Synchrony Financial - Quarter Report: 2018 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2018

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

001-36560

(Commission File Number)

SYNCHRONY FINANCIAL

(Exact name of registrant as specified in its charter)



Delaware		51-0483352
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)



777 Long Ridge Road
Stamford, Connecticut		06902
(Address of principal executive offices)		(Zip Code)

(Registrant’s telephone number, including area code) (203) 585-2400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No ¨

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ý No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.



Large accelerated filer	ý	Accelerated filer	o

Non-accelerated filer	o	Smaller reporting company	o

		Emerging growth company	o

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No ý

The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of October 22, 2018 was 718,731,714.

Synchrony Financial



PART I - FINANCIAL INFORMATION	Page
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations	6

Item 1. Financial Statements:

Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2018 and 2017	33

Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017	34

Condensed Consolidated Statements of Financial Position at September 30, 2018 and at December 31, 2017	35

Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2018 and 2017	36

Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017	37

Notes to Condensed Consolidated Financial Statements	38

Item 3. Quantitative and Qualitative Disclosures About Market Risk	59

Item 4. Controls and Procedures	59

PART II - OTHER INFORMATION

Item 1. Legal Proceedings	60
Item 1A. Risk Factors	60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	60
Item 3. Defaults Upon Senior Securities	60
Item 4. Mine Safety Disclosures	60
Item 5. Other Information	60
Item 6. Exhibits	61
Signatures	62

Certain Defined Terms

Except as the context may otherwise require in this report, references to:


•	“we,” “us,” “our” and the “Company” are to SYNCHRONY FINANCIAL and its subsidiaries;


•	“Synchrony” are to SYNCHRONY FINANCIAL only;


•	“GE” are to General Electric Company and its subsidiaries;


•	the “Bank” are to Synchrony Bank (a subsidiary of Synchrony);


•	the “Board of Directors” are to Synchrony's board of directors;


•	the “Tax Act” are to P.L. 115-97, commonly referred to as the Tax Cuts and Jobs Act, signed into law on December 22, 2017;


•	“Separation” are to Synchrony's separation from GE in November 2015 when Synchrony became a stand-alone savings and loan holding company following the completion of GE's exchange offer, in which GE exchanged shares of GE common stock for all the remaining shares of our common stock it owned; and


•	“FICO” are to a credit score developed by Fair Isaac & Co., which is widely used as a means of evaluating the likelihood that credit users will pay their obligations.

We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which, in our business and in this report, we refer to as our “partners.” The terms of the programs all require cooperative efforts between us and our partners of varying natures and degrees to establish and operate the programs. Our use of the term “partners” to refer to these entities is not intended to, and does not, describe our legal relationship with them, imply that a legal partnership or other relationship exists between the parties or create any legal partnership or other relationship. The “average length of our relationship” with respect to a specified group of partners or programs is measured on a weighted average basis by interest and fees on loans for the year ended December 31, 2017 for those partners or for all partners participating in a program, based on the date each partner relationship or program, as applicable, started.

Unless otherwise indicated, references to “loan receivables” do not include loan receivables held for sale.

For a description of certain other terms we use, including “active account” and “purchase volume,” see the notes to “Item 7. Management’s Discussion and Analysis—Results of Operations—Other Financial and Statistical Data” in our Annual Report on Form 10-K for the year ended December 31, 2017 (our “2017 Form 10-K”). There is no standard industry definition for many of these terms, and other companies may define them differently than we do.

“Synchrony” and its logos and other trademarks referred to in this report, including CareCredit®, Quickscreen®, Dual Card™, Synchrony Car Care™ and SyPI™, belong to us. Solely for convenience, we refer to our trademarks in this report without the ™ and ® symbols, but such references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights to our trademarks. Other service marks, trademarks and trade names referred to in this report are the property of their respective owners.

On our website at www.synchronyfinancial.com, we make available under the "Investors-SEC Filings" menu selection, free of charge, our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to these reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after such reports or amendments are electronically filed with, or furnished to, the SEC. The SEC maintains an Internet site at www.sec.gov that contains reports, proxy and information statements, and other information that we file electronically with the SEC.

Cautionary Note Regarding Forward-Looking Statements:

Various statements in this Quarterly Report on Form 10-Q may contain “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “targets,” “outlook,” “future,” “estimates,” “will,” “should,” “may” or words of similar meaning, but these words are not the exclusive means of identifying forward-looking statements.

Forward-looking statements are based on management’s current expectations and assumptions, and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, actual results could differ materially from those indicated in these forward-looking statements. Factors that could cause actual results to differ materially include global political, economic, business, competitive, market, regulatory and other factors and risks, such as: the impact of macroeconomic conditions and whether industry trends we have identified develop as anticipated; retaining existing partners and attracting new partners, concentration of our revenue in a small number of Retail Card partners, promotion and support of our products by our partners, and financial performance of our partners; cyber-attacks or other security breaches; higher borrowing costs and adverse financial market conditions impacting our funding and liquidity, and any reduction in our credit ratings; our ability to grow our deposits in the future; our ability to securitize our loan receivables, occurrence of an early amortization of our securitization facilities, loss of the right to service or subservice our securitized loan receivables, and lower payment rates on our securitized loan receivables; changes in market interest rates and the impact of any margin compression; effectiveness of our risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, our ability to manage our credit risk, the sufficiency of our allowance for loan losses and the accuracy of the assumptions or estimates used in preparing our financial statements; our ability to offset increases in our costs in retailer share arrangements; competition in the consumer finance industry; our concentration in the U.S. consumer credit market; our ability to successfully develop and commercialize new or enhanced products and services; our ability to realize the value of acquisitions and strategic investments; our ability to realize the benefits of and expected capital available from strategic options; reductions in interchange fees; fraudulent activity; failure of third-parties to provide various services that are important to our operations; disruptions in the operations of our computer systems and data centers; international risks and compliance and regulatory risks and costs associated with international operations; alleged infringement of intellectual property rights of others and our ability to protect our intellectual property; litigation and regulatory actions; damage to our reputation; our ability to attract, retain and motivate key officers and employees; tax legislation initiatives or challenges to our tax positions and/or interpretations and state sales tax rules and regulations; a material indemnification obligation to GE under the Tax Sharing and Separation Agreement with GE if we cause the split-off from GE or certain preliminary transactions to fail to qualify for tax-free treatment or in the case of certain significant transfers of our stock following the split-off; regulation, supervision, examination and enforcement of our business by governmental authorities, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and the impact of the Consumer Financial Protection Bureau's (the “CFPB”) regulation of our business; impact of capital adequacy rules and liquidity requirements; restrictions that limit our ability to pay dividends and repurchase our common stock and restrictions that limit the Bank’s ability to pay dividends to us; regulations relating to privacy, information security and data protection; use of third-party vendors and ongoing third-party business relationships; and failure to comply with anti-money laundering and anti-terrorism financing laws.

For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included elsewhere in this report and in our public filings, including under the heading “Risk Factors” in our 2017 Form 10-K. You should not consider any list of such factors to be an exhaustive statement of all of the risks, uncertainties, or potentially inaccurate assumptions that could cause our current expectations or beliefs to change. Further, any forward-looking statement speaks only as of the date on which it is made, and we undertake no obligation to update or revise any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events, except as otherwise may be required by the federal securities laws.

PART I. FINANCIAL INFORMATION

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and related notes included elsewhere in this quarterly report and in our 2017 Form 10-K. The discussion below contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. See “Cautionary Note Regarding Forward-Looking Statements.”

Introduction and Business Overview

____________________________________________________________________________________________

We are a premier consumer financial services company delivering customized financing programs across key industries including retail, health, auto, travel and home, along with award-winning consumer banking products. We provide a range of credit products through our financing programs which we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which we refer to as our “partners.” For the three and nine months ended September 30, 2018, we financed $36.4 billion and $100.3 billion of purchase volume, respectively, and had 75.5 million and 72.6 million average active accounts, respectively, and at September 30, 2018, we had $87.5 billion of loan receivables.

We offer our credit products primarily through our wholly-owned subsidiary, the Bank. In addition, through the Bank, we offer, directly to retail and commercial customers, a range of deposit products insured by the Federal Deposit Insurance Corporation (“FDIC”), including certificates of deposit, individual retirement accounts (“IRAs”), money market accounts and savings accounts. We also take deposits at the Bank through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. We have significantly expanded our online direct banking operations in recent years and our deposit base serves as a source of stable and diversified low cost funding for our credit activities. At September 30, 2018, we had $62.3 billion in deposits, which represented 72% of our total funding sources.

Our Sales Platforms

_________________________________________________________________

We conduct our operations through a single business segment. Profitability and expenses, including funding costs, loan losses and operating expenses, are managed for the business as a whole. Substantially all of our operations are within the United States. We offer our credit products through three sales platforms (Retail Card, Payment Solutions and CareCredit). Those platforms are organized by the types of products we offer and the partners we work with, and are measured on interest and fees on loans, loan receivables, new accounts and other sales metrics.

Retail Card

Retail Card is a leading provider of private label credit cards, and also provides Dual Cards, general purpose co-branded credit cards and small- and medium-sized business credit products. We offer one or more of these products primarily through 27 national and regional retailers with which we have ongoing program agreements. The average length of our relationship with these Retail Card partners is 21 years. Retail Card’s revenue primarily consists of interest and fees on our loan receivables. Other income primarily consists of interchange fees earned when our Dual Card or general purpose co-branded credit cards are used outside of our partners' sales channels and fees paid to us by customers who purchase our debt cancellation products, less loyalty program payments. In addition, the majority of our retailer share arrangements, which generally provide for payment to our partner if the economic performance of the program exceeds a contractually-defined threshold, are with partners in the Retail Card sales platform. Substantially all of the credit extended in this platform is on standard terms.

Payment Solutions

Payment Solutions is a leading provider of promotional financing for major consumer purchases, offering primarily private label credit cards and installment loans. Payment Solutions offers these products through participating partners consisting of national and regional retailers, local merchants, manufacturers, buying groups and industry associations. Substantially all of the credit extended in this platform is promotional financing. Payment Solutions’ revenue primarily consists of interest and fees on our loan receivables, including “merchant discounts,” which are fees paid to us by our partners in almost all cases to compensate us for all or part of foregone interest income associated with promotional financing.

