SEC Form 10-K Filing Report

Company: Synchrony Financial
CIK: 1601712
SIC Code: 6199
Filing Date: 2016-02-25 00:00:00
Market Capitalization: 23162964.572525024

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ITEM 1. BUSINESS
ITEM 1. BUSINESS
Our Company
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We are one of the premier consumer financial services companies in the United States. Our roots in consumer finance trace back to 1932, and today we are the largest provider of private label credit cards in the United States based on purchase volume and receivables. We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners.” Through our partners’ over 350,000 locations across the United States and Canada, and their websites and mobile applications, we offer their customers a variety of credit products to finance the purchase of goods and services. During 2015, we financed $113.6 billion of purchase volume, and at December 31, 2015, we had $68.3 billion of loan receivables and 68.3 million active accounts. Our active accounts represent a geographically diverse group of both consumers and businesses, with an average FICO score of 715 for consumer active accounts at December 31, 2015. For the years ended December 31, 2015 and 2014, we had net earnings of $2.2 billion and $2.1 billion, respectively, representing a return on assets of 2.9% and 3.2%, respectively.
Our business benefits from longstanding and collaborative relationships with our partners, including some of the nation’s leading retailers and manufacturers with well-known consumer brands, such as Lowe’s, Walmart, Amazon and Ethan Allen. We believe our partner-centric business model has been successful because it aligns our interests with those of our partners and provides substantial value to both our partners and our customers. Our partners promote our credit products because they generate increased sales and strengthen customer loyalty. Our customers benefit from instant access to credit, discounts and promotional offers. We seek to differentiate ourselves through deep partner integration and our extensive marketing expertise. We have omni-channel (in-store, online and mobile) technology and marketing capabilities, which allow us to offer and deliver our credit products instantly to customers across multiple channels. For example, the purchase volume in our Retail Card platform from our online and mobile channels increased by 21% in 2015.
We conduct our operations through a single business segment. Our revenue activities are managed through three sales platforms: Retail Card, Payment Solutions and CareCredit. Retail Card is a leading provider of private label credit cards, and also provides Dual Cards and small- and medium-sized business credit products. Payment Solutions is a leading provider of promotional financing for major consumer purchases, offering primarily private label credit cards and installment loans. CareCredit is a leading provider of promotional financing to consumers for elective healthcare procedures or services, such as dental, veterinary, cosmetic, vision and audiology.
We offer our credit products primarily through our wholly-owned subsidiary, the Bank. Through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”), including certificates of deposit, individual retirement accounts (“IRAs”), money market accounts and savings accounts. We also take deposits at the Bank through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. We have expanded and continue to expand our online direct banking operations to increase our deposit base as a source of stable and diversified low cost funding for our credit activities. We had $43.4 billion in deposits at December 31, 2015.
Formation and Regulation of Synchrony
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Synchrony is a holding company for the legal entities that historically conducted GE’s North American retail finance business. Synchrony was incorporated in Delaware on September 12, 2003, but prior to April 1, 2013 conducted no business. During the period from April 1, 2013 to September 30, 2013, as part of a regulatory restructuring, substantially all of the assets and operations of GE’s North American retail finance business, including the Bank, were transferred to Synchrony. The remaining assets and operations of that business subsequently were transferred to Synchrony in connection with our initial public offering (the “IPO”), which closed in 2014. Following the IPO, GE owned approximately 84.6% of our common stock.
On October 14, 2015, we received approval from the Board of Governors of the Federal Reserve System (the "Federal Reserve Board") to become a stand-alone savings and loan holding company, to retain control of the Bank and to retain control of our nonbank subsidiaries following the completion of GE’s offer to exchange shares of GE common stock for all of our shares of our common stock owned by GE (the “exchange offer”). On November 17, 2015, we announced the completion of the exchange offer and our separation from GE (the "Separation"). Following the Separation, GE no longer owns any of our outstanding common stock.
As a savings and loan holding company, the Company is subject to regulation, supervision and examination by the Federal Reserve Board. In addition, as a large provider of consumer financial services, the Company is subject to regulation, supervision and examination by the CFPB.
The Bank is a federally chartered savings association and therefore 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 CFPB. In addition, the Bank, as an insured depository institution, is supervised by the FDIC.
For a discussion of the regulation of the Company and the Bank, see “-Regulation.” For information regarding certain regulatory matters, including consent orders or assurances of discontinuances that we have entered into with the CFPB, the Department of Justice (the “DOJ”) and the Attorney General for the State of New York relating to our CareCredit platform, our debt cancellation product and sales practices and certain collection offers, see “-Regulation-Consumer Financial Services Regulation” and “

