tax rate for the nine months ended September 30, 2019 increased compared to the same period in the prior year primarily due to a tax benefit recorded in the prior year following a methodology change related to loyalty costs. 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 and nine months ended September 30, 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 September 30,
 
Nine months ended September 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Purchase volume
$
29,282

 
$
27,863

 
$
83,472

 
$
75,930

Period-end loan receivables
$
52,697

 
$
59,139

 
$
52,697

 
$
59,139

Average loan receivables, including held for sale
$
60,660

 
$
58,964

 
$
60,494

 
$
54,101

Average active accounts (in thousands)
58,082

 
57,459

 
58,156

 
54,717

 
 
 
 
 
 
 
 
Interest and fees on loans
$
3,570

 
$
3,383

 
$
10,414

 
$
9,313

Retailer share arrangements
$
(998
)
 
$
(844
)
 
$
(2,774
)
 
$
(2,189
)
Other income
$
65

 
$
57

 
$
200

 
$
180

Retail Card interest and fees on loans increased by $187 million, or 5.5%, and $1,101 million, or 11.8%, for the three and nine months ended September 30, 2019, respectively. The increase was primarily the result of growth in average loan receivables. The increase in the nine months ended September 30, 2019 was also driven by the PayPal Credit acquisition.
Retailer share arrangements increased by $154 million, or 18.2%, and $585 million, or 26.7%, for the three and nine months ended September 30, 2019, respectively, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Other income increased by $8 million, or 14.0%, and $20.0 million, or 11.1%, for the three and nine months ended September 30, 2019, primarily as a result of the factors discussed under the heading “Other Income” above.

18



Payment Solutions
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Purchase volume
$
6,281

 
$
6,007

 
$
17,478

 
$
16,773

Period-end loan receivables
$
20,478

 
$
19,064

 
$
20,478

 
$
19,064

Average loan receivables
$
20,051

 
$
18,659

 
$
19,654

 
$
18,231

Average active accounts (in thousands)
12,384

 
12,062

 
12,354

 
11,992

 
 
 
 
 
 
 
 
Interest and fees on loans
$
721

 
$
683

 
$
2,092

 
$
1,970

Retailer share arrangements
$
(15
)
 
$
(24
)
 
$
(48
)
 
$
(48
)
Other income
$
(1
)
 
$
(2
)
 
$
11

 
$
(6
)
Payment Solutions interest and fees on loans increased by $38 million, or 5.6%, and $122 million, or 6.2%, for the three and nine months ended September 30, 2019, respectively. The increase was primarily driven by growth in average loan receivables.
CareCredit
 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Purchase volume
$
2,832

 
$
2,573

 
$
8,249

 
$
7,634

Period-end loan receivables
$
10,032

 
$
9,318

 
$
10,032

 
$
9,318

Average loan receivables
$
9,845

 
$
9,160

 
$
9,604

 
$
8,938

Average active accounts (in thousands)
6,229

 
5,961

 
6,143

 
5,885

 
 
 
 
 
 
 
 
Interest and fees on loans
$
599

 
$
551

 
$
1,707

 
$
1,587

Retailer share arrangements
$
(3
)
 
$
(3
)
 
$
(7
)
 
$
(7
)
Other income
$
21

 
$
8

 
$
56

 
$
27

CareCredit interest and fees on loans increased by $48 million, or 8.7%, and $120 million, or 7.6%, for the three and nine months ended September 30, 2019, respectively. The increase was primarily driven by growth in average loan receivables.
Loan Receivables
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our loan receivables portfolio.
Loan receivables are our largest category of assets and represent our primary source of revenue. The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.
($ in millions)
At September 30, 2019
 
(%)
 
At December 31, 2018
 
(%)
Loans
 
 
 
 
 
Credit cards
$
79,788

 
95.8
%
 
$
89,994

 
96.6
%
Consumer installment loans
2,050

 
2.5

 
1,845

 
2.0

Commercial credit products
1,317

 
1.6

 
1,260

 
1.4

Other
52

 
0.1

 
40

 