CareCredit

CareCredit is a leading provider of promotional financing to consumers for health and personal care procedures, products or services. We have a network of CareCredit providers and health-focused retailers, the vast majority of which are individual or small groups of independent healthcare providers, through which we offer a CareCredit branded private label credit card and our CareCredit Dual Card offering. Substantially all of the credit extended in this platform is promotional financing. CareCredit’s revenue primarily consists of interest and fees on our loan receivables, including merchant discounts.

Our Credit Products

____________________________________________________________________________________________

Through our platforms, we offer three principal types of credit products: credit cards, commercial credit products and consumer installment loans. We also offer a debt cancellation product.

The following table sets forth each credit product by type and indicates the percentage of our total loan receivables that are under standard terms only or pursuant to a promotional financing offer at September 30, 2018.



			Promotional Offer
Credit Product	Standard Terms Only		Deferred Interest		Other Promotional		Total
Credit cards	66.2	%	16.9	%	13.3	%	96.4	%
Commercial credit products	1.5		—		—		1.5
Consumer installment loans	—		—		2.0		2.0
Other	0.1		—		—		0.1
Total	67.8	%	16.9	%	15.3	%	100.0	%

Credit Cards

We typically offer the following principal types of credit cards:

•

Private Label Credit Cards. Private label credit cards are partner-branded credit cards (e.g., Lowe’s or Amazon) or program-branded credit cards (e.g., Synchrony Car Care or CareCredit) that are used primarily for the purchase of goods and services from the partner or within the program network. In addition, in some cases, cardholders may be permitted to access their credit card accounts for cash advances. In Retail Card, credit under our private label credit cards typically is extended on standard terms only, and in Payment Solutions and CareCredit, credit under our private label credit cards typically is extended pursuant to a promotional financing offer.

•

Dual Cards and General Purpose Co-Brand Cards. Our patented Dual Cards are credit cards that function as private label credit cards when used to purchase goods and services from our partners and as general purpose credit cards when used elsewhere. We also offer general purpose co-branded credit cards that do not function as private label cards. Credit extended under our Dual Cards and general purpose co-branded credit cards typically is extended under standard terms only. Dual Cards and general purpose co-branded credit cards are primarily offered through our Retail Card platform. At September 30, 2018, we offered these credit cards through 20 of our 27 ongoing Retail Card programs, of which the majority are Dual Cards.

Commercial Credit Products

We offer private label cards and Dual Cards for commercial customers that are similar to our consumer offerings. We also offer a commercial pay-in-full accounts receivable product to a wide range of business customers. We offer our commercial credit products primarily through our Retail Card platform to the commercial customers of our Retail Card partners.

Installment Loans

In Payment Solutions, we originate installment loans to consumers (and a limited number of commercial customers) in the United States, primarily in the power products market (motorcycles, ATVs and lawn and garden). Installment loans are closed-end credit accounts where the customer pays down the outstanding balance in installments. Installment loans are assessed periodic finance charges using fixed interest rates.

Business Trends and Conditions

____________________________________________________________________________________________

We believe our business and results of operations will be impacted in the future by various trends and conditions. For a discussion of certain trends and conditions, see “Management's Discussion and Analysis of Financial Condition and Results of Operations—Business Trends and Conditions” in our 2017 Form 10-K. For a discussion of how certain trends and conditions impacted the three and nine months ended September 30, 2018, see “—Results of Operations.”

On July 2, 2018, we completed our acquisition of the U.S. PayPal Credit financing program, comprising of $7.6 billion of outstanding loan receivables (the “PayPal Credit acquisition”). The new program contributed to significant increases in loan receivables, interest income and provision for loan losses for the three and nine months ended September 30, 2018. See Note 4. Loan Receivables and Allowance for Loan Losses to our condensed consolidated financial statements for further details on this acquisition.

Seasonality

____________________________________________________________________________________________

In our Retail Card and Payment Solutions platforms, we experience fluctuations in transaction volumes and the level of loan receivables as a result of higher seasonal consumer spending and payment patterns that typically result in an increase of loan receivables from August through a peak in late December, with reductions in loan receivables occurring over the first and second quarters of the following year as customers pay their balances down.

The seasonal impact to transaction volumes and the loan receivables balance typically results in fluctuations in our results of operations, delinquency metrics and the allowance for loan losses as a percentage of total loan receivables between quarterly periods.

In addition to the seasonal variance in loan receivables discussed above, we also experience a seasonal increase in delinquency rates and delinquent loan receivables balances during the third and fourth quarters of each year due to lower customer payment rates resulting in higher net charge-off rates in the first and second quarters. Our delinquency rates and delinquent loan receivables balances typically decrease during the subsequent first and second quarters as customers begin to pay down their loan balances and return to current status resulting in lower net charge-off rates in the third and fourth quarters. Because customers who were delinquent during the fourth quarter of a calendar year have a higher probability of returning to current status when compared to customers who are delinquent at the end of each of our interim reporting periods, we expect that a higher proportion of delinquent accounts outstanding at an interim period end will result in charge-offs, as compared to delinquent accounts outstanding at a year end. Consistent with this historical experience, we generally experience a higher allowance for loan losses as a percentage of total loan receivables at the end of an interim period, as compared to the end of a calendar year. In addition, despite improving credit metrics such as declining past due amounts, we may experience an increase in our allowance for loan losses at an interim period end compared to the prior year end, reflecting these same seasonal trends.

Results of Operations

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Highlights for the Three and Nine Months Ended September 30, 2018

Below are highlights of our performance for the three and nine months ended September 30, 2018 compared to the three and nine months ended September 30, 2017, as applicable, except as otherwise noted.


•	Net earnings increased 20.9% to $671 million and 29.5% to $2,007 million for the three and nine months ended September 30, 2018, respectively, driven by higher net interest income and lower provision for income taxes, partially offset by increases in provision for loan losses and other expense.


•	Loan receivables increased 13.8% to $87,521 million at September 30, 2018 compared to September 30, 2017, primarily driven by the PayPal Credit acquisition, higher purchase volume and average active account growth.


•	Net interest income increased 8.5% to $4,206 million and 6.2% to $11,785 million for the three and nine months ended September 30, 2018, respectively, primarily due to the PayPal Credit acquisition and higher average loan receivables, partially offset by increases in interest expense reflecting higher benchmark interest rates.

•

Retailer share arrangements increased 8.2% to $871 million and 4.0% to $2,244 million for the three and nine months ended September 30, 2018, primarily due to growth of the programs in which we have retailer share arrangements, including the PayPal Credit acquisition. The increases in the three and nine months ended September 30, 2018 were partially offset by the impact from the Toys "R" Us bankruptcy.


•	Over-30 day loan delinquencies as a percentage of period-end loan receivables decreased 21 basis points to 4.59% at September 30, 2018 from 4.80% at September 30, 2017, and net charge-off rate remained relatively flat at 4.97% and increased 44 basis points to 5.67% for the three and nine months ended September 30, 2018, respectively.

•

Provision for loan losses increased by $141 million, or 10.8%, and $151 million, or 3.8%, for the three and nine months ended September 30, 2018, respectively, primarily due to the reserve build for the PayPal Credit portfolio and higher net charge-offs, partially offset by a lower loan loss reserve build for our existing portfolio. Our allowance coverage ratio (allowance for loan losses as a percent of end of period loan receivables) increased to 7.11% at September 30, 2018, as compared to 6.97% at September 30, 2017.


•	Other expense increased by $96 million, or 10.0%, and $240 million, or 8.6%, for the three and nine months ended September 30, 2018, respectively, primarily driven by business growth and the PayPal Credit acquisition.


•	Provision for income taxes decreased by $102 million, or 31.5%, and $274 million, or 30.5%, for the three and nine months ended September 30, 2018, respectively, primarily due to the reduction in the corporate tax rate included in the Tax Act.


•	At September 30, 2018, deposits represented 72% of our total funding sources. Total deposits increased 10.3% to $62.3 billion at September 30, 2018, compared to December 31, 2017, driven primarily by growth in our direct deposits of 13.3% to $48.4 billion.

•

On May 17, 2018, the Board announced plans to increase our quarterly dividend to $0.21 per share commencing in the third quarter of 2018 and approval of a share repurchase program of up to $2.2 billion through June 30, 2019. During the nine months ended September 30, 2018, we repurchased $1.9 billion of our outstanding common stock, and declared and paid cash dividends of $0.51 per share, or $383 million.


•	In June 2018, we completed our acquisition of Loop Commerce, a provider of digital and in-store gifting services.

2018 Partner Agreements


•	On July 2, 2018, we completed our acquisition of the U.S. PayPal Credit financing program, comprising of $7.6 billion of outstanding loan receivables. We also extended our existing co-brand credit card program with PayPal and Synchrony Bank is now PayPal’s exclusive issuing bank for the PayPal Credit consumer financing program in the United States.


•	On July 26, 2018, we announced that we will not be renewing our Retail Card program agreement with Walmart, which expires July 31, 2019. See “Our Sales Platforms — Retail Card" in our 2017 Form 10-K for further information on our current program with Walmart.


•	We extended our Retail Card program agreements with Lowe's and JCPenney and announced our new partnership with Crate and Barrel.


•	We extended our Payment Solutions program agreements with American Signature Furniture, Ashley HomeStore, Associated Materials, Briggs & Stratton, Generac, Havertys, Nationwide Marketing Group, Robbins Brothers and Sleep Number and announced our new partnerships with Furniture Row, Fred Meyer Jewelers, Mahindra and jtv.


•	In our CareCredit sales platform, we renewed LCA Vision and expanded our network to include American Med Spa Association, Eargo, The Good Feet Store, the Spa Industry Association and the American Veterinary Medical Association.

Summary Earnings

The following table sets forth our results of operations for the periods indicated.