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ITEM 1A. RISK FACTORS
ITEM 1A. RISK FACTORS
The following discussion of risk factors contains “forward-looking statements,” as discussed in “Cautionary Note Regarding Forward-Looking Statements”. These risk factors may be important to understanding any statement in this Annual Report on Form 10-K or elsewhere. The following information should be read in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” (MD&A), and the consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data” of this Form 10-K Report.
Our businesses routinely encounter and address risks, some of which will cause our future results to be different - sometimes materially different - than we anticipate. Discussion about important operational risks that our businesses encounter can be found in the business descriptions in “Item 1. Business” and the MD&A section of this Form 10-K Report. Below, we describe certain important strategic, operational, financial, and legal and compliance risks. Our reactions to material future developments as well as our competitors’ reactions to those developments will affect our future results.
Risks Relating to Our Businesses
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Macroeconomic conditions could have a material adverse effect on our business, results of operations and financial condition.
Key macroeconomic conditions historically have affected our business, results of operations and financial condition and are likely to affect them in the future. Consumer confidence, unemployment and housing indicators are among the factors that often impact consumer spending behavior. Poor economic conditions reduce the usage of our credit cards and other financing products and the average purchase amount of transactions on our credit cards and through our other products, which, in each case, reduces our interest and fee income. We rely primarily on interest and fee income to generate our net earnings. Our interest and fee income was $13.2 billion for the year ended December 31, 2015. Poor economic conditions also adversely affect the ability and willingness of customers to pay amounts owed to us, increasing delinquencies, bankruptcies, charge-offs and allowances for loan losses, and decreasing recoveries. For example, our over-30 day delinquency rate as a percentage of period-end loan receivables was 8.25% at December 31, 2009 during the financial crisis, compared to 4.06% at December 31, 2015, and our full-year net charge-off rate was 11.26% for the year ended December 31, 2009, compared to 4.33% for the year ended December 31, 2015. We believe the delinquency rate in our portfolio is at historically low levels and charge-off rates in our portfolio are back to pre-recession levels, and they both may increase and are likely to increase materially if economic conditions deteriorate.
While certain economic conditions in the United States have shown signs of improvement, economic growth has been slow and uneven as consumers continue to recover from previously high unemployment rates, lower housing values, concerns about the level of U.S. government debt and fiscal actions that may be taken to address this, as well as economic and political conditions in the global markets. A prolonged period of slow economic growth or a significant deterioration in economic conditions would likely affect consumer spending levels and the ability and willingness of customers to pay amounts owed to us, and could have a material adverse effect on our business, results of operations and financial condition.
Macroeconomic conditions may also cause net earnings to fluctuate and diverge from expectations of securities analysts and investors, who may have differing assumptions regarding the impact of these conditions on our business, and this may adversely impact our stock price.
Our results of operations and growth depend on our ability to retain existing partners and attract new partners.
Substantially all of our revenue is generated from the credit products we provide to customers of our partners pursuant to program agreements we enter into with our partners. As a result, our results of operations and growth depend on our ability to retain existing partners and attract new partners. Historically, there has been turnover in our partners, and we expect this will continue in the future. For example, during the year ended December 31, 2015, we sold certain credit card portfolios associated with retail partners whose program agreements with us were not extended beyond their contractual expiration dates.
Program agreements with our Retail Card partners and national and regional retailer and manufacturer Payment Solutions partners typically are for multi-year terms. These program agreements generally permit our partner to terminate the agreement prior to its scheduled termination date for various reasons, including, in some cases, if we fail to meet certain service levels or change certain key cardholder terms or our credit criteria, we fail to achieve certain targets with respect to approvals of new customers as a result of the credit criteria we use, we elect not to increase the program size when the outstanding loan receivables under the program reach certain thresholds or we are not adequately capitalized, or certain force majeure events or changes in our ownership occur or a material adverse change in our financial condition occurs. A few Payment Solutions programs with national and regional retailer and manufacturer partners also may be terminated at will by the partner on specified notice to us (e.g., several months). In addition, programs with manufacturers, buying groups and industry associations generally are made available to Payment Solutions partners such as individual retail outlets, dealers and merchants under dealer agreements, which typically may be terminated at will by the partner on short notice to us (e.g., 15 days).
There is significant competition for our existing partners, and our failure to retain our existing larger partner relationships upon the expiration or our earlier loss of a relationship upon the exercise of a partner’s early termination rights, or the expiration or termination of a substantial number of smaller partner relationships, could have a material adverse effect on our results of operations (including growth rates) and financial condition to the extent we do not acquire new partners of similar size and profitability or otherwise grow our business. The competition for new partners is also significant, and our failure to attract new partners could adversely affect our ability to grow.
A significant percentage of our platform revenue comes from relationships with a small number of Retail Card partners, and the loss of any of these Retail Card partners could adversely affect our business and results of operations.
Our five largest programs (Gap, JCPenney, Lowe’s, Sam’s Club and Walmart) accounted in aggregate for 49% of our total platform revenue for the year ended December 31, 2015 and 51% of loan receivables at December 31, 2015. Our programs with JCPenney and Walmart each accounted for more than 10% of our total platform revenue and JCPenney, Lowe's and Walmart each accounted for more than 10% of our total platform interest and fees and other income, in each case for the year ended December 31, 2015. Sam’s Club is a subsidiary of Walmart that is a separate contracting entity with its own program agreement with us, which we report separately from the Walmart program. We expect to have significant concentration in our largest relationships for the foreseeable future. See "Item 1. Business-Retail Card Partners."
The program agreements generally permit us or our partner to terminate the agreement prior to its scheduled termination date under various circumstances as described in the preceding risk factor. Some of our program agreements also provide that, upon expiration or termination, our partner may purchase or designate a third party to purchase the accounts and loans generated with respect to its program and all related customer data. The loss of any of our largest partners or a material reduction in the interest and fees we receive from their customers could have a material adverse effect on our results of operations and financial condition.
Our results depend, to a significant extent, on the active and effective promotion and support of our products by our partners.
Our partners generally accept most major credit cards and various other forms of payment, and therefore our success depends on their active and effective promotion of our products to their customers. We depend on our partners to integrate the use of our credit products into their store culture by training their sales associates about our products, having their sales associates encourage their customers to apply for, and use, our products and otherwise effectively marketing our products. In addition, although our Retail Card programs and our Payment Solutions programs with national and regional retailer partners typically are exclusive with respect to the credit products we offer at that partner, some Payment Solutions programs and most CareCredit provider relationships are not exclusive to us, and therefore a partner may choose to promote a competitor’s financing over ours, depending upon cost, availability or attractiveness to consumers or other factors. Typically, we do not have, or utilize, any recourse against these non-exclusive partners when they do not sufficiently promote our products. Partners may also implement or fail to implement changes in their systems and technologies that may disrupt the integration between their systems and technologies and ours, which could disrupt the use of our products. The failure by our partners to effectively promote and support our products as well as changes they may make in their business models that negatively impact card usage could have a material adverse effect on our business and results of operations. In addition, if our partners engage in improper business practices, do not adhere to the terms of our program agreements or other contractual arrangements or standards, or otherwise diminish the value of our brand, we may suffer reputational damage and customers may be less likely to use our products, which could have a material adverse effect on our business and results of operations.
Our results are impacted, to a significant extent, by the financial performance of our partners.
Our ability to generate new loans and the interest and fees and other income associated with them is dependent upon sales of merchandise and services by our partners. The retail and healthcare industries in which our partners operate are intensely competitive. Our partners compete with retailers and department stores in their own geographic areas, as well as catalog and internet sales businesses. Our partners in the healthcare industry compete with other healthcare providers. Our partners’ sales may decrease or may not increase as we anticipate for various reasons, some of which are in the partners’ control and some of which are not. For example, partner sales may be adversely affected by macroeconomic conditions having a national, regional or more local effect on consumer spending, business conditions affecting a particular partner or industry, or catastrophes affecting broad or more discrete geographic areas. If our partners’ sales decline for any reason, it generally results in lower credit sales, and therefore lower loan volume and associated interest and fees and other income for us from their customers. In addition, if a partner closes some or all of its stores or becomes subject to a voluntary or involuntary bankruptcy proceeding (or if there is a perception that it may become subject to a bankruptcy proceeding), its customers who have used our financing products may have less incentive to pay their outstanding balances to us, which could result in higher charge-off rates than anticipated and our costs for servicing its customers’ accounts may increase. This risk is particularly acute with respect to our largest partners that account for a significant amount of our platform revenue. See “-A significant percentage of our platform revenue comes from relationships with a small number of Retail Card partners, and the loss of any of these Retail Card partners could adversely affect our business and results of operations.” Moreover, if the financial condition of a partner deteriorates significantly or a partner becomes subject to a bankruptcy proceeding, we may not be able to recover for customer returns, customer payments made in partner stores or other amounts due to us from the partner. A decrease in sales by our partners for any reason or a bankruptcy proceeding involving any of them could have a material adverse impact on our business and results of operations.
Adverse financial market conditions or our inability to effectively manage our funding and liquidity risk could have a material adverse effect on our funding, liquidity and ability to meet our obligations.
We need to effectively manage our funding and liquidity in order to meet our cash requirements such as day-to-day operating expenses, extensions of credit to our customers, payments of principal and interest on our borrowings and payments on our other obligations. Our primary sources of funding and liquidity are collections from our customers, deposits, funds from securitized financings and proceeds from unsecured borrowings. If we do not have sufficient liquidity, we may not be able to meet our obligations, particularly during a liquidity stress event. If we maintain or are required to maintain too much liquidity, it could be costly and reduce our financial flexibility.
We will need additional financing in the future to refinance any existing debt and finance growth of our business. The availability of additional financing will depend on a variety of factors such as financial market conditions generally, including the availability of credit to the financial services industry, consumers’ willingness to place money on deposit in the Bank, our performance and credit ratings and the performance of our securitized portfolios. Disruptions, uncertainty or volatility in the capital, credit or deposit markets, such as the uncertainty and volatility experienced in the capital and credit markets during the financial crisis and more recently arising from the sovereign debt crisis in Europe and other economic and political conditions in the global markets and concerning the level of U.S. government debt and fiscal measures that may be taken over the longer term to address these matters, may limit our ability to obtain additional financing or refinance maturing liabilities on desired terms (including funding costs) in a timely manner or at all. As a result, we may be forced to delay obtaining funding or be forced to issue or raise funding on undesirable terms, which could significantly reduce our financial flexibility and cause us to contract or not grow our business, all of which could have a material adverse effect on our results of operations and financial conditions.
In addition, at December 31, 2015, we had an aggregate of $6.1 billion of undrawn committed capacity from private lenders under two of our existing securitization programs. Our ability to draw on such commitments is subject to the satisfaction of certain conditions, including the applicable securitization trust having sufficient collateral to support the draw and the absence of an early amortization event. Moreover, there are regulatory reforms that have recently been proposed or adopted in the United States and internationally that are intended to address certain issues that affected banks in the recent financial crisis. These reforms, generally referred to as “Basel III,” subject banks to more stringent capital, liquidity and leverage requirements. To the extent that the Basel III requirements result in increased costs to the banks providing undrawn committed capacity under our securitization programs, these costs are likely to be passed on to us. In addition, in response to Basel III, some banks in the market (including certain of the private lenders in our securitization programs) have added provisions to their credit agreements permitting them to delay disbursement of funding requests for 30 days or more. If our bank lenders require delayed disbursements of funding and/or higher pricing for committing undrawn capacity to us, our cost of funding and access to liquidity could be adversely affected.
While financial market conditions have generally stabilized and improved since the financial crisis, there can be no assurance that significant disruptions, uncertainties and volatility will not occur in the future. If we are unable to continue to finance our business, access capital markets and attract deposits on favorable terms and in a timely manner, or if we experience an increase in our borrowing costs or otherwise fail to manage our liquidity effectively, our results of operations and financial condition may be materially adversely affected.
A reduction in our credit ratings could materially increase the cost of our funding from, and restrict our access to, the capital markets.
Our senior unsecured debt currently is rated BBB- (stable outlook) by Fitch Ratings, Inc. (“Fitch”) and BBB- (stable outlook) by Standard & Poor’s (“S&P”). Although we have not requested that Moody’s Investor Services, Inc. (“Moody’s”) provide a rating for our senior unsecured debt, we believe that if Moody’s were to issue a rating on our unsecured debt, its rating would be lower than the comparable ratings issued by Fitch and S&P. The ratings for our unsecured debt are based on a number of factors, including our financial strength, as well as factors that may not be within our control, such as macroeconomic conditions and the rating agencies’ perception of the industries in which we operate and the products we offer. The ratings of our asset-backed securities are, and will continue to be, based on a number of factors, including the quality of the underlying loans and the credit enhancement structure with respect to each series of asset-backed securities, as well as our credit rating as sponsor and servicer of our publicly registered securitization trust. These ratings also reflect the various methodologies and assumptions used by the rating agencies, which are subject to change and could adversely affect our ratings. The rating agencies regularly evaluate our credit ratings as well as the credit ratings of our asset-backed securities. A downgrade in our unsecured debt or asset-backed securities credit ratings (or investor concerns that a downgrade may occur) could materially increase the cost of our funding from, and restrict our access to, the capital markets.
If the ratings on our asset-backed securities are reduced, put on negative watch or withdrawn, it may have an adverse effect on the liquidity or the market price of our asset-backed securities and on the cost of, or our ability to continue using, securitized financings to the extent anticipated.
Our inability to securitize our loans would have a material adverse effect on our business, liquidity, cost of funds and financial condition.
We use the securitization of loans, which involves the transfer of loans to a trust and the issuance by the trust of asset-backed securities to third-party investors, as a significant source of funding. Our average level of securitized financings from third parties was $13.9 billion and $14.8 billion for the years ended December 31, 2015 and 2014, respectively. For a discussion of our securitization activities, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Funding, Liquidity and Capital Resources-Funding Sources-Securitized Financings” and Note 5. Variable Interest Entities to our consolidated and combined financial statements.
Although the securitization market for credit cards has been re-established since the financial crisis that began in 2008, there can be no assurance that the market will not experience future disruptions. The extent to which we securitize our loans in the future will depend in part upon the conditions in the securities markets in general and the credit card asset-backed securities market in particular, the overall credit quality of our loans and the conformity of the loans and our securitization program to rating agency requirements, the costs of securitizing our loans, and the legal, regulatory, accounting and tax requirements governing securitization transactions. In the event we are unable to refinance existing asset-backed securities from our publicly registered securitization trust with new securities from the same trust, there are structural and regulatory constraints on our ability to refinance these asset-backed securities with Bank deposits or other funding at the Bank, and therefore we would be required to rely on sources outside of the Bank, which may not be available or may be available only at higher cost. A prolonged inability to securitize our loans on favorable terms, or at all, or to refinance our asset-backed securities would have a material adverse effect on our business, liquidity, cost of funds and financial condition.
The occurrence of an early amortization of our securitization facilities would have a material adverse effect on our liquidity and cost of funds.
Our liquidity would be materially adversely affected by the occurrence of events resulting in the early amortization of our existing securitized financings. During an early amortization period, principal collections from the loans in our asset-backed securitization trusts would be applied to repay principal of the asset-backed securities rather than being available on a revolving basis to fund purchases of newly originated loans. This would negatively impact our liquidity, including our ability to originate new loans under existing accounts, and require us to rely on alternative funding sources, which might increase our funding costs or might not be available when needed.
Our loss of the right to service or subservice our securitized loans would have a material adverse effect on our liquidity and cost of funds.
Synchrony currently acts as servicer with respect to our publicly registered securitization trust and its related series of asset-backed securities, and the Bank acts as servicer with respect to our other two securitization trusts. If Synchrony or the Bank, as applicable, defaults in its servicing obligations, an early amortization event could occur with respect to the relevant asset-backed securities and/or Synchrony or the Bank, as applicable, could be replaced as servicer. Servicer defaults include, for example, the failure of the servicer to make any payment, transfer or deposit in accordance with the securitization documents, a breach of representations, warranties or agreements made by the servicer under the securitization documents, the delegation of the servicer’s duties contrary to the securitization documents and the occurrence of certain insolvency events with respect to the servicer. Such an amortization event would have the adverse consequences discussed in the immediately preceding risk factor.
If either Synchrony or the Bank defaults in its servicing obligations with respect to any of our three securitization trusts, a third party could be appointed as servicer of the related trust. If a third-party servicer is appointed, there is no assurance that the third party will engage us as sub-servicer, in which event we would no longer be able to control the manner in which the related trust’s assets are serviced, and the failure of a third party to appropriately service such assets could lead to an early amortization event in the affected securitization trust, which would have the adverse consequences discussed in the immediately preceding risk factor.
Lower payment rates on our securitized loans could materially adversely affect our liquidity and financial condition.
Certain collections from our securitized loans come back to us through our subsidiaries, and we use these collections to fund our purchase of newly originated loans to collateralize our securitized financings. If payment rates on our securitized loans are lower than they have historically been, fewer collections will be remitted to us on an ongoing basis. Further, certain series of our asset-backed securities include a requirement that we accumulate principal collections in a restricted account for a specified number of months prior to the applicable security’s maturity date. We are required under the program documents to lengthen this accumulation period to the extent we expect the payment rates to be low enough that the current length of the accumulation period is inadequate to fully fund the restricted account by the applicable security’s maturity date. Lower payment rates, and in particular, payment rates that are low enough that we are required to lengthen our accumulation periods, could materially adversely affect our liquidity and financial condition.
Our inability to grow our deposits in the future could materially adversely affect our liquidity and ability to grow our business.
We obtain deposits directly from retail and commercial customers or through brokerage firms that offer our deposit products to their customers. At December 31, 2015, we had $29.7 billion in direct deposits (which includes deposits from banks and financial institutions) and $13.7 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger who channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to significantly expand our direct deposits.
The deposit business is highly competitive, with intense competition in attracting and retaining deposits. We compete on the basis of the rates we pay on deposits, features and benefits of our products, the quality of our customer service and the competitiveness of our digital banking capabilities. Our ability to originate and maintain retail deposits is also highly dependent on the strength of the Bank and the perceptions of consumers and others of our business practices and our financial health. Adverse perceptions regarding our reputation could lead to difficulties in attracting and retaining deposits accounts. Negative public opinion could result from actual or alleged conduct in a number of areas, including lending practices, regulatory compliance, inadequate protection of customer information or sales and marketing activities, and from actions taken by regulators or others in response to such conduct.
The demand for the deposit products we offer may also be reduced due to a variety of factors, such as demographic patterns, changes in customer preferences, reductions in consumers’ disposable income, regulatory actions that decrease customer access to particular products or the availability of competing products. Competition from other financial services firms and others that use deposit funding products may affect deposit renewal rates, costs or availability. Changes we make to the rates offered on our deposit products may affect our profitability and liquidity.
The FDIA prohibits an insured bank from accepting brokered deposits or offering interest rates on any deposits significantly higher than the prevailing rate in the bank’s normal market area or nationally (depending upon where the deposits are solicited), unless it is “well capitalized,” or it is “adequately capitalized” and receives a waiver from the FDIC. A bank that is “adequately capitalized” and accepts brokered deposits under a waiver from the FDIC may not pay an interest rate on any deposit in excess of 75 basis points over certain prevailing market rates. There are no such restrictions under the FDIA on a bank that is “well capitalized” and at December 31, 2015, the Bank met or exceeded all applicable requirements to be deemed “well capitalized” for purposes of the FDIA. However, there can be no assurance that the Bank will continue to meet those requirements. Limitations on the Bank’s ability to accept brokered deposits for any reason (including regulatory limitations on the amount of brokered deposits in total or as a percentage of total assets) in the future could materially adversely impact our funding costs and liquidity. Any limitation on the interest rates the Bank can pay on deposits could competitively disadvantage us in attracting and retaining deposits and have a material adverse effect on our business.
Changes in market interest rates could have a material adverse effect on our net earnings, funding and liquidity.
Changes in market interest rates cause our net interest income and our interest expense to increase or decrease, as certain of our assets and liabilities carry interest rates that fluctuate with market benchmarks. At December 31, 2015, 55.6% of our loan receivables bore a fixed interest rate to the customer, and we generally fund these assets with fixed rate certificates of deposit, securitized financing and unsecured debt. At December 31, 2015, 44.4% of our loan receivables bore a floating interest rate to the customer, and we generally fund these assets with floating rate deposits, asset-backed securities and unsecured debt. The interest rate benchmark for our floating rate assets is the prime rate, and the interest rate benchmark for our floating rate liabilities is generally either the London Interbank Offered Rate (“LIBOR”) or the federal funds rate. The prime rate and LIBOR or the 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. To the extent we are unable to effectively match the interest rates on our assets and liabilities (including, in the future, potentially through the use of derivatives), our net earnings could be materially adversely affected.
Competitive and regulatory factors may limit our ability to raise interest rates, fixed or floating, on our loans. In addition, some of our program agreements limit the rate of interest we can charge to customers under those agreements. If interest rates were to rise materially over a sustained period of time, and we are unable to sufficiently raise our interest rates in a timely manner, or at all, our net interest margin could be adversely impacted, which could have a material adverse effect on our net earnings.
Interest rates may also adversely impact our customers’ spending levels and ability and willingness to pay amounts owed to us. Our floating rate credit products bear interest rates that fluctuate with the prime rate. Higher interest rates often lead to higher payment obligations by customers to us and other lenders under mortgage, credit card and other consumer loans, which may reduce our customers’ ability to remain current on their obligations to us and therefore lead to increased delinquencies, bankruptcies, charge-offs and allowances for loan losses, and decreasing recoveries, all of which could have a material adverse effect on our net earnings.
Changes in interest rates and competitor responses to these changes may also impact customer decisions to maintain deposits with us, and reductions in deposits could materially adversely affect our funding costs and liquidity.
We assess our interest rate risk by estimating the effect on our net earnings of various scenarios that differ based on assumptions about the direction and the magnitude of interest rate changes. We take risk mitigation actions based on those assessments. Changes in interest rates could materially reduce our net interest income and our net earnings, and could also increase our funding costs and reduce our liquidity, especially if actual conditions turn out to be materially different from those we assumed. For a discussion of interest rate risk sensitivities, see “Item 7A. Quantitative and Qualitative Disclosures About Market Risk-Interest Rate Risk.”
Our risk management processes and procedures may not be effective in mitigating our risks.
Our risk management processes and procedures seek to appropriately balance risk and return and mitigate risks. We have established processes and procedures intended to identify, measure, monitor and control the types of risk to which we are subject, including credit risk, market risk, liquidity risk, strategic risk and operational (including compliance) risk. Credit risk is the risk of loss that arises when an obligor fails to meet the terms of an obligation. We are exposed to both consumer credit risk, from our customer loans, and institutional credit risk, principally from our partners. Market risk is the risk of loss due to changes in external market factors such as interest rates. Liquidity risk is the risk that financial condition or overall safety and soundness are adversely affected by an inability, or perceived inability, to meet obligations and support business growth. Strategic risk is the risk from changes in the business environment, improper implementation of decisions or inadequate responsiveness to changes in the business environment. Operational risk is the risk of loss arising from inadequate or failed processes, people or systems, external events (i.e., natural disasters) or compliance, reputational or legal matters and includes those risks as they relate directly to our Company as well as to third parties with whom we contract or otherwise do business. See “Item 1. Business-Credit Risk Management” and “Risk Management” for additional information on the types of risks affecting our business.
We seek to monitor and control our risk exposure through a framework that includes our risk appetite statement, ERA process, risk policies, procedures and controls, reporting requirements, credit risk culture and governance structure. Management of our risks in some cases depends upon the use of analytical and/or forecasting models. If the models that we use to manage these risks are ineffective at predicting future losses or are otherwise inadequate, we may incur unexpected losses or otherwise be adversely affected. In addition, the information we use in managing our credit and other risk may be inaccurate or incomplete as a result of error or fraud, both of which may be difficult to detect and avoid. There may also be risks that exist, or that develop in the future, that we have not appropriately anticipated, identified or mitigated including when processes are changed or new products and services are introduced. If our risk management framework does not effectively identify and control our risks, we could suffer unexpected losses or be adversely affected, and that could have a material adverse effect on our business, results of operations and financial condition.
We rely extensively on models in managing many aspects of our business, and if they are not accurate or are misinterpreted, it could have a material adverse effect on our business and results of operations.
We rely extensively on models in managing many aspects of our business, including liquidity and capital planning (including stress testing), customer selection, credit and other risk management, pricing, reserving and collections management. The models may prove in practice to be less predictive than we expect for a variety of reasons, including as a result of errors in constructing, interpreting or using the models or the use of inaccurate assumptions (including failures to update assumptions appropriately or in a timely manner). Our assumptions may be inaccurate for many reasons including that they often involve matters that are inherently difficult to predict and beyond our control (e.g., macroeconomic conditions and their impact on partner and customer behaviors) and they often involve complex interactions between a number of dependent and independent variables, factors and other assumptions. The errors or inaccuracies in our models may be material, and could lead us to make wrong or sub-optimal decisions in managing our business, and this could have a material adverse effect on our business, results of operations and financial condition.
Our business depends on our ability to successfully manage our credit risk, and failing to do so may result in high charge-off rates.
Our success depends on our ability to manage our credit risk while attracting new customers with profitable usage patterns. We select our customers, manage their accounts and establish terms and credit limits using proprietary scoring models and other analytical techniques that are designed to set terms and credit limits to appropriately compensate us for the credit risk we accept, while encouraging customers to use their available credit. The models and approaches we use to manage our credit risk may not accurately predict future charge-offs for various reasons discussed in the preceding risk factor.
Our ability to manage credit risk and avoid high charge-off rates also may be adversely affected by economic conditions that may be difficult to predict, such as the recent financial crisis. Although delinquencies and charge-offs continued to decline through 2015, they both may increase in the future and are likely to increase materially if economic conditions deteriorate. We remain subject to conditions in the consumer credit environment. There can be no assurance that our credit underwriting and risk management strategies will enable us to avoid high charge-off levels or delinquencies, or that our allowance for loan losses will be sufficient to cover actual losses.
A customer’s ability to repay us can be negatively impacted by increases in their payment obligations to other lenders under mortgage, credit card and other loans (including student loans). These changes can result from increases in base lending rates or structured increases in payment obligations, and could reduce the ability of our customers to meet their payment obligations to other lenders and to us. In addition, a customer’s ability to repay us can be negatively impacted by the restricted availability of credit to consumers generally, including reduced and closed lines of credit. Customers with insufficient cash flow to fund daily living expenses and lack of access to other sources of credit may be more likely to increase their card usage and ultimately default on their payment obligations to us, resulting in higher credit losses in our portfolio. Our collection operations may not compete effectively to secure more of customers’ diminished cash flow than our competitors. In addition, we may not identify customers who are likely to default on their payment obligations to us and reduce our exposure by closing credit lines and restricting authorizations quickly enough, which could have a material adverse effect on our business, results of operations and financial condition. At December 31, 2015, 26.9% of our portfolio’s loan receivables were from consumers with a FICO score of 660 or less (excluding unrated accounts), who typically have higher delinquency and credits losses than consumers with higher FICO scores.
Our ability to manage credit risk also may be adversely affected by legal or regulatory changes (such as bankruptcy laws and minimum payment regulations) and collection regulations, competitors’ actions and consumer behavior, as well as inadequate collections staffing, techniques, models and performance of vendors such as collection agencies.
Our allowance for loan losses may prove to be insufficient to cover losses on our loans.
We maintain an allowance for loan losses (a reserve established through a provision for losses charged to expense) that we believe is appropriate to provide for incurred losses in our loan portfolio. In addition, for portfolios we may acquire when we enter into new partner program agreements, any deterioration in the performance of the purchased portfolios after acquisition results in incremental loss reserves. Growth in our loan portfolio generally would lead to an increase in the allowance for loan losses.
The process for establishing an allowance for loan losses is critical to our results of operations and financial condition, and requires complex models and judgments, including forecasts of economic conditions. Changes in economic conditions affecting borrowers, new information regarding our loans and other factors, both within and outside of our control, may require an increase in the allowance for loan losses. We may underestimate our incurred losses and fail to maintain an allowance for loan losses sufficient to account for these losses. In cases where we modify a loan, if the modified loans do not perform as anticipated, we may be required to establish additional allowances on these loans.
We periodically review and update our methodology, models and the underlying assumptions, estimates and assessments we use to establish our allowance for loan losses to reflect our view of current conditions. Moreover, our regulators, as part of their supervisory function, periodically review the methodology, models and the underlying assumptions, estimates and assessments we use for calculating, and the adequacy of, our allowance for loan losses. Our regulators, based on their judgment, may conclude that we should modify our methodology, models or the underlying assumptions, estimates and assessments, increase our allowance for loan losses and/or recognize further losses. We continue to review and evaluate our methodology, models and the underlying assumptions, estimates and assessments we use and we will implement further enhancements or changes to them, as needed. We cannot assure you that our loan loss reserves will be sufficient to cover actual losses. Future increases in the allowance for loan losses or recognized losses (as a result of any review, update, regulatory guidance or otherwise) will result in a decrease in net earnings and capital and could have a material adverse effect on our business, results of operations and financial condition.
If assumptions or estimates we use in preparing our financial statements are incorrect or are required to change, our reported results of operations and financial condition may be adversely affected.
We are required to make various assumptions and estimates in preparing our financial statements under GAAP, including for purposes of determining allowances for loan losses, asset impairment, reserves related to litigation and other legal matters, valuation of income and other taxes and regulatory exposures and the amounts recorded for certain contractual payments to be paid to or received from partners and others under contractual arrangements. In addition, significant assumptions and estimates are involved in determining certain disclosures required under GAAP, including those involving the fair value of our financial instruments. If the assumptions or estimates underlying our financial statements are incorrect, the actual amounts realized on transactions and balances subject to those estimates will be different, and this could have a material adverse effect on our results of operations and financial condition.
In addition, the Financial Accounting Standards Board (“FASB”) is currently reviewing or proposing changes to several financial accounting and reporting standards that govern key aspects of our financial statements, including the proposed standard on accounting for credit losses and other areas where assumptions or estimates are required. As a result of changes to financial accounting or reporting standards, whether promulgated or required by the FASB or other regulators, we could be required to change certain of the assumptions or estimates we previously used in preparing our financial statements, which could materially impact how we record and report our results of operations and financial condition generally. For additional information on the key areas for which assumptions and estimates are used in preparing our financial statements, see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations-Critical Accounting Estimates” and Note 2. Basis of Presentation and Summary of Significant Accounting Policies to our consolidated and combined financial statements.
We may not be able to offset increases in our costs with decreased payments under our retailer share arrangements, which could reduce our profitability.
Most of our Retail Card program agreements and certain other program agreements contain retailer share arrangements that provide for payments to our partners if the economic performance of the relevant program exceeds a contractually defined threshold. Although the share arrangements vary by partner, these arrangements are generally structured to measure the economic performance of the program, based typically on agreed upon program revenues (including interest income and certain other income) less agreed upon program expenses (including interest expense, provision for loan losses, retailer payments and operating expenses), and share portions of this amount above a negotiated threshold. These arrangements are typically designed to permit us to achieve an economic return before we are required to make payments to our partners based on the agreed contractually defined threshold. However, because the threshold and the economic performance of a program that are used to calculate payments to our partners may be based on, among other things, agreed upon measures of program expenses rather than our actual expenses, we may not be able to pass on increases in our actual expenses (such as funding costs or operating expenses) in the form of reduced payments under our retailer share arrangements, and our economic return on a program could be adversely affected.
Competition in the consumer finance industry is intense.
The success of our business depends on our ability to retain existing partners and attract new partners. The competition for partners is intense and becoming more competitive. Our primary competitors for partners include major financial institutions, such as Alliance Data, American Express, Capital One, Chase, Citibank, TD Bank and Wells Fargo, and to a lesser extent, potential partners’ own in-house financing capabilities. Some of our competitors are substantially larger, have substantially greater resources and may offer a broader range of products and services. We compete for partners on the basis of a number of factors, including program financial and other terms, underwriting standards, marketing expertise, service levels, product and service offerings (including incentive and loyalty programs), technological capabilities and integration, brand and reputation. In addition, some of our competitors for partners have a business model that allows for their partners to manage underwriting (e.g., new account approval), customer service and collections, and other core banking responsibilities that we retain but some partners may prefer to handle. As a result of competition, we may be unable to acquire new partners, lose existing relationships to competing companies or find it more costly to maintain our existing relationships.
Our success also depends on our ability to attract and retain customers and generate usage of our products by them. The consumer credit and payments industry is highly competitive and we face an increasingly dynamic industry as emerging technologies enter the marketplace. As a form of payment, our products compete with cash, checks, debit cards, general purpose credit cards (including Visa and MasterCard, American Express and Discover Card), other private label card brands and, to a certain extent, prepaid cards. We also compete with non-traditional providers such as PayPal. In the future, we expect our products may face increased competition from new emerging payment technologies, such as Apple Pay, Android Pay, Chase Pay, Samsung Pay, Square and Walmart Pay, as well as consortia of merchants that are expected to combine payment systems to reduce interchange and other costs (e.g., CurrentC), to the extent that our products are not accepted in, or compatible with, such technologies. We may also face increased competition from current competitors or others who introduce or embrace disruptive technology that significantly changes the consumer credit and payment industry. We compete for customers and their usage of our products, and to minimize transfers to competitors of our customers’ outstanding balances, based on a number of factors, including pricing (interest rates and fees), product offerings, credit limits, incentives (including loyalty programs) and customer service. Although we offer a variety of consumer credit products, some of our competitors provide a broader selection of services, including home and automobile loans, debit cards and bank branch ATM access, which may position them better among customers who prefer to use a single financial institution to meet all of their financial needs. Some of our competitors are substantially larger than we are, which may give those competitors advantages, including a more diversified product and customer base, the ability to reach out to more customers and potential customers, operational efficiencies, more versatile technology platforms, broad-based local distribution capabilities and lower-cost funding. In addition, some of our competitors, including new and emerging competitors in the digital and mobile payments space, are not subject to the same regulatory requirements or legislative scrutiny to which we are subject, which also could place us at a competitive disadvantage. Customer attrition from any or all of our credit products or any lowering of the pricing of our products by reducing interest rates or fees in order to retain customers could reduce our revenues and therefore our earnings.
In our retail deposits business, we have acquisition and servicing capabilities similar to other direct banking competitors. We compete for deposits with traditional banks and, in seeking to grow our direct banking business, we compete with other banks that have direct banking models similar to ours, such as Ally Financial, American Express, Capital One 360 (ING), Discover, Nationwide, Sallie Mae and USAA. Competition among direct banks is intense because online banking provides customers the ability to rapidly deposit and withdraw funds and open and close accounts in favor of products and services offered by competitors.
If we are unable to compete effectively for partners, customer usage or deposits, our business and results of operations could be materially adversely affected.
Our business is heavily concentrated in U.S. consumer credit, and therefore our results are more susceptible to fluctuations in that market than a more diversified company.
Our business is heavily concentrated in U.S. consumer credit. As a result, we are more susceptible to fluctuations and risks particular to U.S. consumer credit than a more diversified company. For example, our business is particularly sensitive to macroeconomic conditions that affect the U.S. economy, consumer spending and consumer credit. We are also more susceptible to the risks of increased regulations and legal and other regulatory actions that are targeted at consumer credit or the specific consumer credit products that we offer (including promotional financing). Due to our CareCredit platform, we are also more susceptible to increased regulations and legal and other regulatory actions targeted at elective healthcare related procedures or services, in contrast to other industries. Our business concentration could have an adverse effect on our results of operations.
We may be unable to successfully develop and commercialize new or enhanced products and services.
Our industry is subject to rapid and significant changes in technologies, products and services. A key part of our financial success depends on our ability to develop and commercialize new products and services or enhancements to existing products and services, including with respect to loyalty programs, mobile and point of sale technologies, and new Synchrony-branded bank deposit and credit products. Realizing the benefits of those products and services is uncertain. We may not assign the appropriate level of resources, priority or expertise to the development and commercialization of these new products, services or enhancements. Our ability to develop, acquire or commercialize competitive technologies, products or services on acceptable terms or at all may be limited by intellectual property rights that third parties, including competitors and potential competitors, may assert. In addition, success is dependent on factors such as partner and customer acceptance, adoption and usage, competition, the effectiveness of marketing programs, the availability of appropriate technologies and business processes and regulatory approvals. Success of a new product, service or enhancement also may depend upon our ability to deliver it on a large scale, which may require a significant investment.
We also may select, utilize and invest in technologies, products and services that ultimately do not achieve widespread adoption and therefore are not as attractive or useful to our partners, customers and service partners as we anticipate, or partners may not recognize the value of our new products and services or believe they justify any potential costs or disruptions associated with implementing them. In addition, because our products and services typically are marketed through our partners, if our partners are unwilling or unable to effectively implement our new technologies, products, services or enhancements, we may be unable to grow our business. Competitors may also develop or adopt technologies or introduce innovations that change the markets we operate in and make our products less competitive and attractive to our partners and customers.
In any event, we may not realize the benefit of new technologies, products, services or enhancements for many years or competitors may introduce more compelling products, services or enhancements. Our failure to successfully develop and commercialize new or enhanced products, services or enhancements could have a material adverse effect on our business and results of operations.
We may not realize the value of strategic investments that we pursue and such investments could divert resources or introduce unforeseen risks to our business.
We may execute strategic acquisitions or partnerships or make other strategic investments in businesses, products, technologies or platforms to enhance or grow our business. These strategic investments may introduce new costs or liabilities which could impact our ability to grow or maintain acceptable performance.
We may be unable to integrate systems, personnel or technologies from our strategic investments. These strategic investments may also present unforeseen legal, regulatory or other challenges that we may not be able to manage effectively. The planning and integration of an acquisition, partnership or investment may shift employee time and other resources which could impair our ability to focus on our core business.
Strategic investments may not perform as expected due to lack of acceptance by partners, customers or employees, higher than forecasted costs, lengthy transition periods, synergies or savings not being realized and a variety of other factors. This may result in a delay or unrealized benefit, or in some cases, increased costs or other unforeseen risks to our business.
Reductions in interchange fees may reduce the competitive advantages our private label credit card products currently have by virtue of not charging interchange fees and would reduce our income from those fees.
Interchange is a fee merchants pay to the interchange network in exchange for the use of the network’s infrastructure and payment facilitation, and which are paid to credit card issuers to compensate them for the risk they bear in lending money to customers. We earn interchange fees on Dual Card transactions but we do not charge or earn interchange fees from our partners or customers on our private label credit card products.
Merchants, trying to decrease their operating expenses, have sought to, and have had some success at, lowering interchange rates. Several recent events and actions indicate a continuing increase in focus on interchange by both regulators and merchants. Beyond pursuing litigation, legislation and regulation, merchants are also pursuing alternate payment platforms as a means to lower payment processing costs. To the extent interchange fees are reduced, one of our current competitive advantages with our partners-that we typically do not charge interchange fees when our private label credit card products are used to purchase our partners’ goods and services-may be reduced. Moreover, to the extent interchange fees are reduced, our income from those fees will be lower. We received approximately $505 million of interchange fees for the year ended December 31, 2015. As a result, a reduction in interchange fees could have a material adverse effect on our business and results of operations. In addition, for our Dual Cards, we are subject to the operating regulations and procedures set forth by the interchange network, and our failure to comply with these operating regulations, which may change from time to time, could subject us to various penalties or fees, or the termination of our license to use the interchange network, all of which could have a material adverse effect on our business and results of operations.
Fraudulent activity associated with our products and services could negatively impact our operating results, brand and reputation and cause the use of our products and services to decrease and our fraud losses to increase.
We are subject to the risk of fraudulent activity associated with partners, customers and third parties handling customer information. Our fraud-related losses have increased significantly in recent years and were $219 million, $154 million and $134 million for the years ended December 31, 2015, 2014 and 2013, respectively. Our fraud-related losses are due primarily to our Dual Card product, which has grown in recent years and, like the overall market for general purpose credit cards, has experienced significant counterfeit and mail/phone fraud (including as a result of well-publicized security breaches at retailers unrelated to us). Our products are also susceptible to application fraud, because among other things, we provide immediate access to the credit line at the time of approval. In addition, sales on the internet and through mobile channels are becoming a larger part of our business and fraudulent activity is higher as a percentage of sales in those channels than in stores. Dual Cards and private label credit cards are susceptible to different types of fraud, and, depending on our product channel mix (including as a result of the introduction, if any, of a Synchrony-branded general purpose credit card), we may continue to experience variations in, or levels of, fraud-related expense that are different from or higher than that experienced by some of our competitors or the industry generally.
The risk of fraud continues to increase for the financial services industry in general, and credit card fraud, identity theft and related crimes are likely to continue to be prevalent, and perpetrators are growing more sophisticated. Our resources, technologies and fraud prevention tools may be insufficient to accurately detect and prevent fraud. In 2015, we reissued all active Dual Cards (Visa and MasterCards) that were active at the time when the portfolio was reissued with new EMV chip cards with all of our retail partners, but the types of fraud perpetrated will continue to shift to other fraud types, and we expect to see an increase in the rates of attack in application fraud, account takeover, and card-not-present fraud. High profile fraudulent activity also could negatively impact our brand and reputation, which could negatively impact the use of our cards and thereby have a material adverse effect on our results of operations. In addition, significant increases in fraudulent activity could lead to regulatory intervention (such as increased customer notification requirements and mandatory issuance of cards with EMV chips), which could increase our costs and also negatively impact our operating results, brand and reputation and could lead us to take steps to reduce fraud risk, which could increase our costs.
Cyber-attacks or other security breaches could have a material adverse effect on our business.
In the normal course of business, we collect, process and retain sensitive and confidential information regarding our partners and our customers. We also have arrangements in place with our partners and other third parties through which we share and receive information about their customers who are or may become our customers. Although we devote significant resources and management focus to ensuring the integrity of our systems through information security and business continuity programs, our facilities and systems, and those of our partners and third-party service providers, are vulnerable to external or internal security breaches, acts of vandalism, computer viruses, misplaced or lost data, programming or human errors, or other similar events. We and our partners and third-party service providers have experienced all of these events in the past and expect to continue to experience them in the future. These events could interrupt our business or operations, result in significant legal and financial exposure, supervisory liability, damage to our reputation or a loss of confidence in the security of our systems, products and services. Although the impact to date from these events has not had a material adverse effect on us, we cannot be sure this will be the case in the future.
Information security risks for large financial institutions like us have increased recently in part because of new technologies, the use of the internet and telecommunications technologies (including mobile devices) to conduct financial and other business transactions and the increased sophistication and activities of organized crime, perpetrators of fraud, hackers, terrorists and others. In addition to cyber-attacks or other security breaches involving the theft of sensitive and confidential information, hackers recently have engaged in attacks against large financial institutions that are designed to disrupt key business services, such as consumer-facing web sites. The Separation and our emergence as a separately branded company could increase our profile and therefore our risk of being targeted for cyber-attacks and other security breaches, including attacks targeting our key business services and websites. We are not able to anticipate or implement effective preventive measures against all security breaches of these types, especially because the techniques used change frequently and because attacks can originate from a wide variety of sources. We employ detection and response mechanisms designed to contain and mitigate security incidents, but early detection may be thwarted by sophisticated attacks and malware designed to avoid detection.
We also face risks related to cyber-attacks and other security breaches in connection with credit card transactions that typically involve the transmission of sensitive information regarding our customers through various third-parties, including our partners, retailers that are not our partners where our Dual Cards are used, merchant acquiring banks, payment processors, card networks (e.g., Visa and MasterCard) and our processors (e.g., First Data). Some of these parties have in the past been the target of security breaches and cyber-attacks, and because the transactions involve third parties and environments such as the point of sale that we do not control or secure, future security breaches or cyber-attacks affecting any of these third parties could impact us through no fault of our own, and in some cases, we may have exposure and suffer losses for breaches or attacks relating to them. We also rely on numerous other third-party service providers to conduct other aspects of our business operations and face similar risks relating to them. While we regularly conduct security assessments of significant third-party service providers, we cannot be sure that their information security protocols are sufficient to withstand a cyber-attack or other security breach.
The access by unauthorized persons to, or the improper disclosure by us of, confidential information regarding our customers or our own proprietary information, software, methodologies and business secrets could interrupt our business or operations, result in significant legal and financial exposure, supervisory liability, damage to our reputation or a loss of confidence in the security of our systems, products and services, all of which could have a material adverse impact on our business, financial condition and results of operations. In addition, recently there have been a number of well-publicized attacks or breaches directed at others in our industry that have heightened concern by consumers generally about the security of using credit cards, which have caused some consumers, including our customers, to use our credit cards less in favor of alternative methods of payment and has led to increased regulatory focus on, and potentially new regulations relating to, these matters. Further cyber-attacks or other breaches in the future, whether affecting us or others, could intensify consumer concern and regulatory focus and result in reduced use of our cards and increased costs, all of which could have a material adverse effect on our business.
The failure of third parties to provide various services that are important to our operations could have a material adverse effect on our business and results of operations.
Some services important to our business are outsourced to third-party vendors. For example, our credit card transaction processing, production and related services (including the printing and mailing of customer statements) are handled by First Data. First Data, and, in some cases, other third-party vendors, are the sole source or one of a limited number of sources of the services they provide for us. It would be difficult and disruptive for us to replace some of our third-party vendors, particularly First Data, in a timely manner if they were unwilling or unable to provide us with these services in the future (as a result of their financial or business conditions or otherwise), and our business and operations likely would be materially adversely affected. First Data has publicly disclosed that it is highly leveraged and that it has incurred net losses of $1.5 billion, $458 million and $869 million for the years ended December 31, 2015, 2014 and 2013, respectively. Our principal agreement with First Data expires in November 2026, unless it is terminated earlier or is extended pursuant to the terms thereof. In addition, if a third-party provider fails to provide the services we require, fails to meet contractual requirements, such as compliance with applicable laws and regulations, or suffers a cyber-attack or other security breach, our business could suffer economic and reputational harm that could have a material adverse effect on our business and results of operations.
We are replacing the third-party vendor that manages the technology platform for our online retail deposits. This transition to a new vendor could have a material adverse effect on our business.
The technology platform for our online retail deposits is currently managed by FIS, and will be managed by a replacement vendor, Fiserv. During 2015, we began the process of transitioning the core banking and deposit services provided by FIS to Fiserv. We currently expect our planned transition to our new vendor will be completed in 2016. This transition to a new vendor could be difficult for us and could have a material adverse effect on our business.
Disruptions in the operation of our computer systems and data centers could have a material adverse effect on our business.
Our ability to deliver products and services to our partners and our customers, service our loans and otherwise operate our business and comply with applicable laws depends on the efficient and uninterrupted operation of our computer systems and data centers, as well as those of our partners and third-party service providers. These computer systems and data centers may encounter service interruptions at any time due to system or software failure, natural disaster or other reasons. In addition, the implementation of technology changes and upgrades to maintain current and integrate new systems may also cause service interruptions, transaction processing errors and system conversion delays and may cause our failure to comply with applicable laws, all of which could have a material adverse effect on our business.
In connection with the Separation, we have migrated, and in some cases, established with third parties, key parts of our technology infrastructure, including our data centers. As we migrated, and continue to migrate, to our new data centers, our partners have needed, and will need, to make changes to their networks to establish connectivity with us. These infrastructure changes, both the ones that we make and the ones required of our partners, may cause disruptions, systems interruptions, transaction processing errors and system conversion delays.
We expect that new technologies and business processes applicable to the consumer credit industry will continue to emerge, and these new technologies and business processes may be better than those we currently use. The pace of technology change is high and our industry is intensely competitive, and we cannot assure you that we will be able to sustain our investment in new technology as critical systems and applications become obsolete and better ones become available. A failure to maintain current technology and business processes could cause disruptions in our operations or cause our products and services to be less competitive, all of which could have a material adverse effect on our business, financial condition and results of operations.
We have international operations that subject us to various international risks as well as increased compliance and regulatory risks and costs.
We have international operations, primarily in India, the Philippines and Canada, and some of our third-party service providers provide services to us from other countries, all of which subject us to a number of international risks, including, among other things, sovereign volatility and socio-political instability. U.S. regulations also govern various aspects of the international activities of domestic corporations and increase our compliance and regulatory risks and costs. Any failure on our part or the part of our service providers to comply with applicable U.S. regulations, as well as the regulations in the countries and markets in which we or they operate, could result in fines, penalties, injunctions or other similar restrictions, any of which could have a material adverse effect on our business, results of operations and financial condition.
If we are alleged to have infringed upon the intellectual property rights owned by others or are not able to protect our intellectual property, our business and results of operations could be adversely affected.
Competitors or other third parties may allege that we, or consultants or other third parties retained or indemnified by us, infringe on their intellectual property rights. We also may face allegations that our employees have misappropriated intellectual property of their former employers or other third parties. Given the complex, rapidly changing and competitive technological and business environment in which we operate, and the potential risks and uncertainties of intellectual property-related litigation, an assertion of an infringement claim against us may cause us to spend significant amounts to defend the claim (even if we ultimately prevail), pay significant money damages, lose significant revenues, be prohibited from using the relevant systems, processes, technologies or other intellectual property, cease offering certain products or services, or incur significant license, royalty or technology development expenses. Moreover, it has become common in recent years for individuals and groups to purchase intellectual property assets for the sole purpose of making claims of infringement and attempting to extract settlements from companies like ours. Even in instances where we believe that claims and allegations of intellectual property infringement against us are without merit, defending against such claims is time consuming and expensive and could result in the diversion of time and attention of our management and employees. In addition, although in some cases a third party may have agreed to indemnify us for such costs, such indemnifying party may refuse or be unable to uphold its contractual obligations.
Moreover, we rely on a variety of measures to protect our intellectual property and proprietary information, including copyrights, trademarks, patents, trade secrets and controls on access and distribution. These measures may not prevent misappropriation or infringement of our intellectual property or proprietary information and a resulting loss of competitive advantage, and in any event, we may be required to litigate to protect our intellectual property and proprietary information from misappropriation or infringement by others, which is expensive, could cause a diversion of resources and may not be successful. Third parties may challenge, invalidate or circumvent our intellectual property, or our intellectual property may not be sufficient to provide us with competitive advantages. Our competitors or other third parties may independently design around or develop similar technology, or otherwise duplicate our services or products such that we could not assert our intellectual property rights against them. In addition, our contractual arrangements may not effectively prevent disclosure of our intellectual property or confidential and proprietary information or provide an adequate remedy in the event of an unauthorized disclosure.
We have launched our new brand, “Synchrony,” and expect to spend significant amounts over the next few years promoting the new brand. We recently filed trademark applications to protect our new name in the United States and certain other countries, but the registrations of many of these trademarks are not complete and they may ultimately not become registered. Our use of our new name (for our existing or any new products in the United States or other countries) may be challenged by third parties, and we may become involved in legal proceedings to protect or defend our rights with respect to our new name, all of which could have a material adverse effect on our business and results of operations.
Litigation, regulatory actions and compliance issues could subject us to significant fines, penalties, judgments, remediation costs and/or requirements resulting in increased expenses.
Our business is subject to increased risks of litigation and regulatory actions as a result of a number of factors and from various sources, including the highly regulated nature of the financial services industry, the focus of state and federal prosecutors on banks and the financial services industry and the structure of the credit card industry.
In the normal course of business, from time to time, we have been named as a defendant in various legal actions, 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. In addition, while historically the arbitration provision in our customer agreements generally has limited our exposure to consumer class action litigation, there can be no assurance that we will be successful in enforcing our arbitration clause in the future. There may also be legislative, administrative or regulatory efforts to directly or indirectly prohibit the use of pre-dispute arbitration clauses, or we may be compelled as a result of competitive pressure or reputational concerns to voluntarily eliminate pre-dispute arbitration clauses. In March 2015, the CFPB issued a report scrutinizing pre-dispute arbitration clauses, and in October 2015, the CFPB published proposals that would require any arbitration agreement included in a contract for a consumer financial product or service to provide explicitly that the arbitration agreement is inapplicable to cases filed in court on behalf of a class unless and until class certification is denied or the class claims are dismissed. If the CFPB proposals are enacted, our exposure to class action litigation could increase significantly.
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 earnings and damage to our reputation. The current environment of additional regulation, increased regulatory compliance efforts and enhanced regulatory enforcement has resulted in significant operational and compliance costs and may prevent or make it less attractive for us to continue providing certain products and services. There is no assurance that these regulatory matters or other factors will not, in the future, affect how we conduct our business and in turn have a material adverse effect on our business, results of operations and financial condition.
We contest liability and/or the amount of damages as appropriate in each pending matter. The outcome of pending and future matters could be material to our results of operations, financial condition and cash flows depending on, among other factors, the level of our earnings for that period, and could adversely affect our business and reputation. For a discussion of certain legal proceedings, see “Item 1. Business-Regulation-Consumer Financial Services Regulation,” Note 17. Legal Proceedings and Regulatory Matters to our consolidated and combined financial statements, and “Item 3. Legal Proceedings.”
In addition to litigation and regulatory matters, from time to time, through our operational and compliance controls, we identify compliance issues that require us to make operational changes and, depending on the nature of the issue, result in financial remediation to impacted cardholders. These self-identified issues and voluntary remediation payments could be significant depending on the issue and the number of cardholders impacted. They also could generate litigation or regulatory investigations that subject us to additional adverse effects on our business, results of operations and financial condition.
Damage to our reputation could negatively impact our business.
Recently, financial services companies have been experiencing increased reputational risk as consumers take issue with certain of their practices or judgments. Maintaining a positive reputation is critical to our attracting and retaining customers, partners, investors and employees. In particular, adverse perceptions regarding our reputation could also make it more difficult for us to execute on our strategy of increasing retail deposits at the Bank and may lead to decreases in deposits. Harm to our reputation can arise from many sources, including employee misconduct, misconduct by our partners, outsourced service providers or other counterparties, litigation or regulatory actions, failure by us or our partners to meet minimum standards of service and quality, inadequate protection of customer information and compliance failures. Negative publicity regarding us (or others engaged in a similar business or activities), whether or not accurate, may damage our reputation, which could have a material adverse effect on our business, results of operations and financial condition.
Our business could be adversely affected if we are unable to attract, retain and motivate key officers and employees.
Our success depends, in large part, on our ability to retain, recruit and motivate key officers and employees. Our senior management team has significant industry experience and would be difficult to replace. Competition for senior executives in the financial services and payment industry is intense. We may not be able to attract and retain qualified personnel to replace or succeed members of our senior management team or other key personnel. Guidance issued by the federal banking regulators, as well as proposed rules implementing the executive compensation provisions of the Dodd-Frank Act, may limit the type and structure of compensation arrangements that we may enter into with our most senior executives. In addition, proposed rules under the Dodd-Frank Act would prohibit the payment of “excessive” compensation to our executives. Compensation paid to officers of the Bank would be subject to comparable limitations. These restrictions could negatively impact our ability to compete with other companies in recruiting, retaining and motivating key personnel. Failure to retain talented senior leadership could have a material adverse effect on our business, results of operations and financial condition.
Tax legislation initiatives or challenges to our tax positions could adversely affect our results of operations and financial condition.
We operate in multiple jurisdictions and we are subject to tax laws and regulations of the U.S. federal, state and local governments, and of various foreign jurisdictions. From time to time, legislative initiatives may be proposed, such as proposals for fundamental tax reform in the United States and lowering the corporate tax rate, which may impact our effective tax rate and could adversely affect our deferred tax assets, tax positions and/or our tax liabilities. In addition, U.S. federal, state and local, as well as foreign, tax laws and regulations are extremely complex and subject to varying interpretations. There can be no assurance that our historical tax positions will not be challenged by relevant tax authorities or that we would be successful in defending our position in connection with any such challenge.
State sales tax rules and regulations, and their application and interpretation by the respective states, could change and adversely affect our results of operations.
State sales tax rules and regulations, and their application and interpretation by the respective states, could adversely affect our results of operations. Retailers collect sales tax from retail customers and remit those collections to the applicable states. When customers fail to repay their loans, including the amount of sales tax advanced by us to the merchant on their behalf, we are entitled, in some cases, to seek a refund of the amount of sales tax from the applicable state. Sales tax laws and regulations enacted by the various states are subject to interpretation, and our compliance with such laws is routinely subject to audit and review by the states. Audit risk is concentrated in several states, and these states are conducting ongoing audits. The outcomes of ongoing and any future audits and changes in the states’ interpretation of the sales tax laws and regulations involving the recovery of tax on bad debts could materially adversely impact our results of operations.
We could have a material indemnification obligation to GE under the TSSA if we cause the split-off from GE or certain preliminary transactions to fail to qualify for tax-free treatment or in the case of certain significant transfers of our stock following the split-off from GE.
GE completed its exit from its investment in us in an exchange offer that concluded in November 2015, resulting in our split-off from GE. The split-off was designed to qualify for tax­free treatment to GE and its shareholders under Section 355 of the Internal Revenue Code of 1986, as amended (the “Code”). GE obtained a private letter ruling from the IRS regarding certain issues relating to the tax­free treatment of the split-off and a series of preliminary transactions that occurred prior to implementing the exchange offer. Although the IRS private letter ruling is generally binding on the IRS, the continuing validity of such ruling is subject to the accuracy of factual representations and assumptions made in the IRS private letter ruling. The IRS private letter ruling addresses only certain aspects of the transaction. As a result, GE obtained an opinion from tax counsel confirming the tax-free treatment of the split-off. The opinion is based upon various factual representations and assumptions, as well as certain undertakings made by us and GE. If any of those factual representations or assumptions in the IRS private letter ruling or tax opinion are untrue or incomplete in any material respect, any undertaking is not complied with, or the facts upon which the IRS private letter ruling or tax opinion was based are materially different from the facts at the time of the distribution, the split-off may not qualify for tax­free treatment. Opinions of counsel are not binding on the IRS. As a result, the conclusions expressed in the opinion of counsel could be challenged by the IRS, and if the IRS prevails in such challenge, the tax consequences of the split-off could be materially less favorable. If the split-off (or any of the preliminary transactions) is determined to be taxable, GE and its shareholders could incur significant tax liabilities, and under the TSSA we entered into with GE, we may be required to indemnify GE for any liabilities incurred by GE if the liabilities are caused by any action or inaction undertaken by us following the IPO or as a result of any direct or indirect transfers of our stock following the exchange offer.
In order to preserve the tax­free status of the split-off and the preliminary transactions to GE, the TSSA includes a provision generally prohibiting us from taking any action or inaction that is within our control (other than actions or inactions that implemented the split-off or certain preliminary transactions or actions or inactions that are consented to by GE or are at the direction of GE) that would cause the split-off (or the preliminary transactions) to become taxable, and providing for an indemnity obligation from us to GE for tax liabilities incurred by GE as a result of a breach of these provisions by us or as a result of any direct or indirect transfers of our stock following the exchange offer. As a result, we may not, as part of a plan that includes the exchange offer, enter into certain mergers or other change of control transactions.
The obligations associated with being an independent public company require significant resources and management attention.
As an independent public company, we are subject to the reporting requirements of the Exchange Act, the Sarbanes-Oxley Act and SEC rules thereunder, the Dodd-Frank Act and regulations of the NYSE. The Exchange Act requires that we file annual, quarterly and current reports with respect to our business and financial condition. The Sarbanes-Oxley Act and SEC rules thereunder require, among other things, that we establish and maintain effective internal controls and procedures for financial reporting. Such requirements have and will increase our legal, accounting and financial compliance costs, make some activities more difficult, time-consuming and costly and could be burdensome on our personnel, systems and resources.
Pursuant to the Sarbanes-Oxley Act and SEC rules, our management is required to conduct an annual evaluation of our internal controls over financial reporting and include a report of management on our internal controls in our annual reports on Form 10-K. In addition, our independent auditors will attest to the effectiveness of our internal controls over financial reporting beginning with this Annual Report on Form 10-K for the year ending December 31, 2015. Failure to achieve and maintain an effective internal control environment could have a material adverse effect on our business and the trading prices of our securities.
Risks Relating to Regulation
____________________________________________________________________________________________
Our business is subject to government regulation, supervision, examination and enforcement, which could adversely affect our business, results of operations and financial condition.
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, 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. We and the Bank are regularly reviewed and examined by our respective regulators, which results in supervisory comments and directions relating to many aspects of our business that require response and attention. See “Item 1. Business-Regulation” for more information about the regulations applicable to us.
Banking laws and regulations are primarily intended to protect federally insured deposits, the DIF and the banking system as a whole, and not intended to protect our stockholders, noteholders or creditors. If we or the Bank fail to satisfy applicable laws and regulations, our respective regulators have broad discretion to enforce those laws and regulations, including with respect to the operation of our business, required capital levels, payment of dividends and other capital distributions, engaging in certain activities and making acquisitions and investments. Our regulators also have broad discretion with respect to the enforcement of applicable laws and regulations, including through enforcement actions that could subject us to civil money penalties, customer remediation programs, increased compliance costs, and limits or prohibitions on our ability to offer certain products and services or to engage in certain activities. In addition, to the extent we undertake actions requiring regulatory approval or non-objection, our regulators may make their approval or non-objection subject to conditions or restrictions that could have a material adverse effect on our business, results of operations and financial condition. Any other actions taken by our regulators could also have a material adverse impact on our business, reputation and brand, results of operations and financial condition. Moreover, some of our competitors are subject to different, and in some cases less restrictive, legislative and regulatory regimes, which may have the effect of providing them with a competitive advantage over us.
New laws or regulations or policy or practical changes in enforcement of existing laws or regulations applicable to our businesses, or our own reexamination of our current practices, could adversely impact our profitability, limit our ability to continue existing or pursue new business activities, require us to change certain of our business practices or alter our relationships with customers, affect retention of our key personnel, or expose us to additional costs (including increased compliance costs and/or customer remediation). These changes may also require us to invest significant management attention and resources to make any necessary changes and could adversely affect our business, results of operations and financial condition. For example, the CFPB has broad authority over our businesses. See “-There continues to be uncertainty as to how the Consumer Financial Protection Bureau’s actions will impact our business; the agency’s actions have had and may continue to have an adverse impact on our business.”
We are also subject to potential enforcement and other actions that may be brought by state attorneys general or other state enforcement authorities and other governmental agencies. Any such actions could subject us to civil money penalties and fines, customer remediation programs and increased compliance costs, as well as damage our reputation and brand and limit or prohibit our ability to offer certain products and services or engage in certain business practices. For a discussion of risks related to actions or proceedings brought by regulatory agencies, see “-Risks Relating to Our Business-Litigation, regulatory actions and compliance issues could subject us to significant fines, penalties, judgments, remediation costs and/or requirements resulting in increased expenses.”
The Dodd-Frank Act has had, and may continue to have, a significant impact on our business, financial condition and results of operations.
The Dodd-Frank Act was enacted on July 21, 2010. While certain provisions in the Act were effective immediately, many of the provisions require implementing regulations to be effective. The Dodd-Frank Act and regulations promulgated thereunder have had, and may continue to have, a significant adverse impact on our business, results of operations and financial condition. For example, the Dodd-Frank Act and related regulations restrict certain business practices, impose more stringent capital, liquidity and leverage ratio requirements, as well as additional costs (including increased compliance costs and increased costs of funding raised through the issuance of asset-backed securities), on us, limit the fees we can charge for services and impact the value of our assets. In addition, the Dodd-Frank Act requires us to serve as a source of financial strength for any insured depository institution we control, such as the Bank. Such support may be required by the Federal Reserve Board at times when we might otherwise determine not to provide it or when doing so is not otherwise in the interest of Synchrony or its stockholders, noteholders or creditors. We describe certain provisions of the Dodd-Frank Act and other legislative and regulatory developments in “Item 1. Business-Regulation.” Federal agencies continue to promulgate regulations to implement the Dodd-Frank Act, and these regulations may continue to have a significant adverse impact on our business, financial condition and results of operations.
Many provisions of the Dodd-Frank Act require the adoption of additional rules to implement. In addition, the Dodd-Frank Act mandates multiple studies, which could result in additional legislative or regulatory action. As a result, the ultimate impact of the Dodd-Frank Act and its implementing regulations remains unclear and could have a material adverse effect on our business, results of operations and financial condition.
There continues to be uncertainty as to how the Consumer Financial Protection Bureau’s actions will impact our business; the agency’s actions have had and may continue to have an adverse impact on our business.
The CFPB, which commenced operations in July 2011, has broad authority over our businesses. This includes authority to write regulations under federal consumer financial protection laws and to enforce those laws against and examine large financial institutions, such as us and the Bank, for compliance. The CFPB is authorized to prevent “unfair, deceptive or abusive acts or practices” through its regulatory, supervisory and enforcement authority. The Federal Reserve Board and the OCC and state government agencies may also invoke their supervisory and enforcement authorities to prevent unfair and deceptive acts or practices. These federal and state agencies are authorized to remediate violations of consumer protection laws in a number of ways, including collecting civil money penalties and fines and providing for customer restitution. The CFPB also engages in consumer financial education, requests data and promotes the availability of financial services to underserved consumers and communities. In addition, the CFPB maintains an online complaint system that allows consumers to log complaints with respect to various consumer finance products, including the products we offer. This system could inform future CFPB decisions with respect to its regulatory, enforcement or examination focus.
There continues to be uncertainty as to how the CFPB’s strategies and priorities, including in both its examination and enforcement processes, will impact our businesses and our results of operations going forward. Actions by the CFPB could result in requirements to alter or cease offering affected products and services, making them less attractive to consumers, less profitable to us, and restricting our ability to offer them. For example, since 2013, we have entered into two Consent Orders with the CFPB - the 2013 CFPB Consent Order with respect to CareCredit, and the 2014 CFPB Consent Order with respect to our debt cancellation product and sales practices and an unrelated issue that arose from the Bank’s self-identified omission of certain Spanish-speaking customers and customers residing in Puerto Rico from two offers that were made to certain delinquent customers. Both Consent Orders required remediation to certain consumers and changes to certain business practices. See “Item 1. Business-Regulation-Consumer Financial Services Regulation,” and “-Changes to our methods of offering our CareCredit products could materially impact operating results.”
Although we have committed significant resources to enhancing our compliance programs, changes by the CFPB in regulatory expectations, interpretations or practices or interpretations that are different or stricter than ours or those adopted in the past by other regulators could increase the risk of additional enforcement actions, fines and penalties. In December 2015, the CFPB published its second biennial report reviewing the consumer credit card market. In the report, the CFPB identified areas of concern for consumers, including deferred interest products, subprime specialist credit card issuers, and unexpected rate increases with respect to variable interest rate products. In addition, the report analyzed issues regarding debt sales and debt collection practices, the adequacy and availability of online disclosures, as well as of the disclosures associated with rewards products and grace periods. Actions by the CFPB with respect to any of these areas could result in requirements to alter our products and services that may make them less attractive to consumers or less profitable to us. See “-Changes to our methods of offering our CareCredit products could materially impact operating results.”
Future actions by the CFPB (or other regulators) against us or our competitors that discourage the use of products we offer or suggest to consumers the desirability of other products or services could result in reputational harm and a loss of customers. If the CFPB changes regulations which were adopted in the past by other regulators and transferred to the CFPB by the Dodd-Frank Act, or modifies, through supervision or enforcement, past related regulatory guidance or interprets existing regulations in a different or stricter manner than they have been interpreted in the past by us, the industry or other regulators, our compliance costs and litigation exposure could increase materially. If future regulatory or legislative restrictions or prohibitions are imposed that affect our ability to offer promotional financing, including deferred interest, for certain of our products or require us to make significant changes to our business practices, and we are unable to develop compliant alternatives with acceptable returns, these restrictions or prohibitions could have a material adverse impact on our business, results of operations and financial condition.
The Dodd-Frank Act authorizes state officials to enforce regulations issued by the CFPB and to enforce the Act’s general prohibition against unfair, deceptive or abusive practices. This could make it more difficult than in the past for federal financial regulators to declare state laws that differ from federal standards to be preempted. To the extent that states enact requirements that differ from federal standards or state officials and courts adopt interpretations of federal consumer laws that differ from those adopted by the CFPB, we may be required to alter or cease offering products or services in some jurisdictions, which would increase compliance costs and reduce our ability to offer the same products and services to consumers nationwide, and we may be subject to a higher risk of state enforcement actions.
Changes to our methods of offering our CareCredit products could materially impact operating results.
The 2013 CFPB Consent Order relating to our CareCredit platform required us to pay up to $34.1 million to qualifying customers, and among other things, to provide additional training and monitoring of our CareCredit enrolled network providers, to include provisions in agreements with our CareCredit enrolled network providers prohibiting charges for certain services not yet rendered, to make changes to certain consumer disclosures, application procedures and procedures for resolution of customer complaints, and to terminate CareCredit enrolled network providers that have chargeback rates in excess of certain thresholds. Some of the changes required by the 2013 CFPB Consent Order are similar to requirements in the Assurance. We believe the Bank to be in compliance with the material business practice changes required by the 2013 CFPB Consent Order and the Assurance, subject to ongoing reporting, chargeback monitoring, and biannual enrolled network provider retraining obligations. We will continue to actively monitor and access the impact of these changes on our CareCredit program. In addition to the costs of remediation, which were not material for the Assurance and were $34.1 million for the 2013 CFPB Consent Order, we will incur an estimated ongoing annual cost of approximately $2 million. Although at this time we do not believe that the 2013 CFPB Consent Order and the Assurance will have a material adverse impact on our results of operations going forward, we may elect or be required to make changes with respect to these and other deferred interest products in the future, and those changes may adversely affect customers’ use of our credit cards or our business. In addition, our resolutions with the CFPB and the New York Attorney General do not preclude other regulators or state attorneys general from seeking additional monetary or injunctive relief with respect to CareCredit, and any such relief could have a material adverse effect on our business, results of operations or financial condition.
Failure by Synchrony and the Bank to meet applicable capital adequacy and liquidity requirements could have a material adverse effect on us.
Synchrony and the Bank must meet rules for capital adequacy as discussed in “Item 1. Business-Regulation.” As a stand-alone savings and loan holding company, Synchrony is subject to capital requirements similar to those that apply to the Bank. We cannot predict the effects of these capital requirements on Synchrony. In addition, Synchrony and the Bank may be subject to increasingly stringent capital adequacy standards in the future.
Synchrony and the Bank must also comply with regulatory requirements related to the maintenance, management, monitoring and reporting of liquidity as discussed in “Item 1. Business-Regulation.” These liquidity requirements are new, and Synchrony and the Bank may become subject to additional liquidity requirements in the future. We cannot predict the effects of such liquidity requirements on Synchrony. The Bank is required to conduct stress tests on an annual basis, and beginning on January 1, 2017, Synchrony will be required to conduct stress tests on an annual basis. Under the OCC’s and the Federal Reserve Board’s stress test regulations, the Bank is, and Synchrony will be, required to use stress-testing methodologies providing for results under at least three different sets of conditions, including baseline, adverse and severely adverse conditions. In addition, although as a savings and loan holding company we currently are not subject to the Federal Reserve Board’s Comprehensive Capital Analysis and Review (“CCAR”) rule, the Federal Reserve Board may in the future require us to comply with the CCAR process or some modified version of the CCAR process. Under such process, the Federal Reserve Board would measure our minimum capital requirement levels under various stress scenarios. Further, while as a savings and loan holding company we currently are not subject to the Federal Reserve Board’s capital planning rule, we plan to prepare and submit a form of capital plan to the Federal Reserve Board, and we may in the future be required to seek the Federal Reserve Board’s review and approval of our capital plan consistent with the capital planning rule. To the extent we are made subject to the CCAR process or the capital planning rule, our ability to return capital to shareholders or to reinvest capital in our business may be curtailed.
If Synchrony or the Bank fails to meet current or future minimum capital, leverage or other financial requirements, its operations, results of operations and financial condition could be materially adversely affected. Among other things, failure by Synchrony or the Bank to maintain its status as “well capitalized” (or otherwise meet current or future minimum capital, leverage or other financial requirements) could compromise our competitive position and result in restrictions imposed by the Federal Reserve Board or the OCC, including, potentially, on the Bank’s ability to engage in certain activities. These could include restrictions on the Bank’s ability to enter into transactions with affiliates, accept brokered deposits, grow its assets, engage in material transactions, extend credit in certain highly leveraged transactions, amend or change its charter, bylaws or accounting methods, pay interest on its liabilities without regard to regulatory caps on the rates that may be paid on deposits and pay dividends or repurchase stock. In addition, failure to maintain the well capitalized status of the Bank could result in our having to invest additional capital in the Bank, which could in turn require us to raise additional capital. The market and demand for, and cost of, our asset-backed securities also could be adversely affected by failure to meet current or future capital requirements.
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 or make payments on our indebtedness.
We are limited in our ability to pay dividends and repurchase our common stock by our regulators who have broad authority to review our capital planning and risk management processes, and our current, projected and stressed capital levels, and to object to any capital action that they consider to be unsafe or unsound. In addition, the declaration and amount of any future dividends to holders of our common stock or stock repurchases will be at the discretion of our board of directors and will depend on many factors, including the financial condition, earnings, capital and liquidity requirements of us and the Bank, applicable regulatory requirements, corporate law and contractual restrictions (including restrictions contained in the Bank Term Loan) and other factors that our board of directors deems relevant. If we are unable to pay dividends or repurchase our common stock, it could adversely affect the market price of our common stock and market perceptions of Synchrony Financial. See “Item 1. Business-Regulation-Savings and Loan Holding Company Regulation-Dividends and Stock Repurchases.”
We rely significantly on dividends and other distributions and payments from the Bank for liquidity, including to pay our obligations under our indebtedness and other indebtedness as they become due, and federal law limits the amount of dividends and other distributions and payments that the Bank may pay to us. For example, OCC regulations limit the ability of savings associations to make distributions of capital, including payment of dividends, stock redemptions and repurchases, cash-out mergers and other transactions charged to the capital account. The Bank must obtain the OCC’s approval prior to making a capital distribution in certain circumstances, including if the Bank proposes to make a capital distribution when it does not meet certain capital requirements (or will not do so as a result of the proposed capital distribution) or certain net income requirements. In addition, the Bank must file a prior written notice of a planned or declared dividend or other distribution with the Federal Reserve Board. The Federal Reserve Board or the OCC may object to a capital distribution if, among other things, the Bank is, or as a result of such dividend or distribution would be, undercapitalized or the Federal Reserve Board or OCC has safety and soundness concerns. Additional restrictions on bank dividends may apply if the Bank fails the QTL test. The application of these restrictions on the Bank’s ability to pay dividends involves broad discretion on the part of our regulators. Limitations on the Bank’s payments of dividends and other distributions and payments that we receive from the Bank could reduce our liquidity and limit our ability to pay dividends or our obligations under our indebtedness. See “Item 1. Business-Regulation-Savings Association Regulation-Dividends and Stock Repurchases” and “-Activities.”
Regulations relating to privacy, information security and data protection could increase our costs, affect or limit how we collect and use personal information and adversely affect our business opportunities.
We are subject to various privacy, information security and data protection laws, including requirements concerning security breach notification, and we could be negatively impacted by them. For example, in the United States, certain of our businesses are subject to the GLBA and implementing regulations and guidance. Among other things, the GLBA: (i) imposes certain limitations on the ability of financial institutions to share consumers’ nonpublic personal information with nonaffiliated third parties, (ii) requires that financial institutions provide certain disclosures to consumers about their information collection, sharing and security practices and affords customers the right to “opt out” of the institution’s disclosure of their personal financial information to nonaffiliated third parties (with certain exceptions) and (iii) requires financial institutions to develop, implement and maintain a written comprehensive information security program containing safeguards that are appropriate to the financial institution’s size and complexity, the nature and scope of the financial institution’s activities, and the sensitivity of customer information processed by the financial institution as well as plans for responding to data security breaches.
Moreover, various United States federal banking regulatory agencies, states and foreign jurisdictions have enacted data security breach notification requirements with varying levels of individual, consumer, regulatory and/or law enforcement notification in certain circumstances in the event of a security breach. Many of these requirements also apply broadly to our partners that accept our cards. In many countries that have yet to impose data security breach notification requirements, regulators have increasingly used the threat of significant sanctions and penalties by data protection authorities to encourage voluntary notification and discourage data security breaches.
Furthermore, legislators and/or regulators in the United States and other countries in which we operate are increasingly adopting or revising privacy, information security and data protection laws that potentially could have a significant impact on our current and planned privacy, data protection and information security-related practices, our collection, use, sharing, retention and safeguarding of consumer and/or employee information, and some of our current or planned business activities. This could also increase our costs of compliance and business operations and could reduce income from certain business initiatives. In the United States, this includes increased privacy-related enforcement activity at the Federal level, by the Federal Trade Commission, as well as at the state level, such as with regard to mobile applications.
Compliance with current or future privacy, data protection and information security laws (including those regarding security breach notification) affecting customer and/or employee data to which we are subject could result in higher compliance and technology costs and could restrict our ability to provide certain products and services (such as products or services that involve us sharing information with third parties or storing sensitive credit card information), which could materially and adversely affect our profitability. Our failure to comply with privacy, data protection and information security laws could result in potentially significant regulatory investigations and government actions, litigation, fines or sanctions, consumer or partner actions and damage to our reputation and our brand, all of which could have a material adverse effect on our business and results of operations.
Our use of third-party vendors and our other ongoing third-party business relationships are subject to increasing regulatory requirements and attention.
We regularly use third-party vendors and subcontractors as part of our business. We also have substantial ongoing business relationships with our partners and other third parties. These types of third-party relationships are subject to increasingly demanding regulatory requirements and attention by our federal bank regulators (the Federal Reserve Board, the OCC and the FDIC) and our consumer regulator (the CFPB). Regulatory guidance requires us to enhance our due diligence, ongoing monitoring and control over our third-party vendors and subcontractors and other ongoing third-party business relationships, including with our partners. In certain cases, we may be required to renegotiate our agreements with these vendors and/or their subcontractors to meet these enhanced requirements, which could increase our costs. We expect that our regulators will hold us responsible for deficiencies in our oversight and control of our third-party relationships and in the performance of the parties with which we have these relationships. As a result, if our regulators conclude that we have not exercised adequate oversight and control over our third-party vendors and subcontractors or other ongoing third-party business relationships or that such third parties have not performed appropriately, we could be subject to enforcement actions, including the imposition of civil money penalties or other administrative or judicial penalties or fines as well as requirements for customer remediation.
Failure to comply with anti-money laundering and anti-terrorism financing laws could have significant adverse consequences for us.
We maintain an enterprise-wide program designed to enable us to comply with all applicable anti-money laundering and anti-terrorism financing laws and regulations, including the Bank Secrecy Act and the USA PATRIOT Act. This program includes policies, procedures, processes and other internal controls designed to identify, monitor, manage and mitigate the risk of money laundering or terrorist financing posed by our products, services, customers and geographic locale. These controls include procedures and processes to detect and report suspicious transactions, perform customer due diligence, respond to requests from law enforcement, and meet all recordkeeping and reporting requirements related to particular transactions involving currency or monetary instruments. We cannot be sure our programs and controls will be effective to ensure our compliance with all applicable anti-money laundering and anti-terrorism financing laws and regulations, and our failure to comply could subject us to significant sanctions, fines, penalties and reputational harm, all of which could have a material adverse effect on our business, results of operations and financial condition.