Total loans
$
83,207

 
100.0
%
 
$
93,139

 
100.0
%

19



Loan receivables decreased by $9.9 billion, or 10.7%, at September 30, 2019 compared to December 31, 2018, primarily driven by the reclassification of $8.2 billion of loan receivables associated with the Walmart portfolio to loan receivables held for sale and the seasonality of our business.
Loan receivables decreased by $4.3 billion, or 4.9%, at September 30, 2019 compared to September 30, 2018, primarily driven by the reclassification of the Walmart portfolio to loan receivables held for sale, partially offset by higher purchase volume and average active account growth.
Our loan receivables portfolio had the following geographic concentration at September 30, 2019.
($ in millions)
 
Loan Receivables
Outstanding
 
% of Total Loan
Receivables
Outstanding
State
 
California
 
$
8,836

 
10.6
%
Texas
 
$
8,301

 
10.0
%
Florida
 
$
7,004

 
8.4
%
New York
 
$
4,784

 
5.7
%
Pennsylvania
 
$
3,430

 
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 September 30, 2019
 
At December 31, 2018
Non-accrual loan receivables(1)
$
5

 
$
5

Loans contractually 90 days past-due and still accruing interest
1,715

 
2,116

Earning TDRs(2)
978

 
1,085

Non-accrual, past-due and restructured loan receivables
$
2,698

 
$
3,206

______________________
(1)
Excludes purchase credit impaired (“PCI”) loan receivables.
(2)
At September 30, 2019 and December 31, 2018, balances exclude $114 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 and nine months ended September 30, 2019 and 2018.

20



 
Three months ended September 30,
 
Nine months ended September 30,
($ in millions)
2019
 
2018
 
2019
 
2018
Gross amount of interest income that would have been recorded in accordance with the original contractual terms
$
68

 
$
68

 
$
198

 
$
195

Interest income recognized
11

 
13

 
33

 
37

Total interest income foregone
$
57

 
$
55

 
$
165

 
$
158

Delinquencies
Over-30 day loan delinquencies as a percentage of period-end loan receivables decreased to 4.47% at September 30, 2019 from 4.59% at September 30, 2018, and decreased from 4.76% at December 31, 2018. The decreases were primarily driven by the Walmart portfolio, as the current year rate included minimal delinquencies associated with the Walmart portfolio due to the timing of the portfolio sale in October 2019. The decrease as compared to December 31, 2018 also included the effects of 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 September 30,
 
Nine months ended September 30,
 
2019
 
2018
 
2019
 
2018
Ratio of net charge-offs to average loan receivables, including held for sale
5.35
%
 
4.97
%
 
5.80
%
 
5.67
%
Allowance for Loan Losses
The allowance for loan losses totaled $5,607 million at September 30, 2019, compared with $6,427 million at December 31, 2018 and $6,223 million at September 30, 2018, representing our best estimate of probable losses inherent in the portfolio. Our allowance for loan losses as a percentage of total loan receivables decreased to 6.74% at September 30, 2019, from 6.90% at December 31, 2018 and decreased from 7.11% at September 30, 2018. The decrease from December 31, 2018 is primarily driven by the reclassification of loan receivables associated with the Walmart portfolio to loan receivables held for sale, partially offset by the seasonality of our business. The decrease compared to the prior year is primarily driven by the reclassification of loan receivables associated with the Walmart portfolio to loan receivables held for sale. 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.