	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2018			2017			2018			2017
Interest income	$	4,694		$	4,233		$	13,112		$	12,116
Interest expense	488			357			1,327			1,016
Net interest income	4,206			3,876			11,785			11,100
Retailer share arrangements	(871		)	(805		)	(2,244		)	(2,158		)
Net interest income, after retailer share arrangements	3,335			3,071			9,541			8,942
Provision for loan losses	1,451			1,310			4,093			3,942
Net interest income, after retailer share arrangements and provision for loan losses	1,884			1,761			5,448			5,000
Other income	63			76			201			226
Other expense	1,054			958			3,017			2,777
Earnings before provision for income taxes	893			879			2,632			2,449
Provision for income taxes	222			324			625			899
Net earnings	$	671		$	555		$	2,007		$	1,550

Other Financial and Statistical Data

The following table sets forth certain other financial and statistical data for the periods indicated.



	At and for the						At and for the
	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2018			2017			2018			2017
Financial Position Data (Average):
Loan receivables, including held for sale	$	86,783		$	76,165		$	81,270		$	74,803
Total assets	$	100,449		$	91,121		$	97,474		$	90,004
Deposits	$	60,398		$	53,526		$	58,223		$	52,555
Borrowings	$	21,858		$	20,010		$	21,334		$	20,079
Total equity	$	14,421		$	14,431		$	14,369		$	14,399
Selected Performance Metrics:
Purchase volume⁽¹⁾	$	36,443		$	32,893		$	100,337		$	95,249
Retail Card	$	29,264		$	26,347		$	79,986		$	76,400
Payment Solutions	$	4,606		$	4,178		$	12,717		$	11,794
CareCredit	$	2,573		$	2,368		$	7,634		$	7,055
Average active accounts (in thousands)⁽²⁾	75,482			69,331			72,594			69,319
Net interest margin⁽³⁾	16.41		%	16.74		%	15.94		%	16.38		%
Net charge-offs	$	1,087		$	950		$	3,444		$	2,925
Net charge-offs as a % of average loan receivables, including held for sale	4.97		%	4.95		%	5.67		%	5.23		%
Allowance coverage ratio⁽⁴⁾	7.11		%	6.97		%	7.11		%	6.97		%
Return on assets⁽⁵⁾	2.7		%	2.4		%	2.8		%	2.3		%
Return on equity⁽⁶⁾	18.5		%	15.3		%	18.7		%	14.4		%
Equity to assets⁽⁷⁾	14.36		%	15.84		%	14.74		%	16.00		%
Other expense as a % of average loan receivables, including held for sale	4.82		%	4.99		%	4.96		%	4.96		%
Efficiency ratio⁽⁸⁾	31.0		%	30.4		%	31.0		%	30.3		%
Effective income tax rate	24.9		%	36.9		%	23.7		%	36.7		%
Selected Period-End Data:
Loan receivables	$	87,521		$	76,928		$	87,521		$	76,928
Allowance for loan losses	$	6,223		$	5,361		$	6,223		$	5,361
30+ days past due as a % of period-end loan receivables⁽⁹⁾	4.59		%	4.80		%	4.59		%	4.80		%
90+ days past due as a % of period-end loan receivables⁽⁹⁾	2.09		%	2.22		%	2.09		%	2.22		%
Total active accounts (in thousands)⁽²⁾	75,457			69,008			75,457			69,008

______________________


(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 follows.



	2018							2017
Three months ended September 30 ($ in millions)	Average Balance			Interest Income / Expense		Average Yield / Rate⁽¹⁾		Average Balance			Interest Income/ Expense		Average Yield / Rate⁽¹⁾
Assets
Interest-earning assets:
Interest-earning cash and equivalents⁽²⁾	$	7,901		$	39	1.96	%	$	11,895		$	37	1.23	%
Securities available for sale	7,022			38		2.15	%	3,792			14		1.46	%
Loan receivables⁽³⁾:
Credit cards, including held for sale	83,609			4,538		21.53	%	73,172			4,111		22.29	%
Consumer installment loans	1,753			41		9.28	%	1,543			35		9.00	%
Commercial credit products	1,355			37		10.83	%	1,392			36		10.26	%
Other	66			1		NM		58			—		—	%
Total loan receivables	86,783			4,617		21.11	%	76,165			4,182		21.78	%
Total interest-earning assets	101,706			4,694		18.31	%	91,852			4,233		18.28	%
Non-interest-earning assets:
Cash and due from banks	1,217							877
Allowance for loan losses	(5,956		)					(5,125		)
Other assets	3,482							3,517
Total non-interest-earning assets	(1,257		)					(731		)
Total assets	$	100,449						$	91,121
Liabilities
Interest-bearing liabilities:
Interest-bearing deposit accounts	$	60,123		$	314	2.07	%	$	53,294		$	219	1.63	%
Borrowings of consolidated securitization entities	12,306			86		2.77	%	11,759			65		2.19	%
Senior unsecured notes	9,552			88		3.66	%	8,251			73		3.51	%
Total interest-bearing liabilities	81,981			488		2.36	%	73,304			357		1.93	%
Non-interest-bearing liabilities:
Non-interest-bearing deposit accounts	275							232
Other liabilities	3,772							3,154
Total non-interest-bearing liabilities	4,047							3,386
Total liabilities	86,028							76,690
Equity
Total equity	14,421							14,431
Total liabilities and equity	$	100,449						$	91,121
Interest rate spread⁽⁴⁾						15.95	%						16.35	%
Net interest income				$	4,206						$	3,876
Net interest margin⁽⁵⁾						16.41	%						16.74	%




	2018							2017
Nine months ended September 30 ($ in millions)	Average Balance			Interest Income / Expense		Average Yield / Rate⁽¹⁾		Average Balance			Interest Income/ Expense		Average Yield / Rate⁽¹⁾
Assets
Interest-earning assets:
Interest-earning cash and equivalents⁽²⁾	$	11,128		$	145	1.74	%	$	11,073		$	86	1.04	%
Securities available for sale	6,475			97		2.00	%	4,732			44		1.24	%
Loan receivables⁽³⁾:
Credit cards, including held for sale	78,227			12,647		21.62	%	71,920			11,780		21.90	%
Consumer installment loans	1,658			114		9.19	%	1,465			101		9.22	%
Commercial credit products	1,329			107		10.76	%	1,363			104		10.20	%
Other	56			2		4.77	%	55			1		2.43	%
Total loan receivables	81,270			12,870		21.17	%	74,803			11,986		21.42	%
Total interest-earning assets	98,873			13,112		17.73	%	90,608			12,116		17.88	%
Non-interest-earning assets:
Cash and due from banks	1,192							836
Allowance for loan losses	(5,779		)					(4,774		)
Other assets	3,188							3,334
Total non-interest-earning assets	(1,399		)					(604		)
Total assets	$	97,474						$	90,004
Liabilities
Interest-bearing liabilities:
Interest-bearing deposit accounts	$	57,941		$	836	1.93	%	$	52,325		$	615	1.57	%
Borrowings of consolidated securitization entities	12,178			240		2.63	%	12,096			193		2.13	%
Senior unsecured notes	9,156			251		3.67	%	7,983			208		3.48	%
Total interest-bearing liabilities	79,275			1,327		2.24	%	72,404			1,016		1.88	%
Non-interest-bearing liabilities:
Non-interest-bearing deposit accounts	282							230
Other liabilities	3,548							2,971
Total non-interest-bearing liabilities	3,830							3,201
Total liabilities	83,105							75,605
Equity
Total equity	14,369							14,399
Total liabilities and equity	$	97,474						$	90,004
Interest rate spread⁽⁴⁾						15.49	%						16.00	%
Net interest income				$	11,785						$	11,100
Net interest margin⁽⁵⁾						15.94	%						16.38	%

______________________


(1)	Average yields/rates are based on total interest income/expense over average balances.


(2)	Includes average restricted cash balances of $480 million and $816 million for the three months ended September 30, 2018 and 2017, respectively, and $538 million and $659 million for the nine months ended September 30, 2018 and 2017, respectively.


(3)	Interest income on loan receivables includes fees on loans of $732 million and $692 million for the three months ended September 30, 2018 and 2017, respectively, and $1,971 million and $1,945 million for the nine months ended September 30, 2018 and 2017, respectively.


(4)	Interest rate spread represents the difference between the yield on total interest-earning assets and the rate on total interest-bearing liabilities.


(5)	Net interest margin represents net interest income divided by average total interest-earning assets.

For a summary description of the composition of our key line items included in our Statements of Earnings, see Management's Discussion and Analysis of Financial Condition and Results of Operations in our 2017 Form 10-K.

Interest Income

Interest income increased by $461 million, or 10.9%, and $996 million, or 8.2%, for the three and nine months ended September 30, 2018, driven primarily by the PayPal Credit acquisition and other growth in our average loan receivables.

Average interest-earning assets



Three months ended September 30 ($ in millions)	2018		%		2017		%
Loan receivables, including held for sale	$	86,783	85.3	%	$	76,165	82.9	%
Liquidity portfolio and other	14,923		14.7	%	15,687		17.1	%
Total average interest-earning assets	$	101,706	100.0	%	$	91,852	100.0	%




Nine months ended September 30 ($ in millions)	2018		%		2017		%
Loan receivables, including held for sale	$	81,270	82.2	%	$	74,803	82.6	%
Liquidity portfolio and other	17,603		17.8	%	15,805		17.4	%
Total average interest-earning assets	$	98,873	100.0	%	$	90,608	100.0	%

The increases in average loan receivables of 13.9% and 8.6% for the three months and nine months ended September 30, 2018, respectively, were driven by higher purchase volume of 10.8% and 5.3% and average active account growth of 8.9% and 4.7%, respectively, primarily due to the PayPal Credit acquisition.

Average active accounts increased to 75.5 million and 72.6 million for the three and nine months ended September 30, 2018, respectively, and the average balance per active account increased 4.7% and 3.7% for the three and nine months ended September 30, 2018, respectively.