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ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 1B. UNRESOLVED STAFF COMMENTS
Not applicable.

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ITEM 2. PROPERTIES
ITEM 2. PROPERTIES
Facilities
____________________________________________________________________________________________
Our corporate headquarters are located on a site in Stamford, Connecticut that we lease from a third party.
In addition to those set forth below, we maintain small offices at a few of our U.S. partner locations pursuant to servicing, lease or license agreements.
We believe our space is adequate for our current needs and that suitable additional or substitute space will be available to accommodate the foreseeable expansion of our operations.
The table below sets out selected information on our principal facilities.
Location
Owned/Leased(1)
Corporate Headquarters:
Stamford, CT
Leased
Bank Headquarters:
Draper, UT
Leased
Payment Processing Centers:
Atlanta, GA
Leased
Longwood, FL
Leased
Customer Service Centers:
Canton, OH
Leased
Charlotte, NC
Leased
Frisco, TX
Leased
Hyderabad, India
Leased
Kettering, OH
Leased
Manila, Philippines
Leased
Manila, Philippines (Alabang)
Leased
Merriam, KS
Owned
Phoenix, AZ
Leased
Rapid City, SD
Leased
San Juan, PR
Leased
Other Support Centers:
Alpharetta, GA (2)
Leased
Bellevue, WA
Leased
Bentonville, AR
Leased
Chicago, IL
Leased
Costa Mesa, CA
Leased
San Francisco, CA
Leased
St. Paul, MN
Leased
Van Buren, MI
Leased
Walnut Creek, CA
Leased
Bank Retail Branch Location:
Bridgewater, NJ
Leased
_______________________
(1)
In connection with the IPO, certain of these leased properties were assigned to us by GECC. There are two properties (Kettering, OH and Alpharetta, GA) where GECC continues to have liability for obligations under the leases, and we have agreed to indemnify GECC for any costs or expenses related to those obligations.

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ITEM 3. LEGAL PROCEEDINGS
ITEM 3. LEGAL PROCEEDINGS
For a discussion concerning our legal proceedings, see Note 17. Legal Proceedings and Regulatory Matters to our consolidated and combined financial statements.

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ITEM 4. RESERVED
ITEM 4. MINE SAFETY DISCLOSURES
Not applicable.
PART II.

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ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY
ITEM 5. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Market Information
Our common stock trades on the New York Stock Exchange under the symbol “SYF”.
The following table reflects the range of the high and low closing prices per share of our common stock, as reported on The New York Stock Exchange for the periods indicated.
Common stock market price
($ in dollars)
High
Low
Fourth quarter
$
33.98
$
29.51
Third quarter
$
35.99
$
30.56
Second quarter
$
33.30
$
29.76
First quarter
$
33.61
$
28.52
Fourth quarter
$
30.50
$
24.20
Third quarter(1)
$
25.79
$
22.93
______________________
(1)
Trading commenced July 31, 2014. Prior to that date, there was no public trading market for our common stock.
Holders
At February 22, 2016, the approximate number of holders of record of common stock was 3,531.
Dividends
Dividend Policy. We intend to establish dividends and share repurchase programs, subject to approval from our board of directors and non-objection from our regulators, in each case consistent with maintaining capital ratios well in excess of minimum regulatory requirements. The declaration and amount of any future dividends to holders of our common stock or stock repurchases will be at the discretion of our board of directors and will depend on many factors, including the financial condition, earnings, capital and liquidity requirements of us and the Bank, applicable regulatory restrictions, corporate law and contractual restrictions (including restrictions contained in the Bank Term Loan) and other factors that our board of directors deems relevant.
As a savings and loan holding company, our ability to pay dividends to our stockholders or to repurchase our stock is subject to regulation by the Federal Reserve Board. In addition, as a holding company, we rely significantly on dividends, distributions and other payments from the Bank to fund dividends to our stockholders. The ability of the Bank to make dividends and other distributions and payments to us is subject to regulation by the OCC and the Federal Reserve Board. See “Item 1A. Risk Factors-Risks Relating to Regulation-Failure by Synchrony and the Bank to meet applicable capital adequacy and liquidity requirements could have a material adverse effect on us” and “-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 or make payments on our indebtedness” and “Item 1. Business-Regulation-Savings Association Regulation-Dividends and Stock Repurchases”.
Payment of Dividends to GE. Following the IPO, we did not pay any dividends to GE, and as a result of the Separation, GE no longer owns any of our outstanding common stock. Prior to the IPO, we made net transfers to GE of $603 million and $586 million during the years ended December 31, 2014 and 2013, respectively.
Securities Authorized for Issuance under Equity Compensation Plans
For information regarding compensation plans under which equity securities are authorized for issuance, see Note 13. Equity and Other Stock Related Information to the consolidated and combined financial statements in Part II, "Item 8. Financial Statements and Supplementary Data” of this Form 10-K Report.
Performance Graph
The following graph compares the cumulative total stockholders return (rounded to the nearest whole dollar) of the Company's common stock, the S&P 500 Stock Index and the S&P 500 Financials Index for the period from July 31, 2014 through December 31, 2015. The graph assumes an initial investment of $100 on July 31, 2014, the date the Company began trading on the NYSE following the IPO. The cumulative returns include stock price appreciation and assume full reinvestment of dividends. This graph does not forecast future performance of the Company's common stock.
July 31, 2014
December 31, 2014
December 31, 2015
Synchrony Financial
$
100.00
$
129.35
$
132.22
S&P 500
100.00
106.64
105.87
S&P 500 Financials
100.00
110.42
106.58

---

ITEM 6. SELECTED FINANCIAL DATA
ITEM 6. FINANCIAL INFORMATION
Selected Financial Data
____________________________________________________________________________________________
Consolidated and Combined Statements of Earnings Information
Years Ended December 31,
($ in millions, except per share data)
Interest income
$
13,228
$
12,242
$
11,313
$
10,309
$
9,141
Interest expense
1,135
Net interest income
12,093
11,320
10,571
9,564
8,209
Retailer share arrangements
(2,738
)
(2,575
)
(2,373
)
(1,984
)
(1,428
)
Net interest income, after retailer share arrangements
9,355
8,745
8,198
7,580
6,781
Provision for loan losses
2,952
2,917
3,072
2,565
2,258
Net interest income, after retailer share arrangements and provision for loan losses
6,403
5,828
5,126
5,015
4,523
Other income
Other expense
3,264
2,927
2,484
2,123
2,010
Earnings before provision for income taxes
3,531
3,386
3,142
3,376
3,010
Provision for income taxes
1,317
1,277
1,163
1,257
1,120
Net earnings
$
2,214
$
2,109
$
1,979
$
2,119
$
1,890
Weighted average shares outstanding (in millions)
Basic
833.8
757.4
705.3
705.3
705.3
Diluted
835.5
757.6
705.3
705.3
705.3
Earnings per share
Basic
$
2.66
$
2.78
$
2.81
$
3.00
$
2.68
Diluted
$
2.65
$
2.78
$
2.81
$
3.00
$
2.68
Consolidated and Combined Statements of Financial Position Information
($ in millions)
At December 31,
Assets:
Cash and equivalents
$
12,325
$
11,828
$
2,319
$
1,334
$
1,187
Investment securities
3,142
1,598
Loan receivables
68,290
61,286
57,254
52,313
47,741
Allowance for loan losses
(3,497
)
(3,236
)
(2,892
)
(2,274
)
(2,052
)
Loan receivables held for sale
-
-
-
-
Goodwill
Intangible assets, net
Other assets
2,225
2,431
1,853
Total assets
$
84,135
$
75,707
$
59,085
$
53,462
$
50,115
Liabilities and Equity:
Total deposits
$
43,447
$
34,955
$
25,719
$
18,804
$
17,832
Total borrowings
24,344
27,460
24,321
27,815
25,890
Accrued expenses and other liabilities
3,740
2,814
3,085
2,261
2,065
Total liabilities
71,531
65,229
53,125
48,880
45,787
Total equity
12,604
10,478
5,960
4,582
4,328
Total liabilities and equity
$
84,135
$
75,707
$
59,085
$
53,462
$
50,115