21



The following tables provide changes in our allowance for loan losses for the periods presented:
 ($ in millions)
Balance at July 1, 2019

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
September 30, 2019

 
 
 
 
 
 
 
 
 
 
Credit cards
$
5,702

 
$
993

 
$
(1,422
)
 
$
225

 
$
5,498

Consumer installment loans
50

 
18

 
(16
)
 
4

 
56

Commercial credit products
55

 
9

 
(14
)
 
2

 
52

Other
2

 
(1
)
 

 

 
1

Total
$
5,809

 
$
1,019

 
$
(1,452
)
 
$
231

 
$
5,607

($ in millions)
Balance at July 1, 2018

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
September 30, 2018

 
 
 
 
 
 
 
 
 
 
Credit cards
$
5,757

 
$
1,427

 
$
(1,269
)
 
$
202

 
$
6,117

Consumer installment loans
51

 
9

 
(13
)
 
4

 
51

Commercial credit products
50

 
15

 
(13
)
 
2

 
54

Other
1

 

 

 

 
1

Total
$
5,859

 
$
1,451

 
$
(1,295
)
 
$
208

 
$
6,223

 
 
 
 
 
 
 
 
 
 
($ in millions)
Balance at January 1, 2019

 
Provision charged to operations

 
Gross charge-offs

 
Recoveries

 
Balance at
September 30, 2019

 
 
Credit cards
$
6,327

 
$
2,994

 
$
(4,584
)
 
$
761

 
$
5,498

Consumer installment loans
44

 
46

 
(47
)
 
13

 
56

Commercial credit products
55

 
35

 
(43
)
 
5

 
52

Other
1

 
1

 
(1
)
 

 
1

Total
$
6,427

 
$
3,076

 
$
(4,675
)
 
$
779

 
$
5,607

 
 
 
 
 
 
 
 
 
 
 
Balance at
January 1, 2018

 
Provision
charged to
operations

 
Gross charge- 
offs

 
Recoveries

 
Balance at
September 30, 2018

($ in millions)
 
Credit cards
$
5,483

 
$
4,016

 
$
(4,016
)
 
$
634

 
$
6,117

Consumer installment loans
40

 
39

 
(40
)
 
12

 
51

Commercial credit products
50

 
38

 
(39
)
 
5

 
54

Other
1

 

 

 

 
1

Total
$
5,574

 
$
4,093

 
$
(4,095
)
 
$
651

 
$
6,223

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 senior unsecured notes.

22



The following table summarizes information concerning our funding sources during the periods indicated:
 
2019
 
2018
Three months ended September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
65,615

 
75.6
%
 
2.5
%
 
$
60,123

 
73.3
%
 
2.1
%
Securitized financings
11,770

 
13.6

 
3.0

 
12,306

 
15.0

 
2.8

Senior unsecured notes
9,347

 
10.8

 
4.0

 
9,552

 
11.7

 
3.7

Total
$
86,732

 
100.0
%
 
2.7
%
 
$
81,981

 
100.0
%
 
2.4
%
______________________
(1)
Excludes $283 million and $275 million average balance of non-interest-bearing deposits for the three months ended September 30, 2019 and 2018, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended September 30, 2019 and 2018.
 
 
 
 
 
 
 
 
 
 
 
 
 
2019
 
2018
Nine months ended September 30 ($ in millions)
Average
Balance
 
%
 
Average
Rate
 
Average
Balance
 
%
 
Average
Rate
Deposits(1)
$
64,546

 
74.9
%
 
2.5
%
 
$
57,941

 
73.1
%
 
1.9
%
Securitized financings
12,315

 
14.3

 
3.0

 
12,178

 
15.4

 
2.6

Senior unsecured notes
9,262

 
10.8

 
4.0

 
9,156

 
11.5

 
3.7

Total
$
86,123

 
100.0
%
 
2.7
%
 
$
79,275

 
100.0
%
 
2.2
%
______________________
(1)
Excludes $280 million and $282 million average balance of non-interest-bearing deposits for the nine months ended September 30, 2019 and 2018, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the nine months ended September 30, 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 September 30, 2019, we had $53.7 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.
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 September 30, 2019, had a weighted average remaining life of 2.1 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:

23



Three months ended September 30 ($ in millions)