Yield on average interest-earning assets

The yield on average interest-earning assets increased slightly for the three months ended September 30, 2018, primarily due to a higher percentage of interest-earning assets attributable to loan receivables for the three months ended September 30, 2018, largely offset by lower yield on our average loan receivables of 67 basis points to 21.11%. The yield on average interest-earning assets decreased for the nine months ended September 30, 2018, primarily due to a decrease in the yield on our average loan receivables of 25 basis points to 21.17%.

Interest Expense

Interest expense increased by $131 million, or 36.7%, and $311 million, or 30.6%, for the three and nine months ended September 30, 2018, respectively, driven primarily by higher cost of funds and the growth in our deposit liabilities. Our cost of funds increased to 2.36% and 2.24% for the three and nine months ended September 30, 2018, respectively, compared to 1.93% and 1.88% for the three and nine months ended September 30, 2017, respectively, primarily due to higher benchmark interest rates and the funding strategy for the PayPal Credit acquisition.

Average interest-bearing liabilities



Three months ended September 30 ($ in millions)	2018		%		2017		%
Interest-bearing deposit accounts	$	60,123	73.3	%	$	53,294	72.7	%
Borrowings of consolidated securitization entities	12,306		15.0	%	11,759		16.0	%
Third-party debt	9,552		11.7	%	8,251		11.3	%
Total average interest-bearing liabilities	$	81,981	100.0	%	$	73,304	100.0	%




Nine months ended September 30 ($ in millions)	2018		%		2017		%
Interest-bearing deposit accounts	$	57,941	73.1	%	$	52,325	72.3	%
Borrowings of consolidated securitization entities	12,178		15.4	%	12,096		16.7	%
Third-party debt	9,156		11.5	%	7,983		11.0	%
Total average interest-bearing liabilities	$	79,275	100.0	%	$	72,404	100.0	%

The increase in average interest-bearing liabilities for the three and nine months ended September 30, 2018 was driven primarily by growth in our direct deposits.

Net Interest Income

Net interest income increased by $330 million, or 8.5%, and $685 million, or 6.2%, for the three and nine months ended September 30, 2018, respectively, driven primarily by the PayPal Credit acquisition and higher average loan receivables, partially offset by increases in interest expense reflecting higher benchmark rates.

Retailer Share Arrangements

Retailer share arrangements increased by $66 million, or 8.2%, and $86 million, or 4.0%, for the three and nine months ended September 30, 2018, respectively, primarily due to growth of the programs in which we have retailer share arrangements including the PayPal Credit acquisition. The increases for the three and nine months ended September 30, 2018 were partially offset by the impact from the Toys "R" Us bankruptcy.

Provision for Loan Losses

Our allowance coverage ratio increased to 7.11% at September 30, 2018, as compared to 6.97% at September 30, 2017, reflecting an increase in forecasted losses inherent in our loan portfolio.

Other Income



	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2018			2017			2018			2017
Interchange revenue	$	182		$	164		$	517		$	474
Debt cancellation fees	65			67			197			203
Loyalty programs	(196		)	(168		)	(543		)	(511		)
Other	12			13			30			60
Total other income	$	63		$	76		$	201		$	226

Other income decreased by $13 million, or 17.1%, and $25 million, or 11.1%, for the three and nine months ended September 30, 2018. Interchange revenue increased in both periods driven by increased purchase volume outside of our retail partners' sales channels. Loyalty costs increased for both periods primarily due to the launch of new rewards programs with our partners and growth in purchase volume associated with existing loyalty programs. Other income also decreased for the nine months ended September 30, 2018 due to the impact of a pre-tax gain of $18 million recognized in the nine months ended September 30, 2017.

Other Expense



	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2018		2017		2018		2017
Employee costs	$	365	$	333	$	1,074	$	974
Professional fees	232		161		575		470
Marketing and business development	131		124		362		342
Information processing	105		96		308		274
Other	221		244		698		717
Total other expense	$	1,054	$	958	$	3,017	$	2,777

Other expense increased by $96 million, or 10.0%, and $240 million, or 8.6%, for the three and nine months ended September 30, 2018, respectively, primarily due to increases in professional fees, as well as increases in employee costs and information processing.

The increases in professional fees were primarily due to interim servicing costs associated with the PayPal Credit acquisition. Employee costs increases were primarily due to new employees added to support the continued growth of the business. Information processing costs increased primarily due to both business growth and strategic investments.

Provision for Income Taxes



	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2018			2017			2018			2017
Effective tax rate	24.9		%	36.9		%	23.7		%	36.7		%
Provision for income taxes	$	222		$	324		$	625		$	899

The effective tax rate for the three and nine months ended September 30, 2018 decreased compared to the same period in the prior year primarily due to the reduction in the corporate tax rate from 35% to 21%. In each period, the effective tax rate differs from the applicable U.S. federal statutory rate primarily due to state income taxes.

Platform Analysis

As discussed above under “—Our Sales Platforms,” we offer our products through three sales platforms (Retail Card, Payment Solutions and CareCredit), which management measures based on their revenue-generating activities. The following is a discussion of certain supplemental information for the three and nine months ended September 30, 2018, for each of our sales platforms.

Retail Card



	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2018			2017			2018			2017
Purchase volume	$	29,264		$	26,347		$	79,986		$	76,400
Period-end loan receivables	$	60,564		$	52,119		$	60,564		$	52,119
Average loan receivables	$	60,389		$	51,817		$	55,522		$	51,002
Average active accounts (in thousands)	59,846			54,471			57,140			54,639

Interest and fees on loans	$	3,465		$	3,102		$	9,554		$	8,890
Retailer share arrangements	$	(851	)	$	(795	)	$	(2,209	)	$	(2,133	)
Other income	$	51		$	61		$	164		$	163

Retail Card interest and fees on loans increased by $363 million, or 11.7%, and $664 million, or 7.5%, for the three and nine months ended September 30, 2018, respectively. These increases were primarily the result of the PayPal Credit acquisition and other growth in average loan receivables.

Retailer share arrangements increased by $56 million, or 7.0%, and $76 million, or 3.6%, for the three and nine months ended September 30, 2018, respectively, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.

Other income decreased by $10 million, or 16.4%, for the three months ended September 30, 2018, primarily as a result of the changes in interchange revenue and loyalty costs discussed under the heading “Other Income” above. Other income was relatively flat for the nine months ended September 30, 2018.

Payment Solutions



	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2018			2017			2018			2017
Purchase volume	$	4,606		$	4,178		$	12,717		$	11,794
Period-end loan receivables	$	17,639		$	16,153		$	17,639		$	16,153
Average loan receivables	$	17,234		$	15,848		$	16,810		$	15,538
Average active accounts (in thousands)	9,675			9,183			9,569			9,108

Interest and fees on loans	$	601		$	559		$	1,729		$	1,607
Retailer share arrangements	$	(17	)	$	(9	)	$	(28	)	$	(19	)
Other income	$	4		$	2		$	10		$	12

Payment Solutions interest and fees on loans increased by $42 million, or 7.5%, and $122 million, or 7.6%, for the three and nine months ended September 30, 2018, respectively. These increases were primarily driven by growth in average loan receivables.

CareCredit



	Three months ended September 30,						Nine months ended September 30,
($ in millions)	2018			2017			2018			2017
Purchase volume	$	2,573		$	2,368		$	7,634		$	7,055
Period-end loan receivables	$	9,318		$	8,656		$	9,318		$	8,656
Average loan receivables	$	9,160		$	8,500		$	8,938		$	8,263
Average active accounts (in thousands)	5,961			5,677			5,885			5,572

Interest and fees on loans	$	551		$	521		$	1,587		$	1,489
Retailer share arrangements	$	(3	)	$	(1	)	$	(7	)	$	(6	)
Other income	$	8		$	13		$	27		$	51

CareCredit interest and fees on loans increased by $30 million, or 5.8%, and $98 million, or 6.6%, for the three and nine months ended September 30, 2018. The increase was primarily driven by growth in average loan receivables.

Debt Securities

____________________________________________________________________________________________

The following discussion provides supplemental information regarding our debt securities portfolio. All of our debt securities are classified as available-for-sale at September 30, 2018 and December 31, 2017, and are held to meet our liquidity objectives and to comply with the Community Reinvestment Act. Debt securities classified as available-for-sale are reported in our Condensed Consolidated Statements of Financial Position at fair value.

The following table sets forth the amortized cost and fair value of our portfolio of debt securities at the dates indicated:



	At September 30, 2018				At December 31, 2017
($ in millions)	Amortized Cost		Estimated Fair Value		Amortized Cost		Estimated Fair Value
U.S. government and federal agency	$	4,300	$	4,291	$	2,419	$	2,416
State and municipal	40		39		44		44
Residential mortgage-backed	1,216		1,161		1,258		1,231
Asset-backed	1,791		1,788		781		780
U.S. corporate debt	2		2		2		2
Total	$	7,349	$	7,281	$	4,504	$	4,473

Unrealized gains and losses, net of the related tax effects, on available-for-sale debt securities that are not other-than-temporarily impaired are excluded from earnings and are reported as a separate component of comprehensive income (loss) until realized. At September 30, 2018, our debt securities had gross unrealized gains of $1 million and gross unrealized losses of $69 million. At December 31, 2017, our debt securities had gross unrealized gains of $1 million and gross unrealized losses of $32 million.

Our debt securities portfolio had the following maturity distribution at September 30, 2018.



($ in millions)	Due in 1 Year or Less			Due After 1 through 5 Years			Due After 5 through 10 Years			Due After 10 years			Total
U.S. government and federal agency	$	4,024		$	267		$	—		$	—		$	4,291
State and municipal	—			—			5			34			39
Residential mortgage-backed	—			1			160			1,000			1,161
Asset-backed	1,412			376			—			—			1,788
U.S. corporate debt	2			—			—			—			2
Total⁽¹⁾	$	5,438		$	644		$	165		$	1,034		$	7,281
Weighted average yield⁽²⁾	2.2		%	2.2		%	3.2		%	2.8		%	2.3		%

______________________


(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 September 30, 2018, we did not hold investments in any single issuer with an aggregate book value that exceeded 10% of equity, excluding obligations of the U.S. government.

Loan Receivables

____________________________________________________________________________________________

The following discussion provides supplemental information regarding our loan receivables portfolio.