---

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS
ITEM 7. 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 consolidated and combined financial statements and related notes included elsewhere in this report. The discussion below contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. See “Cautionary Note Regarding Forward-Looking Statements.”
Introduction and Business Overview
____________________________________________________________________________________________
We are one of the premier consumer financial services companies in the United States. We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners”. During 2015, we financed $113.6 billion of purchase volume, and at December 31, 2015, we had $68.3 billion of loan receivables and 68.3 million active accounts. For the year ended December 31, 2015, we had net earnings of $2.2 billion, representing a return on assets of 2.9%.
We offer our credit products primarily through our wholly-owned subsidiary, Synchrony Bank (the "Bank"). Through the Bank, we offer a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”). We are continuing to expand our direct banking operations to increase our deposit base as a source of stable and diversified low cost funding for our credit activities. We had $43.4 billion in deposits at December 31, 2015.
Our Separation from GE
On October 14, 2015, we received approval from the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) to become a stand-alone savings and loan holding company, to retain control of the Bank and to retain control of our nonbank subsidiaries following the completion of GE’s offer to exchange shares of GE common stock for all of our shares of our common stock owned by GE (the “exchange offer”). On November 17, 2015, we announced the completion of the exchange offer and our separation from GE (the "Separation"). Following the Separation, GE no longer owns any of our outstanding common stock.
Our Sales Platforms
____________________________________________________________________________________________
We conduct our operations through a single business segment. Profitability and expenses, including funding costs, loan losses and operating expenses, are managed for the business as a whole. Substantially all of our operations are within the United States. We offer our products through three sales platforms (Retail Card, Payment Solutions and CareCredit). Those platforms are organized by the types of products we offer and the partners we work with, and are measured on platform revenue, loan receivables, new accounts and other sales metrics. See “Item 1. Business-Our Sales Platforms.”
______________________
(1)
For a definition of platform revenue, which is a non-GAAP measure, and its reconciliation to interest and fees on loans, see “Results of Operations-Platform Analysis-Non-GAAP Measure”.
Retail Card
Retail Card is a leading provider of private label credit cards, and also provides Dual Cards and small and medium-sized business credit products. Our patented Dual Cards are credit cards that function as private label credit cards when used to purchase goods and services from our partners and as general purpose credit cards when used elsewhere. We offer one or more of these products primarily through 22 national and regional retailers with which we have ongoing program agreements. The average length of our relationship with these Retail Card partners is 17 years. Retail Card’s platform revenue consists of interest and fees on our loan receivables, plus other income, less retailer share arrangements. Other income primarily consists of interchange fees earned on Dual Card transactions (when the card is used outside of our partners' sales channels) and fees paid to us by customers who purchase our debt cancellation products, less loyalty program payments. Substantially all of the credit extended in this platform is on standard terms.
Payment Solutions
Payment Solutions is a leading provider of promotional financing for major consumer purchases, offering primarily private label credit cards and installment loans. At December 31, 2015, Payment Solutions offered these products through participating partners consisting of national and regional retailers, local merchants, manufacturers, buying groups and industry associations. Substantially all of the credit extended in this platform is promotional financing. Payment Solutions’ platform revenue primarily consists of interest and fees on our loan receivables, including “merchant discounts,” which are fees paid to us by our partners in almost all cases to compensate us for all or part of foregone interest income associated with promotional financing.
CareCredit
CareCredit is a leading provider of promotional financing to consumers for elective healthcare procedures or services, such as dental, veterinary, cosmetic, vision and audiology. At December 31, 2015, we had a network of CareCredit providers that collectively have approximately 195,000 locations, 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. Substantially all of the credit extended in this platform is promotional financing. CareCredit’s platform revenue primarily consists of interest and fees on our loan receivables, including merchant discounts.
Our Credit Products
____________________________________________________________________________________________
Through our platforms, we offer three principal types of credit products: credit cards, commercial credit products and consumer installment loans. See “Item 1. Business - Our Credit Products.”
Credit Cards
We offer two principal types of credit cards: private label credit cards and Dual Cards:
•
Private label credit cards. Private label credit cards are partner-branded credit cards (e.g., Lowe’s or Amazon) or program-branded credit cards (e.g., CarCareONE or CareCredit) that are used primarily for the purchase of goods and services from the partner or within the program network. In Retail Card, credit under our private label credit cards typically is extended on standard terms only, and in Payment Solutions and CareCredit, credit under our private label credit cards typically is extended pursuant to a promotional financing offer.
•
Dual Cards. Our patented Dual Cards are credit cards that function as private label credit cards when used to purchase goods and services from our partners and as general purpose credit cards when used elsewhere. Credit extended under our Dual Cards typically is extended under standard terms only. Currently, only Retail Card offers Dual Cards. At December 31, 2015, we offered Dual Cards through 16 of our 22 active Retail Card programs.
Commercial Credit Products
We offer private label cards and co-branded cards for commercial customers that are similar to our consumer offerings. We also offer a commercial pay-in-full accounts receivable product to a wide range of business customers. We offer 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 product market (motorcycles, ATVs and lawn and garden). Installment loans are closed-end credit accounts where the customer pays down the outstanding balance in installments. Installment loans are assessed periodic finance charges using fixed interest rates.
Business Trends and Conditions
____________________________________________________________________________________________
We believe our business and results of operations will be impacted in the future by various trends and conditions, including the following:
•
Growth in loan receivables and interest income. We believe continuing improvement in the U.S. economy and employment rates will contribute to an increase in consumer credit spending. In addition, we expect the use of credit cards to continue to increase versus other forms of payment such as cash and checks. We anticipate that these trends, combined with our marketing and partner engagement strategies, will contribute to growth in our loan receivables. In the near-to-medium term, we expect our total interest income to continue to grow, driven by the expected growth in average loan receivables. Our historical growth rates in loan receivables and interest income have benefited from new partner acquisitions, and therefore, if we do not continue to acquire new partners, replace the programs that are not extended or otherwise grow our business, our growth rates in loan receivables and interest income in the future will be lower than in recent periods. In addition, we do not expect to make any significant changes to customer pricing or merchant discount pricing in the near term, and therefore we expect yields generated from interest and fees on interest-earning assets will remain relatively stable.
•
Extended duration of our Retail Card program agreements. We have extended many of our largest Retail Card program agreements, and as a result, we expect to continue to benefit from these programs on a long-term basis as indicated by the expiration schedule, which indicates for each period the number of programs scheduled to expire and the proportion of platform revenue that these programs comprised for the year ended December 31, 2015. See “Business - Retail Card” for additional information on the expiration of these programs.
A total of 17 of our 22 Retail Card program agreements now have an expiration date in 2019 or beyond. These 17 program agreements represented in the aggregate 89.7% of our Retail Card platform revenue for the year ended December 31, 2015 and 91.6% of our Retail Card loan receivables at December 31, 2015.
•
Increases in retailer share arrangement payments and other expense under extended program agreements. We believe that as a result of both the overall growth of our programs, as well as amendments we have made to the terms of certain program agreements that we extended during 2015, the payments we make to our partners under these extended retailer share arrangements, in the aggregate, are likely to increase both in absolute terms and as a percentage of our net earnings. Overall, we expect our payments to our partners under our retailer share arrangements to grow generally in line with the growth of our Retail Card loan receivables.
In addition, under the terms of certain program agreements we have extended in recent years, we have agreed to dedicate increased marketing expense and other investments to promote these programs. We expect to benefit from these increased payments and other expenses, as they will create additional incentives for our partners to support their programs and, in the case of increased marketing expense and other investments, directly promote these programs, all of which we expect will have a positive impact on purchase volume and result in higher loan receivables and increased interest and fees on loans. We also expect to benefit from the extended duration of our amended program agreements.
•
Stable asset quality. Our credit performance continued to improve through 2015. Our net charge-off rates decreased to 4.33% for the year ended December 31, 2015 from 4.51% for the year ended December 31, 2014, and our over-30 day delinquency rate decreased to 4.06% at December 31, 2015 from 4.14% at December 31, 2014, which are lower year-end levels than we experienced immediately prior to the financial crisis in 2007. In the near term, we expect the U.S. employment rate to continue to stabilize, and we do not anticipate making significant changes to our underwriting standards. Accordingly, we expect our charge-off rates to remain relatively stable in the near term. Provision for loan losses increased slightly by $35 million, or 1.2%, for the year ended December 31, 2015, as the growth in loan receivables was partially offset by the benefit from improving asset quality trends. As the credit environment stabilizes, we do not believe this benefit will repeat in the near term and expect that our provision for loan losses will increase at a higher rate than we experienced in 2015, primarily driven by our receivables growth.
•
Growth in interchange revenues and loyalty program costs. We believe that as a result of the overall growth in Dual Card transactions occurring outside of our Retail Card partners’ locations, interchange revenues will continue to increase. The expected growth in these transactions is driven, in part, by both existing and new loyalty programs with our Retail Card partners. In addition, we continue to offer and add new loyalty programs for our private label credit cards, for which we do not receive interchange fees. The growth in these existing and new loyalty programs will result in an increase in costs associated with these programs. Overall, we expect both our interchange revenues and loyalty program costs to grow in excess of the growth of our Retail Card loan receivables, and expect the increase in loyalty program costs to be higher than that expected for interchange revenues due to the additional loyalty programs for our private label credit cards. These increases have been contemplated in our program agreements with our Retail Card partners and are a component of the calculation of our payments due under our retailer share arrangements.
•
Impact of regulatory developments. Our business and the consumer financial services industry continues to be subject to regulation from various regulatory authorities, including the CFPB, which was established through the Dodd Frank Act. For the years ended December 31, 2015, 2014 and 2013, we incurred $9 million, $26 million and $133 million, respectively, in expenses related to litigation and regulatory matters. The expenses incurred in 2013, primarily related to an increase to our reserve for the matters settled with the CFPB and the DOJ in late 2013 and 2014. See “Item 1. Business-Regulation-Consumer Financial Services Regulation.”
•
Capital and liquidity levels. We expect to maintain sufficient capital and liquidity resources to support our daily operations, our business growth, and our credit ratings as well as regulatory and compliance requirements in a cost effective and prudent manner through expected and unexpected market environments. Following the Separation, we expect to continue to increase our capital and liquidity levels by, among other things, retaining net earnings and not paying a dividend or returning capital through stock repurchases until we have the non-objection of the Federal Reserve Board to do so. Our board of directors intends to establish dividends and share repurchases programs, in each case consistent with maintaining capital ratios well in excess of minimum regulatory requirements. At December 31, 2015, the Company had an estimated fully phased-in Basel III common equity Tier 1 ratio of 15.9%. We also expect that our liquidity portfolio will continue to be sufficient to support all of our business objectives.
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. These fluctuations are generally most evident between the fourth quarter and the first quarter of the following year.
In addition to the seasonal variance in loan receivables discussed above, we also experience a seasonal increase in delinquency rates and delinquent loan receivables balances during the third and fourth quarters of each year due to lower customer payment rates. Our delinquency rates and delinquent loan receivables balances typically decrease during the subsequent first and second quarters as customers begin to pay down their loan balances and return to current status. Because customers who were delinquent during the fourth quarter of a calendar year have a higher probability of returning to current status when compared to customers who are delinquent at the end of each of our interim reporting periods, we expect that a higher proportion of delinquent accounts outstanding at an interim period end will result in charge-offs, as compared to delinquent accounts outstanding at a year end. Consistent with this historical experience, we generally experience a higher allowance for loan losses as a percentage of total loan receivables at the end of an interim period, as compared to the end of a calendar year. In addition, despite improving credit metrics such as declining past due amounts, we may experience an increase in our allowance for loan losses at an interim period end compared to the prior year end, reflecting these same seasonal trends.
Results of Operations
____________________________________________________________________________________________
Key Earnings Metrics
Growth Metrics
Asset Quality Metrics
Capital and Liquidity
______________________
(a) Represents Tier 1 common equity calculated under Basel I regulatory capital standards, see “Item 7. -Management’s Discussion and Analysis of Financial Condition and Results of Operations-Capital-Non-GAAP Measures.”
(b) Calculated under Basel III regulatory capital standards, subject to transition provisions.
Highlights for Year Ended December 31, 2015
Below are highlights of our performance for the year ended December 31, 2015 compared to the year ended December 31, 2014, as applicable, except as otherwise noted.
•
Net earnings increased 5.0% to $2,214 million for the year ended December 31, 2015, driven by higher net interest income, partially offset by increases in retailer share arrangements, provision for loan losses and other expenses.
•
Loan receivables increased 11.4% to $68,290 million at December 31, 2015 compared to December 31, 2014, primarily driven by higher purchase volume and average active account growth, and included growth associated with the BP portfolio acquired in the second quarter of 2015.
•
Net interest income increased 6.8% to $12,093 million for the year ended December 31, 2015, primarily due to higher average loan receivables, partially offset by higher interest expense driven by increased liquidity, funding mix and growth.
•
Retailer share arrangements increased 6.3% to $2,738 million for the year ended December 31, 2015, primarily as a result of growth and improved performance of the programs in which we have retailer share arrangements, partially offset with increased other expense and loyalty costs associated with these programs.
•
Loan delinquencies as a percentage of period-end loan receivables decreased with the over-30 day delinquency rate decreasing to 4.06% at December 31, 2015 from 4.14% at December 31, 2014, primarily driven by improving asset quality trends and general improvement in the U.S. economy. Net charge-off rates decreased 18 basis points to 4.33% for the year ended December 31, 2015, from 4.51% for the year ended December 31, 2014 reflecting these same trends.
•
Provision for loan losses increased by $35 million, or 1.2%, to $2,952 million for the year ended December 31, 2015, primarily due to portfolio growth, partially offset by improving asset quality trends. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) decreased to 5.12% at December 31, 2015, as compared to 5.28% at December 31, 2014, reflecting the recent improvements in our asset quality trends.
•
Other expense increased by $337 million, or 11.5%, for the year ended December 31, 2015, driven by investments in growth and infrastructure build in preparation for separation from GE and also included expenses for the completion of the EMV card rollout for active Dual Card accounts.
•
We continue to invest in our direct banking activities to grow our deposit base. Total deposits increased 24.3% to $43.4 billion at December 31, 2015, compared to December 31, 2014, driven primarily by growth in our direct deposits of 50.8% to $29.7 billion, partially offset by a reduction in our brokered deposits.
New and Extended Partner Agreements
•
We extended our Retail Card program agreements with Amazon, Chevron, Dick's Sporting Goods and PayPal, launched our new program with BP, and announced our new partnerships with Citgo and Stash Hotel Rewards.
•
We entered into new program agreements in our Payment Solutions sales platform with Guitar Center, Mattress Firm, The Container Store and Newegg and extended our program agreements with Discount Tire, Sleepy's, P.C. Richard & Son, Conn's, Polaris Industries, Mohawk Flooring, Art Van Furniture and MEGA Group USA, a national home furnishings buying group of independent retailers.
•
In our CareCredit sales platform, we added Rite Aid to our network of providers, added a new endorsement with VSP, the nation’s largest vision insurance provider, and renewed our endorsement with the American Society of Plastic Surgeons.
Highlights for Year Ended December 31, 2014
Below are highlights of our performance in 2014. These highlights generally are based on a comparison between our 2014 and 2013 results, except as otherwise noted.
•
Net earnings increased 6.6% to $2,109 million for the year ended December 31, 2014, driven by higher net interest income and a reduction in our provision for loan losses, partially offset by increases in retailer share arrangements and other expenses.
•
Loan receivables increased 7.0% to $61,286 million at December 31, 2014 compared to December 31, 2013, primarily driven by higher purchase volume and average active account growth.
•
Net interest income increased 7.1% to $11,320 million for the year ended December 31, 2014, primarily due to higher average loan receivables.
•
Retailer share arrangements increased 8.5% to $2,575 million for the year ended December 31, 2014, primarily as a result of improved performance, and the growth of the programs in which we had retailer share arrangements, as well as from changes to the terms of the retailer share arrangements for those partners with whom we extended program agreements in late 2013 and in 2014.
•
Loan delinquencies as a percentage of period-end loan receivables decreased with the over-30 day delinquency rate decreasing to 4.14% at December 31, 2014 from 4.35% at December 31, 2013, driven by continued improvement in the U.S. economy and employment rates. Net charge-off rates decreased to 4.51% for the year ended December 31, 2014, from 4.68% for the year ended December 31, 2013.
•
Provision for loan losses decreased by $155 million, or 5.0%, to $2,917 million for the year ended December 31, 2014. This decrease was driven primarily as a result of an incremental provision of $642 million recorded during 2013 relating to the enhancements to our allowance for loan loss methodology, which was not repeated in 2014. This decrease was partially offset by increased provisions in 2014 primarily driven by portfolio growth. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) increased to 5.28% at December 31, 2014, as compared to 5.05% at December 31, 2013, reflecting a transition to a stable credit outlook at December 31, 2014 from an improving outlook at December 31, 2013.
•
Other expense increased to $2,927 million from $2,484 million for the years ended December 31, 2014 and 2013, respectively, driven by business growth, increased marketing investments and incremental costs associated with building our stand-alone infrastructure.
•
We completed our IPO, resulting in the issuance of a total of 128.5 million shares of our common stock, and entered into our new debt financings, which increased our indebtedness with third parties and reduced our funding from GECC. The net proceeds from these transactions increased our liquidity portfolio by $7.3 billion. Our liquidity portfolio, including undrawn credit facilities, was $19.0 billion at December 31, 2014.
•
We invested in our direct banking activities to grow our deposit base. Total deposits increased 35.9% to $35.0 billion at December 31, 2014, compared to December 31, 2013, driven primarily by growth in our direct deposits of 79.1% to $19.7 billion at December 31, 2014.
New and Extended Partner Agreements
•
During the year ended December 31, 2014, we extended five program agreements in Retail Card (American Eagle, Gap, Lowe's, QVC and Sam’s Club), and in February 2015, we extended our program agreement with Amazon. These programs represented, in the aggregate $22.2 billion in loan receivables at December 31, 2014. Program agreements with three Retail Card partners representing $0.5 billion in loan receivables, including loan receivables held for sale, at December 31, 2014, were not renewed.
•
During the year ended December 31, 2014, we entered into an agreement with BP, for a Retail Card program which commenced in May 2015, and which became one of our 20 largest program agreements.
•
In our Payment Solutions sales platform, we increased the number of participating partners in our network by over 2,000 partners, compared to the number of partners at December 31, 2013. In our CareCredit network, we increased the number of provider locations by over 9,000 locations, compared to the number of locations at December 31, 2013.
Summary Earnings
The following table sets forth our results of operations for the periods indicated.
Years ended December 31 ($ in millions)
Interest income
$
13,228
$
12,242
$
11,313
Interest expense
1,135
Net interest income
12,093
11,320
10,571
Retailer share arrangements
(2,738
)
(2,575
)
(2,373
)
Net interest income, after retailer share arrangements
9,355
8,745
8,198
Provision for loan losses
2,952
2,917
3,072
Net interest income, after retailer share arrangements and provision for loan losses
6,403
5,828
5,126
Other income
Other expense
3,264
2,927
2,484
Earnings before provision for income taxes
3,531
3,386
3,142
Provision for income taxes
1,317
1,277
1,163
Net earnings
$
2,214
$
2,109
$
1,979
Other Financial and Statistical Data
The following table sets forth certain other financial and statistical data for the periods indicated.
At and for the years ended December 31 ($ in millions)
Financial Position Data (Average):
Loan receivables, including held for sale
$
62,120
$
57,101
$
52,407
Total assets
$
77,245
$
66,152
$
56,184
Deposits
$
38,300
$
30,350
$
22,911
Borrowings
$
24,352
$
24,608
$
25,209
Total equity
$
11,578
$
7,888
$
5,121
Selected Performance Metrics:
Purchase volume(1)
$
113,615
$
103,149
$
93,858
Retail Card
$
92,190
$
83,591
$
75,739
Payment Solutions
$
13,668
$
12,447
$
11,360
CareCredit
$
7,757
$
7,111
$
6,759
Average active accounts (in thousands)(2)
62,643
60,009
56,253
Net interest margin(3)
15.77
%
17.20
%
18.78
%
Net charge-offs
$
2,691
$
2,573
$
2,454
Net charge-offs as a % of average loan receivables, including held for sale
4.33
%
4.51
%
4.68
%
Allowance coverage ratio(4)
5.12
%
5.28
%
5.05
%
Return on assets(5)
2.9
%
3.2
%
3.5
%
Return on equity(6)
19.1
%
26.7
%
38.6
%
Equity to assets(7)
14.99
%
11.92
%
9.11
%
Other expense as a % of average loan receivables, including held for sale
5.25
%
5.13
%
4.74
%
Efficiency ratio(8)
33.5
%
31.7
%
28.6
%
Effective income tax rate
37.3
%
37.7
%
37.0
%
Selected Period End Data:
Loan receivables
$
68,290
$
61,286
$
57,254
Allowance for loan losses
$
3,497
$
3,236
$
2,892
30+ days past due as a % of period-end loan receivables(9)
4.06
%
4.14
%
4.35
%
90+ days past due as a % of period-end loan receivables(9)
1.86
%
1.90
%
1.96
%
Total active accounts (in thousands)(2)
68,314
64,286
61,957
__________________
(1)
Purchase volume, or net credit sales, represents the aggregate amount of charges incurred on credit cards or other credit product accounts less returns during the period. Purchase volume includes activity related to our portfolios classified as held for sale.
(2)
Active accounts represent credit card or installment loan accounts on which there has been a purchase, payment or outstanding balance in the current month.
(3)
Net interest margin represents net interest income divided by average interest-earning assets.
(4)
Allowance coverage ratio represents allowance for loan losses divided by total period-end loan receivables.
(5)
Return on assets represents net earnings as a percentage of average total assets.
(6)
Return on equity represents net earnings as a percentage of average total equity.
(7)
Equity to assets represents average equity as a percentage of average total assets.
(8)
Efficiency ratio represents (i) other expense, divided by (ii) net interest income, after retailer share arrangements, plus other income.
(9)
Based on customer statement-end balances extrapolated to the respective period-end date.
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 follow.
Years ended December 31 ($ in millions)
Average
Balance(1)
Interest
Income /
Expense
Average
Yield /
Rate(2)
Average
Balance(1)
Interest
Income/
Expense
Average
Yield /
Rate(2)
Average
Balance(1)
Interest
Income/
Expense
Average
Yield /
Rate(2)
Assets
Interest-earning assets:
Interest-earning cash and equivalents(3)
$
11,406
$
0.25
%
$
8,230
$
0.19
%
$
3,651
$
0.27
%
Securities available for sale
3,142
0.67
%
2.05
%
3.69
%
Loan receivables(4):
Credit cards, including held for sale(5)
59,603
12,932
21.70
%
54,686
11,967
21.88
%
49,704
11,015
22.16
%
Consumer installment loans
1,119
9.29
%
1,025
9.66
%
1,336
9.66
%
Commercial credit products
1,359
10.45
%
1,373
10.85
%
1,355
11.07
%
Other
2.56
%
5.88
%
8.33
%
Total loan receivables
62,120
13,179
21.22
%
57,101
12,216
21.39
%
52,407
11,295
21.55
%
Total interest-earning assets
76,668
13,228
17.25
%
65,818
12,242
18.60
%
56,275
11,313
20.10
%
Non-interest-earning assets:
Cash and due from banks
Allowance for loan losses
(3,340
)
(3,039
)
(2,693
)
Other assets
3,013
2,492
2,050
Total non-interest-earning assets
(91
)
Total assets
$
77,245
$
66,152
$
56,184
Liabilities
Interest-bearing liabilities:
Interest-bearing deposit accounts
$
38,148
$
1.59
%
$
30,110
$
1.56
%
$
22,405
$
1.67
%
Borrowings of consolidated securitization entities
13,868
1.55
%
14,835
1.45
%
16,209
1.30
%
Bank term loan
5,383
2.53
%
3,056
2.42
%
-
-
-
%
Senior unsecured notes
4,976
3.48
%
1,382
3.62
%
-
-
-
%
Related party debt
3.20
%
5,335
2.12
%
9,000
1.74
%
Total interest-bearing liabilities
62,500
1,135
1.82
%
54,718
1.69
%
47,614
1.56
%
Non-interest-bearing liabilities:
Non-interest-bearing deposit accounts
Other liabilities
3,015
3,306
2,943
Total non-interest-bearing liabilities
3,167
3,546
3,449
Total liabilities
65,667
58,264
51,063
Equity
Total equity
11,578
7,888
5,121
Total liabilities and equity
$
77,245
$
66,152
$
56,184
Interest rate spread(6)
15.43
%
16.91
%
18.54
%
Net interest income
$
12,093
$
11,320
$
10,571
Net interest margin(7)
15.77
%
17.20
%
18.78
%
____________________
(1)
Average balances are based on monthly balances, including beginning of period balances, except where monthly balances are unavailable and quarterly balances are used. Collection of daily averages involves undue burden and expense. We believe our average balance sheet data appropriately incorporates the seasonality in the level of our loan receivables and is representative of our operations.
(2)
Average yields/rates are based on total interest income/expense over average monthly balances.
(3)
Includes average restricted cash balances of $566 million, $331 million and $58 million for the years ended December 31, 2015, 2014 and 2013, respectively.
(4)
Non-accrual loans are included in the average loan receivables balances.
(5)
Interest income on credit cards includes fees on loans of $2,235 million, $2,129 million and $2,029 million for the years ended December 31, 2015, 2014 and 2013, respectively.
(6)
Interest rate spread represents the difference between the yield on total interest-earning assets and the rate on total interest-bearing liabilities.
(7)
Net interest margin represents net interest income divided by average total interest-earning assets.
The following table sets forth the amount of changes in interest income and interest expense due to changes in average volume and average yield/rate. Variances due to changes in both average volume and average yield/rate have been allocated between the average volume and average yield/rate variances on a consistent basis based upon the respective percentage changes in average volume and average yield/rate.
2015 vs. 2014
2014 vs. 2013
Increase (decrease) due to change in:
Increase (decrease) due to change in:
($ in millions)
Average Volume
Average Yield / Rate
Net Change
Average Volume
Average Yield / Rate
Net Change
Interest-earning assets:
Interest-earning cash and equivalents
$
$
$
$
$
(4
)
$
Securities available for sale
(11
)
(5
)
Loan receivables:
Credit cards, including held for sale
1,064
(99
)
1,092
(140
)
Consumer installment loans
(4
)
(30
)
-
(30
)
Commercial credit products
(2
)
(5
)
(7
)
(3
)
(1
)
Other
(1
)
-
-
-
-
Total loan receivables
1,072
(109
)
1,064
(143
)
Change in interest income from total interest-earning assets
$
1,101
$
(115
)
$
$
1,081
$
(152
)
$
Interest-bearing liabilities:
Interest-bearing deposit accounts
$
$
$
$
$
(26
)
$
Borrowings of consolidated securitization entities
(14
)
-
(19
)
Bank term loan
-
Senior unsecured notes
(2
)
-
Related party debt
(147
)
(109
)
(73
)
(44
)
Change in interest expense from total interest-bearing liabilities
Total change in net interest income
$
$
(177
)
$
$
$
(178
)
$
Interest Income
Interest income is comprised of interest and fees on loans, which includes merchant discounts provided by partners to compensate us in almost all cases for all or part of the promotional financing provided to their customers, and interest on cash and equivalents and investment securities. We include in interest and fees on loans any past due interest and fees deemed to be collectible. Direct loan origination costs on credit card loans are deferred and amortized on a straight-line basis over a one-year period and recorded in interest and fees on loans. For non-credit card receivables, direct loan origination costs are deferred and amortized over the life of the loan and recorded in interest and fees on loans.
We analyze interest income as a function of two principal components: average interest-earning assets and yield on average interest-earning assets. Key drivers of average interest-earning assets include:
•
purchase volumes, which are influenced by a number of factors including macroeconomic conditions and consumer confidence generally, our partners’ sales and our ability to increase our share of those sales;
•
payment rates, reflecting the extent to which customers maintain a credit balance;
•
charge-offs, reflecting the receivables that are deemed not to be collectible;
•
the size of our liquidity portfolio; and
•
portfolio acquisitions when we enter into new partner relationships.
Key drivers of yield on average interest-earning assets include:
•
pricing (contractual rates of interest, movement in prime rates, late fees and merchant discount rates);
•
changes to our mix of loans (e.g., the number of loans bearing promotional rates as compared to standard rates);
•
frequency of late fees incurred when account holders fail to make their minimum payment by the required due date;
•
credit performance and accrual status of our loans; and
•
yield earned on our liquidity portfolio.
Interest income increased by $986 million, or 8.1%, for the year ended December 31, 2015, and by $929 million, or 8.2%, for the year ended December 31, 2014. These increases were driven primarily by growth in our loan receivables.
Average interest-earning assets
($ in millions)
Loan receivables, including held for sale
$
62,120
$
57,101
$
52,407
Liquidity portfolio and other
14,548
8,717
3,868
Total average interest-earning assets
$
76,668
$
65,818
$
56,275
The increase in average loan receivables for the year ended December 31, 2015 was driven primarily by higher purchase volume of 10.1% as a result of average active account growth and higher purchase volume per account. Average active accounts increased 4.4% to 62.6 million for the year ended December 31, 2015 from 60.0 million for the year ended December 31, 2014.
The increase in average loan receivables for the year ended December 31, 2014, was driven primarily by higher purchase volume of 9.9% resulting from an increase in average active credit card accounts to 60.0 million for the year ended December 31, 2014 from 56.3 million for the year ended December 31, 2013.
Yield on average interest-earning assets
Yield on average interest-earning assets for the prior year
18.60
%
20.10
%
21.22
%
Increase in liquidity portfolio invested in cash and short-term U.S. Treasuries
(1.18
)%
(1.34
)%
(1.01
)%
Decrease in yield on loan receivables, including held for sale
(0.17
)%
(0.16
)%
(0.11
)%
Yield on average interest-earning assets for the years ended
December 31
17.25
%
18.60
%
20.10
%
The decrease in yield on interest-earning assets for the year ended December 31, 2015 was driven primarily by growth in our liquidity portfolio, which is comprised primarily of cash and equivalents and obligations of the U.S. Treasury that mature in less than twelve months, which results in a significantly lower yield than our loan receivables. The yield on our average loan receivables decreased to 21.22% for the year ended December 31, 2015 from 21.39% for the year ended December 31, 2014, reflecting the impact of slightly higher payment rates from our customers and growth in promotional balances.
The decrease in yield on interest-earning assets for the year ended December 31, 2014 was driven primarily by an increase in our average interest-earning cash and equivalents which earn a lower yield than our loan receivables. The yield on our average loan receivables decreased slightly to 21.39% for the year ended December 31, 2014 from 21.55% for the year ended December 31, 2013, reflecting the impact of higher payment rates from our customers.
Interest Expense
Interest expense is incurred on our interest-bearing liabilities, which consisted of interest-bearing deposit accounts, borrowings of consolidated securitization entities, the Bank Term Loan and senior unsecured notes.
Key drivers of interest expense include:
•
the amounts outstanding of our deposits and borrowings;
•
the interest rate environment and its effect on interest rates paid on our funding sources; and
•
the changing mix in our funding sources as we continue to increase the proportion of our funding provided by our deposits and third-party debt.
Interest expense increased by $213 million, or 23.1%, for the year ended December 31, 2015, driven primarily by increases in average interest-bearing liabilities of $7,782 million, or 14.2%, and an increase of 13 basis points in our cost of funds arising from the changes in our funding mix. Our cost of funds increased to 1.82% for the year ended December 31, 2015 from 1.69% for the year ended December 31, 2014.
Interest expense increased by $180 million, or 24.3%, for the year ended December 31, 2014, driven primarily by increases in average interest-bearing liabilities of $7,104 million, or 14.9% and an increase of 13 basis points in cost of funds.
Average interest-bearing liabilities
Years ended December 31 ($ in millions)
Interest-bearing deposit accounts
$
38,148
$
30,110
$
22,405
Borrowings of consolidated securitization entities
13,868
14,835
16,209
Third-party debt
10,359
4,438
-
Related party debt
5,335
9,000
Total average interest-bearing liabilities
$
62,500
$
54,718
$
47,614
The increases in average interest-bearing liabilities for the year ended December 31, 2015 was driven primarily by growth in our direct deposits and the issuance of third-party debt to replace our related party funding from GECC.
The increase in average interest-bearing liabilities for the year ended December 31, 2014 were driven primarily by increases of $7,705 million in our average interest-bearing deposit accounts, as well as from the new third-party debt incurred in connection with the IPO, partially offset by a reduction in average borrowings under our securitization programs and our related party debt.
Net Interest Income
Net interest income represents the difference between interest income and interest expense. We expect net interest income as a percentage of interest-earning assets to be influenced by changes in the interest rate environment, changes in our mix of products, the level of loans bearing promotional rates as compared to our standard rates, credit performance of our loans and changes in the amount and composition of our interest-bearing liabilities.
Net interest income increased by $773 million, or 6.8%, for the year ended December 31, 2015, driven by higher average loan receivables, partially offset by increased interest expense driven by higher liquidity, funding mix and growth.
Net interest income increased by $749 million, or 7.1%, for the year ended December 31, 2014, driven by growth in loan receivables, partially offset by higher interest expense and a decrease in our yield on interest-earning assets due to a higher average interest-earning cash and equivalents balance.
Retailer Share Arrangements
Most of our Retail Card program agreements and certain other program agreements contain retailer share arrangements that provide for payments to our partners if the economic performance of the program exceeds a contractually defined threshold. These arrangements are designed to align our interests and provide an additional incentive to our partners to promote our credit products. Although the share arrangements vary by partner, these arrangements are generally structured to measure the economic performance of the program, based typically on agreed upon program revenues (including interest income and certain other income) less agreed upon program expenses (including interest expense, provision for loan losses, retailer payments and operating expenses), and share portions of this amount above a negotiated threshold. The threshold and economic performance of a program that are used to calculate payments to our partners may be based on, among other things, agreed upon measures of program expenses rather than our actual expenses, and therefore increases in our actual expenses (such as funding costs or operating expenses) may not necessarily result in reduced payments under our retailer share arrangements. These arrangements are typically designed to permit us to achieve an economic return before we are required to make payments to our partners based on the agreed contractually defined threshold. Our payments to partners pursuant to these retailer share arrangements have increased in recent years (both in absolute terms and as a proportion of interest income), partially as a result of the growth of our receivables related to programs with retailer share arrangements and improvements in the credit performance of these receivables. In addition, we have made changes to the terms of certain program agreements that have been renegotiated in the past few years that have contributed to the increase in payments to partners pursuant to retailer share arrangements.
We believe that our retailer share arrangements have been effective in helping us to grow our business by aligning our partners’ interests with ours. We also believe that changes to the terms of certain program agreements that have contributed to the increase in our retailer share arrangement payments will help us to grow our business by providing an additional incentive to the relevant partners to promote our credit products going forward. Payments to partners pursuant to these retailer share arrangements would generally decrease, and mitigate the impact on our profitability, in the event of declines in the performance of the programs or the occurrence of other unfavorable developments that impact the calculation of payments to our partners pursuant to our retailer share arrangements.
Retailer share arrangements increased by $163 million, or 6.3%, for the year ended December 31, 2015, driven primarily by the growth and improved performance of the programs in which we have retailer share arrangements, partially offset with increased other expense and loyalty costs associated with these programs.
Retailer share arrangements increased by $202 million, or 8.5%, for the year ended December 31, 2014, driven by the growth and improved performance of the programs in which we have retailer share arrangements, including the effect of a lower provision for loan losses. The increase was also driven by changes to the terms of the retailer share arrangements for those partners with whom we extended program agreements in the second half of 2013 and in 2014.
Provision for Loan Losses
Provision for loan losses is the expense related to maintaining the allowance for loan losses at an appropriate level to absorb the estimated probable losses inherent in the loan portfolio at each period end date. Provision for loan losses in each period is a function of net charge-offs (gross charge-offs net of recoveries) and the required level of the allowance for loan losses. Our process to determine our allowance for loan losses is based upon our estimate of the incurred loss period for each type of loss (i.e., aged, fraud, deceased, settlement, other non-aged and bankruptcy) by partner. See “Critical Accounting Estimates - Allowance for Loan Losses” and Note 2. Significant Accounting Policies to our consolidated and combined financial statements for additional information on our allowance for loan loss methodology.
Provision for loan losses increased by $35 million, or 1.2%, for the year ended December 31, 2015 primarily due to portfolio growth, partially offset by improving asset quality trends. Our allowance coverage ratio decreased to 5.12% at December 31, 2015, as compared to 5.28% at December 31, 2014, reflecting the recent improvements in our asset quality trends.
Provision for loan losses decreased by $155 million, or 5.0%, for the year ended December 31, 2014. This decrease was driven primarily as a result of an incremental provision of $642 million recorded in 2013 relating to enhancements to our allowance for loan loss methodology, which was not repeated in the current period. This decrease was partially offset by increased provisions in 2014 primarily related to portfolio growth. Our allowance coverage ratio increased to 5.28% at December 31, 2014, as compared to 5.05% at December 31, 2013, reflecting a transition to a stable credit outlook at December 31, 2014 from an improving outlook at December 31, 2013.
Other Income
Years ended December 31 ($ in millions)
Interchange revenue
$
$
$
Debt cancellation fees
Loyalty programs
(419
)
(281
)
(213
)
Other
Total other income
$
$
$
Interchange revenue
We earn interchange fees on Dual Card transactions outside of our partners’ sales channels, based on a flat fee plus a percent of the purchase amount. We also process general purpose card transactions for some Payment Solutions and CareCredit partners as their acquiring bank, for which we obtain an interchange fee. Growth in interchange revenue has been, and is expected to continue to be, driven primarily by growth in our Dual Card product.
Interchange revenue increased by $116 million, or 29.8%, for the year ended December 31, 2015, and by $65 million, or 20.1%, for the year ended December 31, 2014, due to increased purchase volume outside of our retail partners' sales channels.
Debt cancellation fees
Debt cancellation fees relate to payment protection products purchased by our credit card customers. Customers who choose to purchase these products are charged a monthly fee based on their account balance. In return, we will cancel all or a portion of a customer’s credit card balance in the event of certain qualifying life events. We offer our debt cancellation product to our credit card customers online and, on a limited basis, by direct mail. We no longer offer this product via phone calls to our customer service department, which has led to a decrease in new enrollments for this product and is expected to result in a lower level of income generated by this product in the future as the balances of existing accounts enrolled in this program decrease over time.
Debt cancellation fees decreased by $26 million, or 9.5%, for the year ended December 31, 2015, and by $49 million, or 15.1%, for the year ended December 31, 2014, driven by fewer customers being enrolled in the product.
Loyalty programs
We operate a number of loyalty programs in our Retail Card platform that are designed to generate incremental purchase volume per customer, while reinforcing the value of the card and strengthening cardholder loyalty. These programs typically provide cardholders with rewards in the form of merchandise discounts that are earned by achieving a pre-set spending level on their private label credit card or Dual Card. Other programs provide cash back or rewards points, which are redeemable for a variety of products or awards. Growth in loyalty program payments has been, and is expected to continue to be, driven by growth in purchase volume related to existing loyalty programs and the rollout of new loyalty programs.
Loyalty programs cost increased by $138 million, or 49.1%, for the year ended December 31, 2015, and by $68 million, or 31.9%, for the year ended December 31, 2014, arising from the launch of new rewards programs with our partners and growth in purchase volume associated with existing loyalty programs.
Other
Other includes a variety of items including ancillary fees and investment gains/losses.
Other decreased by $45 million, or 44.1%, for the year ended December 31, 2015, and increased by $37 million, or 56.9%, for the year ended December 31, 2014. These changes were primarily due to a gain recorded in connection with portfolio sales in 2014.
Other Expense
Years ended December 31 ($ in millions)
Employee costs
$
1,042
$
$
Professional fees
Marketing and business development
Information processing
Other
Total other expense
$
3,264
$
2,927
$
2,484
Employee costs
Employee costs primarily consist of employee compensation and benefit costs.
Employee costs increased by $176 million, or 20.3%, for the year ended December 31, 2015, and by $168 million, or 24.1%, for the year ended December 31, 2014, primarily related to additional compensation expenses for new employees related to the building of our stand-alone infrastructure and to support business growth and salary increases for existing employees.
Professional fees
Professional fees consist primarily of outsourced provider fees (e.g., collection agencies and call centers), legal, accounting, consulting, and recruiting expenses.
Professional fees increased by $82 million, or 14.6%, for the year ended December 31, 2015. These expense increases were due to business growth, the Separation and higher third-party costs related to the EMV card rollout for active Dual Card accounts.
Professional fees increased by $121 million, or 24.9%, for the year ended December 31, 2014. These expense increases were due to higher professional and other consulting fees related to the IPO, the Separation, growth of the retail deposit platform and other business growth (e.g., increased active accounts and increased purchase volumes).
Marketing and business development
Marketing and business development costs consist primarily of our contractual and discretionary marketing and business development spend, as well as amortization expense associated with retail partner contract acquisitions and extensions.
Marketing and business development costs decreased by $27 million, or 5.9%, for the year ended December 31, 2015, primarily due to lower portfolio marketing investments and lower brand advertising.
Marketing and business development costs increased by $191 million, or 71.0%, for the year ended December 31, 2014, due to increased marketing expenses for our programs, investments in our brand, including the launch of our new advertising campaign, and increased amortization expense associated with program acquisitions and extensions.
Information processing
Information processing costs primarily consist of fees related to outsourced information processing providers, credit card associations and software licensing agreements.
Information processing costs increased by $85 million, or 40.1%, for the year ended December 31, 2015, due to higher information technology investment and higher transaction volume.
Information processing costs increased by $19 million, or 9.8%, for the year ended December 31, 2014, due to higher transaction volume and increased software licensing and maintenance expense.
Other
Other primarily consists of postage, fraud expense, litigation and regulatory matters expense and various other corporate overhead items such as facilities leases and maintenance, leased equipment and telephone charges. For periods prior to the IPO, we incurred certain corporate overhead costs that were allocated to us by GE. Postage is driven primarily by the number of our active accounts and the percentage of customers that utilize our electronic billing option. Fraud is driven primarily by the number of our active Dual Card accounts.
The “other” component increased for the year ended December 31, 2015 primarily due to investments in growth, infrastructure build in preparation for separation from GE, higher fraud expense, and also included expenses related to the completion of the EMV card rollout for active Dual Card accounts. These increases were largely offset by the impact of corporate overhead allocations no longer being billed to us by GE following our IPO.
The “other” component decreased for the year ended December 31, 2014 primarily due to lower corporate overhead allocations and assessments from GECC and a decrease in litigation and regulatory expense. These decreases were partially offset by an increase in expense driven by business growth. Following the IPO, we no longer receive corporate overhead allocations and assessments from GECC. All services provided by GECC to us following the IPO were directly billed to us in accordance with the terms of the relevant agreement, and are included in the appropriate cost categories. See Note 15. Related Party Transactions to our consolidated and combined financial statements for additional information on our transactions with GE and GECC.
Provision for Income Taxes
Years ended December 31 ($ in millions)
Effective tax rate
37.3
%
37.7
%
37.0
%
Provision for income taxes
$
1,317
$
1,277
$
1,163
For periods up to and including the date of Separation, we are included in the consolidated U.S. federal and state income tax returns of GE, where applicable, but also file certain separate state and foreign income tax returns. For periods after the date of Separation we will file separate consolidated U.S. federal and state income tax returns. Our current obligations for taxes are settled with GE, or the relevant tax authority, as applicable, on an estimated basis and adjusted in later periods as appropriate and are reflected in our consolidated and combined financial statements in the periods in which those settlements occur. We recognize the current and deferred tax consequences of all transactions that have been recognized in the consolidated and combined financial statements using the provisions of the enacted tax laws. See “Critical Accounting Estimates-Income Taxes” for a discussion of the significant judgments and estimates related to income taxes.
The effective tax rate for the year ended December 31, 2015 decreased slightly compared to the prior year. The decrease was primarily due to a reduction in certain non-deductible expenses and tax reserves for uncertain income tax positions, partially offset by increases in current state tax rates, and a non-recurring tax expense incurred in the prior year related to an internal corporate reorganization. In each period, the effective tax rate differs from the U.S. federal statutory tax rate of 35.0%, primarily due to state income taxes.
Platform Analysis
As discussed above under “-Our Sales Platforms,” we offer our products through three sales platforms (Retail Card, Payment Solutions and CareCredit), which management measures based on their revenue-generating activities. The following is a discussion of the platform revenue for each of our platforms.
Non-GAAP Measure
In order to assess and internally report the revenue performance of our three sales platforms, we use a measure we refer to as “platform revenue.” Platform revenue is the sum of three line items in our Consolidated and Combined Statements of Earnings prepared in accordance with GAAP: “interest and fees on loans,” plus “other income,” less “retailer share arrangements.” Platform revenue itself is not a measure presented in accordance with GAAP. We deduct retailer share arrangements but do not deduct other line item expenses, such as interest expense, provision for loan losses and other expense, because those items are managed for the business as a whole. We believe that platform revenue is a useful measure to investors because it represents management’s view of the net revenue contribution of each of our platforms. This measure should not be considered a substitute for interest and fees on loans or other measures of performance we have reported in accordance with GAAP. The reconciliation of platform revenue to interest and fees on loans for each platform is set forth in the table included in the discussion of each of our three platforms below. The following table sets forth the reconciliation of total platform revenue to total interest and fees on loans for the periods indicated.
Years ended December 31 ($ in millions)
Interest and fees on loans
$
13,179
$
12,216
$
11,295
Other income
Retailer share arrangements
(2,738
)
(2,575
)
(2,373
)
Platform revenue
$
10,833
$
10,126
$
9,422
Retail Card
The following table sets forth supplemental information related to our Retail Card platform for the periods indicated.
Years ended December 31 ($ in millions)
Purchase volume
$
92,190
$
83,591
$
75,739
Period-end loan receivables
$
47,412
$
42,308
$
39,834
Average loan receivables, including held for sale
$
42,687
$
39,278
$
35,716
Average active accounts (in thousands)
50,358
48,599
45,690
Platform revenue:
Interest and fees on loans
$
9,774
$
9,040
$
8,317
Other income
Retailer share arrangements
(2,688
)
(2,530
)
(2,331
)
Platform revenue
$
7,425
$
6,917
$
6,405
Retail Card platform revenue increased by $508 million, or 7.3%, for the year ended December 31, 2015 and by $512 million, or 8.0%, for the year ended December 31, 2014. These increases were primarily the result of an increase in interest and fees on loans driven by an increase in average loan receivables, partially offset by increases in retailer share arrangement payments. The increases in these payments were as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Payment Solutions
The following table sets forth supplemental information related to our Payment Solutions platform for the periods indicated.
Years ended December 31 ($ in millions)
Purchase volume
$
13,668
$
12,447
$
11,360
Period-end loan receivables
$
13,543
$
12,095
$
10,893
Average loan receivables
$
12,436
$
11,171
$
10,469
Average active accounts (in thousands)
7,478
6,869
6,330
Platform revenue:
Interest and fees on loans
$
1,719
$
1,582
$
1,506
Other income
Retailer share arrangements
(45
)
(41
)
(36
)
Platform revenue
$
1,691
$
1,573
$
1,506
Payment Solutions platform revenue increased by $118 million, or 7.5%, for the year ended December 31, 2015. The increase was primarily the result of higher interest and fees on loans driven primarily by an increase in average loan receivables, partially offset with a reduction in receivable yield.
Payment Solutions platform revenue increased by $67 million, or 4.4%, for the year ended December 31, 2014. The increase was primarily the result of higher interest and fees on loans due to an increase in average loan receivables.
CareCredit
The following table sets forth supplemental information related to our CareCredit platform for the periods indicated.
Years ended December 31 ($ in millions)
Purchase volume
$
7,757
$
7,111
$
6,759
Period-end loan receivables
$
7,335
$
6,883
$
6,527
Average loan receivables
$
6,997
$
6,652
$
6,222
Average active accounts (in thousands)
4,807
4,541