Loan receivables are our largest category of assets and represent our primary source of revenue. The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.



($ in millions)	At September 30, 2018		(%)		At December 31, 2017		(%)
Loans
Credit cards	$	84,319	96.4	%	$	79,026	96.5	%
Consumer installment loans	1,789		2.0		1,578		1.9
Commercial credit products	1,353		1.5		1,303		1.6
Other	60		0.1		40		—
Total loans	$	87,521	100.0	%	$	81,947	100.0	%

Loan receivables increased by $5,574 million, or 6.8%, at September 30, 2018 compared to December 31, 2017, primarily driven by the PayPal Credit acquisition, partially offset by the seasonality of our business.

Loan receivables increased by $10,593 million, or 13.8%, at September 30, 2018 compared to September 30, 2017, primarily driven by the PayPal Credit acquisition, higher purchase volume and average active account growth.

Our loan receivables portfolio had the following geographic concentration at September 30, 2018.



($ in millions)	Loan Receivables Outstanding		% of Total Loan Receivables Outstanding
State	Loan Receivables Outstanding		% of Total Loan Receivables Outstanding
California	$	9,148	10.5	%
Texas	$	8,796	10.1	%
Florida	$	7,274	8.3	%
New York	$	4,984	5.7	%
Pennsylvania	$	3,639	4.2	%

Impaired Loans and Troubled Debt Restructurings

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

Loans classified as TDRs are recorded at their present value with impairment measured as the difference between the loan balance and the discounted present value of cash flows expected to be collected, discounted at the original effective interest rate of the loan.

Interest income from loans accounted for as TDRs is accounted for in the same manner as other accruing loans. We accrue interest on credit card balances until the accounts are charged-off in the period the accounts become 180 days past due. The following table presents the amount of loan receivables that are not accruing interest, loans that are 90 days or more past-due and still accruing interest, and earning TDRs for the periods presented.



($ in millions)	At September 30, 2018		At December 31, 2017
Non-accrual loan receivables	$	4	$	5
Loans contractually 90 days past-due and still accruing interest	1,829		1,864
Earning TDRs⁽¹⁾	1,048		940
Non-accrual, past-due and restructured loan receivables	$	2,881	$	2,809

______________________

(1)

At September 30, 2018 and December 31, 2017, balances exclude $105 million and $103 million, respectively, of TDRs which are included in loans contractually 90 days past-due and still accruing interest on the balance. See Note 4. Loan Receivables and Allowance for Loan Losses to our condensed consolidated financial statements for additional information on the financial effects of TDRs for the three and nine months ended September 30, 2018 and 2017.



	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2018		2017		2018		2017
Gross amount of interest income that would have been recorded in accordance with the original contractual terms	$	68	$	58	$	195	$	162
Interest income recognized	13		13		37		36
Total interest income foregone	$	55	$	45	$	158	$	126

Delinquencies

Over-30 day loan delinquencies as a percentage of period-end loan receivables decreased to 4.59% at September 30, 2018 from 4.80% at September 30, 2017, and decreased from 4.67% at December 31, 2017. These decreases include the impact in the current year from certain underwriting refinements. The decrease as compared to December 31, 2017 was partially offset by the effects of the seasonality of our business.

Net Charge-Offs

Net charge-offs consist of the unpaid principal balance of loans held for investment that we determine are uncollectible, net of recovered amounts. We exclude accrued and unpaid finance charges and fees and third-party fraud losses from charge-offs. Charged-off and recovered finance charges and fees are included in interest and fees on loans while third-party fraud losses are included in other expense. Charge-offs are recorded as a reduction to the allowance for loan losses and subsequent recoveries of previously charged-off amounts are credited to the allowance for loan losses. Costs incurred to recover charged-off loans are recorded as collection expense and included in other expense in our Condensed Consolidated Statements of Earnings.

The table below sets forth the ratio of net charge-offs to average loan receivables, including held for sale, for the periods indicated.



	Three months ended September 30,				Nine months ended September 30,
	2018		2017		2018		2017
Ratio of net charge-offs to average loan receivables, including held for sale	4.97	%	4.95	%	5.67	%	5.23	%

Allowance for Loan Losses

The allowance for loan losses totaled $6,223 million at September 30, 2018, compared with $5,574 million at December 31, 2017 and $5,361 million at September 30, 2017, representing our best estimate of probable losses inherent in the portfolio. Our allowance for loan losses as a percentage of total loan receivables increased to 7.11% at September 30, 2018, from 6.80% at December 31, 2017 and 6.97% at September 30, 2017, which reflects the increase in forecasted net charge-offs over the next twelve months. The increase from December 31, 2017 also includes the effects of the seasonality of our business. See "Business Trends and Conditions — Asset Quality" in our 2017 Form 10-K for discussion of the various factors that contribute to forecasted net charge-offs over the next twelve months.

The following tables provide changes in our allowance for loan losses for the periods presented:



($ in millions)	Balance at July 1, 2018		Provision charged to operations		Gross charge-offs			Recoveries		Balance at September 30, 2018

Credit cards	$	5,757	$	1,427	$	(1,269	)	$	202	$	6,117
Consumer installment loans	51		9		(13		)	4		51
Commercial credit products	50		15		(13		)	2		54
Other	1		—		—			—		1
Total	$	5,859	$	1,451	$	(1,295	)	$	208	$	6,223



($ in millions)	Balance at July 1, 2017		Provision charged to operations		Gross charge-offs			Recoveries		Balance at September 30, 2017

Credit cards	$	4,906	$	1,287	$	(1,140	)	$	211	$	5,264
Consumer installment loans	34		14		(12		)	3		39
Commercial credit products	60		9		(14		)	2		57
Other	1		—		—			—		1
Total	$	5,001	$	1,310	$	(1,166	)	$	216	$	5,361




($ in millions)	Balance at January 1, 2018		Provision charged to operations		Gross charge-offs			Recoveries		Balance at September 30, 2018

Credit cards	$	5,483	$	4,016	$	(4,016	)	$	634	$	6,117
Consumer installment loans	40		39		(40		)	12		51
Commercial credit products	50		38		(39		)	5		54
Other	1		—		—			—		1
Total	$	5,574	$	4,093	$	(4,095	)	$	651	$	6,223




	Balance at January 1, 2017		Provision charged to operations		Gross charge- offs			Recoveries		Balance at September 30, 2017
($ in millions)
Credit cards	$	4,254	$	3,866	$	(3,518	)	$	662	$	5,264
Consumer installment loans	37		28		(37		)	11		39
Commercial credit products	52		48		(48		)	5		57
Other	1		—		—			—		1
Total	$	4,344	$	3,942	$	(3,603	)	$	678	$	5,361

Funding, Liquidity and Capital Resources

____________________________________________________________________________________________

We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources to support our daily operations, our business growth, our credit ratings and our regulatory and policy requirements, in a cost effective and prudent manner through expected and unexpected market environments.

Funding Sources

Our primary funding sources include cash from operations, deposits (direct and brokered deposits), securitized financings and third-party debt.

The following table summarizes information concerning our funding sources during the periods indicated:



	2018						2017
Three months ended September 30 ($ in millions)	Average Balance		%		Average Rate		Average Balance		%		Average Rate
Deposits⁽¹⁾	$	60,123	73.3	%	2.1	%	$	53,294	72.7	%	1.6	%
Securitized financings	12,306		15.0		2.8		11,759		16.0		2.2
Senior unsecured notes	9,552		11.7		3.7		8,251		11.3		3.5
Total	$	81,981	100.0	%	2.4	%	$	73,304	100.0	%	1.9	%


(1)	Excludes $275 million and $232 million average balance of non-interest-bearing deposits for the three months ended September 30, 2018 and 2017, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the three months ended September 30, 2018 and 2017.




	2018						2017
Nine months ended September 30 ($ in millions)	Average Balance		%		Average Rate		Average Balance		%		Average Rate
Deposits⁽¹⁾	$	57,941	73.1	%	1.9	%	$	52,325	72.3	%	1.6	%
Securitized financings	12,178		15.4		2.6		12,096		16.7		2.1
Senior unsecured notes	9,156		11.5		3.7		7,983		11.0		3.5
Total	$	79,275	100.0	%	2.2	%	$	72,404	100.0	%	1.9	%

______________________


(1)	Excludes $282 million and $230 million average balance of non-interest-bearing deposits for the nine months ended September 30, 2018 and 2017, respectively. Non-interest-bearing deposits comprise less than 10% of total deposits for the nine months ended September 30, 2018 and 2017.

Deposits

We obtain deposits directly from retail and commercial customers (“direct deposits”) or through third-party brokerage firms that offer our deposits to their customers (“brokered deposits”). At September 30, 2018, we had $48.4 billion in direct deposits and $13.9 billion in deposits originated through brokerage firms (including network deposit sweeps procured through a program arranger that channels brokerage account deposits to us). A key part of our liquidity plan and funding strategy is to continue to expand our direct deposits base as a source of stable and diversified low-cost funding.

Our direct deposits include a range of FDIC-insured deposit products, including certificates of deposit, IRAs, money market accounts and savings accounts.

Brokered deposits are primarily from retail customers of large brokerage firms. We have relationships with 10 brokers that offer our deposits through their networks. Our brokered deposits consist primarily of certificates of deposit that bear interest at a fixed rate and at September 30, 2018, had a weighted average remaining life of 2.4 years. These deposits generally are not subject to early withdrawal.

Our ability to attract deposits is sensitive to, among other things, the interest rates we pay, and therefore, we bear funding risk if we fail to pay higher rates, or interest rate risk if we are required to pay higher rates, to retain existing deposits or attract new deposits. To mitigate these risks, our funding strategy includes a range of deposit products, and we seek to maintain access to multiple other funding sources, such as securitized financings (including our undrawn committed capacity) and unsecured debt.

The following table summarizes certain information regarding our interest-bearing deposits by type (all of which constitute U.S. deposits) for the periods indicated:



Three months ended September 30 ($ in millions)	2018						2017
Three months ended September 30 ($ in millions)	Average Balance		% of Total		Average Rate		Average Balance		% of Total		Average Rate
Direct deposits:
Certificates of deposit (including IRA certificates of deposit)	$	28,804	47.9	%	2.0	%	$	23,331	43.8	%	1.6	%
Savings accounts (including money market accounts)	18,072		30.1		1.8		17,522		32.9		1.2
Brokered deposits	13,247		22.0		2.6		12,441		23.3		2.3
Total interest-bearing deposits	$	60,123	100.0	%	2.1	%	$	53,294	100.0	%	1.6	%




Nine months ended September 30 ($ in millions)	2018						2017
Nine months ended September 30 ($ in millions)	Average Balance		% of Total		Average Rate		Average Balance		% of Total		Average Rate
Direct deposits:
Certificates of deposit (including IRA certificates of deposit)	$	27,255	47.1	%	1.9	%	$	22,138	42.3	%	1.6	%
Savings accounts (including money market accounts)	18,031		31.1		1.6		17,492		33.4		1.1
Brokered deposits	12,655		21.8		2.5		12,695		24.3		2.2
Total interest-bearing deposits	$	57,941	100.0	%	1.9	%	$	52,325	100.0	%	1.6	%

Our deposit liabilities provide funding with maturities ranging from one day to ten years. At September 30, 2018, the weighted average maturity of our interest-bearing time deposits was 1.3 years. See Note 7. Deposits to our condensed consolidated financial statements for more information on their maturities.

The following table summarizes deposits by contractual maturity at September 30, 2018.



($ in millions)	3 Months or Less		Over 3 Months but within 6 Months		Over 6 Months but within 12 Months		Over 12 Months		Total
U.S. deposits (less than $100,000)⁽¹⁾	$	8,766	$	3,741	$	5,366	$	9,822	$	27,695
U.S. deposits ($100,000 or more)
Direct deposits:
Certificates of deposit (including IRA certificates of deposit)	3,135		4,538		6,745		5,239		19,657
Savings accounts (including money market accounts)	13,253		—		—		—		13,253
Brokered deposits:
Sweep accounts	1,712		—		—		—		1,712
Total	$	26,866	$	8,279	$	12,111	$	15,061	$	62,317

______________________


(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”) and the Synchrony Card Issuance Trust (“SYNIT”) through which we issue asset-backed securities through both public transactions and private transactions funded by financial institutions and commercial paper conduits. In addition, we issue asset-backed securities in private transactions through the Synchrony Sales Finance Master Trust (“SFT”).

The following table summarizes expected contractual maturities of the investors’ interests in securitized financings, excluding debt premiums, discounts and issuance costs at September 30, 2018.



($ in millions)	Less Than One Year		One Year Through Three Years		After Three Through Five Years		After Five Years		Total
Scheduled maturities of long-term borrowings—owed to securitization investors:
SYNCT⁽¹⁾	$	2,752	$	3,333	$	1,591	$	—	$	7,676
SFT	900		3,125		—		—		4,025
SYNIT⁽¹⁾	—		2,500		—		—		2,500
Total long-term borrowings—owed to securitization investors	$	3,652	$	8,958	$	1,591	$	—	$	14,201

______________________


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

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

All of our securitized financings include early repayment triggers, referred to as early amortization events, including events related to material breaches of representations, warranties or covenants, inability or failure of the Bank to transfer loan receivables to the trusts as required under the securitization documents, failure to make required payments or deposits pursuant to the securitization documents, and certain insolvency-related events with respect to the related securitization depositor, Synchrony (solely with respect to SYNCT) or the Bank. In addition, an early amortization event will occur with respect to a series if the excess spread as it relates to a particular series or for the trust, as applicable, falls below zero. Following an early amortization event, principal collections on the loan receivables in the applicable trust are applied to repay principal of the trust's asset-backed securities rather than being available on a revolving basis to fund the origination activities of our business. The occurrence of an early amortization event also would limit or terminate our ability to issue future series out of the trust in which the early amortization event occurred. No early amortization event has occurred with respect to any of the securitized financings in SYNCT, SFT or SYNIT.

The following table summarizes for each of our trusts the three-month rolling average excess spread at September 30, 2018.



	Note Principal Balance ($ in millions)		# of Series Outstanding	Three-Month Rolling Average Excess Spread⁽¹⁾
SYNCT⁽²⁾	$	8,625	15	~14.5% to 16%
SFT	$	4,025	10	11.1	%
SYNIT⁽²⁾⁽³⁾	$	2,515	5	~17.8% to 18.4%

______________________

(1)

Represents the excess spread (generally calculated as interest income collected from the applicable pool of loan receivables less applicable net charge-offs, interest expense and servicing costs, divided by the aggregate principal amount of loan receivables in the applicable pool) for SFT or, in the case of SYNCT and SYNIT, a range of the excess spreads relating to the particular series issued within each trust, in each case calculated in accordance with the applicable trust or series documentation, for the three securitization monthly periods ended September 30, 2018.


(2)	Includes subordinated classes of SYNCT and SYNIT notes that we own.


(3)	A three-month rolling average excess spread is not available for SYNIT's public series, because the first issuance for such series closed in September 2018.

Third-Party Debt

Senior Unsecured Notes

The following table provides a summary of our outstanding senior unsecured notes at September 30, 2018.



($ in millions)	Maturity	Principal Amount Outstanding⁽¹⁾
Fixed rate senior unsecured notes:
Synchrony Financial
2.600% senior unsecured notes	January, 2019	$	1,000
3.000% senior unsecured notes	August, 2019	1,100
2.700% senior unsecured notes	February, 2020	750
3.750% senior unsecured notes	August, 2021	750
4.250% senior unsecured notes	August, 2024	1,250
4.500% senior unsecured notes	July, 2025	1,000
3.700% senior unsecured notes	August, 2026	500
3.950% senior unsecured notes	December, 2027	1,000
Synchrony Bank
3.000% senior unsecured notes	June, 2022	750
3.650% senior unsecured notes	May, 2021	750
Total fixed rate senior unsecured notes		$	8,850

Floating rate senior unsecured notes:
Synchrony Financial
Three-month LIBOR plus 1.23% senior unsecured notes	February, 2020	$	250
Synchrony Bank
Three-month LIBOR plus 0.625% senior unsecured notes	March, 2020	500
Total floating rate senior unsecured notes		$	750

______________________


(1)	The amounts shown exclude unamortized debt discount, premiums and issuance cost.

At September 30, 2018, the aggregate amount of outstanding senior unsecured notes was $9.6 billion and the weighted average interest rate was 3.51%.

Short-Term Borrowings

Except as described above, there were no material short-term borrowings for the periods presented.

Other

At September 30, 2018, we had more than $25.0 billion of unencumbered assets in the Bank available to be used to generate additional liquidity through secured borrowings or asset sales or to be pledged to the Federal Reserve Board for credit at the discount window.

Covenants

The indenture pursuant to which our senior unsecured notes have been issued includes various covenants. If we do not satisfy any of these covenants, the maturity of amounts outstanding thereunder may be accelerated and become payable. We were in compliance with all of these covenants at September 30, 2018.

At September 30, 2018, we were not in default under any of our credit facilities or senior unsecured notes.

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.

At September 30, 2018, Synchrony's senior unsecured debt is rated BBB- (negative outlook) by Fitch and BBB- (negative outlook) by S&P. The Bank’s senior unsecured debt is rated BBB- (negative outlook) by Fitch and BBB (negative outlook) by S&P. In addition, certain of the asset-backed securities issued by SYNCT and SYNIT are rated by Fitch, S&P and/or Moody’s. A credit rating is not a recommendation to buy, sell or hold securities, may be subject to revision or withdrawal at any time by the assigning rating organization, and each rating should be evaluated independently of any other rating. Downgrades in these credit ratings could materially increase the cost of our funding from, and restrict our access to, the capital markets.

Liquidity

____________________________________________________________________________________________

We seek to ensure that we have adequate liquidity to sustain business operations, fund asset growth, satisfy debt obligations and to meet regulatory expectations under normal and stress conditions.

We maintain policies outlining the overall framework and general principles for managing liquidity risk across our business, which is the responsibility of our Asset and Liability Management Committee, a subcommittee of our Risk Committee. We employ a variety of metrics to monitor and manage liquidity. We perform regular liquidity stress testing and contingency planning as part of our liquidity management process. We evaluate a range of stress scenarios including Company specific and systemic events that could impact funding sources and our ability to meet liquidity needs.

We maintain a liquidity portfolio, which at September 30, 2018 had $18.2 billion of liquid assets, primarily consisting of cash and equivalents and short-term obligations of the U.S. Treasury, less cash in transit which is not considered to be liquid, compared to $15.1 billion of liquid assets at December 31, 2017. The increase in liquid assets was primarily due to the retention of excess cash flows from operations and deposit growth, partially offset by the deployment of some of our liquidity to support the PayPal Credit acquisition.

As additional sources of liquidity, at September 30, 2018, we had an aggregate of $4.6 billion of undrawn committed capacity on our securitized financings, subject to customary borrowing conditions, from private lenders under our securitization programs and $0.5 billion of undrawn committed capacity under our unsecured revolving credit facility with private lenders, and we had more than $25.0 billion of unencumbered assets in the Bank available to be used to generate additional liquidity through secured borrowings or asset sales or to be pledged to the Federal Reserve Board for credit at the discount window.

As a general matter, investments included in our liquidity portfolio are expected to be highly liquid, giving us the ability to readily convert them to cash. The level and composition of our liquidity portfolio may fluctuate based upon the level of expected maturities of our funding sources as well as operational requirements and market conditions.

We rely significantly on dividends and other distributions and payments from the Bank for liquidity; however, bank regulations, contractual restrictions and other factors limit the amount of dividends and other distributions and payments that the Bank may pay to us. For a discussion of regulatory restrictions on the Bank’s ability to pay dividends, see “Item 1A. Risk Factors—Risks Relating to Regulation—We are subject to restrictions that limit our ability to pay dividends and repurchase our common stock; the Bank is subject to restrictions that limit its ability to pay dividends to us, which could limit our ability to pay dividends, repurchase our common stock or make payments on our indebtedness” and “Item 1A. Business—Regulation—Savings Association Regulation—Dividends and Stock Repurchases” in our 2017 Form 10-K.