4,233
Platform revenue:
Interest and fees on loans
$
1,686
$
1,594
$
1,472
Other income
Retailer share arrangements
(5
)
(4
)
(6
)
Platform revenue
$
1,717
$
1,636
$
1,511
CareCredit platform revenue increased by $81 million, or 5.0%, for the year ended December 31, 2015. The increase was primarily the result of an increase in interest and fees on loans driven primarily by an increase in average loan receivables.
CareCredit platform revenue increased by $125 million, or 8.3%, for the year ended December 31, 2014. The increase was primarily the result of an increase in interest and fees on loans driven primarily by an increase in average loan receivables.
Services and Funding Provided by GE
____________________________________________________________________________________________
Services provided by GE
Following the Separation, GE no longer owns any of our outstanding common stock and is no longer a related party to us, and we no longer consider our transactions with GE as related party transactions.
Following the IPO, GE provided a variety of services to us, which were governed by the Transitional Services Agreement (“TSA”) and various other agreements with GE and GECC that we entered into in connection with the IPO. The services provided included, among other things, employee benefits and benefit administration, information technology, telecommunication services and leases for vehicles, equipment and facilities. Under the TSA, all of the costs billed to us by GE subsequent to the IPO were at GE’s cost in accordance with historic billing methodologies. The majority of the services provided by GE have been replaced, and we expect the remaining services will be replaced by mid-2016.
For periods prior to the IPO, we were an indirect wholly-owned subsidiary of GE and GECC, and in addition to the services discussed above, we also received a corporate overhead allocation and assessment from GE and GECC for corporate activities that either directly or indirectly benefited our business.
Funding provided by GECC
GECC no longer provides funding to our business. During the first quarter of 2015, we prepaid all of the remaining outstanding indebtedness provided under the GECC Term Loan. Prior to the IPO, GECC was a key source of funding for our business.
See Note 15. Related Party Transactions to our consolidated and combined financial statements for additional information on our transactions with GE and GECC prior to the Separation, and see Funding, Liquidity and Capital Resources - Funding Sources - Related Party Debt for additional information on the funding provided by GECC to us and the related interest expense.
Investment Securities
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our investment securities portfolio. All of our investment securities are classified as available-for-sale at December 31, 2015, 2014 and 2013, and are primarily short-term obligations of the U.S. Treasury or held to comply with the Community Reinvestment Act. Investment securities classified as available-for-sale are reported in our Consolidated Statements of Financial Position at fair value. Our portfolio of investment securities consisted primarily of short-term obligations of the U.S. Treasury, state and municipal bonds and residential mortgage-backed securities.
The following table sets forth the amortized cost and fair value of our investment securities at the dates indicated:
At December 31 ($ in millions)
Amortized
Cost
Estimated Fair Value
Amortized
Cost
Estimated Fair Value
Amortized
Cost
Estimated Fair Value
Debt:
U.S. government and federal agency
$
2,768
$
2,761
$
1,252
$
1,252
$
-
$
-
State and municipal
Residential mortgage-backed
U.S. corporate debt
-
-
-
-
Equity
Total
$
3,157
$
3,142
$
1,598
$
1,598
$
$
Unrealized gains and losses, net of the related tax effect, on available-for-sale securities that are not other-than-temporarily impaired are excluded from earnings and are reported as a separate component of comprehensive income (loss) until realized. At December 31, 2015, 2014 and 2013, our investment securities had gross unrealized gains of $2 million, $4 million and $1 million, respectively, and gross unrealized losses of $17 million, $4 million and $16 million, respectively.
Our investment securities portfolio had the following maturity distribution at December 31, 2015. Equity securities have been excluded from the table because they do not have a maturity.
($ in millions)
Due in 1 Year
or Less
Due After 1
through
5 Years
Due After 5
through
10 Years
Due After
10 years
Total
Debt:
U.S. government and federal agency
$
1,218
$
1,543
$
-
$
-
$
2,761
State and municipal
-
-
Residential mortgage-backed
-
-
-
Total(1)
$
1,218
$
1,544
$
-
$
$
3,127
Weighted average yield(2)
0.3
%
0.7
%
-
%
3.5
%
0.9
%
______________________
(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 December 31, 2015, we did not hold investments in any single issuer with an aggregate book value that exceeded 10% of equity, excluding obligations of the U.S. government.
Loan Receivables
____________________________________________________________________________________________
The following discussion provides supplemental information regarding our loan receivables portfolio.
Loan receivables are our largest category of assets and represent our primary source of revenues. The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.
At December 31 ($ in millions)
(%)
(%)
(%)
(%)
(%)
Loans
Credit cards
$
65,773
96.3
%
$
58,880
96.1
%
$
54,958
96.0
%
$
49,572
94.8
%
$
44,287
92.7
%
Consumer installment loans
1,154
1.7
1,063
1.7
1.7
1,424
2.7
2,078
4.4
Commercial credit products
1,323
1.9
1,320
2.2
1,317
2.3
1,307
2.5
1,350
2.8
Other
0.1
-
-
-
0.1
Total loans
$
68,290
100.0
%
$
61,286
100.0
%
$
57,254
100.0
%
$
52,313
100.0
%
$
47,741
100.0
%
Loan receivables increased by $7,004 million, or 11.4%, at December 31, 2015 compared to December 31, 2014, driven by higher purchase volume and average active account growth.
Our loan receivables portfolio had the following maturity distribution at December 31, 2015.
($ in millions)
Within 1
Year(1)
1-5 Years(2)
After
5 Years
Total
Loans
Credit cards
$
65,290
$
$
-
$
65,773
Consumer installment loans
1,154
Commercial credit products
1,319
-
1,323
Other
Total loans
$
66,632
$
1,099
$
$
68,290
Loans due after one year at fixed interest rates
N/A
$
1,099
$
$
1,658
Loans due after one year at variable interest rates
N/A
-
-
-
Total loans due after one year
N/A
$
1,099
$
$
1,658
______________________
(1)
Credit card loans have minimum payment requirements but no stated maturity and therefore are included in the due within one year category. However, many of our credit card holders will revolve their balances, which may extend their repayment period beyond one year for balances at December 31, 2015.
(2)
Credit card and commercial loans due after one year relate to Troubled Debt Restructuring ("TDR") assets
Our loan receivables portfolio had the following geographic concentration at December 31, 2015.
($ in millions)
Loan Receivables
Outstanding(1)
% of Total Loan
Receivables
Outstanding
State
Texas
$
6,695
9.8
%
California
$
6,595
9.7
%
Florida
$
5,368
7.9
%
New York
$
3,840
5.6
%
Pennsylvania
$
3,016
4.4
%
_______________________
(1)
Based on December 2015 customer statement-end balances extrapolated to December 31, 2015. Individual customer balances at December 31, 2015 are not available without undue burden and expense.
Impaired Loans and Troubled Debt Restructurings
Our loss mitigation strategy is intended to minimize economic loss and at times can result in rate reductions, principal forgiveness, extensions or other actions, which may cause the related loan to be classified as a Troubled Debt Restructuring (“TDR”) and also be impaired. We use short-term (3 to 12 months) or long-term (12 to 60 months) modification programs for borrowers experiencing financial difficulty as a loss mitigation strategy to improve long-term collectability of the loans that are classified as TDRs. For our credit card customers, the short-term program primarily consists of a reduced minimum payment and an interest rate reduction, both lasting for a period no longer than 12 months. The long-term program involves changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The long-term program does not normally provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. We also make loan modifications for some customers who request financial assistance through external sources, such as a consumer credit counseling agency program. The loans that are modified typically receive a reduced interest rate but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. The determination of whether these changes to the terms and conditions meet the TDR criteria includes our consideration of all relevant facts and circumstances.
Loans classified as TDRs are recorded at their present value with impairment measured as the difference between the loan balance and the discounted present value of cash flows expected to be collected, discounted at the original effective interest rate of the loan. Our allowance for loan losses on TDRs is generally measured based on the difference between the recorded loan receivable and the present value of the expected future cash flows.
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.
At December 31 ($ in millions)
Non-accrual loan receivables
$
$
$
$
1,042
$
1,003
Loans contractually 90 days past-due and still accruing interest
1,270
1,160
1,119
Earning TDRs(1)
1,082
Non-accrual, past-due and restructured loan receivables
$
1,985
$
1,832
$
1,862
$
1,923
$
2,121
______________________
(1)
At December 31, 2015, 2014 and 2013, balances exclude $51 million, $54 million and $70 million, respectively, of TDRs which are included in loans contractually 90 days past-due and still accruing interest balance. See Note 4. Loan Receivables and Allowance for Loan Losses to our consolidated and combined financial statements for additional information on the financial effects of TDRs for the years ended December 31, 2015 and 2014, respectively.
At December 31 ($ in millions)
Gross amount of interest income that would have been recorded in accordance with the original contractual terms
$
$
Interest income recognized
Total interest income foregone
$
$
Delinquencies
Loan delinquencies as a percentage of period-end loan receivables decreased with the over-30 day delinquency rate decreasing to 4.06% at December 31, 2015, as compared to 4.14% at December 31, 2014. The 8 basis point decrease compared to the same period in prior year was primarily driven by general improvement in the U.S. economy.
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 Consolidated and Combined Statements of Earnings.
The table below sets forth the ratio of net charge-offs to average loan receivables, including held for sale, for the periods indicated.
Years ended December 31
Ratio of net charge-offs to average loan receivables, including held for sale
4.33
%
4.51
%
4.68
%
4.93
%
5.80
%
Allowance for Loan Losses
The allowance for loan losses totaled $3,497 million at December 31, 2015 compared with $3,236 million at December 31, 2014, representing our best estimate of probable losses inherent in the portfolio. The increase in allowance for loan losses was primarily driven by an increase in our expected losses driven by growth in loan receivables.
The following tables provide changes in our allowance for loan losses for the periods presented:
Balance at January 1, 2015
Provision charged to operations
Other(1)
Gross charge-offs(2)
Recoveries(2)
Balance at December 31, 2015
($ in millions)
Credit cards
$
3,169
$
2,880
$
-
$
(3,289
)
$
$
3,420
Consumer installment loans
-
(35
)
Commercial credit products
-
(47
)
Other
-
-
-
-
Total
$
3,236
$
2,952
$
-
$
(3,371
)
$
$
3,497
Balance at January 1, 2014
Provision charged to operations
Other(1)
Gross charge-offs(2)
Recoveries(2)
Balance at December 31, 2014
($ in millions)
Credit cards
$
2,827
$
2,858
$
-
$
(3,111
)
$
$
3,169
Consumer installment loans
-
(30
)
Commercial credit products
-
(48
)
Other
-
-
-
-
-
-
Total
$
2,892
$
2,917
$
-
$
(3,189
)
$
$
3,236
Balance at January 1, 2013
Provision charged to operations
Other(1)
Gross charge-offs(2)
Recoveries(2)
Balance at December 31, 2013
($ in millions)
Credit cards
$
2,174
$
2,970
$
-
$
(2,847
)
$
$
2,827
Consumer installment loans
-
(111
)
Commercial credit products
-
(53
)
Other
-
-
-
-
-
-
Total
$
2,274
$
3,072
$
-
$
(3,011
)
$
$
2,892
Balance at
January 1,
Provision
charged to
operations
Other(1)
Gross charge-offs(2)
Recoveries(2)
Balance at December 31, 2012
($ in millions)
Credit cards
$
1,902
$
2,438
$
-
$
(2,680
)
$
$
2,174
Consumer installment loans
-
(130
)
Commercial credit products
-
(76
)
Other
-
-
(4
)
-
-
Total
$
2,052
$
2,565
$
-
$
(2,890
)
$
$
2,274
Balance at
January 1,
Provision
charged to
operations
Other(1)
Gross charge-offs(2)
Recoveries(2)
Balance at December 31, 2011
($ in millions)
Credit cards
$
2,137
$
2,130
$
(8
)
$
(2,850
)
$
$
1,902
Consumer installment loans
-
(151
)
Commercial credit products
-
(99
)
Other
-
-
-
-
-
-
Total
$
2,362
$
2,258
$
(8
)
$
(3,100
)
$
$
2,052
______________________
(1)
Other primarily included the effects of foreign currency exchange.
(2)
Net charge-offs (gross charge-offs less recoveries) in certain portfolios may exceed the beginning allowance for loan losses as our revolving credit portfolios turn over more than once per year or, in all portfolios, can reflect losses that are incurred subsequent to the beginning of the period due to information becoming available during the period, which may identify further deterioration of existing loan receivables.
Funding, Liquidity and Capital Resources
____________________________________________________________________________________________
We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources to support our daily operations, our business growth, our credit ratings and our regulatory and policy requirements, in a cost effective and prudent manner through expected and unexpected market environments.
Funding Sources
Our primary funding sources include cash from operations, deposits (direct and brokered deposits), third-party debt and securitized financings.
The following table summarizes information concerning our funding sources during the periods indicated:
Years ended December 31 ($ in millions)
Average
Balance
%
Average
Rate
Average
Balance
%
Average
Rate
Average
Balance
%
Average
Rate
Deposits(1)
$
38,148
61.0
%
1.6
%
$
30,110
55.0
%
1.6
%
$
22,405
47.1
%
1.7
%
Securitized financings
13,868
22.2
1.6
14,835
27.1
1.4
16,209
34.0
1.3
Bank term loan
5,383
8.6
2.5
3,056
5.6
2.4
-
-
-
Senior unsecured notes
4,976
8.0
3.5
1,382
2.5
3.6
-
-
-
Related party debt
0.2
3.2
5,335
9.8
2.1
9,000
18.9
1.7
Total
$
62,500
100.0
%
1.8
%
$
54,718
100.0
%
1.7
%
$
47,614
100.0
%
1.6
%
______________________
(1)
Excludes $152 million, $240 million and $506 million average balance of non-interest-bearing deposits for the years ended December 31, 2015, 2014 and 2013, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the years ended December 31, 2015, 2014 and 2013.
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 December 31, 2015, we had $29.7 billion in direct deposits (which includes deposits from banks and financial institutions) and $13.7 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger that channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to significantly expand our direct deposits base as a source of stable and diversified low cost funding.
Our direct deposits include a range of FDIC-insured deposit products, including certificates of deposit, IRAs, money market accounts and savings accounts.
Brokered deposits are primarily from retail customers of large brokerage firms. We have relationships with 10 brokers that offer our deposits through their networks. Our brokered deposits consist primarily of certificates of deposit that bear interest at a fixed rate and at December 31, 2015, had a weighted average remaining life of 3.4 years. These deposits generally are not subject to early withdrawal.
Our ability to attract deposits is sensitive to, among other things, the interest rates we pay, and therefore, we bear funding and interest rate risk if we fail, or are required to pay higher rates, to attract new deposits or retain existing deposits. To mitigate these risks, we pursue a funding strategy that seeks to match our assets and liabilities by interest rate and expected maturity characteristics, and we seek to maintain access to multiple other funding sources, including securitized financings (including our undrawn committed capacity) and unsecured debt.
Over the next several years, we are seeking to increase our direct deposits through investing in our direct deposit programs and capabilities. The growth of direct deposits will be supported by a significant investment in marketing and brand awareness.
The following table summarizes certain information regarding our interest-bearing deposits by type (all of which constitute U.S. deposits) for the periods indicated.
Years ended December 31 ($ in millions)
Average
Balance(1)
% of
Total
Average
Rate
Average
Balance(1)
% of
Total
Average
Rate
Average
Balance(1)
% of
Total
Average
Rate
Direct deposits:
Certificates of deposit (including IRA certificates of deposit)
$
15,543
40.7
%
1.4
%
$
10,993
36.5
%
1.3
%
$
5,889
26.3
%
0.9
%
Savings accounts (including money market accounts)
8,775
23.0
%
1.0
4,365
14.5
0.9
2,193
9.8
0.8
Brokered deposits
13,830
36.3
%
2.2
14,752
49.0
2.0
14,323
63.9
2.1
Total interest-bearing deposits
$
38,148
100.0
%
1.6
%
$
30,110
100.0
%
1.6
%
$
22,405
100.0
%
1.7
%
______________________
(1)
Average balances are based on monthly balances. Calculation of daily averages at this time involves undue burden and expense. We believe our average balance data is representative of our operations.
Our deposit liabilities provide funding with maturities ranging from one day to ten years. At December 31, 2015, the weighted average maturity of our interest-bearing time deposits was 2.2 years. See Note 7. Deposits to our consolidated and combined financial statements for more information on their maturities.
The following table summarizes deposits by contractual maturity at December 31, 2015.
($ 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)
$
5,234
$
1,447
$
2,779
$
11,362
$
20,822
U.S. deposits ($100,000 or more)
Direct deposits:
Certificates of deposit (including IRA certificates of deposit)
1,747
2,182
3,108
4,898
11,935
Savings accounts (including money market accounts)
9,330
-
-
-
9,330
Brokered deposits:
Sweep accounts
1,360
-
-
-
1,360
Total
$
17,671
$
3,629
$
5,887
$
16,260
$
43,447
______________________
(1)
Includes brokered certificates of deposit for which underlying individual deposit balances are assumed to be less than $100,000.
Securitized Financings
We have been engaged in the securitization of our credit card receivables since 1997. We access the asset-backed securitization market using the Synchrony Credit Card Master Note Trust (“SYNCT”) through which we issue asset-backed securities through both public transactions and private transactions funded by financial institutions and commercial paper conduits. In addition, we issue asset-backed securities in private transactions through the Synchrony Sales Finance Master Trust (“SFT”) and the Synchrony Receivables Trust (“SRT”).
At December 31, 2015, we had $6.0 billion of outstanding private asset-backed securities and $7.6 billion of outstanding public asset-backed securities, in each case held by unrelated third parties.
The following table summarizes expected contractual maturities of the investors’ interests in securitized financings at December 31, 2015.
($ in millions)
Less Than
One Year
One Year
Through
Three
Years
Four
Years
Through
Five
Years
After Five
Years
Total
Scheduled maturities of long-term borrowings-owed to securitization investors:
SYNCT(1)
$
$
8,242
$
2,188
$
-
$
11,173
SFT
-
1,875
-
2,250
SRT
-
-
Total long-term borrowings-owed to securitization investors
$
$
10,198
$
2,563
$
-
$
13,603
______________________
(1)
Excludes subordinated classes of SYNCT notes that we own.
We retain exposure to the performance of trust assets through: (i) in the case of SYNCT, SFT and SRT, subordinated retained interests in the receivables transferred to the trust in excess of the principal amount of the notes for a given series to provide credit enhancement for a particular series, as well as a pari passu seller’s interest in each trust and (ii) subordinated classes of SYNCT 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 loans 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 falls below zero. Following an early amortization event, principal collections on the loans in our trusts are applied to repay principal of the 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 SRT.
The following table summarizes for each of our trusts the three-month rolling average excess spread at December 31, 2015.
Note Principal Balance
($ in millions)
# of Series
Outstanding
Three-Month Rolling
Average Excess
Spread(1)
SYNCT(2)
$
12,569
14.0% to 17.6%
SFT
$
2,250
12.8
%
SRT
$
39.3
%
______________________
(1)
Represents the excess spread (generally calculated as interest income collected from the applicable pool of loan receivables less applicable net charge-offs, interest expense and servicing costs, divided by the aggregate principal amount of loan receivables in the applicable pool) for each trust (or, in the case of SYNCT, represents a range of the excess spreads relating to the particular series issued within the trust), in each case calculated in accordance with the applicable trust or series documentation, for the three securitization monthly periods ending prior to December 31, 2015.
(2)
Includes subordinated classes of SYNCT notes that we own.
Third-Party Debt
Bank Term Loan
On August 5, 2014, we borrowed the full amount under the Bank Term Loan with third-party lenders that provided $8.0 billion principal amount of unsecured term loans maturing in 2019. In 2014, we prepaid $505 million of the Bank Term Loan, using a portion of the net proceeds from our issuance of senior unsecured notes. In October 2014, we amended the Bank Term Loan to, among other things, increase the amount of indebtedness that the Company may incur by $750 million, and this amount was borrowed in full.
During the year ended December 31, 2015, we prepaid an additional $4.1 billion in the aggregate of the Bank Term Loan, which included the use of a portion of the net proceeds from the issuance of senior unsecured notes in February, July and December 2015. At December 31, 2015, the total indebtedness outstanding under the Bank Term Loan was $4.2 billion and the weighted average interest rate was 2.17%.
Subsequent to December 31, 2015, we prepaid an additional $2.7 billion in the aggregate of the Bank Term Loan. The total indebtedness outstanding under the Bank Term Loan following the additional prepayments was $1.5 billion.
There are no required amortization payments or prepayments of the Bank Term Loan.
Senior Unsecured Notes
2015 Issuances ($ in millions):
Issuance Date
Principal Amount
Maturity
Interest Rate
February 2, 2015
$
2.700
%
February 2, 2015
Floating rate (three-month LIBOR plus 1.23%)
July 23, 2015
1,000
4.500
%
December 4, 2015
1,000
2.600
%
$
3,000
The net proceeds from the above issuances were primarily used to prepay our indebtedness under the GECC Term Loan and Bank Term Loan.
In addition, on August 11, 2014, we issued a total of $3.6 billion of senior unsecured notes with various maturities ranging from 2017 through 2024. We used a portion of the net proceeds from the issuance of unsecured senior notes to prepay $505 million of the Bank Term Loan.
At December 31, 2015, the amount outstanding of our senior unsecured notes debt was $6.6 billion and the weighted average interest rate on the unsecured notes was 3.31%.
Related Party Debt
During the first quarter of 2015, we prepaid $655 million of the GECC Term Loan, which represented all of the remaining outstanding indebtedness under that agreement, and GECC no longer provides funding to our business.
For periods prior to our IPO in 2014, GECC was a key source of our debt funding pursuant to various intercompany funding arrangements.
The aggregate interest and fees incurred with respect to funding provided by GECC to us was $4 million, $113 million and $157 million for the years ended December 31, 2015, 2014 and 2013, respectively.
Short-Term Borrowings
Except as described above, there were no material short-term borrowings for the periods presented.
Undrawn Securitized Financings
At December 31, 2015, we had an aggregate of $6.1 billion of undrawn committed capacity on our securitized financings, subject to customary borrowing conditions, from private lenders under two of our existing securitization programs.
Other
At December 31, 2015, 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 Bank Term Loan includes: (a) affirmative covenants, which, among other things, require the Bank to remain a wholly-owned subsidiary of ours and (b) negative covenants which, among other things, restrict our and certain of our subsidiaries’ ability (subject to various exceptions) to incur liens, incur indebtedness, engage in transactions with affiliates, amend the Master Agreement and enter into certain restrictive agreements. The negative covenants also restrict our ability (subject to certain exceptions) to undergo various fundamental changes (including mergers, liquidations, sale-leaseback transactions and transfers of all or substantially all of our assets).
The Bank Term Loan also contains financial covenants (to be tested on a quarterly basis) that require (i) Synchrony to maintain a minimum common equity Tier 1 ratio of not less than 10%, (ii) Synchrony to maintain minimum liquidity of not less than $4.0 billion and (iii) the Bank to maintain minimum liquidity of not less than $2.0 billion. The Bank Term Loan includes customary events of default, including the occurrence of a change of control (not including the Separation) and the occurrence of certain material adverse regulatory events.
The indenture pursuant to which our senior unsecured notes have been issued includes various covenants, including covenants that restrict (subject to certain exceptions) Synchrony’s ability to dispose of, or incur liens on, any of the voting stock of the Bank or otherwise permit the Bank to be merged, consolidated, leased or sold in a manner that results in the Bank being less than 80% controlled by us.
If we do not satisfy any of the covenants discussed above, the maturity of amounts outstanding thereunder may be accelerated and become payable. We were in compliance with all of these covenants at December 31, 2015.
Our real estate leases also include various covenants, but typically do not include financial covenants. If we do not satisfy the covenants in the real estate leases, the leases may be terminated and we may be liable for damage claims. At December 31, 2015, we were not in default under any of our credit facilities and had not received any notices of default under any of our real estate leases.
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.
Our senior unsecured debt issued in 2014 and 2015, was rated BBB- (stable outlook) by Fitch and BBB- (stable outlook) by S&P. In addition, certain of the asset-backed securities issued by SYNCT are rated by Fitch, S&P and/or Moody’s. A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. Downgrades in these credit ratings could materially increase the cost of our funding from, and restrict our access to, the capital markets.
Liquidity
____________________________________________________________________________________________
We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth, satisfy debt obligations and to meet regulatory expectations under normal and stress conditions.
We maintain policies outlining the overall framework and general principles for managing liquidity risk across our business, which is the responsibility of our Asset and Liability Management Committee, a subcommittee of our Enterprise Risk Management 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 December 31, 2015 had $14.8 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 a $12.9 billion liquidity portfolio at December 31, 2014. The increase in liquid assets was primarily due to debt financings, and also the retention of excess cash flows from operations within our Company.
As additional sources of liquidity, at December 31, 2015, we had an aggregate of $6.1 billion of undrawn committed capacity, subject to customary borrowing conditions, from private lenders under two of our existing securitization programs, 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 will rely significantly on dividends and other distributions and payments from the Bank for liquidity; however, bank regulations, contractual restrictions and other factors limit the amount of dividends and other distributions and payments that the Bank may pay to us. For a discussion of regulatory restrictions on the Bank’s ability to pay dividends, see “Item 1A. Risk Factors-Risks Relating to Regulation-We are subject to restrictions that limit our ability to pay dividends and repurchase our common stock; the Bank is subject to restrictions that limit its ability to pay dividends to us, which could limit our ability to pay dividends or make payments on our indebtedness.” and “Regulation-Savings Association Regulation-Dividends and Stock Repurchases”.
Capital
____________________________________________________________________________________________
Our primary sources of capital have been earnings generated by our businesses and existing equity capital. The proceeds from the IPO in 2014 also increased our equity capital significantly. We seek to manage capital to a level and composition sufficient to support the risks of our businesses, 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.
Our capital adequacy assessment also includes tax and accounting considerations in accordance with regulatory guidance. We maintain a deferred tax asset on our balance sheet, and we include this asset when calculating our regulatory capital levels. However, for regulatory capital purposes, deferred tax assets (i) are limited to the amount of taxes previously paid that a company could recover through loss carrybacks; and (ii) 10% of the amount of our Tier 1 capital. At December 31, 2015, no portion of our deferred tax asset was disallowed for regulatory capital purposes.
The Bank is required to conduct stress tests on an annual basis, and beginning on January 1, 2017, the Company will be required to conduct stress tests on an annual basis under the OCC's and the Federal Reserve Board's stress test regulations. The Bank is, and the Company will be, required to use stress-testing methodologies providing for results under at least three different sets of conditions, including baseline, adverse and severely adverse conditions. 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 prepare and submit a capital plan to the Federal Reserve Board.
Dividend and Share Repurchases
The declaration and payment of future dividends to holders of our common stock will be at the discretion of our board of directors and will depend on many factors, including the financial condition, earnings, capital and liquidity requirements of us and the Bank, regulatory restrictions, corporate law and contractual restrictions and other factors that our board of directors deems relevant. In addition, banking laws and regulations and our banking regulators may limit our ability to pay dividends and make repurchases of our stock. For a discussion of regulatory restrictions on our and the Bank’s ability to pay dividends and repurchase stock, see “Risk Factors-Risks Relating to Regulation-We are subject to restrictions that limit our ability to pay dividends and repurchase our common stock; the Bank is subject to restrictions that limit its ability to pay dividends to us, which could limit our ability to pay dividends or make payments on our indebtedness”.
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”.
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 December 31, 2015, Synchrony Financial met all the requirements to be deemed well-capitalized.
The following table sets forth at December 31, 2015 and 2014, the composition of our capital ratios for the Company calculated under the Basel III and Basel I regulatory capital standards, respectively.
Basel III Transition
Basel I
At December 31, 2015
At December 31, 2014
($ in millions)
Amount
Ratio
Amount
Ratio
Total risk-based capital
$
12,533
18.1
%
$
10,106
16.2
%
Tier 1 risk-based capital
$
11,633
16.8
%
$
9,297
14.9
%
Tier 1 common equity
N/A
N/A
$
9,297
14.9
%
Tier 1 leverage(1)
$
11,633
14.4
%
$
9,297
12.5
%
Common equity Tier 1 capital
$
11,633
16.8
%
N/A
N/A
______________________
(1)
Tier 1 leverage ratio represents total tier 1 capital as a percentage of total leveraged assets.
Basel III Fully Phased-in (estimated)
At December 31, 2015
At December 31, 2014
($ in millions)
Amount
Ratio
Amount
Ratio
Common equity Tier 1 capital
$
11,234
15.9
%
$
9,277
14.5
%
Non-GAAP Measures
The capital ratios presented above include common equity Tier 1 capital ("CET1") as calculated under the U.S. Basel III capital rules on a fully phased-in basis, which is not currently required by our regulators to be disclosed and, as such, is considered to be a non-GAAP measure. In addition, we also present certain capital ratios for the Company at December 31, 2014, as calculated under the U.S. Basel I capital rules, which are also considered to be non-GAAP measures. We believe that these capital ratios are useful measures to investors because they are widely used by analysts and regulators to assess the capital position of financial services companies, although these ratios may not be comparable to similarly titled measures reported by other companies. The following table sets forth a reconciliation of each component of our capital ratios set forth above to the comparable GAAP component at December 31, 2015 and 2014.
At December 31 ($ in millions)
Equity to Tier 1 capital, Tier 1 common equity and Risk-based capital
Total equity
$
12,604
$
10,478
Disallowed goodwill and other disallowed intangible assets
(1,650
)
(1,181
)
Basel I - Tier 1 capital and Tier 1 common equity
$
9,297
Adjustments for certain other intangibles assets and deferred tax liabilities
(20
)
Adjustments for certain deferred tax liabilities and certain items in accumulated comprehensive income (loss)
Basel III - Common equity Tier 1 (fully phased-in)
$
11,234
$
9,277
Adjustments related to capital components during transition
Tier 1 capital and Tier 1 common equity(1)
11,633
9,297
Allowance for loan losses includible in risk-based capital
Risk-based capital(1)
$
12,533
$
10,106
Total assets to leveraged assets
Total assets(2)
$
82,029
$
75,707
Disallowed goodwill and other disallowed intangible assets, net of related deferred tax liabilities
(991
)
(1,181
)
Other
-
Total assets for leverage capital purposes(1)
$
81,038
$
74,605
Risk-weighted assets - Basel I
N/A
$
62,270
Risk-weighted assets - Basel III (fully phased-in)(3)
$
70,640
$
64,162
Risk-weighted assets - Basel III (transition)(3)
$
69,372
N/A
______________________
(1)
At December 31, 2015, regulatory capital amounts are calculated under Basel III rules, subject to transition provisions. At December 31, 2014, regulatory capital amounts are calculated under Basel I rules.
(2)
Represents total average assets for the three months ended December 31, 2015 and total assets at December 31, 2014.
(3)
Key differences between Basel III transition rules and fully phased-in Basel III rules relate to the calculation of risk-weighted assets including, but not limited to, risk weighting of deferred tax assets and adjustments for certain intangible assets.
Regulatory Capital Requirements - Synchrony Bank
At December 31, 2015 and 2014, the Bank met all applicable requirements to be deemed well-capitalized pursuant to OCC regulations and for purposes of the Federal Deposit Insurance Act. Effective January 1, 2015, the Bank became subject to the U.S. Basel III regulatory capital standards, subject to transition provisions. The following table sets forth the composition of the Bank’s capital ratios calculated under the Basel III rules at December 31, 2015 and calculated under Basel I rules at December 31, 2014.
Bank
Minimum to be Well-
Capitalized under
Prompt Corrective Action Provisions - Basel III
At December 31, 2015 ($ in millions)
Amount
Ratio
Amount
Ratio
Total risk-based capital
$
8,443
16.6
%
$
5,089
10.0
%
Tier 1 risk-based capital
$
7,781
15.3
%
$
4,071
8.0
%
Tier 1 leverage
$
7,781
13.0
%
$
2,984
5.0
%
Common equity Tier 1 capital
$
7,781
15.3
%
$
3,308
6.5
%
Bank
Minimum to be Well-
Capitalized under
Prompt Corrective Action Provisions - Basel I
At December 31, 2014 ($ in millions)
Amount
Ratio
Amount
Ratio
Total risk-based capital
$
7,100
17.1
%
$
4,152
10.0
%
Tier 1 risk-based capital
$
6,559
15.8
%
$
2,491
6.0
%
Tier 1 leverage
$
6,559
13.4
%
$
2,449
5.0
%
Failure to meet minimum capital requirements can result in the initiation of certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a material adverse effect on our business, results of operations and financial condition. See “Risk Factors-Risks Relating to Regulation-Failure by Synchrony and the Bank to meet applicable capital adequacy and liquidity requirements could have a material adverse effect on us”.
Off-Balance Sheet Arrangements and Unfunded Lending Commitments
____________________________________________________________________________________________
We do not have any significant off-balance sheet arrangements, including guarantees of third-party obligations. Guarantees are contracts or indemnification agreements that contingently require us to make a guaranteed payment or perform an obligation to a third-party based on certain trigger events. At December 31, 2015, we had not recorded any contingent liabilities in our Consolidated Statements of Financial Position related to any guarantees.
We extend credit, primarily arising from agreements with customers for unused lines of credit on our credit cards, in the ordinary course of business. See Note 4 - Loan Receivables and Allowance for Loan Losses to our consolidated and combined financial statements for more information on our unfunded lending commitments.
Contractual Obligations
____________________________________________________________________________________________
In the normal course of business, we enter into various contractual obligations that require future cash payments. Our future cash payments associated with our contractual obligations at December 31, 2015 are summarized below.
Payments Due by Period
($ in millions)
Total
2017 - 2018
2019 - 2020
2021 and Thereafter
Deposits(1)(2)
$
43,447
$
27,187
$
6,946
$
6,733
$
2,581
Securitized financings(3)
13,931
10,363
2,606
-
Bank term loan(4)
4,151
-
-
4,151
-
Senior unsecured notes(5)
7,943
3,396
3,415
Operating leases
Total contractual obligations(6)(7)
$
69,676
$
28,399
$
18,288
$
16,937
$
6,052
______________________
(1)
Savings accounts (including money market accounts), brokered network deposits sweeps, and non-interest-bearing deposits are assumed for purposes of this table to be due in 2016 because they may be withdrawn at any time without payment of any penalty.
(2)
Deposits do not include interest payments because the amount and timing of these payments cannot be reasonably estimated as certain deposits have early withdrawal rights and also the option to roll interest payments into the balance. The average interest rate on our interest-bearing deposits for the year ended December 31, 2015 was 1.6%. See Note 7. Deposits to our consolidated and combined financial statements.
(3)
These amounts shown exclude interest on floating rate securitized borrowings. The average interest rate for the year ended December 31, 2015 was 1.6%. See Note 8. Borrowings to our consolidated and combined financial statements.
(4)
The amounts shown exclude interest as payments of interest on these borrowings are based on floating rates. The average interest rate for the year ended December 31, 2015 was 2.5% for the Bank Term Loan. See Note 8. Borrowings to our consolidated and combined financial statements.
(5)
The amounts shown exclude interest for the $250 million senior unsecured debt due 2020 as payments of interest on this senior unsecured note are based on floating rates.
(6)
The table above does not include estimated payments of liabilities associated with uncertain income tax positions. The inherent complexity and uncertainty around the timing and amount of future outflows for uncertain tax positions do not permit a reasonably reliable estimate of payments, if any, to be made in connection with these liabilities. At December 31, 2015, we had gross unrecognized tax benefits of $327 million, excluding related interest and penalties. See Note 14. Income Taxes to the consolidated and combined financial statements.
(7)
The table above excludes our reimbursement obligations to GE for certain retiree benefits obligations of $166 million at December 31, 2015. See Note 11. Employee Benefit Plans to the consolidated and combined financial statements for additional information.
Critical Accounting Estimates
____________________________________________________________________________________________
In preparing our consolidated and combined 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, asset impairment, income taxes and fair value measurements. All of these estimates reflect our best judgment about current, and for some estimates future, economic and market conditions and their effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that these judgments and estimates could change, which may result in incremental losses on loan receivables, future impairments of investment securities, goodwill and intangible assets, and the establishment of valuation allowances on deferred tax assets and increases in our tax liabilities, among other effects. See Note 2. Basis of Presentation and Summary of Significant Accounting Policies to our consolidated and combined financial statements, which discusses the significant accounting policies related to these estimates.
Allowance for Loan Losses
Losses on loan receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in the portfolio. The method for calculating the best estimate of probable losses takes into account our historical experience adjusted for current conditions with each product and customer type and our judgment concerning the probable effects of relevant observable data, trends and market factors.
We evaluate each portfolio quarterly. For credit card receivables, our estimation process includes analysis of historical data and there is a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance. Our risk process includes standards and policies for reviewing major risk exposures and concentrations, and evaluates relevant data either for individual loans or on a portfolio basis, as appropriate. More specifically, we use a migration analysis to estimate the likelihood that a loan will progress through the various stages of delinquency. The migration analysis considers uncollectible principal, interest and fees reflected in the loan receivables. We use other analyses to estimate losses incurred on non-delinquent accounts. The considerations in these analyses include past performance, risk management techniques applied to various accounts, historical behavior of different account vintages, current economic conditions, recent trends in delinquencies, bankruptcy filings, account collection management, policy changes, account seasoning, loan volume and amounts, payment rates, forecasting uncertainties and a qualitative assessment of the adequacy of the allowance for losses, which compares this allowance for losses to projected net charge-offs over the next 12 months, in a manner consistent with regulatory guidance. We do not evaluate credit card loans for impairment on an individual basis, but instead estimate its allowance for credit card loan losses on a portfolio basis. Further, experience is not available for new portfolios; therefore, while we are developing that experience, we set loss allowances based on our experience with the most closely analogous products in our portfolio. The underlying assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions and are subject to the regulatory examination process, which can result in changes to our assumptions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible that we will experience credit losses that are different from our current estimates.
Asset Impairment
Investments
We regularly review investment securities for impairment using both quantitative and qualitative criteria. For debt securities, if we do not intend to sell the security, and it is not more likely than not that we will be required to sell the security before recovery of our amortized cost, we evaluate other qualitative criteria to determine whether a credit loss exists, such as the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. Quantitative criteria include determining whether there has been an adverse change in expected future cash flows. For equity securities, our criteria include the length of time and magnitude of the amount that each security is in an unrealized loss position.
Goodwill and Intangible Assets
We do not amortize goodwill but test it at least annually for impairment at the reporting unit level. A reporting unit is defined under GAAP as the operating segment, or one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. Our operating segment consists of a single reporting unit, based on the level at which management regularly reviews and measures the business operating results.
Goodwill impairment risk is first assessed under FASB Accounting Standards Update (“ASU”) 2011-08, Intangibles-Goodwill and Other (Topic 350): Testing Goodwill for Impairment by performing a qualitative review of entity-specific, industry, market and general economic factors for our reporting unit. If potential goodwill impairment risk exists that indicates that it is more likely than not that the carrying value of our reporting unit exceeds its fair value, we apply a two-step quantitative test. The first step compares the reporting unit’s estimated fair value with its carrying value. If the carrying value of our reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value. The qualitative assessment for each period presented in the consolidated and combined financial statements was performed without hindsight, assuming only factors and market conditions existing as of those dates, and resulted in no potential goodwill impairment risk for our reporting unit. Consequently, goodwill was not deemed to be impaired for any of the periods presented.
Definite-lived intangible assets principally consist of customer-related assets, including contract acquisitions and purchased credit card relationships. These assets are amortized over their estimated useful lives and evaluated for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The evaluation compares the cash inflows expected to be generated from each intangible asset to its carrying value. If cash flows attributable to the intangible asset are less than the carrying value, the asset is considered impaired and written down to its estimated fair value. No impairments of definite-lived intangible assets have been recognized in the periods presented.
Income Taxes
We are subject to income tax in the United States (federal, state and local) as well as other jurisdictions in which we operate. Our provision for income tax expense is based on our income, the statutory tax rates and other provisions of the tax laws applicable to us in each of these various jurisdictions. These laws are complex and their application to our facts is at times open to interpretation. The process of determining our consolidated income tax expense includes significant judgments and estimates, including judgments regarding the interpretation of those laws. Our provision for income taxes and our deferred tax assets and liabilities incorporate those judgments and estimates and reflect management’s best estimate of current and future income taxes to be paid. We review our tax positions quarterly and adjust the balances as new information becomes available.
Deferred tax assets and liabilities relate to temporary differences between the financial reporting and income tax bases of our assets and liabilities, as well as the impact of tax loss carryforwards or carrybacks, and are measured using the enacted income tax laws and rates that will be in effect when such differences are expected to reverse. Deferred tax assets are specific to the jurisdiction in which they arise and are recognized subject to management’s judgment that realization of those assets is more likely than not. In making decisions regarding our ability to realize tax assets, we evaluate all positive and negative evidence, including projected future taxable income, taxable income in carryback periods, expected reversal of deferred tax liabilities and the implementation of available tax planning strategies. These decisions rely heavily on estimates. We use our historical experience and our short and long-range business forecasts to provide insight.
ASC 740, Income Taxes, establishes the framework by which we determine the appropriate level of tax reserves to be maintained for uncertain income tax positions. Applying this framework, we recognize the financial statement impact of uncertain income tax positions when we conclude that it is more likely than not, based on the technical merits of a position, that the position will be sustained upon examination. In certain situations, 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.
Fair Value Measurements
Assets and liabilities measured at fair value every reporting period include investments in debt and equity securities. Assets that are not measured at fair value every reporting period, but that are subject to fair value measurements in certain circumstances primarily include loans that have been reduced to fair value when they are held for sale, impaired loans that have been reduced based on the fair value of the underlying collateral, cost method and equity method investments that are written down to fair value when they are impaired.
Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs. A fair value measurement is determined as the price that we would receive to sell an asset or pay to transfer a liability in an orderly transaction between market participants at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date. The determination of fair value often involves significant judgments about assumptions such as determining an appropriate discount rate that factors in both risk and liquidity premiums, identifying the similarities and differences in market transactions, weighting those differences accordingly and then making the appropriate adjustments to those market transactions to reflect the risks specific to our asset being valued.
New Accounting Standards
____________________________________________________________________________________________
In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The ASU will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. In July 2015, the FASB approved a one-year deferral of this standard, with a revised effective date for fiscal years beginning after December 15, 2017. The standard permits the use of either the retrospective or modified retrospective (cumulative effect) transition method. We are evaluating the effect that ASU 2014-09 will have on our consolidated and combined financial statements and related disclosures. We have not yet selected a transition method nor have we determined the effect of the standard on our ongoing financial reporting.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation of Interest. The ASU changes the financial statement presentation of debt issuance costs from being presented as an asset to a direct reduction to the carrying amount of the long-term debt. The amortization of debt issuance costs will continue to be included in interest expense. This standard is effective for annual reporting periods beginning after December 15, 2015. We are currently evaluating the effect of the ASU on our consolidated and combined financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
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. See “Item 1A. Risk Factors-Risks Relating to Our Business-Changes in market interest rates could have a material adverse effect on our net earnings, funding and liquidity” and “-A reduction in our credit ratings could materially increase the cost of our funding from, and restrict our access to, the capital markets.”
Interest Rate Risk
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 certain 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.
Competitive factors and future regulatory reform may limit or restrict our ability to raise interest rates, fixed or floating, on our loans. In addition, some of our program agreements limit the rate of interest we can charge to customers. If interest rates were to rise materially over a sustained period of time, and we are unable to sufficiently raise our interest rates in a timely manner, our net interest income and margin could be adversely impacted, which could have a material adverse effect on our net earnings.
Interest rates may also adversely impact our customers’ spending levels and ability and willingness to pay outstanding amounts owed to us. Our floating rate products bear interest rates that fluctuate with the prime rate. Higher interest rates often lead to higher payment obligations by customers to us and other lenders under mortgage, credit card and other consumer loans, which may reduce our customers’ ability to remain current on their obligations to us and therefore lead to increased delinquencies, charge-offs and allowances for loan losses, which could have a material adverse effect on our net earnings.
Changes in interest rates and competitor responses to these changes may also impact customer decisions to maintain deposits with us, and reductions in deposits could materially adversely affect our funding costs and liquidity.
To manage interest rate risk, we generally pursue a match funding strategy pursuant to which we seek to match the interest rate repricing characteristics of our assets and liabilities. At December 31, 2015, 55.6% of our loan receivables bore a fixed interest rate to the customer, and we have historically funded these assets with fixed rate certificates of deposit, securitized financing and unsecured debt. At December 31, 2015, 44.4% of our loan receivables bore a floating interest rate to the customer, and we generally fund these assets with floating rate deposits, securitized financing and unsecured debt. Historically, we have not used interest rate derivative contracts to manage interest rate risk. To the extent we are unable to effectively match the interest rates on our assets and liabilities, our net earnings could be materially adversely affected.
We assess our interest rate risk by estimating the effect of various interest rate scenarios on our net interest income.
For purposes of presenting the possible earnings effect of a hypothetical, adverse change in interest rates over the 12-month period from our reporting date, we assume that all interest rate sensitive assets and liabilities will be impacted by a hypothetical, immediate 100 basis point increase in interest rates as of the beginning of the period. The sensitivity is based upon the hypothetical assumption that all relevant types of interest rates that affect our results would increase instantaneously, simultaneously and to the same degree.
Our interest-rate sensitive assets include our variable rate loan receivables and the assets that make up our liquidity portfolio. At December 31, 2015, 44.4% of our receivables bore a floating interest rate. Assets with rates that are fixed at period end but which will mature, or otherwise contractually reset to a market-based indexed rate or other fixed rate prior to the end of the 12-month period, are considered to be rate sensitive. The latter category includes certain loans that may be offered at below-market rates for an introductory period, such as balance transfers and special promotional programs, after which the loans will contractually reprice under standard terms in accordance with our normal market-based pricing structure. For purposes of measuring rate sensitivity for such loans, only the effect of the hypothetical 100 basis point change in the underlying market-based indexed rate or other fixed rate has been considered rather than the full change in the rate to which the loan would contractually reprice (i.e. assets are categorized as fixed or floating according to their underlying contractual terms). For assets that have a fixed interest rate at the period end but which contractually will, or are assumed to, reset to a market-based indexed rate or other fixed rate during the next 12 months, net interest income sensitivity is measured from the expected repricing date.
Interest rate sensitive liabilities are assumed to be those for which the stated interest rate is not contractually fixed for the next 12-month period. Thus, liabilities that vary with changes in a market-based index, such as the federal funds rate or LIBOR, which will reset before the end of the 12-month period, or liabilities whose rates are fixed at the period end but which will mature and are assumed to be replaced with a market-based indexed rate prior to the end of the 12-month period, also are considered to be rate sensitive. For these fixed rate liabilities, net interest income sensitivity is measured from the expected repricing date.
Assuming an immediate 100 basis point increase in the interest rates affecting all interest rate sensitive assets and liabilities at December 31, 2015, we estimate that net interest income over the following 12-month period would increase by approximately $107 million.
Limitations of Market Risk Measures
The interest rate risk models that we use in deriving these measures incorporate contractual information, internally-developed assumptions and proprietary modeling methodologies, which project borrower and deposit behavior patterns in certain interest rate environments. Other market inputs, such as interest rates, market prices and interest rate volatility, are also critical components of our interest rate risk measures. We regularly evaluate, update and enhance these assumptions, models and analytical tools as we believe appropriate to reflect our best assessment of the market environment and the expected behavior patterns of our existing assets and liabilities.
There are inherent limitations in any methodology used to estimate the exposure to changes in market interest rates. The sensitivity analysis provided above contemplates only certain movements in interest rates at a particular point in time based on the existing balance sheet. It does not attempt to estimate the effect of a more significant interest rate increase over a sustained period of time, which as described in “-Interest Rate Risk” above, could adversely affect our net interest income. In addition, the strategic actions that management may take to manage our balance sheet may differ from our projections, which could cause our actual net interest income to differ from the above sensitivity analysis.