Capital

____________________________________________________________________________________________

Our primary sources of capital have been earnings generated by our business and existing equity capital. We seek to manage capital to a level and composition sufficient to support the risks of our business, meet regulatory requirements, adhere to rating agency targets and support future business growth. The level, composition and utilization of capital are influenced by changes in the economic environment, strategic initiatives and legislative and regulatory developments. Within these constraints, we are focused on deploying capital in a manner that will provide attractive returns to our stockholders.

Synchrony and the Bank are required to conduct stress tests on an annual basis. Under the Office of the Comptroller of the Currency of the U.S. Treasury's (the “OCC”) and the Federal Reserve Board's stress test regulations, the Bank and Synchrony are required to use stress-testing methodologies providing for results under various scenarios of economic and financial market stress. In addition, while as a savings and loan holding company and a financial holding company, we currently are not subject to the Federal Reserve Board's capital planning rule, we submitted a capital plan to the Federal Reserve Board in 2018.

In May 2018, the Economic Growth, Regulatory Relief and Consumer Protection Act was enacted, which among other things, includes changes to stress testing reporting thresholds based on an institution’s total consolidated assets. The Act will likely decrease the overall regulatory burden on savings and loan holding companies, though the ultimate impact will not be known until the regulators have finalized the law's implementation.

Dividend and Share Repurchases



Cash Dividends Declared	Month of Payment	Amount per Common Share		Amount
($ in millions, except per share data)
Three months ended March 31, 2018	February, 2018	$	0.15	$	114
Three months ended June 30, 2018	May, 2018	0.15		113
Three months ended September 30, 2018	August, 2018	0.21		156
Total dividends declared		$	0.51	$	383

On May 17, 2018, the Board announced plans to increase our quarterly dividend to $0.21 per share commencing in the third quarter of 2018. The declaration and payment of future dividends to holders of our common stock will be at the discretion of the Board and will depend on many factors. For a discussion of regulatory and other restrictions on our ability to pay dividends and repurchase stock, see “Risk Factors—Risks Relating to Regulation—We are subject to restrictions that limit our ability to pay dividends and repurchase our common stock; the Bank is subject to restrictions that limit its ability to pay dividends to us, which could limit our ability to pay dividends, repurchase our common stock or make payments on our indebtedness” in our 2017 Form 10-K.



Shares Repurchased Under Publicly Announced Programs	Total Number of Shares Purchased	Dollar Value of Shares Purchased

($ and shares in millions)
Three months ended March 31, 2018	10.4	$	410
Three months ended June 30, 2018	14.0	491
Three months ended September 30, 2018	30.3	966
Total	54.7	$	1,867

In May 2018, we completed our share repurchase program of up to $1.64 billion (the "2017 Share Repurchase Program"). On May 17, 2018, the Company approved a share repurchase program of up to $2.2 billion through June 30, 2019 (the "2018 Share Repurchase Program"). Through the end of the third quarter of 2018, we have repurchased approximately $1.2 billion of common stock as part of the 2018 Share Repurchase Program and expect to complete the share repurchase program by the end of the second quarter of 2019. We made, and expect to continue to make, share repurchases subject to market conditions and other factors, including legal and regulatory restrictions and required approvals.

Regulatory Capital Requirements - Synchrony Financial

As a savings and loan holding company, we are required to maintain minimum capital ratios, under the applicable U.S. Basel III capital rules. For more information, see “Regulation—Savings and Loan Holding Company Regulation” in our 2017 Form 10-K.

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 September 30, 2018, Synchrony Financial met all the requirements to be deemed well-capitalized.

The following table sets forth the composition of our capital ratios for the Company calculated under the Basel III regulatory capital standards at September 30, 2018 and December 31, 2017, respectively.



	Basel III
	At September 30, 2018⁽¹⁾				At December 31, 2017⁽²⁾
($ in millions)	Amount		Ratio⁽³⁾		Amount		Ratio⁽³⁾
Total risk-based capital	$	13,315	15.5	%	$	13,954	17.3	%
Tier 1 risk-based capital	$	12,178	14.2	%	$	12,890	16.0	%
Tier 1 leverage	$	12,178	12.3	%	$	12,890	13.8	%
Common equity Tier 1 capital	$	12,178	14.2	%	$	12,890	16.0	%
Risk-weighted assets	$	85,941			$	80,669

______________________


(1)	Amounts presented do not reflect certain modifications to the regulatory capital rules proposed by the federal banking agencies in September 2017, which among other things, may increase the risk weighting of certain deferred tax assets from 100% to 250% if the proposed rule becomes effective.


(2)	Amounts at December 31, 2017 are presented in accordance with applicable transition guidelines.


(3)	Tier 1 leverage ratio represents total tier 1 capital as a percentage of total average assets, after certain adjustments. All other ratios presented above represent the applicable capital measure as a percentage of risk-weighted assets.

The decrease in our Common equity Tier 1 capital ratio was primarily due to the increase in loan receivables as a result of the PayPal Credit acquisition and a corresponding increase in risk-weighted assets in the nine months ended September 30, 2018.

Regulatory Capital Requirements - Synchrony Bank

At September 30, 2018 and December 31, 2017, the Bank met all applicable requirements to be deemed well-capitalized pursuant to OCC regulations and for purposes of the Federal Deposit Insurance Act. The following table sets forth the composition of the Bank’s capital ratios calculated under the Basel III rules at September 30, 2018 and December 31, 2017.



	At September 30, 2018				At December 31, 2017				Minimum to be Well- Capitalized under Prompt Corrective Action Provisions
($ in millions)	Amount		Ratio		Amount		Ratio		Ratio
Total risk-based capital	$	11,588	15.7	%	$	10,842	16.2	%	10.0%
Tier 1 risk-based capital	$	10,607	14.4	%	$	9,958	14.9	%	8.0%
Tier 1 leverage	$	10,607	12.5	%	$	9,958	12.9	%	5.0%
Common equity Tier 1 capital	$	10,607	14.4	%	$	9,958	14.9	%	6.5%

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

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 September 30, 2018, we had not recorded any contingent liabilities in our Condensed Consolidated Statement of Financial Position related to any guarantees. See Note 9 - Fair Value Measurements to our condensed consolidated financial statements for information on contingent consideration liabilities related to business acquisitions.

We extend credit, primarily arising from agreements with customers for unused lines of credit on our credit cards, in the ordinary course of business. See Note 4 - Loan Receivables and Allowance for Loan Losses to our condensed consolidated financial statements for more information on our unfunded lending commitments.

Critical Accounting Estimates

____________________________________________________________________________________________

In preparing our condensed consolidated financial statements, we have identified certain accounting estimates and assumptions that we consider to be the most critical to an understanding of our financial statements because they involve significant judgments and uncertainties. The critical accounting estimates we have identified relate to allowance for loan losses, income taxes and fair value measurements. All of these estimates reflect our best judgment about current, and for some estimates future, economic and market conditions and their effects based on information available as of the date of these financial statements. If these conditions change from those expected, it is reasonably possible that these judgments and estimates could change, which may result in incremental losses on loan receivables and the establishment of valuation allowances on deferred tax assets and increases in our tax liabilities, among other effects. See “Management's Discussion and Analysis—Critical Accounting Estimates” in our 2017 Form 10-K, for a detailed discussion of these critical accounting estimates.

New Accounting Standards

____________________________________________________________________________________________

See Note 2. Basis of Presentation and Summary of Significant Accounting Policies — New Accounting Standards, for additional information related to recent accounting pronouncements.

Regulation and Supervision

____________________________________________________________________________________________

Our business, including our relationships with our customers, is subject to regulation, supervision and examination under U.S. federal, state and foreign laws and regulations. These laws and regulations cover all aspects of our business, including lending practices, treatment of our customers, safeguarding deposits, customer privacy and information security, capital structure, liquidity, dividends and other capital distributions, transactions with affiliates, and conduct and qualifications of personnel.

As a savings and loan holding company and a financial holding company, Synchrony is subject to regulation, supervision and examination by the Federal Reserve Board. As a large provider of consumer financial services, we are also subject to regulation, supervision and examination by the CFPB.

The Bank is a federally chartered savings association. As such, the Bank is subject to regulation, supervision and examination by the OCC, which is its primary regulator, and by the CFPB. In addition, the Bank, as an insured depository institution, is supervised by the FDIC.

See “Regulation” in our 2017 Form 10-K for additional information. See also “—Capital” above, for discussion of the impact of regulations and supervision on our capital and liquidity, including our ability to pay dividends and repurchase stock.

ITEM 1. FINANCIAL STATEMENTS

Synchrony Financial and subsidiaries

Condensed Consolidated Statements of Earnings

(Unaudited)

____________________________________________________________________________________________



	Three months ended September 30,						Nine months ended September 30,
($ in millions, except per share data)	2018			2017			2018			2017
Interest income:
Interest and fees on loans (Note 4)	$	4,617		$	4,182		$	12,870		$	11,986
Interest on debt securities	77			51			242			130
Total interest income	4,694			4,233			13,112			12,116
Interest expense:
Interest on deposits	314			219			836			615
Interest on borrowings of consolidated securitization entities	86			65			240			193
Interest on third-party debt	88			73			251			208
Total interest expense	488			357			1,327			1,016
Net interest income	4,206			3,876			11,785			11,100
Retailer share arrangements	(871		)	(805		)	(2,244		)	(2,158		)
Net interest income, after retailer share arrangements	3,335			3,071			9,541			8,942
Provision for loan losses (Note 4)	1,451			1,310			4,093			3,942
Net interest income, after retailer share arrangements and provision for loan losses	1,884			1,761			5,448			5,000
Other income:
Interchange revenue	182			164			517			474
Debt cancellation fees	65			67			197			203
Loyalty programs	(196		)	(168		)	(543		)	(511		)
Other	12			13			30			60
Total other income	63			76			201			226
Other expense:
Employee costs	365			333			1,074			974
Professional fees	232			161			575			470
Marketing and business development	131			124			362			342
Information processing	105			96			308			274
Other	221			244			698			717
Total other expense	1,054			958			3,017			2,777
Earnings before provision for income taxes	893			879			2,632			2,449
Provision for income taxes (Note 12)	222			324			625			899
Net earnings	$	671		$	555		$	2,007		$	1,550

Earnings per share
Basic	$	0.91		$	0.70		$	2.68		$	1.93
Diluted	$	0.91		$	0.70		$	2.66		$	1.93

Dividends declared per common share	$	0.21		$	0.15		$	0.51		$	0.41

See accompanying notes to condensed consolidated financial statements.