---

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Report of Independent Registered Public Accounting Firm
____________________________________________________________________________________________
The Board of Directors and Stockholders
Synchrony Financial:
We have audited Synchrony Financial’s (the Company) internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Synchrony Financial’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report on Management’s Assessment of Internal Control over Financial Reporting (Item 9A). Our responsibility is to express an opinion on the Company’s internal control over financial reporting based on our audit.
We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
In our opinion, Synchrony Financial maintained, in all material respects, effective internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Consolidated Statements of Financial Position of Synchrony Financial and Subsidiaries as of December 31, 2015 and 2014, and the related Consolidated and Combined Statements of Earnings, Comprehensive Income, Changes in Equity, and Cash Flows for each of the years in the three-year period ended December 31, 2015, and our report dated February 25, 2016 expressed an unqualified opinion on those consolidated and combined financial statements.
/s/ KPMG LLP
New York, New York
February 25, 2016
Report of Independent Registered Public Accounting Firm
____________________________________________________________________________________________
The Board of Directors and Stockholders
Synchrony Financial:
We have audited the accompanying Consolidated Statements of Financial Position of Synchrony Financial and Subsidiaries (the Company) as of December 31, 2015 and 2014, and the related Consolidated and Combined Statements of Earnings, Comprehensive Income, Changes in Equity, and Cash Flows for each of the years in the three-year period ended December 31, 2015. These consolidated and combined financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated and combined financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated and combined financial statements referred to above present fairly, in all material respects, the financial position of Synchrony Financial and Subsidiaries as of December 31, 2015 and 2014, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2015, in conformity with U.S. generally accepted accounting principles.
We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Synchrony Financial’s internal control over financial reporting as of December 31, 2015, based on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 25, 2016 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting.
/s/ KPMG LLP
New York, New York
February 25, 2016
Synchrony Financial and subsidiaries
Consolidated and Combined Statements of Earnings ____________________________________________________________________________________
For the years ended December 31 ($ in millions, except per share data)
Interest income:
Interest and fees on loans (Note 4)
$
13,179
$
12,216
$
11,295
Interest on investment securities
Total interest income
13,228
12,242
11,313
Interest expense:
Interest on deposits
Interest on borrowings of consolidated securitization entities
Interest on third-party debt
-
Interest on related party debt (Note 15)
Total interest expense
1,135
Net interest income
12,093
11,320
10,571
Retailer share arrangements
(2,738
)
(2,575
)
(2,373
)
Net interest income, after retailer share arrangements
9,355
8,745
8,198
Provision for loan losses (Note 4)
2,952
2,917
3,072
Net interest income, after retailer share arrangements and provision for loan losses
6,403
5,828
5,126
Other income:
Interchange revenue
Debt cancellation fees
Loyalty programs
(419
)
(281
)
(213
)
Other
Total other income
Other expense:
Employee costs
1,042
Professional fees
Marketing and business development
Information processing
Other
Total other expense
3,264
2,927
2,484
Earnings before provision for income taxes
3,531
3,386
3,142
Provision for income taxes (Note 14)
1,317
1,277
1,163
Net earnings
$
2,214
$
2,109
$
1,979
Earnings per share
Basic
$
2.66
$
2.78
$
2.81
Diluted
$
2.65
$
2.78
$
2.81
See accompanying notes to consolidated and combined financial statements.
Synchrony Financial and subsidiaries
Consolidated and Combined Statements of Comprehensive Income
____________________________________________________________________________________________
For the years ended December 31 ($ in millions)
Net earnings
$
2,214
$
2,109
$
1,979
Other comprehensive income (loss)
Investment securities
(10
)
(10
)
Currency translation adjustments
(11
)
(5
)
(4
)
Employee benefit plans
(10
)
(1
)
(1
)
Other comprehensive income (loss)
(31
)
(15
)
Comprehensive income
$
2,183
$
2,112
$
1,964
Amounts presented net of taxes.
See accompanying notes to consolidated and combined financial statements.
Synchrony Financial and subsidiaries
Consolidated Statements of Financial Position
____________________________________________________________________________________________
At December 31 ($ in millions)
Assets
Cash and equivalents
$
12,325
$
11,828
Investment securities (Note 3)
3,142
1,598
Loan receivables: (Notes 4 and 5)
Unsecuritized loans held for investment
42,826
34,335
Restricted loans of consolidated securitization entities
25,464
26,951
Total loan receivables
68,290
61,286
Less: Allowance for loan losses
(3,497
)
(3,236
)
Loan receivables, net
64,793
58,050
Loan receivables held for sale (Note 4)
-
Goodwill (Note 6)
Intangible assets, net (Note 6)
Other assets(a)
2,225
2,431
Total assets
$
84,135
$
75,707
Liabilities and Equity
Deposits: (Note 7)
Interest-bearing deposit accounts
$
43,295
$
34,847
Non-interest-bearing deposit accounts
Total deposits
43,447
34,955
Borrowings: (Notes 5 and 8)
Borrowings of consolidated securitization entities
13,603
14,967
Bank term loan
4,151
8,245
Senior unsecured notes
6,590
3,593
Related party debt (Note 15)
-
Total borrowings
24,344
27,460
Accrued expenses and other liabilities
3,740
2,814
Total liabilities
$
71,531
$
65,229
Equity:
Common Stock, par share value $0.001 per share; 4,000,000,000 shares authorized, 833,828,340 and 833,764,589 shares issued and outstanding at December 31, 2015 and 2014, respectively
$
$
Additional paid-in capital
9,351
9,408
Retained earnings
3,293
1,079
Accumulated other comprehensive income (loss):
Investment securities
(10
)
-
Currency translation adjustments
(19
)
(8
)
Other
(12
)
(2
)
Total equity
12,604
10,478
Total liabilities and equity
$
84,135
$
75,707
_______________________
(a) Other assets include restricted cash and equivalents of $391 million and $1,104 million at December 31, 2015 and 2014, respectively.
See accompanying notes to consolidated and combined financial statements.
Synchrony Financial and subsidiaries
Consolidated and Combined Statements of Changes in Equity
____________________________________________________________________________________________
Common Stock
($ in millions, shares in thousands)
Shares
Amount
Additional Paid-in Capital
Parent's Net Investment
Retained Earnings
Accumulated Other Comprehensive Income (Loss)
Total Equity
Balance at January 1, 2013
-
$
-
$
-
$
4,580
$
-
$
$
4,582
Comprehensive income:
Net earnings
-
-
-
1,979
-
-
1,979
Other comprehensive income
-
-
-
-
-
(15
)
(15
)
Changes in Parent's net investment
-
-
-
(586
)
-
-
(586
)
Balance at December 31, 2013
-
$
-
$
-
$
5,973
$
-
$
(13
)
$
5,960
Balance at January 1, 2014
-
$
-
$
-
$
5,973
$
-
$
(13
)
$
5,960
Comprehensive income:
Net earnings
-
-
-
1,030
1,079
-
2,109
Other comprehensive income
-
-
-
-
-
Changes in Parent's net investment
-
-
-
(603
)
-
-
(603
)
Conversion of parent's net investment into common stock
705,271
6,399
(6,400
)
-
-
-
Issuance of common stock
128,494
-
2,842
-
-
-
2,842
Stock-based compensation
-
-
-
-
-
Other
-
-
-
-
-
Balance at December 31, 2014
833,765
$
$
9,408
$
-
$
1,079
$
(10
)
$
10,478
Balance at January 1, 2015
833,765
$
$
9,408
$
-
$
1,079
$
(10
)
$
10,478
Comprehensive income:
Net earnings
-
-
-
-
2,214
-
2,214
Other comprehensive income
-
-
-
-
-
(31
)
(31
)
Stock-based compensation
-
-
-
-
Other
-
-
(91
)
-
-
-
(91
)
Balance at December 31, 2015
833,828
$
$
9,351
$
-
$
3,293
$
(41
)
$
12,604
See accompanying notes to consolidated and combined financial statements.
Synchrony Financial and subsidiaries
Consolidated and Combined Statements of Cash Flows
____________________________________________________________________________________________
For the years ended December 31 ($ in millions)
Cash flows - operating activities
Net earnings
$
2,214
$
2,109
$
1,979
Adjustments to reconcile net earnings to cash provided from operating activities
Provision for loan losses
2,952
2,917
3,072
Deferred income taxes
(295
)
(203
)
(237
)
Depreciation and amortization
(Increase) decrease in interest and fees receivable
(163
)
(152
)
(Increase) decrease in other assets
Increase (decrease) in accrued expenses and other liabilities
(172
)
All other operating activities
Cash from operating activities
6,184
5,340
5,679
Cash flows - investing activities
Maturity and redemption of investment securities
3,538
Purchases of investment securities
(5,102
)
(1,376
)
(100
)
Acquisition of loan receivables
(1,051
)
-
(206
)
Net cash from principal business purchased
-
-
6,393
Net (increase) decrease in restricted cash and equivalents
(1,028
)
(20
)
Proceeds from sale of loan receivables
1,510
Net (increase) decrease in loan receivables
(8,852
)
(8,755
)
(7,355
)
All other investing activities
(441
)
(446
)
(107
)
Cash (used for) from investing activities
(10,803
)
(10,068
)
(1,066
)
Cash flows - financing activities
Borrowings of consolidated securitization entities
Proceeds from issuance of securitized debt
3,881
5,176
Maturities and repayment of securitized debt
(5,244
)
(5,569
)
(2,708
)
Third-party debt
Proceeds from issuance of third-party debt
2,995
12,343
-
Maturities and repayment of third-party debt
(4,094
)
(505
)
-
Related party debt
Proceeds from borrowings of related party debt
-
1,615
-
Maturities and repayment of related party debt
(655
)
(10,015
)
(1,649
)
Net increase (decrease) in deposits
8,273
9,088
Proceeds from initial public offering
-
2,842
-
Net transfers (to) from Parent
-
(603
)
(586
)
All other financing activities
(40
)
(135
)
(32
)
Cash from (used for) financing activities
5,116
14,237
(3,628
)
Increase in cash and equivalents
9,509
Cash and equivalents at beginning of year
11,828
2,319
1,334
Cash and equivalents at end of year
$
12,325
$
11,828
$
2,319
Supplemental disclosure of cash flow information
Cash paid during the year for interest
$
(1,040
)
$
(839
)
$
(729
)
Cash paid during the year for income taxes
$
(1,219
)
$
(1,787
)
$
(1,183
)
See accompanying notes to consolidated and combined financial statements.
Synchrony Financial and subsidiaries
Notes to Consolidated and Combined Financial Statements
____________________________________________________________________________________________
NOTE 1. BUSINESS DESCRIPTION
Synchrony Financial (the “Company”) provides a range of credit products through programs it has established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers. The Company is a holding company for the legal entities that historically conducted General Electric Company’s (“GE”) North American retail finance business, including GE Capital Retail Bank. All of the assets and operations of that business were transferred to the Company prior to the completion of the Company’s initial public offering of its common stock (the “IPO”), which closed in 2014.
In 2014, the Company also changed its name to Synchrony Financial and changed the name of GE Capital Retail Bank to 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.
GE Ownership and Exchange Offer
The Company was previously an indirectly wholly-owned subsidiary of General Electric Capital Corporation (“GECC”) until the closing of the IPO in 2014, which reduced GECC's ownership of the Company to approximately 84.6% of our common stock.
On October 14, 2015, we received approval from the Board of Governors of the Federal Reserve System (the “Federal Reserve Board”) to become a stand-alone savings and loan holding company, to retain control of the Bank and to retain control of our nonbank subsidiaries following the completion of GE’s offer to exchange shares of GE common stock for all of our shares of our common stock owned by GE (the “exchange offer”). On November 17, 2015, we announced the completion of the exchange offer and our separation from GE (the “Separation”). Following the Separation, GE no longer owns any of our outstanding common stock.
See Note 13. Equity and Other Stock Related Information and Note 15. Related Party Transactions for additional information on the IPO and exchange offer.
NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated and combined 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 consolidated and combined 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 investment 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 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 year-end exchange rates, while revenues and expenses are translated at average rates for the respective periods.
Consolidated Basis of Presentation
The transfer of all of the assets of our business from GECC and its subsidiaries to the Company was completed in the second quarter of 2014. As a result, the Company’s financial statements have been prepared on a consolidated basis beginning June 30, 2014. 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. In addition, all periods subsequent to June 30, 2014 are presented on a consolidated basis.
To determine if we hold a controlling financial interest in an entity, we first evaluate if we are required to apply the variable interest entity (“VIE”) model to the entity, otherwise the entity is evaluated under the voting interest model. Where we hold current or potential rights that give us the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance (“power”) combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses (“significant economics”), we have a controlling financial interest in that VIE. Rights held by others to remove the party with power over the VIE are not considered unless one party can exercise those rights unilaterally. We consolidate certain securitization entities under the VIE model because we have both power and significant economics. See Note 5. Variable Interest Entities.
We have reclassified certain prior-period amounts to conform to current-period presentation.
Combined Basis of Presentation
For all periods prior to June 30, 2014, the Company's financial statements were prepared on a combined basis. The combined financial statements combine all of our subsidiaries and certain accounts of GECC and its subsidiaries that were historically managed as part of our business.
For all periods prior to the IPO, the Consolidated and Combined Statements of Earnings reflect intercompany expense allocations made to us by GE and GECC for certain corporate functions and for shared services provided by GE and GECC. Where possible, these allocations were made on a specific identification basis, and in other cases, these expenses were allocated by GE and GECC based on relative percentages of net operating costs or some other basis depending on the nature of the allocated cost. See Note 15. Related Party Transactions for further information on expenses allocated by GE and GECC.
The historical financial results in the consolidated and combined financial statements presented may not be indicative of the results that would have been achieved had we operated as a separate, stand-alone entity during those periods. We believe that the consolidated and combined financial statements include all adjustments necessary for a fair presentation of the Company.
Segment Reporting
We conduct our operations through a single business segment. Substantially all of our interest and fees on loans and long-lived assets relate to our operations within the United States. Pursuant to Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 280, Segment Reporting, operating segments represent components of an enterprise for which separate financial information is available that is regularly evaluated by the chief operating decision maker in determining how to allocate resources and in assessing performance. The chief operating decision maker uses a variety of measures to assess the performance of the business as a whole, depending on the nature of the activity. Revenue activities are managed through three sales platforms (Retail Card, Payment Solutions and CareCredit). Those platforms are organized by the types of partners we work with to reach our customers, with success principally measured based on revenues, new accounts and other cardholder sales metrics. Detailed profitability information of the nature that could be used to allocate resources and assess the performance and operations for each sales platform individually, however, is not used by our chief operating decision maker. Expense activities, including funding costs, loan losses and operating expenses, are not measured for each platform but instead are managed for the Company as a whole.
Cash and Equivalents
Debt securities, money market instruments and bank deposits with original maturities of three months or less are included in cash equivalents unless designated as available-for-sale and classified as investment securities. Cash and equivalents at December 31, 2015 and 2014 primarily included interest-earning deposits with the Federal Reserve Bank.
Restricted Cash and Equivalents
Restricted cash and equivalents represent cash and equivalents that are not available to us due to restrictions related to its use. For example, the Bank is required to maintain reserves against its deposit liabilities in the form of vault cash and/or balances with the Federal Reserve Bank. In addition, our securitization entities are required to fund segregated accounts that may only be used for certain purposes, including payment of interest and servicing fees and repayment of maturing debt. We include our restricted cash and equivalents in other assets in our Consolidated Statements of Financial Position.
Investment Securities
We report investments in debt and marketable equity securities at fair value. See Note 9. Fair Value Measurements for further information on fair value. Unrealized gains and losses on these investment securities, which are classified as available-for-sale, are included in equity, net of applicable taxes. We regularly review investment securities for impairment using both quantitative and qualitative criteria.
For debt securities, if we do not intend to sell the security or it is not more likely than not that we will be required to sell the security before recovery of our amortized cost, we evaluate other qualitative criteria to determine whether we do not expect to recover the amortized cost basis of the security, such as the financial health of and specific prospects for the issuer, including whether the issuer is in compliance with the terms and covenants of the security. We also evaluate quantitative criteria including determining whether there has been an adverse change in expected future cash flows. If we do not expect to recover the entire amortized cost basis of the security, we consider the security to be other-than-temporarily impaired, and we record the difference between the security’s amortized cost basis and its recoverable amount in earnings and the difference between the security’s recoverable amount and fair value in other comprehensive income. If we intend to sell the security or it is more likely than not we will be required to sell the security before recovery of its amortized cost basis, the security is also considered other-than-temporarily impaired and we recognize the entire difference between the security’s amortized cost basis and its fair value in earnings. For equity securities, we consider the length of time and magnitude of the amount that each security is in an unrealized loss position. If we do not expect to recover the entire amortized cost basis of the security, we consider the security to be other-than-temporarily impaired, and we record the difference between the security’s amortized cost basis and its fair value in earnings.
Realized gains and losses are accounted for on the specific identification method.
Loan Receivables
Loan receivables primarily consist of open-end consumer revolving credit card accounts, closed-end consumer installment loans and open-end commercial revolving credit card accounts. Loan receivables are reported at the amounts due from customers, including unpaid interest and fees.
Loan Receivables Held for Sale
Loans purchased or originated with the intent to sell or as to which we do not have the ability and intent to hold for the foreseeable future are classified as loan receivables held for sale and recorded at the lower of amortized cost or fair value. We continue to recognize interest and fees on these loans on the accrual basis. The fair value of loan receivables held for sale is determined on an aggregate homogeneous portfolio basis.
If a loan is transferred from held for investment to held for sale, declines in fair value related to credit are recorded as a charge-off, which establishes a new cost basis for the loan. Further declines in fair value and recoveries up to the amortized cost and realized gains or losses are recorded as a component of other income in our Consolidated and Combined Statements of Earnings.
Allowance for Loan Losses
Losses on loan receivables are recognized when they are incurred, which requires us to make our best estimate of probable losses inherent in the portfolio. The method for calculating the best estimate of probable losses takes into account our historical experience adjusted for current conditions with each product and customer type and our judgment concerning the probable effects of relevant observable data, trends and market factors.
We evaluate each portfolio for impairment quarterly. For credit card receivables, our estimation process includes analysis of historical data, and there is a significant amount of judgment applied in selecting inputs and analyzing the results produced by the models to determine the allowance. We use a migration analysis to estimate the likelihood that a loan will progress through the various stages of delinquency. The migration analysis considers uncollectible principal, interest and fees reflected in the loan receivables. We use other analyses to estimate losses incurred on non-delinquent accounts. The considerations in these analyses include past performance, risk management techniques applied to various accounts, historical behavior of different account vintages, current economic conditions, recent trends in delinquencies, bankruptcy filings, account collection management, policy changes, account seasoning, loan volume and amounts, payment rates, forecasting uncertainties, and a qualitative assessment of the adequacy of the allowance for losses, which compares this allowance for losses to projected net charge-offs over the next twelve months, in a manner consistent with regulatory guidance. We regularly review our collection experience (including delinquencies and net charge-offs) in determining our allowance for loan losses. We also consider our historical loss experience to date based on actual defaulted loans and overall portfolio indicators including delinquent and non-accrual loans, trends in loan volume and lending terms, credit policies and other observable environmental factors such as unemployment and home price indices.
The underlying assumptions, estimates and assessments we use to provide for losses are updated periodically to reflect our view of current conditions and are subject to the regulatory examination process, which can result in changes to our assumptions. Changes in such estimates can significantly affect the allowance and provision for losses. It is possible that we will experience credit losses that are different from our current estimates. Charge-offs are deducted from the allowance for losses when we judge the principal to be uncollectible and subsequent recoveries are added to the allowance generally at the time cash is received on a charged-off account.
Delinquent receivables are those that are 30 days or more past due based on their contractual payments. Non-accrual loan receivables are those on which we have stopped accruing interest. We continue to accrue interest until the earlier of the time at which collection of an account becomes doubtful or the account becomes 180 days past due, with the exception of non-credit card accounts, for which we stop accruing interest in the period that the account becomes 90 days past due.
Impaired loans represent loans for which it is probable that we will be unable to collect all amounts due according to the original contractual terms of the loan agreement and loans meeting the definition of a troubled debt restructuring (“TDR”). TDRs are those loans for which we have granted a concession to a borrower experiencing financial difficulties where we do not receive adequate compensation.
The same loan receivable may meet more than one of the definitions above. Accordingly, these categories are not mutually exclusive and it is possible for a particular loan to meet the definitions of a TDR, impaired loan and non-accrual loan and be included in each of these categories. The categorization of a particular loan also may not be indicative of the potential for loss.
Loan Modifications and 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 TDR and also as impaired. We utilize short-term (3 to 12 months) or long-term (12 to 60 months) modification programs to borrowers experiencing financial difficulty as a loss mitigation strategy to improve long-term collectability of the loans that are classified as TDRs. For our credit card customers, the short-term program primarily consists of a reduced minimum payment and an interest rate reduction, both lasting for a period no longer than 12 months. The long-term program involves changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The long-term program does not normally provide for the forgiveness of unpaid principal, but may allow for the reversal of certain unpaid interest or fee assessments. We also make loan modifications for 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. See Note 4. Loan Receivables and Allowance for Loan Losses for additional information on our loan modifications and restructurings.
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. If the loan is collateral dependent, we measure impairment based upon the fair value of the underlying collateral less estimated selling costs.
Data related to redefault experience is also considered in our overall reserve adequacy review. Once the loan has been modified, it returns to current status (re-aged) only after three consecutive minimum monthly payments are received post modification date, subject to a re-aging limitation of once a year, or twice in a five-year period in accordance with the Federal Financial Institutions Examination Council (“FFIEC”) guidelines on Uniform Retail Credit Classification and Account Management policy issued in June 2000. We believe that the allowance for loan losses would not be materially different had we not re-aged these accounts.
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, fees and third-party fraud losses from charge-offs. Charged-off and recovered accrued and unpaid finance charges and fees are included in interest and fees on loans while 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 are included in other expense in our Consolidated and Combined Statements of Earnings.
We charge-off unsecured closed-end consumer installment loans and loans secured by collateral when they are 120 days contractually past due and unsecured open-ended revolving loans when they are 180 days contractually past due. Unsecured consumer loans in bankruptcy are charged-off within 60 days of notification of filing by the bankruptcy court or within contractual charge-off periods, whichever occurs earlier. Credit card loans of deceased account holders are charged-off within 60 days of receipt of notification.
Goodwill and Intangible Assets
We do not amortize goodwill but test it at least annually for impairment at the reporting unit level pursuant to ASC 350, Intangibles-Goodwill and Other. A reporting unit is defined under GAAP as the operating segment, or one level below that operating segment (the component level) if discrete financial information is prepared and regularly reviewed by segment management. Our single operating segment comprises a single reporting unit, based on the level at which segment management regularly reviews and measures the business operating results.
Goodwill impairment risk is first assessed by performing a qualitative review of entity-specific, industry, market and general economic factors for our reporting unit. If potential goodwill impairment risk exists that indicates that it is more likely than not that the carrying value of our reporting unit exceeds its fair value, we apply a two-step quantitative test. The first step compares the reporting unit’s estimated fair value with its carrying value. If the carrying value of our reporting unit’s net assets exceeds its fair value, the second step is applied to measure the difference between the carrying value and implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fair value, the goodwill is considered impaired and reduced to its implied fair value. The qualitative assessment for each period presented in the consolidated and combined financial statements was performed without hindsight, assuming only factors and market conditions existing as of those dates, and resulted in no potential goodwill impairment risk for our reporting unit. Consequently, goodwill was not deemed to be impaired for any of the periods presented.
Definite-lived intangible assets principally consist of customer-related assets including contract acquisition costs and purchased credit card relationships. These assets are amortized over their estimated useful lives and evaluated for impairment annually or whenever events or changes in circumstances indicate that the carrying amount of these assets may not be recoverable. The evaluation compares the cash inflows expected to be generated from each intangible asset to its carrying value. If cash flows attributable to the intangible asset are less than the carrying value, the asset is considered impaired and written down to its estimated fair value. No impairments of definite-lived intangible assets have been recognized in the periods presented in the consolidated and combined financial statements.
Revenue Recognition
Interest and Fees on Loans
We use the effective interest method to recognize income on loans. Interest on loans is comprised largely of interest and late fees on credit card and other loans. Interest income is recognized based upon the amount of loans outstanding and their contractual interest rate. Late fees are recognized when billable to the customer. We continue to accrue interest and fees on credit cards until the accounts are charged-off in the period the account becomes 180 days past due. For non-credit card loans, we stop accruing interest and fees when the account becomes 90 days past due. Previously recognized interest income that was accrued but not collected from the customer is reversed. Although we stop accruing interest in advance of payments, we recognize interest income as cash is collected when appropriate, provided the amount does not exceed that which would have been earned at the historical effective interest rate; otherwise, payments received are applied to reduce the principal balance of the loan.
We resume accruing interest on non-credit card loans when the customer’s account is less than 90 days past due and collection of such amounts is probable. Interest accruals on modified loans that are not considered to be TDRs may return to current status (re-aged) only after receipt of at least three consecutive minimum monthly payments subject to a re-aging limitation of once a year, or twice in a five-year period.
Direct loan origination costs on credit card loans are deferred and amortized on a straight-line basis over a one-year period, or the life of the loan for other loan receivables, and are included in interest and fees on loans in our Consolidated and Combined Statements of Earnings. See Note 4. Loan Receivables and Allowance for Loan Losses for further detail.
Other loan fees including miscellaneous fees charged to borrowers are recognized net of waivers and charge-offs when the related transaction or service is provided, and are included in other income in our Consolidated and Combined Statements of Earnings.
Promotional Financing
Loans originated with promotional financing may include deferred interest financing (interest accrues during a promotional period and becomes payable if the full purchase amount is not paid off during the promotional period), no interest financing (no interest accrues during a promotional period but begins to accrue thereafter on any outstanding amounts at the end of the promotional period) and reduced interest financing (interest accrues monthly at a promotional interest rate during the promotional period). For deferred interest financing, we bill interest to the borrower, retroactive to the inception of the loan, if the loan is not repaid prior to the specified date. Income is recognized on such loans when it is billable. In almost all cases, our retail partner will pay an upfront fee or reimburse us to compensate us for all or part of the costs associated with providing the promotional financing. Upfront fees are deferred and accreted to income over the promotional period. Reimbursements are estimated and accrued as income over the promotional period.
Purchased Loans
Loans acquired by purchase are recorded at fair value, which incorporates our estimate at the acquisition date of the credit losses over the remaining life of the acquired loans. As a result, the allowance for losses is not carried over at acquisition. For loans acquired with evidence of credit deterioration, the excess of cash flows expected at acquisition over the initial acquisition cost is recognized into interest income over their remaining lives using the effective interest method. Subsequent decreases to the expected cash flows for these loans require us to evaluate the need for an allowance for credit losses. Subsequent improvements in expected cash flows are recognized into interest income prospectively. For other acquired loans, the excess of contractually required cash flows over the initial acquisition cost is recognized into interest income over the remaining lives using the effective interest method. Subsequent increases in incurred losses for these loans require us to evaluate the need for an allowance for credit losses. Our evaluation of the amount of future cash flows expected to be collected is performed in a similar manner as that used to determine our allowance for loan losses.
Retailer Share Arrangements
Most of our Retail Card program agreements and certain other program agreements contain retailer share arrangements that provide for payments to our partners if the economic performance of the program exceeds a contractually defined threshold. Although the share arrangements vary by partner, these arrangements are generally structured to measure the economic performance of the program, based typically on agreed upon program revenues (including interest income and certain other income) less agreed upon program expenses (including interest expense, provision for credit losses, retailer payments and operating expenses), and share portions of this amount above a negotiated threshold. These thresholds and the economic performance of a program are based on, among other things, agreed upon measures of program expenses. On a quarterly basis, we make a judgment as to whether it is probable that the performance threshold will be met under a particular retail partner’s retailer share arrangement. The current period’s estimated contribution to that ultimate expected payment is recorded as a liability. To the extent facts and circumstances change and the cumulative probable payment for prior months has changed, a cumulative adjustment is made to align the retailer share arrangement liability balance with the amount considered probable of being paid relating to past periods.
Loyalty Programs
Our loyalty programs are designed to generate increased purchase volume per customer while reinforcing the value of our credit cards and strengthening cardholder loyalty. These programs typically provide cardholders with rewards in the form of merchandise discounts that are earned by achieving a pre-set spending level on their private label credit card or Dual Card. Other programs provide cash back or reward points, which are redeemable for a variety of products or awards. These programs are primarily in our Retail Card platform. We establish a rewards liability based on points and merchandise discounts earned that are ultimately expected to be redeemed and the average cost per point at redemption. The rewards liability is included in accrued expenses and other liabilities in our Consolidated Statements of Financial Position. Cash rebates are earned based on a tiered percentage of purchase volume. As points and discounts are redeemed or cash rebates are issued, the rewards liability is relieved. The estimated cost of loyalty programs is classified as a reduction to other income in our Consolidated and Combined Statements of Earnings.
Fraud Losses
We experience third-party fraud losses from the unauthorized use of credit cards and when loans are obtained through fraudulent means. Fraud losses are included as a charge within other expense in our Consolidated and Combined Statements of Earnings, net of recoveries, when such losses are probable. Loans are charged off, as applicable, after the investigation period has completed.
Income Taxes
For periods up to and including the date of Separation, we are included in the consolidated U.S. federal and state income tax returns of GE, where applicable, but also file certain separate state and foreign income tax returns. For periods after the date of Separation, we will file separate consolidated U.S. federal and state income tax returns. The tax provision is presented on a separate company basis as if we were a separate filer for tax purposes for all periods presented. The effects of tax adjustments and settlements from taxing authorities are presented in our consolidated and combined financial statements in the period in which they occur. Our current obligations for taxes are settled with GE, or the relevant tax authority, as applicable, on an estimated basis and adjusted in later periods as appropriate and are reflected in our consolidated and combined financial statements in the periods in which those settlements occur. We recognize the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. Deferred tax assets and liabilities are determined based on differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax laws and rates that will be in effect when the differences are expected to reverse. We record valuation allowances to reduce deferred tax assets to the amount that is more likely than not to be realized. We recognize accrued interest and penalties related to unrecognized tax benefits as interest expense and provision for income taxes, respectively.
Fair Value Measurements
For financial assets and liabilities measured at fair value on a recurring basis, fair value is the price we would receive to sell an asset or pay to transfer a liability in an orderly transaction with a market participant at the measurement date. In the absence of active markets for the identical assets or liabilities, such measurements involve developing assumptions based on market observable data and, in the absence of such data, internal information that is consistent with what market participants would use in a hypothetical transaction that occurs at the measurement date.
Observable inputs reflect market data obtained from independent sources, while unobservable inputs reflect our market assumptions. Preference is given to observable inputs. These two types of inputs create the following fair value hierarchy:
Level 1- Quoted prices for identical instruments in active markets.
Level 2- Quoted prices for similar instruments in active markets; quoted prices for identical or similar instruments in markets that are not active; and model-derived valuations whose inputs are observable or whose significant value drivers are observable.
Level 3- Significant inputs to the valuation model are unobservable.
We maintain policies and procedures to value instruments using the best and most relevant data available. In addition, we have risk management teams that review valuation, including independent price validation for certain instruments. We use non-binding broker quotes and third-party pricing services as our primary basis for valuation when there is limited or no relevant market activity for a specific instrument or for other instruments that share similar characteristics. We have not adjusted prices that we have obtained.
The third-party brokers and third-party pricing services do not provide us access to their proprietary valuation models, inputs and assumptions. Accordingly, our risk management, treasury and/or finance personnel conduct reviews of these brokers and services, as applicable. In addition, we conduct internal reviews of pricing provided by our third-party pricing service for all investment securities on a quarterly basis to ensure reasonableness of valuations used in the consolidated and combined financial statements. These reviews are designed to identify prices that appear stale, those that have changed significantly from prior valuations and other anomalies that may indicate that a price may not be accurate. Based on the information available, we believe that the fair values provided by the third-party pricing services are representative of prices that would be received to sell the assets at the measurement date (exit prices) and are classified appropriately in the hierarchy.
Recurring Fair Value Measurements
Our investments in debt and equity securities are measured at fair value every reporting period on a recurring basis.
Non-Recurring Fair Value Measurements
Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an ongoing basis but are subject to fair value adjustments only in certain circumstances. Assets that are written down to fair value when impaired are not subsequently adjusted to fair value unless further impairment occurs.
Financial Assets and Financial Liabilities Carried at Other than Fair Value
The following is a description of the valuation techniques used to estimate the fair values of the financial assets and liabilities carried at other than fair value.
Loan receivables, net
In estimating the fair value for our loan receivables, we use a discounted future cash flow model. We use various unobservable inputs including estimated interest and fee income, payment rates, loss rates and discount rates (which consider current market interest rate data adjusted for credit risk and other factors) to estimate the fair values of loans. When collateral dependent, loan receivables may be valued using collateral values.
Deposits
For demand deposits with no defined maturity, carrying value approximates fair value due to the potentially liquid nature of these deposits. For fixed-maturity certificates of deposit, fair values are estimated by discounting expected future cash flows using market rates currently offered for deposits with similar remaining maturities.
Borrowings
The fair values of borrowings of consolidated securitization entities are based on valuation methodologies that utilize current market interest rate data, which are comparable to market quotes adjusted for our non-performance risk. Borrowings that are publicly traded securities are classified as level 2. Borrowings that are not publicly traded are classified as level 3.
The fair values of the senior unsecured notes are based on secondary market trades and other observable inputs and are classified as level 2. The fair value of the Bank Term Loan is based on non-binding broker quotes and is classified as level 3.
NOTE 3. INVESTMENT SECURITIES
All of our investment securities are classified as available-for-sale and are held to meet our liquidity objectives and to comply with the Community Reinvestment Act. Our investment securities consist of the following:
December 31, 2015
December 31, 2014
Gross
Gross
Gross
Gross
Amortized
unrealized
unrealized
Estimated
Amortized
unrealized
unrealized
Estimated
($ in millions)
cost
gains
losses
fair value
cost
gains
losses
fair value
Debt
U.S. government and federal agency
$
2,768
$
-
$
(7
)
$
2,761
$
1,252
$
-
$
-
$
1,252
State and municipal
(3
)
(1
)
Residential
mortgage-backed(a)
(7
)
(3
)
U.S. corporate debt
-
-
-
-
-
-
Equity
-
-
-
-
Total
$
3,157
$
$
(17
)
$
3,142
$
1,598
$
$
(4
)
$
1,598
_______________________
(a)
At December 31, 2015 and 2014, all of our residential mortgage-backed securities related to securities issued by government-sponsored entities and are pledged by the Bank as collateral to the Federal Reserve to secure Federal Reserve Discount Window advances. All residential mortgage-backed securities are collateralized by U.S. mortgages.
The following table presents the estimated fair values and gross unrealized losses of our available-for-sale investment 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 December 31, 2015
Debt
U.S. government and federal agency
$
2,611
$
(7
)
$
-
$
-
State and municipal
(3
)
-
-
Residential mortgage-backed
(3
)
(4
)
Equity
-
-
-
Total
$
2,827
$
(13
)
$
$
(4
)
At December 31, 2014
Debt
U.S. government and federal agency
$
$
-
$
-
$
-
State and municipal
-
-
(1
)
Residential mortgage-backed
-
(3
)
Total
$
$
-
$
$
(4
)
We regularly review investment 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 for the years ended December 31, 2015, 2014 and 2013.
Contractual Maturities of Investments in Available-for-Sale Debt Securities (excluding residential mortgage-backed securities)
Amortized
Estimated
At December 31, 2015 ($ in millions)
cost
fair value
Due
Within one year
$
1,218
$
1,218
After one year through five years
$
1,550
$
1,544
After five years through ten years
$
-
$
-
After ten years
$
$
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 years ended December 31, 2015, 2014 and 2013.
Although we generally do not have the intent to sell any specific securities held at December 31, 2015, in the ordinary course of managing our investment 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
At December 31 ($ in millions)
Credit cards
$
65,773
$
58,880
Consumer installment loans
1,154
1,063
Commercial credit products
1,323
1,320
Other
Total loan receivables, before allowance for losses(a)(b)
$
68,290
$
61,286
_______________________
(a)
Total loan receivables include $25.5 billion and $27.0 billion of restricted loans of consolidated securitization entities at December 31, 2015 and 2014, respectively. See Note 5. Variable Interest Entities for further information on these restricted loans.
(b)
At December 31, 2015 and 2014, loan receivables included deferred expense, net of deferred income, of $63 million and $46 million, respectively.
Disposition of Loan Receivables
During 2015 and 2014, we sold certain credit card portfolios associated with retail partners whose program agreements with us were not extended beyond their contractual expiration dates. We recognized a pre-tax gain of $20 million and $46 million related to the portfolio sales within other income in our Consolidated and Combined Statement of Earnings for the years ended December 31, 2015 and 2014, respectively.
Allowance for Loan Losses
($ in millions)
Balance at January 1, 2015
Provision charged to operations
Gross charge-offs
Recoveries
Balance at December 31, 2015
Credit cards
$
3,169
$
2,880
$
(3,289
)
$
$
3,420
Consumer installment loans
(35
)
Commercial credit products
(47
)
Other
-
-
-
Total
$
3,236
$
2,952
$
(3,371
)
$
$
3,497
($ in millions)
Balance at January 1, 2014
Provision charged to operations
Gross charge-offs
Recoveries
Balance at December 31, 2014
Credit cards
$
2,827
$
2,858
$
(3,111
)
$
$
3,169
Consumer installment loans
(30
)
Commercial credit products
(48
)
Total
$
2,892
$
2,917
$
(3,189
)
$
$
3,236
($ in millions)
Balance at January 1, 2013
Provision charged to operations
Gross charge-offs
Recoveries
Balance at December 31, 2013
Credit cards
$
2,174
$
2,970
$
(2,847
)
$
$
2,827
Consumer installment loans
(111
)
Commercial credit products
(53
)
Total
$
2,274
$
3,072
$
(3,011
)
$
$
2,892
Delinquent and Non-accrual Loans
At December 31, 2015 ($ 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
$
1,451
$
1,257
$
2,708
$
1,257
$
-
Consumer installment loans
-
Commercial credit products
-
Total delinquent loans
$
1,499
$
1,273
$
2,772
$
1,270
$
Percentage of total loan receivables(a)
2.2
%
1.9
%
4.1
%
1.9
%
-
%
At December 31, 2014 ($ 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
$
1,331
$
1,147
$
2,478
$
1,147
$
-
Consumer installment loans
-
Commercial credit products
-
Total delinquent loans
$
1,374
$
1,162
$
2,536
$
1,160
$
Percentage of total loan receivables(a)
2.2
%
1.9
%
4.1
%
1.9
%
-
%
______________________
(a)
Percentages are calculated based on period-end balances.
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 TDR. We use certain loan modification programs for borrowers experiencing financial difficulties. These loan modification programs include interest rate reductions and payment deferrals in excess of three months, which were not part of the terms of the original contract.
We have both internal and external loan modification programs. The internal loan modification programs include both temporary and permanent programs. For our credit card customers, the temporary hardship program primarily consists of a reduced minimum payment and an interest rate reduction, both lasting for a period no longer than 12 months. The permanent workout 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 permanent 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:
For the years ended December 31 ($ in millions)
Credit cards
$
$
Consumer installment loans
-
-
Commercial credit products
Total
$
$
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 December 31, 2015 ($ in millions)
Total recorded
investment
Related allowance
Net recorded investment
Unpaid principal balance
Credit cards
$
$
(256
)
$
$
Consumer installment loans
-
-
-
-
Commercial credit products
(3
)
Total
$
$
(259
)
$
$
At December 31, 2014 ($ in millions)
Total recorded
investment
Related allowance
Net recorded investment
Unpaid principal balance
Credit cards
$
$
(217
)
$
$
Consumer installment loans
-
-
-
-
Commercial credit products
(3
)
Total
$
$
(220
)
$
$
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:
Years ended December 31,
($ 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
Interest income recognized during period when loans were impaired
Interest income that would have been recorded with original terms
Average recorded investment
Credit cards
$
$
$
$
$
$
$
$
$
Consumer installment loans
-
-
-
-
-
-
-
Commercial credit products
-
-
Total
$
$
$
$
$
$
$
$
$
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 and experienced a payment default during the periods presented. A customer defaults from a modification program after two consecutive missed payments.
Years ended December 31,
($ in millions)
Accounts defaulted
Loans defaulted
Accounts defaulted
Loans defaulted
Accounts defaulted
Loans defaulted
Credit cards
28,126
$
29,313
$
30,640
$
Consumer installment loans
-
-
-
-
Commercial credit products
-
Total
28,221
$
29,472
$
30,780
$
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 December 31, 2015 and 2014, respectively, as a percentage of each class of loan receivable. The table below excludes 0.9% and 0.8% of our total loan receivables balance at December 31, 2015 and 2014, respectively, which represents those customer accounts for which a FICO score is not available.
At December 31
661 or
601 to
600 or
661 or
601 to
600 or
higher
less
higher
less
Credit cards
73.0
%
19.8
%
7.2
%
72.5
%
19.9
%
7.6
%
Consumer installment loans
77.7
%
16.6
%
5.7
%
78.9
%
15.7
%
5.4
%
Commercial credit products
86.8
%
8.7
%
4.5
%
86.5
%
8.6
%
4.8
%
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 $322 billion and $297 billion at December 31, 2015 and 2014, respectively. While these amounts represented the total available unused credit card lines, we have not experienced and do not anticipate that all of our customers will access their entire available line at any given point in time.
Interest Income by Product
The following table provides additional information about our interest and fees on loans from our loan receivables, including held for sale:
For the years ended December 31 ($ in millions)
Credit cards
$
12,932
$
11,967
$
11,015
Consumer installment loans
Commercial credit products
Other
Total
$
13,179
$
12,216
$
11,295
NOTE 5. VARIABLE INTEREST ENTITIES
We use VIEs to securitize loans 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 years ended December 31, 2015 and 2014. 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 loans originated under such account to be transferred to the VIE. The amount of loan receivables held by our VIEs in excess of the minimum amount required under the asset-backed financing arrangements with investors may be removed by us under random removal of accounts provisions. All loan receivables held by a VIE are subject to claims of third-party investors.
In evaluating whether we have the power to direct the activities of a VIE that most significantly impact its economic performance, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.
In determining whether we have the right to receive benefits or the obligation to absorb losses that could potentially be significant to a VIE, we evaluate all of our economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity’s design, including: the entity’s capital structure, contractual rights to earnings or losses, subordination of our interests relative to those of other investors, as well as any other contractual arrangements that might exist that could have the potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of our economic interests is a matter that requires the exercise of professional judgment.
We consolidate our VIEs because 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; however, 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.
The table below summarizes the assets and liabilities of our consolidated securitization VIEs described above.
At December 31 ($ in millions)
Assets
Loan receivables, net(a)
$
24,338
$
25,645
Other assets(b)
1,134
Total
$
24,479
$
26,779
Liabilities
Borrowings
$
13,603
$
14,967
Other liabilities
Total
$
13,633
$
15,335
_______________________
(a)
Includes $1.1 billion and $1.3 billion of related allowance for loan losses resulting in gross restricted loans of $25.5 billion and $27.0 billion at December 31, 2015 and 2014, respectively.
(b)
Includes $118 million and $1.0 billion of segregated funds held by the VIEs at December 31, 2015 and 2014, respectively, which are classified as restricted cash and equivalents and included as a component of other assets in our Consolidated Statements of Financial Position.
The balances presented above are net of intercompany balances and transactions that are eliminated in our consolidated and combined financial statements.
On December 2, 2015, we replaced GECC as the servicer for one of our VIEs for which we were the subservicer. We now 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 $5.5 billion, $5.2 billion and $5.3 billion for the years ended December 31, 2015, 2014 and 2013, respectively. Related expenses consisted primarily of provision for loan losses of $940 million, $1.1 billion and $1.2 billion for the years ended December 31, 2015, 2014 and 2013, respectively, and interest expense of $215 million, $215 million and $211 million for the years ended December 31, 2015, 2014 and 2013, respectively. These amounts do not include intercompany transactions, principally fees and interest, which are eliminated in our consolidated and combined financial statements.
NOTE 6. GOODWILL AND OTHER INTANGIBLE ASSETS
Goodwill
($ in millions)
Balance at January 1
$
$
Acquisitions
-
-
Balance at December 31
$
$
Intangible Assets Subject to Amortization
At December 31 ($ in millions)
Gross carrying amount
Accumulated amortization
Net
Gross carrying amount
Accumulated amortization
Net
Customer-related
$
1,045
$
(505
)
$
$
$
(405
)
$
Capitalized software
(92
)
(45
)
Total
$
1,298
$
(597
)
$
$
$
(450
)
$
During 2015, we recorded additions to intangible assets subject to amortization of $329 million, primarily related to customer-related intangible assets, as well as capitalized software expenditures related to the build of our stand-alone information technology infrastructure.
Customer-related intangible assets primarily relate to retail partner contract acquisitions and extensions, as well as purchased credit card relationships. During the year ended December 31, 2015, we recorded additions to customer-related intangible assets subject to amortization of $196 million, primarily related to payments made to acquire and extend certain retail partner relationships. These additions had a weighted average amortizable life of 7 years.
Amortization expense related to retail partner contracts was $84 million, $81 million and $60 million for the years ended December 31, 2015, 2014 and 2013, respectively, and is included as a component of marketing and business development expense in our Consolidated and Combined Statements of Earnings. All other amortization expense was $63 million, $28 million and $23 million for the years ended December 31, 2015, 2014 and 2013, respectively, and is included as a component of other expense in our Consolidated and Combined Statements of Earnings.
We estimate annual amortization expense for existing intangible assets over the next five calendar years to be as follows:
($ in millions)
Amortization expense
$
$
$
$
$
NOTE 7. DEPOSITS
Deposits
At December 31 ($ in millions)
Amount
Average rate (a)
Amount
Average rate (a)
Interest-bearing deposits
$
43,295
1.6
%
$
34,847
1.6
%
Non-interest-bearing deposits
-
-
Total deposits
$
43,447
$
34,955
___________________
(a)
Based on interest expense for the years ended December 31, 2015 and 2014 and average deposits balances.
At December 31, 2015 and 2014, interest-bearing deposits included $11.9 billion and $9.4 billion, respectively, of direct deposit certificates of $100,000 or more. Of the total direct deposit certificates of $100,000 or more, $3.6 billion and $2.8 billion were direct deposit certificates of $250,000 or more at December 31, 2015 and 2014, respectively.
At December 31, 2015, our interest-bearing time deposits maturing over the next five years and thereafter were as follows:
($ in millions)
Thereafter
Deposits
$
12,151
$
4,820
$
2,126
$
3,917
$
2,815
$
2,581
The above maturity table excludes $12.0 billion of demand deposits with no defined maturity. In addition, at December 31, 2015, we had $2.9 billion of broker network deposit sweeps procured through a program arranger who channels brokerage account deposits to us. Unless extended, the contracts associated with these broker network deposit sweeps will terminate between 2017 and 2020.
NOTE 8. BORROWINGS
At December 31 ($ in millions)
Maturity date
Interest Rate
Weighted average interest rate
Outstanding Amount(a)
Outstanding Amount(a)
Borrowings of consolidated securitization entities:
Fixed securitized borrowings
2017 - 2020
1.3%-4.5%
1.9
%
$
6,396
$
6,315
Floating securitized borrowings
2016 - 2019
0.8%-1.3%
1.0
%
7,207
8,652
Total borrowings of consolidated securitization entities
1.4
%
13,603
14,967
Bank term loan
2.2
%
2.2
%
4,151
8,245
Senior unsecured notes:
Fixed senior unsecured notes
2017 - 2025
1.8%-4.5%
3.4
%
6,340
3,593
Floating senior unsecured notes
1.6
%
1.6
%
-
Total senior unsecured notes
3.3
%
6,590
3,593
Related party debt
N/A
N/A
N/A
-
Total borrowings
$
24,344
$
27,460
___________________
(a)
The amounts presented for outstanding borrowings include unamortized debt premiums and discounts.
Borrowings of Consolidated Securitization Entities
We securitize credit card receivables as an additional source of funding. At December 31, 2015, the maturities of the borrowings of our consolidated securitization entities over the next five years and thereafter were as follows:
($ in millions)
Thereafter
Borrowings of consolidated securitization entities
$
$
5,383
$
4,815
$
1,538
$
1,025
$
-
In addition, at December 31, 2015, we had an aggregate of $6.1 billion of undrawn committed capacity under our securitization programs.
Third-Party Debt
Bank Term Loan
On August 5, 2014, we entered into a new term loan facility (the “Bank Term Loan”) with third-party lenders that initially provided $8.0 billion principal amount of unsecured term loans maturing in 2019. The Bank Term Loan bears interest based upon, at our option, (i) a base rate plus a margin of 0.65% to 1.40% or (ii) a London Interbank Offered Rate (“LIBOR”) rate plus a margin of 1.65% to 2.40%, with the margin, in each case, based on our long-term senior unsecured non-credit-enhanced debt ratings or, if such rating has not been assigned to our debt by the applicable rating agency, a corporate credit rating. In August 2014, we prepaid $505 million of the Bank Term Loan, using a portion of the net proceeds from our issuance of senior unsecured notes. In October 2014, we amended the Bank Term Loan to, among other things, increase the amount of indebtedness that the Company may incur thereunder by $750 million, and this amount was borrowed in full.
During the year ended December 31, 2015, we prepaid $4.1 billion in the aggregate of the Bank Term Loan, which included the use of a portion of the net proceeds from the issuance of senior unsecured notes in February, July and December 2015.
Subsequent to December 31, 2015, we prepaid an additional $2.7 billion in the aggregate of the Bank Term Loan. The total indebtedness outstanding under the Bank Term Loan following the additional prepayments was $1.5 billion.
Senior Unsecured Notes
2015 Issuances ($ in millions):
Issuance Date
Principal Amount
Maturity
Interest Rate
February 2, 2015
$
2.700
%
February 2, 2015
Floating rate (three-month LIBOR plus 1.23%)
July 23, 2015
1,000
4.500
%
December 4, 2015
1,000
2.600
%
$
3,000
The net proceeds from the above issuances were primarily used to prepay our indebtedness under the GECC Term Loan and Bank Term Loan.
In addition, on August 11, 2014, we issued a total of $3.6 billion principal amount of senior unsecured notes, comprising $500 million aggregate principal amount of 1.875% senior notes due 2017, $1.1 billion aggregate principal amount of 3.000% senior notes due 2019, $750 million aggregate principal amount of 3.750% senior notes due 2021, and $1.25 billion aggregate principal amount of 4.250% senior notes due 2024.
Related Party Debt
In connection with the IPO in 2014, we entered into a new term loan facility (the “GECC Term Loan”) with GECC, which provided $1.5 billion principal amount of unsecured term loan maturing in 2019 of which $655 million remained outstanding at December 31, 2014, following prepayments in 2014 of $845 million. During the first quarter of 2015, we prepaid all of the remaining outstanding indebtedness under this agreement, and GECC no longer provides funding to our business.
NOTE 9. FAIR VALUE MEASUREMENTS
For a description of how we estimate fair value, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies.
The following tables present our assets and liabilities measured at fair value on a recurring basis. Included in the tables are debt and equity securities.
Recurring Fair Value Measurements
The following tables present our assets measured at fair value on a recurring basis.
At December 31, 2015 ($ in millions)
Level 1
Level 2
Level 3
Total
Assets
Investment securities
Debt
U.S. Government and Federal Agency
$
-
$
2,761
$
-
$
2,761
State and municipal
-
-
Residential mortgage-backed
-
-
Equity
-
-
Total
$
$
3,078
$
$
3,142
At December 31, 2014 ($ in millions)
Assets
Investment securities
Debt
U.S. Government and Federal Agency
$
-
$
1,252
$
-
$
1,252
State and municipal
-
-
Residential mortgage-backed
-
-
US Corporate
-
-
Equity
-
-
Total
$
$
1,523
$
$
1,598
For the years ended December 31, 2015 and 2014, there were no securities transferred between Level 1 and Level 2 or between Level 2 and Level 3. At December 31, 2015 and 2014, we did not have any significant liabilities measured at fair value on a recurring basis.
Our Level 3 recurring fair value measurements primarily relate to state and municipal debt instruments of $49 million and $57 million at December 31, 2015 and 2014, respectively, which are valued using non-binding broker quotes or other third-party sources. For a description of our process to evaluate third-party pricing servicers, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies. Our state and municipal debt securities are classified as available-for-sale with changes in fair value included in accumulated other comprehensive income.
The following table presents the changes in our Level 3 debt instruments that are measured on a recurring basis for the years ended December 31, 2015 and 2014.
Changes in Level 3 Instruments
Years ended December 31, ($ in millions)
Balance at beginning of period
$
$
Net realized/unrealized gains (losses)
Purchases
-
Sales
(6
)
-
Settlements
(6
)
(4
)
Balance at end of period
$
$
Net change in unrealized gains (losses) relating to instruments still held at December 31
$
$
Non-Recurring Fair Value Measurements
We hold certain assets that have been measured at fair value on a non-recurring basis at December 31, 2015 and 2014. These assets are written down to fair value when they are impaired and are not subsequently adjusted to fair value unless further impairment occurs. The assets held by us that were measured at fair value on a non-recurring basis and the effects of the remeasurement to fair value were not material for all periods presented. The estimated fair value of loan receivables held for sale exceeded their amortized cost and accordingly a remeasurement to fair value was not required during the year ended December 31, 2014.
Financial Assets and Financial Liabilities Carried at Other than Fair Value
Carrying
Corresponding fair value amount
At December 31, 2015 ($ 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)
$
12,325
$
12,325
$
11,865
$
$
-
Other assets(b)
$
$
$
$
-
$
-
Financial assets carried at other than fair value:
Loan receivables, net(c)
$
64,793
$
71,386
$
-
$
-
$
71,386
Financial Liabilities
Financial liabilities carried at other than fair value:
Deposits
$
43,447
$
43,840
$
-
$
43,840
$
-
Borrowings of consolidated securitization entities
$
13,603
$
13,562
$
-
$
7,566
$
5,996
Bank term loan
$
4,151
$
4,125
$
-
$
-
$
4,125
Senior unsecured notes
$
6,590
$
6,574
$
-
$
6,574
$
-
Carrying
Corresponding fair value amount
At December 31, 2014 ($ in millions)
value
Total
Level 1
Level 2
Level 3
Financial Assets
Financial assets for which carrying values equal or approximate fair value:
Cash and equivalents(a)
$
11,828
$
11,828
$
8,153
$
3,675
$
-
Other assets(b)
$
1,104
$
1,104
$
1,104
$
-
$
-
Financial assets carried at other than fair value:
Loan receivables, net(c)
$
58,050
$
64,113
$
-
$
-
$
64,113
Loan receivables held for sale(c)
$
$
$
-
$
-
$
Financial Liabilities
Financial liabilities carried at other than fair value:
Deposits
$
34,955
$
35,442
$
-
$
35,442
$
-
Borrowings of consolidated securitization entities
$
14,967
$
14,985
$
-
$
7,912
$
7,073
Bank term loan
$
8,245
$
8,204
$
-
$
-
$
8,204
Senior unsecured notes
$
3,593
$
3,660
$
-
$
3,660
$
-
Related party debt
$
$
$
-
$
-
$
_______________________
(a)
For cash and equivalents, carrying value approximates fair value due to the liquid nature and short maturity of these instruments. Cash equivalents classified as Level 2 represent U.S. Government and Federal Agency debt securities with original maturities of three months or less.
(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.
NOTE 10. REGULATORY AND CAPITAL ADEQUACY
As a savings and loan holding company, we are subject to regulation, supervision and examination by the Federal Reserve Board. 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 Consumer Financial Protection Bureau (“CFPB”). In addition, the Bank, as an insured depository institution, is supervised by the Federal Deposit Insurance Corporation.
Following the approval from the Federal Reserve Board to become a stand-alone savings and loan holding company, the Company is now subject to the capital requirements as prescribed by Basel III capital rules and the requirements of the Dodd-Frank Act.
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 following table) 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, 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 December 31, 2015, Synchrony Financial met all the requirements to be deemed well-capitalized.
At December 31, 2015, we met all applicable requirements to be deemed well-capitalized pursuant to Federal Reserve Board regulations. At December 31, 2015 and 2014, 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. The capital rules applicable to the Bank as of January 1, 2015, include new minimum and "well-capitalized" risk-based capital and leverage ratios, and redefine the definition of what constitutes "capital" for purposes of calculating these ratios. There are no conditions or events subsequent to December 31, 2015 that management believes have changed the Company’s or 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 December 31, 2015 ($ in millions)
Actual
Minimum for capital
adequacy purposes
Amount
Ratio(a)
Amount
Ratio
Total risk-based capital
$
12,533
18.1
%
$
5,550
8.0
%
Tier 1 risk-based capital
$
11,633
16.8
%
$
4,162
6.0
%
Tier 1 leverage
$
11,633
14.4
%
$
3,242
4.0
%
Common equity Tier 1 Capital
$
11,633
16.8
%
$
3,122
4.5
%
Synchrony Bank
At December 31, 2015 ($ in millions)
Actual
Minimum for capital
adequacy purposes
Minimum to be well-capitalized under prompt corrective action provisions
Amount
Ratio(a)
Amount
Ratio
Amount
Ratio
Total risk-based capital
$
8,443
16.6
%
$
4,071
8.0
%
$
5,089
10.0
%
Tier 1 risk-based capital
$
7,781
15.3
%
$
3,053
6.0
%
$
4,071
8.0
%
Tier 1 leverage
$
7,781
13.0
%
$
2,387
4.0
%
$
2,984
5.0
%
Common equity Tier 1 Capital
$
7,781
15.3
%
$
2,290
4.5
%
$
3,308
6.5
%
At December 31, 2014 ($ in millions)
Actual
Minimum for capital
adequacy purposes
Minimum to be well-capitalized under prompt corrective action provisions
Amount
Ratio(a)
Amount
Ratio
Amount
Ratio
Total risk-based capital
$
7,100
17.1
%
$
3,322
8.0
%
$
4,152
10.0
%
Tier 1 risk-based capital
$
6,559
15.8
%
$
1,661
4.0
%
$
2,491
6.0
%
Tier 1 leverage
$
6,559
13.4
%
$
1,959
4.0
%
$
2,449
5.0
%
_______________________
(a)
Capital ratios are calculated based on the Basel III Standardized Approach rules, subject to applicable transition provisions, at December 31, 2015 and are calculated based on Basel I capital rules at December 31, 2014.
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 amount then required by the applicable regulatory capital requirements.
NOTE 11. EMPLOYEE BENEFIT PLANS
Following the Separation, our applicable employees ceased participating in GE benefit plans and began participating in employee benefit plans established and maintained by us. The following summarizes information related to the Synchrony benefit plans and our remaining obligations to GE related to certain of their plans.
Savings Plan
Our U.S. employees are eligible to participate in a qualified defined contribution savings plan that allows them to contribute a portion of their pay to the plan on a pre-tax basis. We make employer contributions to the plan equal to 3% of eligible compensation and make matching contributions of up to 4% of eligible compensation. We also provide certain additional contributions to the plan for employees who were participants in GE's pension plan at Separation. The expense incurred associated with this plan for the year ended December 31, 2015 was not material.
Health and Welfare Benefits
We provide health and welfare benefits to our employees, including health, dental, prescription drug and vision for which we are self-insured. The expense incurred associated with these benefits for the year ended December 31, 2015 was not material.
GE Benefit Plans and Reimbursement Obligations
Prior to Separation, our employees participated in various GE retirement and retiree health and life insurance benefit plans. Certain of these retirement benefits vested as a result of Separation. Under the terms of the Employee Matters Agreement between us and GE, GE will continue to pay for these benefits and we are obligated to reimburse them. The principal retirement benefits subject to this arrangement are fixed, life-time annuity payments. The estimated liability for our reimbursement obligations to GE for retiree benefits was $166 million at December 31, 2015 and is included in other liabilities in our Consolidated Statement of Financial Position.
Expenses associated with our employees’ participation in these GE benefit plans prior to Separation were $157 million, $164 million and $124 million for the years ended December 31, 2015, 2014 and 2013, respectively.
NOTE 12. 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:
Years ended December 31,
(in millions, except per share data)
Net earnings
$
2,214
$
2,109
$
1,979
Weighted average common shares outstanding, basic
833.8
757.4
705.3
Effect of dilutive securities
1.7
0.2
-
Weighted average common shares outstanding, dilutive
835.5
757.6
705.3
Earnings per basic common share
$
2.66
$
2.78
$
2.81
Earnings per diluted common share
$
2.65
$
2.78
$
2.81
We have issued certain stock based awards under the Synchrony Financial 2014 Long-Term Incentive Plan. A total of approximately 1 million and 6 million shares related to these awards were considered anti-dilutive and therefore were excluded from the computation of diluted earnings per share for the years ended December 31, 2015 and 2014, respectively.
NOTE 13. EQUITY AND OTHER STOCK RELATED INFORMATION
The IPO and Exchange Offer
In July 2014, in preparation for the IPO, we completed a stock split pursuant to which each share held by the holder of our common stock was reclassified into 5,262.3512 shares. Following this stock split, we had approximately 705 million shares of common stock outstanding. The effects of the stock split have been reflected for all periods presented.
On August 5, 2014, we closed the initial public offering of 125 million shares of our common stock at a price to the public of $23.00 per share and on September 3, 2014 we issued an additional 3.5 million shares of our common stock pursuant to to an option granted to the underwriters in the IPO (the “Underwriters' Option”). We received net proceeds from the initial public offering and the Underwriters' Option of approximately $2.8 billion. Following the initial public offering and the Underwriters' Option, GE owned approximately 84.6% of our common stock.
On November 17, 2015, GE completed its offer to exchange shares of GE common stock for all of the remaining shares of our common stock that were owned by GE. Following the Separation, GE no longer owns any of our outstanding common stock.
Synchrony Financial Incentive Programs
We have established the Synchrony Financial 2014 Long-Term Incentive Plan, which we refer to as the “Incentive Plan.” The Incentive Plan permits us to issue stock-based, stock-denominated and other awards to officers, employees, consultants and non-employee directors providing services to the Company and our participating affiliates. Available awards under the Incentive Plan include stock options and stock appreciation rights (“SARs”), restricted stock and restricted stock units (“RSUs”), performance awards and other awards valued in whole or in part by reference to or otherwise based on our common stock (other stock-based awards), and dividend equivalents. A total of 16,605,417 shares of our common stock (including authorized and unissued shares) are available for granting awards under the Incentive Plan.
In connection with the IPO, we issued a total of 3.3 million RSUs and 4.9 million stock options to certain employees. These RSUs and stock options will generally cliff vest four years from the award date provided that the employee has remained continuously employed by the Company through such vesting date. Subsequent to the IPO we issued additional RSUs and stock options in connection with annual grants.
The RSUs and stock options issued in connection with the annual grants will generally vest 20% annually, starting with the first anniversary of the award date, provided that the employee has remained continuously employed by the Company through such vesting date. Each RSU is convertible into one share of Synchrony Financial common stock.
The total compensation expense recorded for these awards was not material for all periods presented. At December 31, 2015, there were 4.4 million RSUs and 6.5 million stock options issued and outstanding and $108 million of total unrecognized compensation cost related to these awards, which is expected to be amortized over a weighted average period of 3.0 years.
NOTE 14. INCOME TAXES
Earnings before Provision for Income Taxes
For the years ended December 31 ($ in millions)
U.S.
$
3,513
$
3,377
$
3,124
Non-U.S.
Earnings before provision for income taxes
$
3,531
$
3,386
$
3,142
Provision for Income Taxes
For the years ended December 31 ($ in millions)
Current provision for income taxes
U.S. Federal
$
1,443
$
1,320
$
1,280
U.S. state and local
Non-U.S.
Total current provision for income taxes
1,612
1,480
1,400
Deferred (benefit) provision for income taxes
U.S. Federal
(263
)
(181
)
(215
)
U.S. state and local
(32
)
(23
)
(21
)
Non-U.S.
-
(1
)
Deferred (benefit) provision for income taxes
(295
)
(203
)
(237
)
Total provision for income taxes
$
1,317
$
1,277
$
1,163
Consistent with the provisions of ASC 740, Income Taxes, U.S. income taxes have not been provided on temporary differences related to investments in certain non-U.S. subsidiaries. These temporary differences are due to earnings that have been reinvested abroad for an indefinite period of time and other differences between the book basis and tax basis in the equity in our non-U.S. subsidiaries. The cumulative amounts of temporary differences with regard to which we have not provided U.S. income taxes were approximately $29 million and $23 million at December 31, 2015 and 2014, respectively. Any U.S. tax liability associated with these temporary differences would not be material to the consolidated financial statements.
Reconciliation of Our Effective Tax Rate to the U.S. Federal Statutory Income Tax Rate
For the years ended December 31
U.S. federal statutory income tax rate
35.0
%
35.0
%
35.0
%
U.S. state and local income taxes, net of federal benefit
2.3
%
2.5
%
1.9
%
All other, net
-
%
0.2
%
0.1
%
Effective tax rate
37.3
%
37.7
%
37.0
%
Deferred Taxes
Deferred income taxes reflect the net tax effects of temporary differences between the financial reporting and tax bases of assets and liabilities and are measured using the enacted tax laws and rates that will be in effect when such differences are expected to reverse.
Significant Components of Our Net Deferred Income Taxes
At December 31 ($ in millions)
Assets
Allowance for loan losses
$
1,329
$
1,221
Reward programs
Compensation and employee benefits
Net operating losses
Other assets
Total deferred income tax assets before valuation allowance
1,620
1,406
Valuation allowance
(9
)
(10
)
Total deferred income tax assets
$
1,611
$
1,396
Liabilities
Original issue discount(a)
$
(332
)
$
(519
)
Goodwill and identifiable intangibles
(246
)
(259
)
Other liabilities
(18
)
(15
)
Total deferred income tax liabilities
(596
)
(793
)
Net deferred income tax assets
$
1,015
$
_______________________
(a)
Includes the deferred tax impact of an unrecognized tax benefit of $200 million at December 31, 2015 related to temporary items that are expected to reverse within the next twelve months.
At December 31, 2015 and 2014, the Company had state income tax net operating losses of $482 million and $520 million, respectively. The deferred tax assets presented above, related to these net operating losses, are net of unrecognized tax benefits and have been reflected in the reconciliation of unrecognized tax benefits. The state net operating losses will begin to expire in 2025 with the majority of the loss expiring in 2034 if not utilized prior to that year. The Company believes that it is more likely than not that a portion of the state net operating losses will expire before being utilized. Therefore, we have recorded the above valuation allowances at December 31, 2015 and 2014, respectively, to reduce the deferred tax assets to the amounts more likely than not to be realized.
Tax Sharing and Separation Agreement
In connection with the IPO, we entered into a Tax Sharing and Separation Agreement (“TSSA”) which governs certain separation-related tax matters between the Company and GE following the IPO. The TSSA governs the allocation of responsibilities for the taxes of the GE group between GE and the Company. The TSSA also allocates rights, obligations and responsibilities in connection with certain administrative matters relating to the preparation of tax returns and control of tax audits and other proceedings relating to taxes.
Under the TSSA, we generally are responsible for all taxes attributable to us or our operations for taxable periods following December 31, 2013. To the extent we file tax returns on a consolidated basis with GE, we will be required to make tax sharing payments to GE in amounts equal to our separate company tax liability. Our separate company tax liability will generally be equal to the amount of tax we would have paid had we been filing tax returns separately from GE, subject to certain adjustments, whether or not GE is actually required to pay such amounts to the taxing authorities. For taxable periods prior to January 1, 2014, GE is responsible for all income taxes imposed by the United States, Canada and Puerto Rico. Liabilities related to taxable periods prior to January 1, 2014 were settled with GE during the year ended December 31, 2014. We are responsible for all other taxes attributable to our business. Where required for certain tax items, we have retained the liability and recorded an indemnity receivable from GE in our Consolidated Statement of Financial Position.
Unrecognized Tax Benefits
Reconciliation of Unrecognized Tax Benefits
($ in millions)
Balance at January 1
$
$
Additions:
Tax positions of the current year(a)
Tax positions of prior years
Reductions:
Prior year tax positions
(8
)
(194
)
Settlements with tax authorities
(1
)
-
Expiration of the statute of limitation
(8
)
(1
)
Balance at December 31
$
$
Portion of balance that, if recognized, would impact the effective income tax rate
$
$
_______________________
(a)
Included in the increase in tax positions for the year ended December 31, 2015 is an unrecognized tax benefit of $207 million ($200 million net of federal benefit) related to temporary items that are expected to reverse within the next twelve months.
Included in the amount of unrecognized tax benefits are certain items that would not affect the effective tax rate if they were recognized in our Consolidated and Combined Statements of Earnings. These unrecognized items include uncertain tax positions that have offsetting amounts in other jurisdictions, unrecognized tax benefits that would be offset by a valuation allowance if they were recognized and unrecognized tax benefits that result from temporary differences. We expect approximately $200 million (net of federal benefit) of unrecognized tax benefits related to temporary differences to reverse within the next twelve months. Excluding that item, the amount of unrecognized tax benefits which may be resolved in the next twelve months is not expected to be material to our consolidated financial statements.
Included in the reduction for prior year tax positions for the year ended December 31, 2014 is a non-cash settlement with GE of $194 million, related to taxable periods prior to January 1, 2014, in accordance with the TSSA. Principally as a result of this settlement, net of the associated U.S. federal income tax deduction and the related accrued interest, additional paid-in capital increased by $147 million during the year ended December 31, 2014.
Additionally, there are unrecognized tax benefits of $22 million and $21 million for the years ended December 31, 2015 and 2014, respectively, that are included in the tabular reconciliation above but recorded in the Consolidated Statement of Financial Position as a reduction of the related deferred tax asset for net operating losses.
Interest expense and penalties related to income tax liabilities recognized in our Consolidated and Combined Statements of Earnings were not material for all periods presented.
The Company is under continuous examination by the Internal Revenue Service (“IRS”) and the tax authorities of various states as part of their audit of GE’s tax returns. The IRS is currently auditing the GE consolidated U.S. income tax returns for 2010 and 2011, as well as 2012 and 2013. In addition, certain issues and refund claims for previous years are still unresolved. We are under examination in various states going back to 2007 as part of the audit of GE’s tax returns. We believe that there are no issues or claims that are likely to significantly impact our results of operations, financial position or cash flows. We further believe that we have made adequate provision for all income tax uncertainties that could result from such examinations.
NOTE 15. RELATED PARTY TRANSACTIONS
Following the Separation, GE no longer owns any of our outstanding common stock and is no longer a related party to us, and we will no longer consider our transactions with GE and GECC as related party transactions. The following table sets forth the direct costs, indirect costs and interest expenses related to services and funding provided by GE for the periods prior to the Separation, as indicated.
($ in millions)
Years ended December 31,
2015(c)
Direct costs(a)
$
$
$
Indirect costs(a)
-
Interest expense(b)
Total expenses for services and funding provided by GECC
$
$
$
_______________________
(a)
Direct and indirect costs are included in the other expense line items in our Consolidated and Combined Statements of Earnings.
(b)
Included in interest expense in our Consolidated and Combined Statements of Earnings.
(c)
Represents expenses incurred through November 17, 2015, the date of Separation.
Services Provided by GE
Direct Costs
Direct costs are costs associated with either services previously provided directly to us that were centralized at GE or services provided to us by third parties under contracts entered into by GE. These services included the provision of employee benefits and benefit administration; information technology services; telecommunication services; and other services, including leases for vehicles, equipment and facilities. GE allocated the costs associated with these services to us using established allocation methodologies.
Under the Transitional Services Agreement (“TSA”) with GE, all of the costs billed to us by GE subsequent to the IPO are included as a component of direct costs and are at GE’s cost in accordance with historic allocation methodologies.
Indirect Costs
For periods prior to the IPO, GE and GECC allocated costs to us related to corporate overhead that directly or indirectly benefited our business. These assessments related to information technology, insurance coverage, tax services provided, executive incentive payments, advertising and branding and other functional support. These allocations were determined primarily using our percentage of GECC’s relevant expenses.
Funding Provided by GECC
GECC no longer provides funding to our business. During the first quarter of 2015, we prepaid all of the remaining outstanding indebtedness provided by the GECC Term Loan. See Note 8. Borrowings for additional information.
Interest Expense
For all periods subsequent to the IPO in 2014, interest expense represents interest accruing on the GECC Term Loan. For all other prior periods presented, interest expense represents interest cost assessed to us from GECC’s centralized treasury function based on fixed and floating interest rates, plus funding related costs that include charges for liquidity and other treasury costs.
NOTE 16. PARENT COMPANY FINANCIAL INFORMATION
The following parent company financial statements for Synchrony Financial are provided in accordance with SEC rules, which requires such disclosure when restricted net assets of consolidated subsidiaries exceed 25% of consolidated net assets. At December 31, 2015, restricted net assets of our subsidiaries were approximately $8.9 billion.
Condensed Statements of Earnings
For the years ended December 31 ($ in millions)
Interest income:
Interest income from subsidiaries
$
$
$
Interest on investment securities
-
Total interest income
Interest expense:
Interest on third-party debt
-
Interest on related party debt
Total interest expense
Net interest income
(254
)
(147
)
-
Dividends from bank subsidiaries
1,400
Dividends from nonbank subsidiaries
-
1,206
2,500
Other income
-
Other expense(a)
Earnings before benefit from income taxes
1,533
3,874
Benefit from income taxes
Equity in undistributed net earnings of subsidiaries
1,694
(1,902
)
Net earnings
$
2,214
$
2,109
$
1,979
Comprehensive income
$
2,183
$
2,112
$
1,964
_____________
(a)
Other expense for the year ended December 31, 2014, primarily included various intercompany charges that were eliminated in consolidation.
Condensed Statements of Financial Position
At December 31 ($ in millions)
Assets
Cash and equivalents
$
5,301
$
5,643
Investment securities
2,014
1,255
Investments in and amounts due from subsidiaries(a)
16,329
16,723
Goodwill
Other assets
Total assets
$
23,995
$
23,786
Liabilities and Equity
Amounts due to subsidiaries
$
$
Bank term loan
4,151
8,245
Senior unsecured notes
6,590
3,593
Related party debt
-
Accrued expenses and other liabilities
Total liabilities
11,391
13,308
Equity:
Total equity
12,604
10,478
Total liabilities and equity
$
23,995
$
23,786
_____________
(a)
Includes investments in and amounts due from bank subsidiaries of $9.4 billion and $8.5 billion at December 31, 2015 and 2014, respectively.
Condensed Statements of Cash Flows
For the years ended December 31 ($ in millions)
Cash flows - operating activities
Net earnings
$
2,214
$
2,109
$
1,979
Adjustments to reconcile net earnings to cash provided from operating activities
Deferred income taxes
(36
)
-
(Increase) decrease in other assets
(133
)
(8
)
Increase (decrease) in accrued expenses and other liabilities
(257
)
Equity in undistributed net earnings of subsidiaries
(1,694
)
(361
)
1,902
All other operating activities
(223
)
-
Cash from operating activities
2,025
3,886
Cash flows - investing activities
Net (increase) decrease in investments in and amounts due from subsidiaries
1,928
(1,030
)
(1,848
)
Maturity and redemption of investment securities
3,480
-
-
Purchases of investment securities
(4,246
)
(1,256
)
-
All other investing activities
(6
)
(2
)
-
Cash (used for) from investing activities
1,156
(2,288
)
(1,848
)
Cash flows - financing activities
Third-party debt
Proceeds from issuance of third-party debt
2,995
12,343
-
Maturities and repayment of third-party debt
(4,094
)
(505
)
-
Related party debt
Proceeds from issuance of related party debt
-
1,615
-
Maturities and repayment of related party debt
(655
)
(9,820
)
(1,452
)
Proceeds from initial public offering
-
2,842
-
Net transfers to Parent
-
(603
)
(586
)
Increase (decrease) in amounts due to subsidiaries
(56
)
-
All other financing activities
(18
)
(64
)
-
Cash (used for) from financing activities
(1,828
)
5,906
(2,038
)
Increase (decrease) in cash and equivalents
(342
)
5,643
-
Cash and equivalents at beginning of year
5,643
-
-
Cash and equivalents at end of year
$
5,301
$
5,643
$
-
NOTE 17. 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 consolidated and combined 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 December 10, 2013, we entered into a Consent Order with the CFPB relating to our CareCredit platform, which required us to pay up to $34.1 million to qualifying customers; provide additional training and monitoring of our CareCredit partners; include provisions in agreements with our CareCredit partners prohibiting charges for certain services not yet rendered; make changes to certain consumer disclosures, application procedures and procedures for resolution of customer complaints; and terminate CareCredit partners that have chargeback rates in excess of certain thresholds. Some of the business practice changes required by the Consent Order are similar to requirements in an Assurance of Discontinuance that we entered into with the Attorney General for the State of New York on June 3, 2013. The payments required by the Consent Order were completed in the second quarter of 2015.
Our settlements with the CFPB and the New York State Attorney General do not preclude other regulators or state attorneys general from seeking additional monetary or injunctive relief with respect to CareCredit.
On June 19, 2014, we entered into a Consent Order with the CFPB (the “2014 CFPB Consent Order”) related to the CFPB’s review of the Bank’s debt cancellation products and its marketing practices in its telesales channel related to those products. The 2014 CFPB Consent Order required us to refund $56 million to cardholders who enrolled in a debt cancellation product over the telephone from January 2010 to October 2012 ($11 million of which was refunded prior to the 2014 CFPB Consent Order), pay civil money penalties of $3.5 million, and implement a compliance plan related to the sale of “add-on” products to the extent the Bank restarts telesales of such products (which were discontinued in October 2012). In the second quarter of 2015, we completed the consumer refunds.
The 2014 CFPB Consent Order also resolved a separate CFPB investigation related to potential violations of the Equal Credit Opportunity Act as a result of the Bank’s omission of certain Spanish-speaking customers and customers residing in Puerto Rico from certain statement credit and settlement offers that were made to certain delinquent customers. The Bank identified this issue through an audit of its collection operations, reported it to the CFPB and initiated a remediation program. The CFPB referred the issue to the Department of Justice (the “DOJ”), which initiated a civil investigation. At the same time we entered into the 2014 CFPB Consent Order, we entered into a consent order with the DOJ (the “2014 DOJ Consent Order,” and together with the 2014 CFPB Consent Order, the “2014 Consent Orders”) to settle a complaint filed by the DOJ on June 19, 2014 in the United States District Court for the District of Utah that made similar allegations to those alleged in the 2014 CFPB Consent Order. The 2014 DOJ Consent Order was approved by the Court on June 26, 2014. The 2014 DOJ Consent Order is similar to the 2014 CFPB Consent Order and did not impose any additional requirements on us. The 2014 Consent Orders required us to complete our remediation program by providing additional payments, balance credits and balance waivers and to update our credit bureau reporting relating to the affected accounts. In the third quarter of 2015, we completed our consumer remediation program, which consisted of approximately $185 million of balance credits and waivers to previously charged-off accounts and approximately $15 million of other credits or payments. This remediation program included the $132 million of voluntary remediation completed prior to the 2014 Consent Orders. In addition to the consumer remediation, the 2014 Consent Orders required us to implement a fair lending compliance plan (including fair lending reviews, audits and training), which will, in part, be satisfied by our existing compliance processes.
Although we do not believe that the 2014 Consent Orders themselves will have a material adverse effect on our results of operations going forward, we cannot be sure whether the settlements will have an adverse impact on our reputation or whether any similar actions will be brought by state attorneys general or others, all of which could have a material adverse effect on us.
On October 30, 2014, the United States Trustee, which is part of the DOJ, filed an application in In re Nyree Belton, a Chapter 7 bankruptcy case pending in the U.S. Bankruptcy Court for the Southern District of New York for orders authorizing discovery of the Bank pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure, related to an investigation of the Bank’s credit reporting. The discovery, which is ongoing, concerns allegations made in Belton et al. v. GE Capital Consumer Lending, a putative class action adversary proceeding pending in the same Bankruptcy Court. In the Belton adversary proceeding, which was filed on April 30, 2014, plaintiff alleges that the Bank violates the discharge injunction under Section 524(a)(2) of the Bankruptcy Code by attempting to collect discharged debts and by failing to update and correct credit information to credit reporting agencies to show that such debts are no longer due and owing because they have been discharged in bankruptcy. Plaintiff seeks declaratory judgment, injunctive relief and an unspecified amount of damages. On December 15, 2014, the Bankruptcy Court entered an order staying the adversary proceeding pending an appeal to the District Court of the Bankruptcy Court’s order denying the Bank’s motion to compel arbitration. On October 14, 2015, the District Court reversed the Bankruptcy Court and on November 4, 2015, the Bankruptcy Court granted the Bank’s motion to compel arbitration.
On October 15, 2015, the Bank received a Civil Investigative Demand from the CFPB seeking information related to the Bank’s credit bureau reporting with respect to sold accounts. The information sought by the CFPB generally relates to the allegations made in Belton et al. v. GE Capital Consumer Lending.
Other Matters
The Bank is a defendant in three putative class actions alleging claims under the federal Telephone Consumer Protection Act (“TCPA”) as a result of phone calls made by the Bank. In each case, the complaints allege that the Bank 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. The amount of damages sought in the aggregate is unspecified. In two of the cases (Abdeljalil and Hofer), the plaintiffs assert that they received calls on their cellular telephones relating to accounts not belonging to them; in the third case (Mintz), the plaintiffs assert that the calls were made in connection with their account but that they had revoked consent to receive such calls. Abdeljalil et al. v. GE Capital Retail Bank was filed on August 22, 2012 in the U.S. District Court for the Southern District of California. On March 26, 2015, the Court entered an order granting class certification under Federal Rule of Civil Procedure 23(b)(3) (for damages) and denying class certification under Federal Rule of Civil Procedure 23(b)(2) (for injunctive relief). Hofer et al. v. Synchrony Bank was filed on November 4, 2014 in the U.S. District Court for the Eastern District of Missouri. In the first quarter of 2016, the Bank entered an agreement to resolve the Abdeljalil and Hofer actions on a class basis. Pursuant to the agreement, a stipulation dismissing the Hofer case was filed on February 11, 2016. Mintz et al v. Synchrony Bank was filed on December 28, 2015 in the U.S. District Court for the Eastern District of New York. In addition to the Abdeljalil, Hofer, and Mintz developments discussed above, the Bank has resolved five other putative class actions that made similar claims under the TCPA on an individual basis with the class representative. Travaglio et al. v. GE Capital Retail Bank and Allied Interstate LLC was filed on January 17, 2014 in the U.S. District Court for the Middle District of Florida and dismissed on October 9, 2014. Fitzhenry v. Lowe’s Companies Inc. and GE Capital Retail Bank was filed on May 29, 2014 in the U.S. District Court for the District of South Carolina and dismissed on October 20, 2014. Cowan v. GE Capital Retail Bank was filed on May 14, 2014 in the U.S. District Court for the District of Connecticut and dismissed on July 8, 2015. Pittman et al. v. GE Capital d/b/a GE Capital Retail Bank was filed on July 29, 2014 in the U.S. District Court for the Northern District of Alabama and dismissed on August 20, 2015. Dubanoski et al. v. Wal-Mart Stores, Inc., for which the Bank indemnified the defendant, was filed on February 27, 2015 in the United States District Court for the Northern District of Illinois and dismissed on September 1, 2015.
In addition to the TCPA class action lawsuits related to phone calls, Synchrony is a defendant in a putative class action lawsuit alleging claims under the TCPA relating to facsimiles. In Michael W. Kincaid, DDS et al. v. Synchrony Financial, plaintiff alleges that Synchrony violated the TCPA by sending fax advertisements without consent and without required notices, and seeks up to $1,500 for each violation. The amount of damages sought in the aggregate is unspecified. The complaint was filed in U.S. District Court for the Northern District of Illinois on January 20, 2016.
NOTE 18. SELECTED QUARTERLY FINANCIAL INFORMATION (UNAUDITED)
Quarterly Periods Ended
($ in millions)
December 31, 2015
September 30,
June 30,
March 31,
December 31, 2014
September 30,
June 30,
March 31,
Interest income
$
3,509
$
3,392
$
3,177
$
3,150
$
3,260
$
3,123
$
2,926
$
2,933
Interest expense
Net interest income
3,208
3,103
2,907
2,875
2,978
2,879
2,720
2,743
Earnings before provision for income taxes
Provision for income taxes
Net earnings
$
$
$
$
$
$
$
$
Earnings per share
Basic
$
0.66
$
0.69
$
0.65
$
0.66
$
0.64
$
0.70
$
0.67
$
0.79
Diluted
$
0.65
$
0.69
$
0.65
$
0.66
$
0.64
$
0.70
$
0.67
$
0.79

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ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.

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ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9A. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
____________________________________________________________________________________________
Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act), and based on such evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December 31, 2015.
Changes in Internal Control Over Financial Reporting
____________________________________________________________________________________________
No change in internal control over financial reporting occurred during the fiscal quarter ended December 31, 2015 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Report on Management's Assessment of Internal Control Over Financial Reporting
____________________________________________________________________________________________
The management of Synchrony Financial and subsidiaries (“the Company”) is responsible for establishing and maintaining adequate internal control over financial reporting for the Company as defined by Exchange Act Rules 13a-15 and 15d-15. The Company's internal control over financial reporting is designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. The Company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the transactions and dispositions of the Company's assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that the Company's receipts and expenditures are made only in accordance with authorizations of the Company's management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on its financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Although any system of internal control can be compromised by human error or intentional circumvention of required procedures, we believe our system provides reasonable assurance that financial transactions are recorded and reported properly, providing an adequate basis for reliable financial statements.
The Company’s management has used the criteria established in Internal Control - Integrated Framework (2013 framework) issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”) to evaluate the effectiveness of the Company’s internal control over financial reporting.
The Company’s management has assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2015 and has concluded that such internal control over financial reporting is effective. There are no material weaknesses in the Company’s internal control over financial reporting that have been identified by the Company’s management.
KPMG LLP, an independent registered public accounting firm, has audited the consolidated financial statements of the Company for the year ended December 31, 2015 and has also issued an audit report, which is included in Part II, "Item 8. Financial Statements and Supplementary Data” of this Form 10-K Report, on internal control over financial reporting as of December 31, 2015 under Auditing Standard No. 5 of the Public Company Accounting Oversight Board (“PCAOB”).

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ITEM 9B. OTHER INFORMATION
ITEM 9B. OTHER INFORMATION
Not applicable.
PART III.

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ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Incorporated by reference to “Management,” “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Governance Principles,” “Code of Conduct” and “Committees of the Board of Directors” in our definitive proxy statement for our 2016 Annual Meeting of Stockholders to be held on May 19, 2016, which will be filed within 120 days of the end of our fiscal year ended December 31, 2015 (the “2016 Proxy Statement”).

---

ITEM 11. EXECUTIVE COMPENSATION
ITEM 11. EXECUTIVE COMPENSATION
Incorporated by reference to “Compensation Discussion and Analysis,” “2015 Executive Compensation,” “Management Development and Compensation Committee Report” and “Management Development and Compensation Committee Interlocks and Insider Participation” in the 2016 Proxy Statement.

---

ITEM 12. SECURITY OWNERSHIP
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Incorporated by reference to “Beneficial Ownership” and “Equity Compensation Plan Information” in the 2016 Proxy Statement.

---

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Incorporated by reference to “Related Person Transactions,” “Election of Directors” and “Committees of the Board of Directors” in the 2016 Proxy Statement.

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ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Incorporated by reference to “Independent Auditor” in the 2016 Proxy Statement.
PART VI.

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ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(a) Documents filed as part of this Form 10-K:
1. Consolidated Financial Statements
The consolidated financial statements required to be filed in this annual report on Form 10-K are listed below and appear herein on the pages indicated.
INDEX TO COMBINED CONSOLIDATED FINANCIAL STATEMENTS
Reports of Independent Registered Public Accounting Firm
Consolidated and Combined Statements of Earnings for the years ended December 31, 2015, 2014 and 2013
Consolidated and Combined Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013
Consolidated Statements of Financial Position as of December 31, 2015 and 2014
Consolidated and Combined Statements of Changes in Equity for the years ended December 31, 2015, 2014 and 2013
Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013
Notes to the Consolidated and Combined Financial Statements
2. Financial Statement Schedules
Separate financial statement schedules have been omitted either because they are not applicable or because the required information is included in the consolidated financial statements.
3. Exhibits
See the Exhibit Index following the signature pages for a list of the exhibits being filed or furnished with or incorporated by reference into this annual report on Form 10-K.
Signatures
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this annual report on Form 10-K for the fiscal year ended December 31, 2015, to be signed on its behalf by the undersigned, and in the capacity indicated, thereunto duly authorized in the City of Stamford and State of Connecticut on the 25th day of February 2016.
Synchrony Financial
(Registrant)
/s/ Brian D. Doubles
Brian D. Doubles
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
Power of Attorney
Each person whose signature appears below hereby constitutes and appoints Margaret M. Keane, Brian D. Doubles and Jonathan S. Mothner, and each of them acting individually, as his or her true and lawful attorneys-in-fact and agents, with full power of substitution and resubstitution, to execute for him or her and in his or her name, place and stead, in any and all capacities, any and all amendments to this annual report on Form 10-K, and to file the same, with all exhibits thereto and any other documents required in connection therewith with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents and their substitutes, and each of them, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully as he or she might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or any of them, or their or his or her substitutes, may lawfully do or cause to be done by virtue hereof.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
Signature
Title
Date
/s/ Margaret M. Keane
Principal Executive Officer
Director
February 25, 2016
Margaret M. Keane
Director, President and Chief Executive Officer
/s/ Brian D. Doubles
Principal Financial Officer
February 25, 2016
Brian D. Doubles
Executive Vice President and Chief Financial Officer
(Duly Authorized Officer and Principal Financial Officer)
/s/ David P. Melito
Principal Accounting Officer
February 25, 2016
David P. Melito
Senior Vice President and Controller
/s/ Paget L. Alves
Director
February 25, 2016
Paget L. Alves
/s/ Arthur W. Coviello, Jr.
Director
February 25, 2016
Arthur W. Coviello, Jr.
/s/ William W. Graylin
Director
February 25, 2016
William W. Graylin
/s/ Roy A. Guthrie
Director
February 25, 2016
Roy A. Guthrie
/s/ Richard C. Hartnack
Director
February 25, 2016
Richard C. Hartnack
/s/ Jeffrey G. Naylor
Director
February 25, 2016
Jeffrey G. Naylor
/s/ Laurel J. Richie
Director
February 25, 2016
Laurel J. Richie
/s/ Olympia J. Snowe
Director
February 25, 2016
Olympia J. Snowe
EXHIBIT INDEX
Exhibit Number
Description
3.1
Amended and Restated Certificate of Incorporation of Synchrony Financial (incorporated by reference to Exhibit 3.2 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
3.2
Amended and Restated Bylaws of Synchrony Financial (incorporated by reference to Exhibit 3.1 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
4.1
Indenture, dated as of August 11, 2014, between Synchrony Financial and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 of Form 8-K filed by Synchrony Financial on August 13, 2014)
4.2
First Supplemental Indenture, dated as of August 11, 2014, between Synchrony Financial and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.2 of Form 8-K filed by Synchrony Financial on August 13, 2014)
4.3
Second Supplemental Indenture, dated as of February 2, 2015, between Synchrony Financial and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 of Form 8-K filed by Synchrony Financial on February 2, 2015)
4.4
Third Supplemental Indenture, dated as of July 23, 2015, between Synchrony Financial and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 of Form 8-K filed by Synchrony Financial on July 23, 2015)
4.5
Fourth Supplemental Indenture, dated as of December 4, 2015, between Synchrony Financial and The Bank of New York Mellon, as Trustee (incorporated by reference to Exhibit 4.1 of Form 8-K filed by Synchrony Financial on December 4, 2015)
4.6
Form of 2.700% Senior Notes due 2020 (incorporated by reference to Exhibit 4.2 of Form 8-K filed by Synchrony Financial on February 2, 2015)
4.7
Form of Floating Rate Senior Notes due 2020 (incorporated by reference to Exhibit 4.3 of Form 8-K filed by Synchrony Financial on February 2, 2015)
4.8
Form of 4.500% Senior Notes due 2025 (incorporated by reference to Exhibit 4.2 of Form 8-K filed by Synchrony Financial on July 23, 2015)
4.9
Form of 2.600% Senior Notes due 2019 (incorporated by reference to Exhibit 4.2 of Form 8-K filed by Synchrony Financial on December 4, 2015)
4.10
Specimen Common Stock Certificate (incorporated by reference to Exhibit 4.1 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.1
Master Agreement, dated as of July 30, 2014, among General Electric Capital Corporation, Synchrony Financial, and, solely for purposes of certain sections and articles set forth therein, General Electric Company (incorporated by reference to Exhibit 10.1 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.2
Transitional Services Agreement, dated August 5, 2014, by and among General Electric Capital Corporation, Synchrony Financial and Retail Finance International Holdings, Inc. (incorporated by reference to Exhibit 10.1 of Form 8-K filed by Synchrony Financial on August 11, 2014)
10.3
Registration Rights Agreement, dated as of August 5, 2014, by and between Synchrony Financial and General Electric Capital Corporation (incorporated by reference to Exhibit 10.2 of Form 8-K filed by Synchrony Financial on August 11, 2014)
10.4
Tax Sharing and Separation Agreement, dated as of August 5, 2014, by and between General Electric Company and Synchrony Financial (incorporated by reference to Exhibit 10.3 of Form 8-K filed by Synchrony Financial on August 11, 2014)
10.5
Employee Matters Agreement, dated as of August 5, 2014, by and among General Electric Company, General Electric Capital Corporation and Synchrony Financial (incorporated by reference to Exhibit 10.4 of Form 8-K filed by Synchrony Financial on August 11, 2014)
10.6
Transitional Trademark License Agreement, dated as of August 5, 2014, by and between GE Capital Registry, Inc. and Synchrony Financial (incorporated by reference to Exhibit 10.5 of Form 8-K filed by Synchrony Financial on August 11, 2014)
10.7
Intellectual Property Cross License Agreement, dated as of August 5, 2014, by and between General Electric Company and General Electric Capital Corporation, on the one hand, and Synchrony Financial, on the other hand (incorporated by reference to Exhibit 10.6 of Form 8-K filed by Synchrony Financial on August 11, 2014)
10.8
Credit Agreement, dated as of July 30, 2014, among Synchrony Financial, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the other Lenders party thereto (incorporated by reference to Exhibit 1.1 of Amendment No. 8 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.9
Credit Agreement, dated as of July 30, 2014, among Synchrony Financial, as borrower, General Electric Capital Corporation, as administrative agent, and the other Lenders party thereto (incorporated by reference to Exhibit 10.9 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.10
Amendment No. 1 to Credit Agreement, dated October 1, 2014, by and among Synchrony Financial and General Electric Capital Corporation (incorporated by reference to Exhibit 10.1 to Form 8-K filed by Synchrony Financial on October 6, 2014)
10.11
Amendment No. 1 to Credit Agreement, dated October 1, 2014, by and among Synchrony Financial, the Lenders party thereto and JP Morgan Chase Bank, N.A. (incorporated by reference to Exhibit 10.2 to Form 8-K filed by Synchrony Financial on October 6, 2014)
10.12
Form of Synchrony 2014 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.10 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.13
Form of agreement for awards under Synchrony 2014 Long-Term Incentive Plan (incorporated by reference to Exhibit 10.11 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.14
Form of Transaction Award Agreement, by and between GE Capital Retail Bank/GE Capital Retail Finance, Inc. and each of Margaret M. Keane, Brian D. Doubles, Jonathan S. Mothner, Thomas M. Quindlen and Glenn P. Marino (incorporated by reference to Exhibit 10.12 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.15
Operating Agreement, dated as of January 11, 2013, between GE Capital Retail Bank and the Office of the Comptroller of the Currency (incorporated by reference to Exhibit 10.13 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.16
Capital Assurance and Liquidity Maintenance Agreement, dated as of January 11, 2013, among GE Capital Retail Bank, General Electric Capital Corporation and GE Consumer Finance, Inc. (incorporated by reference to Exhibit 10.14 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.17
Master Indenture, dated as of September 25, 2003, between Synchrony Credit Card Master Note Trust (formerly known as GE Capital Credit Card Master Note Trust), as Issuer and Deutsche Bank Trust Company Americas, as Indenture Trustee (incorporated by reference to Exhibit 4.1 of Amendment No. 1 to Form S-3 Registration Statement filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 20, 2004 (No. 333-107495, 333-107495-01 and 333-107495-02))
10.18
Omnibus Amendment No. 1 to Securitization Documents, dated as of February 9, 2004, among RFS Holding, L.L.C., RFS Funding Trust, GE Capital Retail Bank (formerly known as Monogram Credit Card Bank of Georgia), Synchrony Credit Card Master Note Trust, Deutsche Bank Trust Company Delaware, as Trustee of RFS Funding Trust, RFS Holding, Inc. and Deutsche Bank Trust Company Americas, as Indenture Trustee (incorporated by reference to Exhibit 4.16 of Amendment No. 1 to Form S-3 Registration Statement filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 20, 2004 (No. 333-107495, 333-107495-01 and 333-107495-02))
10.19
Second Amendment to Master Indenture, dated as of June 17, 2004, between Synchrony Credit Card Master Note Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.4 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on July 2, 2004)
10.20
Third Amendment to Master Indenture, dated as of August 31, 2006, between Synchrony Credit Card Master Note Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on September 5, 2006)
10.21
Fourth Amendment to Master Indenture, dated as of June 28, 2007, between Synchrony Credit Card Master Note Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on July 3, 2007)
10.22
Fifth Amendment to Master Indenture, dated as of May 22, 2008, between Synchrony Credit Card Master Note Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 28, 2008)
10.23
Sixth Amendment to Master Indenture, dated as of August 7, 2009, between Synchrony Credit Card Master Note Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on August 7, 2009)
10.24
Seventh Amendment to Master Indenture, dated as of January 21, 2014, between Synchrony Credit Card Master Note Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on January 21, 2014)
10.25
Eighth Amendment to Master Indenture and Omnibus Supplement to Specified Indenture Supplements, dated as of March 11, 2014, between Synchrony Credit Card Master Note Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on March 14, 2014)
10.26
Ninth Amendment to Master Indenture, dated as of November 24, 2015, between Synchrony Credit Card Master Note Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on November 25, 2015)
10.27
Form of Indenture Supplement, between Synchrony Credit Card Master Note Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 4.8 of Form S-3 Registration Statement filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 16, 2012 (333-181466))
10.28
Form of VFN Indenture Supplement, between Synchrony Credit Card Master Note Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.24 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.29
Form of Loan Agreement (VFN Series, Class A), among Synchrony Credit Card Master Note Trust, the Lenders party thereto from time to time, and the Managing Agents party thereto from time to time (incorporated by reference to Exhibit 10.25 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.30
Trust Agreement, dated as of September 25, 2003, between RFS Holding, L.L.C. and The Bank of New York (Delaware) (incorporated by reference to Exhibit 4.3 of Amendment No. 1 to Form S-3 Registration Statement filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 20, 2004 (No. 333-107495, 333-107495-01 and 333-107495-02))
10.31
First Amendment to Trust Agreement, dated as of January 21, 2014, between RFS Holding, L.L.C. and BNY Mellon Trust of Delaware (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Master Note Trust and RFS Holding, L.L.C. on January 21, 2014)
10.32
Second Amendment to Trust Agreement, dated as of September 8, 2014, between RFS Holding, L.L.C. and BNY Mellon Trust of Delaware (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Master Note Trust and RFS Holding, L.L.C. on September 11, 2014)
10.33
Custody and Control Agreement, dated as of September 25, 2003 by and among Deutsche Bank Trust Company of Americas, in its capacity as Custodian and in its capacity as Indenture Trustee, and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.8 of Amendment No. 1 to Form S-3 Registration Statement filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 20, 2004 (No. 333-107495, 333-107495-01 and 333-107495-02))
10.34
Receivables Sale Agreement, dated as of June 27, 2003, between GE Capital Retail Bank (formerly known as Monogram Credit Card Bank of Georgia) and RFS Holding, L.L.C. (incorporated by reference to Exhibit 4.9 of Amendment No. 1 to Form S-3 Registration Statement filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 20, 2004 (No. 333-107495, 333-107495-01 and 333-107495-02))
10.35
RSA Assumption Agreement and Second Amendment to Receivables Sale Agreement, dated as of February 7, 2005, between GE Capital Retail Bank (formerly known as GE Money Bank) and RFS Holding, L.L.C. (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on February 11, 2005)
10.36
Third Amendment to Receivables Sale Agreement, dated as of December 21, 2006, between GE Capital Retail Bank (formerly known as GE Money Bank) and RFS Holding, L.L.C. (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on December 21, 2006)
10.37
Fourth Amendment to Receivables Sale Agreement, dated as of May 21, 2008, between GE Capital Retail Bank (formerly known as GE Money Bank) and RFS Holding, L.L.C. (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 28, 2008)
10.38
Designation of Removed Accounts and Fifth Amendment to Receivables Sale Agreement, dated as of December 29, 2008, between GE Capital Retail Bank (formerly known as GE Money Bank) and RFS Holding, L.L.C. (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on December 30, 2008)
10.39
Designation of Removed Accounts and Sixth Amendment to Receivables Sale Agreement, dated as of February 26, 2009, between GE Capital Retail Bank (formerly known as GE Money Bank) and RFS Holding, L.L.C. (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on February 26, 2009)
10.40
Seventh Amendment to Receivables Sale Agreement, dated as of November 23, 2010, between GE Capital Retail Bank (formerly known as GE Money Bank), and RFS Holding, L.L.C. (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on November 24, 2010)
10.41
Eighth Amendment to Receivables Sale Agreement, dated as of March 20, 2012, among GE Capital Retail Bank, RFS Holding, Inc., PLT Holding, L.L.C. and RFS Holding, L.L.C. (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on March 21, 2012)
10.42
Ninth Amendment to Receivables Sale Agreement, dated as of March 11, 2014, among GE Capital Retail Bank, RFS Holding, Inc., PLT Holding, L.L.C. and RFS Holding, L.L.C. (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on March 14, 2014)
10.43
Designation of Removed Accounts and Tenth Amendment to Receivables Sale Agreement, dated as of November 7, 2014, among Synchrony Bank (formerly known as GE Capital Retail Bank), RFS Holding Inc., PLT Holding, L.L.C. and RFS Holding, L.L.C. (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on November 14, 2014)
10.44
Transfer Agreement, dated as of September 25, 2003, between RFS Holding, L.L.C. and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.12 of Amendment No. 1 to Form S-3 Registration Statement filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 20, 2004 (No. 333-107495, 333-107495-01 and 333-107495-02))
10.45
Second Amendment to Transfer Agreement, dated as of June 17, 2004, between RFS Holding, L.L.C. and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.3 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on July 2, 2004)
10.46
Third Amendment to Transfer Agreement, dated as of November 21, 2004, between RFS Holding, L.L.C. and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on November 24, 2004)
10.47
Fourth Amendment to Transfer Agreement, dated as of August 31, 2006, between RFS Holding, L.L.C. and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on September 5, 2006)
10.48
Fifth Amendment to Transfer Agreement, dated as of December 21, 2006, between RFS Holding, L.L.C. and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on December 21, 2006)
10.49
Sixth Amendment to Transfer Agreement, dated as of May 21, 2008, between RFS Holding, L.L.C. and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.4 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 28, 2008)
10.50
Reassignment of Receivables in Removed Accounts and Seventh Amendment to Transfer Agreement, dated as of December 29, 2008, between RFS Holding, L.L.C. and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on December 30, 2008)
10.51
Reassignment No. 4 of Receivables in Removed Accounts and Eighth Amendment to Transfer Agreement, dated as of February 26, 2009, between RFS Holding, L.L.C. and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on February 26, 2009)
10.52
Ninth Amendment to Transfer Agreement, dated as of March 31, 2010, between RFS Holding, L.L.C. and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on March 31, 2010)
10.53
Tenth Amendment to Transfer Agreement, dated as of March 20, 2012, between RFS Holding, L.L.C. and Synchrony Credit Card Master Note Trust (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on March 21, 2012)
10.54
Servicing Agreement, dated as of June 27, 2003, by and among RFS Funding Trust Synchrony Credit Card Master Note Trust and General Electric Capital Corporation, successor to GE Capital Retail Bank (formerly known as Monogram Credit Card Bank of Georgia) (incorporated by reference to Exhibit 4.13 of Amendment No. 1 to Form S-3 Registration Statement filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 20, 2004 (No. 333-107495, 333-107495-01 and 333-107495-02))
10.55
Servicing Assumption Agreement, dated as of February 7, 2005, by GE Capital Retail Bank (formerly known as GE Money Bank) (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on February 11, 2005)
10.56
First Amendment to Servicing Agreement, dated as of May 22, 2006, between Synchrony Credit Card Master Note Trust and GE Capital Retail Bank (formerly known as GE Money Bank) (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 25, 2006)
10.57
Second Amendment to Servicing Agreement, dated as of June 28, 2007, between Synchrony Credit Card Master Note Trust and GE Capital Retail Bank (formerly known as GE Money Bank) (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on June 28, 2007)
10.58
Instrument of Resignation, Appointment and Acceptance and Third Amendment to Servicing Agreement, dated as of May 22, 2008, by and among Synchrony Credit Card Master Note Trust, GE Capital Retail Bank (formerly known as GE Money Bank) and General Electric Capital Corporation (incorporated by reference to Exhibit 4.3 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 28, 2008)
10.59
Fourth Amendment to Servicing Agreement, dated as of July 16, 2014, between Synchrony Credit Card Master Note Trust and General Electric Capital Corporation (incorporated by reference to Exhibit 4.14 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on July 16, 2014)
10.60
Fifth Amendment to Servicing Agreement, dated as of November 24, 2015, between Synchrony Credit Card Master Note Trust and General Electric Capital Corporation (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on November 25, 2015)
10.61
Instrument of Resignation, Appointment and Acceptance, dated as of December 2, 2015, by and among Synchrony Credit Card Master Note Trust, General Electric Capital LLC and Synchrony Financial (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on December 4, 2015)
10.62
Servicer Performance Guaranty, dated as of December 2, 2015, between General Electric Capital LLC and Synchrony Financial (incorporated by reference to Exhibit 4.2 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on December 4, 2015)
10.63
Administration Agreement, dated as of September 25, 2003, among Synchrony Credit Card Master Note Trust, General Electric Capital Corporation, as Administrator, and The Bank of New York (Delaware), not in its individual capacity but solely as Trustee (incorporated by reference to Exhibit 4.14 of Amendment No. 1 to Form S-3 Registration Statement filed on May 20, 2004 (No. 333-107495, 333-107495-01 and 333-107495-02))
10.64
First Amendment to Administration Agreement, dated as of May 4, 2009, between Synchrony Credit Card Master Note Trust and General Electric Capital Corporation (incorporated by reference to Exhibit 4.1 of the current report on Form 8-K filed by Synchrony Credit Card Master Note Trust and RFS Holding, L.L.C. on May 6, 2009)
10.65
Master Indenture, dated as of February 29, 2012, between GE Sales Finance Master Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.55 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.66
Supplement No. 1 to Master Indenture, dated as of September 19, 2012, between GE Sales Finance Master Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.56 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.67
Supplement No. 2 to Master Indenture, dated as of March 21, 2014, between GE Sales Finance Master Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.57 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.68
Form of Indenture Supplement, between GE Sales Finance Master Trust and Deutsche Bank Trust Company Americas (incorporated by reference to Exhibit 10.58 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.69
Form of Loan Agreement, among GE Sales Finance Master Trust, the Lenders party thereto from time to time, and the Lender Group Agents for the Lender Groups party thereto from time to time (incorporated by reference to Exhibit 10.59 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.70
Amended and Restated Trust Agreement of GE Sales Finance Master Trust, dated as of February 29, 2012, between GE Sales Finance Holding, L.L.C. and BNY Mellon Trust of Delaware (incorporated by reference to Exhibit 10.60 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.71
Amended and Restated Receivables Participation Agreement, dated as of February 29, 2012, between GE Capital Retail Bank and GEMB Lending Inc. (incorporated by reference to Exhibit 10.61 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.72
First Amendment to Amended and Restated Receivables Participation Agreement, dated as of August 17, 2012, between GE Capital Retail Bank and GEMB Lending Inc. (incorporated by reference to Exhibit 10.62 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.73
Second Amendment to Amended and Restated Receivables Participation Agreement, dated as of August 5, 2013, between GE Capital Retail Bank and GEMB Lending Inc. (incorporated by reference to Exhibit 10.63 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.74
Participation Interest Sale Agreement, dated as of February 29, 2012, between GEMB Lending Inc. and GE Sales Finance Holding, L.L.C. (incorporated by reference to Exhibit 10.64 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.75
First Amendment to Participation Interest Sale Agreement, dated as of September 19, 2012, between GEMB Lending Inc. and GE Sales Finance Holding, L.L.C. (incorporated by reference to Exhibit 10.65 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.76
Second Amendment to Participation Interest Sale Agreement, dated as of March 21, 2014, between GEMB Lending Inc. and GE Sales Finance Holding, L.L.C. (incorporated by reference to Exhibit 10.66 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.77
Transfer Agreement, dated as of February 29, 2012, between GE Sales Finance Holding, L.L.C. and GE Sales Finance Master Trust (incorporated by reference to Exhibit 10.67 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.78
First Amendment to Transfer Agreement, dated as of September 19, 2012, between GE Sales Finance Holding, L.L.C. and GE Sales Finance Master Trust (incorporated by reference to Exhibit 10.68 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.79†
Second Amendment to Transfer Agreement, dated as of March 21, 2014, between GE Sales Finance Holding, L.L.C. and GE Sales Finance Master Trust (incorporated by reference to Exhibit 10.69 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.80†
Servicing Agreement, dated as of February 29, 2012, between GE Capital Retail Bank and GE Sales Finance Master Trust (incorporated by reference to Exhibit 10.70 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.81
Administration Agreement, dated as of February 29, 2012, between GE Sales Finance Master Trust and GE Capital Retail Bank (incorporated by reference to Exhibit 10.71 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on April 25, 2014 (No. 333-194528))
10.82
First Amended and Restated Technology Sourcing Agreement, dated as of December 10, 1998, between Retailer Credit Services, Inc. and First Data Resources, Inc., as amended (incorporated by reference to Exhibit 10.72 of Amendment No. 4 to Form S-1 Registration Statement filed by Synchrony Financial on June 27, 2014 (No. 333-194528))
10.83
First Amended and Restated Production Services Agreement, dated as of December 1, 2009, by and between Retailer Credit Services, Inc. and First Data Resources, LLC, as amended (incorporated by reference to Exhibit 10.73 of Amendment No. 4 to Form S-1 Registration Statement filed by Synchrony Financial on June 27, 2014 (No. 333-194528))
10.84
Stock Contribution Agreement, dated as of April 1, 2013, between GE Capital Retail Finance Corporation and GE Consumer Finance, Inc. (incorporated by reference to Exhibit 10.74 of Amendment No. 3 to Form S-1 Registration Statement filed by Synchrony Financial on June 6, 2014 (No. 333-194528))
10.85
Stock Contribution Agreement, dated as of August 5, 2013, between GE Capital Retail Finance Corporation and General Electric Capital Corporation (incorporated by reference to Exhibit 10.75 of Amendment No. 3 to Form S-1 Registration Statement filed by Synchrony Financial on June 6, 2014 (No. 333-194528))
10.86
General Electric Company 2007 Long-Term Incentive Plan (as amended and restated April 25, 2012) (incorporated by reference to Exhibit 99.1 of the Registration Statement on Form S-8 filed by General Electric Company on May 4, 2012 (No. 333-181177))
10.87
Form of Agreement for Stock Option Grants to Executive Officers under the General Electric Company 2007 Long-term Incentive Plan, as amended January 1, 2009 (incorporated by reference to Exhibit 10(n) of the annual report on Form 10-K filed by General Electric Company on February 18, 2009)
10.88
Form of Agreement for Periodic Restricted Stock Unit Grants to Executive Officers under the General Electric Company 2007 Long-term Incentive Plan (incorporated by reference to Exhibit 10.4 of the current report on Form 8-K filed by General Electric Company on April 27, 2007)
10.89
Form of Agreement for Long Term Performance Award Grants to Executive Officers under the General Electric Company 2007 Long-term Incentive Plan (as amended and restated April 25, 2012) (incorporated by reference to Exhibit 10(a) of the quarterly report on Form 10-Q filed by General Electric Company on July 26, 2013)
10.90
General Electric Supplementary Pension Plan, as amended effective January 1, 2011 (incorporated by reference to Exhibit 10(g) of the annual report on Form 10-K filed by General Electric Company on February 25, 2011)
10.91
GE Excess Benefits Plan, effective January 1, 2009 (incorporated by reference to Exhibit 10(k) to the annual report on Form 10-K filed by General Electric Company on February 18, 2009)
10.92
General Electric Leadership Life Insurance Program, effective January 1, 1994 (incorporated by reference to Exhibit 10(r) to the annual report on Form 10-K filed by General Electric Company on March 11, 1994)
10.93
General Electric Supplemental Life Insurance Program, as amended February 8, 1991 (incorporated by reference to Exhibit 10(i) to the annual report on Form 10-K filed by General Electric Company for the fiscal year ended December 31, 1990)
10.94
General Electric 2006 Executive Deferred Salary Plan, as amended January 1, 2009 (incorporated by reference to Exhibit 10(l) to the annual report on Form 10-K filed by General Electric Company on February 18, 2009)
10.95
Amendment to Nonqualified Deferred Compensation Plans, dated as of December 14, 2004 (incorporated by reference to Exhibit 10(w) to the annual report on Form 10-K filed by General Electric Company on March 1, 2005)
10.96
General Electric Financial Planning Program, as amended through September 1993 (incorporated by reference to Exhibit 10(h) to the annual report on Form 10-K filed by General Electric Company on March 11, 1994)
10.97
GE Capital Executive Incentive Compensation Plan (incorporated by reference to Exhibit 10.87 of Amendment No. 4 to Form S-1 Registration Statement filed by Synchrony Financial on June 27, 2014 (No. 333-194528))
10.98
Assumption Agreement, dated as of June 20, 2014, by and between General Electric Capital Corporation and Synchrony Financial (incorporated by reference to Exhibit 10.88 of Amendment No. 4 to Form S-1 Registration Statement filed by Synchrony Financial on June 27, 2014 (No. 333-194528))
10.99
Form of Indemnification Agreement for directors, executive officers and key employees (incorporated by reference to Exhibit 10.89 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.100
Sub-Servicing Agreement, dated as of July 30, 2014, between Synchrony Financial and General Electric Capital Corporation (incorporated by reference to Exhibit 10.90 of Amendment No. 1 to Form S-1 Registration Statement filed by Synchrony Financial on August 1, 2014 (333-197244))
10.101
Synchrony Financial Non-Employee Director Deferred Compensation Plan (incorporated by reference to Exhibit 10.91 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 33-194528))
10.102
Revolving Credit Agreement, dated as of March 29, 1996, between GE Capital Consumer Card Co. (Macy’s) and General Electric Capital Corporation (incorporated by reference to Exhibit 10.93 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.103
Revolving Credit Agreement, dated as of March 29, 1996, between GE Capital Consumer Card Co. and General Electric Capital Corporation (incorporated by reference to Exhibit 10.94 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.104
Revolving Credit Agreement, dated as of March 29, 1996, between GE Capital Consumer Card Co. (Macy’s) and GECFS, Inc. (Macy’s) (incorporated by reference to Exhibit 10.95 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.105
Revolving Credit Agreement, dated as of March 29, 1996, between GE Capital Consumer Card Co. and GECFS, Inc. (Card Services) (incorporated by reference to Exhibit 10.96 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.106
Amendment No. 1 to Revolving Credit Agreement, dated as of October 6, 1997, between GE Capital Consumer Card Co. and GECFS, Inc. (Card Services) (incorporated by reference to Exhibit 10.97 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.107
Revolving Credit Agreement, dated as of May 1996, between Monogram Credit Card Bank of Georgia and General Electric Capital Corporation (incorporated by reference to Exhibit 10.98 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.108
Amendment No. 1 to Revolving Credit Agreement, dated as of April 18, 2003, between Monogram Credit Card Bank of Georgia and General Electric Capital Corporation (incorporated by reference to Exhibit 10.99 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.109
Amendment to Revolving Credit Agreements, dated as of October 1, 2008, between GE Money Bank and General Electric Capital Corporation (incorporated by reference to Exhibit 10.100 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.110
Amendment to Revolving Credit Agreements, dated as of June 13, 2012, between GE Capital Retail Bank and General Electric Capital Corporation (incorporated by reference to Exhibit 10.101 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.111
Letter, dated as of March 20, 2013, from General Electric Capital Corporation to GE Capital Retail Bank relating to revolving credit agreements (incorporated by reference to Exhibit 10.102 of Amendment No. 5 to Form S-1 Registration Statement filed by Synchrony Financial on July 18, 2014 (No. 333-194528))
10.112
Form of Synchrony Financial Deferred Compensation Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed by Synchrony Financial on September 22, 2014)
10.113
First Amendment to the Synchrony Financial Deferred Compensation Plan (incorporated by reference to Exhibit 10.109 to 2014 Annual Report on Form 10-K filed by Synchrony Financial on February 23, 2015)
10.114
Form of Restricted Stock Unit and Non-Qualified Stock Option Award (incorporated by reference to Exhibit 10.2 to Form 8-K filed by Synchrony Financial on September 22, 2014)
10.115
Form of Synchrony Financial Annual Incentive Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed by Synchrony Financial on December 12, 2014)
10.116
Form of Synchrony Financial Restoration Plan (incorporated by reference to Exhibit 10.1 to Form 8-K filed by Synchrony Financial on May 27, 2015)
10.117
Synchrony Financial Executive Severance Plan (incorporated by reference to Exhibit 10.2 to Form 8-K filed by Synchrony Financial on May 27, 2015)
10.118*
First Amendment to the Synchrony Financial Restoration Plan
10.119*
Second Amendment to the Synchrony Financial Restoration Plan
10.120
Form of Synchrony Financial Change in Control Severance Plan (incorporated by reference to Exhibit 10.3 to Form 8-K filed by Synchrony Financial on May 27, 2015)
10.121
Services Agreement, dated as of September 15, 2015, between Retail Finance Servicing, LLC and First Data Resources, LLC (incorporated by reference to Exhibit 10.1 to Form 8-K filed by Synchrony Financial on September 15, 2015)†
10.122
Letter, dated as of October 19, 2015, delivered by General Electric Capital Corporation and acknowledged and agreed to by General Electric Company and Synchrony Financial(incorporated by reference to Exhibit 10.116 of Form S-4 Registration Statement filed by Synchrony Financial on October 16, 2015 (No. 333-207479))
12.1*
Statement of Ratio of Earnings to Fixed Charges
21.1
Subsidiaries of the Registrant (incorporated by reference to Exhibit 21.1 to 2014 Annual Report on Form 10-K filed by Synchrony Financial on February 23, 2015)
23.1*
Consent of KPMG LLP
24.1*
Powers of Attorney (included on the signature page)
31(a)*
Certification Pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended
31(b)*
Certification Pursuant to Rules 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended
32*
Certification Pursuant to 18 U.S.C. Section 1350
The following materials from Synchrony Financial’s Annual Report on Form 10-K for the year ended December 31, 2015, formatted in XBRL (eXtensible Business Reporting Language); (i) Consolidated and Combined Statements of Earnings for the years ended December 31, 2015, 2014 and 2013, (ii) Consolidated and Combined Statements of Comprehensive Income for the years ended December 31, 2015, 2014 and 2013, (iii) Consolidated and Combined Statements of Financial Position at December 31, 2015 and 2014, (iv) Consolidated and Combined Statements of Changes in Equity for the years ended December 31, 2015, 2014 and 2013, (v) Consolidated and Combined Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013, and (vi) Notes to Consolidated and Combined Financial Statements
______________________
*
Filed electronically herewith.
†
Confidential treatment granted to certain portions, which portions have been provided separately to the Securities and Exchange Commission.

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Stock Performance Metrics:
Return: 0.001803142600692809
1-Day Return: $1_day_return
3-Day Return: $3_day_return
5-Day Return: $5_day_return
10-Day Return: $10_day_return
20-Day Return: $20_day_return
40-Day Return: $40_day_return
60-Day Return: $60_day_return
80-Day Return: $80_day_return
100-Day Return: $100_day_return
150-Day Return: $150_day_return
252-Day Return: $252_day_return