Synchrony Financial and subsidiaries

Condensed Consolidated Statements of Comprehensive Income (Unaudited)

____________________________________________________________________________________________



	Three months ended September 30,					Nine months ended September 30,
($ in millions)	2018			2017		2018			2017

Net earnings	$	671		$	555	$	2,007		$	1,550

Other comprehensive income (loss)
Debt securities	(5		)	3		(29		)	6
Currency translation adjustments	—			6		(6		)	7
Employee benefit plans	(1		)	—		—			—
Other comprehensive income (loss)	(6		)	9		(35		)	13

Comprehensive income	$	665		$	564	$	1,972		$	1,563

Amounts presented net of taxes.

See accompanying notes to condensed consolidated financial statements.

Synchrony Financial and subsidiaries

Condensed Consolidated Statements of Financial Position

____________________________________________________________________________________________



($ in millions)	At September 30, 2018			At December 31, 2017
	(Unaudited)
Assets
Cash and equivalents	$	12,068		$	11,602
Debt securities (Note 3)	7,281			4,473
Loan receivables: (Notes 4 and 5)
Unsecuritized loans held for investment	59,868			55,526
Restricted loans of consolidated securitization entities	27,653			26,421
Total loan receivables	87,521			81,947
Less: Allowance for loan losses	(6,223		)	(5,574		)
Loan receivables, net	81,298			76,373
Goodwill	1,024			991
Intangible assets, net (Note 6)	1,105			749
Other assets	1,769			1,620
Total assets	$	104,545		$	95,808

Liabilities and Equity
Deposits: (Note 7)
Interest-bearing deposit accounts	$	62,030		$	56,276
Non-interest-bearing deposit accounts	287			212
Total deposits	62,317			56,488
Borrowings: (Notes 5 and 8)
Borrowings of consolidated securitization entities	14,187			12,497
Senior unsecured notes	9,554			8,302
Total borrowings	23,741			20,799
Accrued expenses and other liabilities	4,491			4,287
Total liabilities	$	90,549		$	81,574

Equity:
Common Stock, par share value $0.001 per share; 4,000,000,000 shares authorized; 833,984,684 shares issued at both September 30, 2018 and December 31, 2017; 718,710,316 and 770,531,433 shares outstanding at September 30, 2018 and December 31, 2017, respectively	$	1		$	1
Additional paid-in capital	9,470			9,445
Retained earnings	8,355			6,809
Accumulated other comprehensive income (loss):
Debt securities	(48		)	(19		)
Currency translation adjustments	(23		)	(17		)
Other	(28		)	(28		)
Treasury Stock, at cost; 115,274,368 and 63,453,251 shares at September 30, 2018 and December 31, 2017, respectively	(3,731		)	(1,957		)
Total equity	13,996			14,234
Total liabilities and equity	$	104,545		$	95,808

See accompanying notes to condensed consolidated financial statements.

Synchrony Financial and subsidiaries

Condensed Consolidated Statements of Changes in Equity

(Unaudited)

____________________________________________________________________________________________



	Common Stock
($ in millions, shares in thousands)	Shares Issued	Amount		Additional Paid-in Capital		Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Treasury Stock			Total Equity

Balance at January 1, 2017	833,985	$	1	$	9,393	$	5,330		$	(53	)	$	(475	)	$	14,196
Net earnings	—	—		—		1,550			—			—			1,550
Other comprehensive income	—	—		—		—			13			—			13
Purchases of treasury stock	—	—		—		—			—			(1,066		)	(1,066		)
Stock-based compensation	—	—		36		(9		)	—			10			37
Dividends - common stock	—	—		—		(328		)	—			—			(328		)
Balance at September 30, 2017	833,985	$	1	$	9,429	$	6,543		$	(40	)	$	(1,531	)	$	14,402


Balance at January 1, 2018	833,985	$	1	$	9,445	$	6,809		$	(64	)	$	(1,957	)	$	14,234
Net earnings	—	—		—		2,007			—			—			2,007
Other comprehensive income	—	—		—		—			(35		)	—			(35		)
Purchases of treasury stock	—	—		—		—			—			(1,868		)	(1,868		)
Stock-based compensation	—	—		25		(81		)	—			94			38
Dividends - common stock	—	—		—		(383		)	—			—			(383		)
Other	—	—		—		3			—						3
Balance at September 30, 2018	833,985	$	1	$	9,470	$	8,355		$	(99	)	$	(3,731	)	$	13,996

See accompanying notes to condensed consolidated financial statements.

Synchrony Financial and subsidiaries

Condensed Consolidated Statements of Cash Flows

(Unaudited)

____________________________________________________________________________________________



	Nine months ended September 30,
($ in millions)	2018			2017
Cash flows - operating activities
Net earnings	$	2,007		$	1,550
Adjustments to reconcile net earnings to cash provided from operating activities
Provision for loan losses	4,093			3,942
Deferred income taxes	(53		)	186
Depreciation and amortization	222			187
(Increase) decrease in interest and fees receivable	(36		)	(110		)
(Increase) decrease in other assets	(39		)	(79		)
Increase (decrease) in accrued expenses and other liabilities	120			(58		)
All other operating activities	452			488
Cash provided from (used for) operating activities	6,766			6,106

Cash flows - investing activities
Maturity and sales of debt securities	3,961			2,987
Purchases of debt securities	(6,805		)	(1,247		)
Acquisition of loan receivables	(7,342		)	(73		)
Net (increase) decrease in loan receivables	(1,950		)	(3,706		)
All other investing activities	(615		)	(383		)
Cash provided from (used for) investing activities	(12,751		)	(2,422		)

Cash flows - financing activities
Borrowings of consolidated securitization entities
Proceeds from issuance of securitized debt	4,493			2,381
Maturities and repayment of securitized debt	(2,807		)	(2,884		)
Third-party debt
Proceeds from issuance of third-party debt	1,244			741
Maturities and repayment of third-party debt	—			(500		)
Net increase (decrease) in deposits	5,792			2,400
Purchases of treasury stock	(1,868		)	(1,066		)
Dividends paid on common stock	(383		)	(328		)
All other financing activities	(32		)	(8		)
Cash provided from (used for) financing activities	6,439			736

Increase (decrease) in cash and equivalents, including restricted amounts	454			4,420
Cash and equivalents, including restricted amounts, at beginning of period	11,817			9,668
Cash and equivalents at end of period:
Cash and equivalents	12,068			13,915
Restricted cash and equivalents included in other assets	203			173
Total cash and equivalents, including restricted amounts, at end of period	$	12,271		$	14,088

See accompanying notes to condensed consolidated financial statements.

Synchrony Financial and subsidiaries

Notes to Condensed Consolidated Financial Statements (Unaudited)

____________________________________________________________________________________________

NOTE 1. BUSINESS DESCRIPTION

Synchrony Financial (the “Company”) provides a range of credit products through programs it has established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers. We primarily offer private label, Dual Card and general purpose co-branded credit cards, promotional financing and installment lending, loyalty programs and FDIC-insured savings products through Synchrony Bank (the “Bank”).

References to the “Company”, “we”, “us” and “our” are to Synchrony Financial and its consolidated subsidiaries unless the context otherwise requires.

NOTE 2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements were prepared in conformity with U.S. generally accepted accounting principles (“GAAP”).

Preparing financial statements in conformity with U.S. GAAP requires us to make estimates based on assumptions about current, and for some estimates, future, economic and market conditions (for example, unemployment, housing, interest rates and market liquidity) which affect reported amounts and related disclosures in our condensed consolidated financial statements. Although our current estimates contemplate current conditions and how we expect them to change in the future, as appropriate, it is reasonably possible that actual conditions could be different than anticipated in those estimates, which could materially affect our results of operations and financial position. Among other effects, such changes could result in incremental losses on loan receivables, future impairments of debt securities, goodwill and intangible assets, increases in reserves for contingencies, establishment of valuation allowances on deferred tax assets and increases in our tax liabilities.

We primarily conduct our operations within the United States and Canada. Substantially all of our revenues are from U.S. customers. The operating activities conducted by our non-U.S. affiliates use the local currency as their functional currency. The effects of translating the financial statements of these non-U.S. affiliates to U.S. dollars are included in equity. Asset and liability accounts are translated at period-end exchange rates, while revenues and expenses are translated at average rates for the respective periods.

Consolidated Basis of Presentation

The Company’s financial statements have been prepared on a consolidated basis. Under this basis of presentation, our financial statements consolidate all of our subsidiaries – i.e., entities in which we have a controlling financial interest, most often because we hold a majority voting interest.

To determine if we hold a controlling financial interest in an entity, we first evaluate if we are required to apply the variable interest entity (“VIE”) model to the entity, otherwise the entity is evaluated under the voting interest model. Where we hold current or potential rights that give us the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance (“power”) combined with a variable interest that gives us the right to receive potentially significant benefits or the obligation to absorb potentially significant losses (“significant economics”), we have a controlling financial interest in that VIE. Rights held by others to remove the party with power over the VIE are not considered unless one party can exercise those rights unilaterally. We consolidate certain securitization entities under the VIE model because we have both power and significant economics. See Note 5. Variable Interest Entities.

We have reclassified certain prior-period amounts to conform to current-period presentation.

Interim Period Presentation

The condensed consolidated financial statements and notes thereto are unaudited. These statements include all adjustments (consisting of normal recurring accruals) that we considered necessary to present a fair statement of our results of operations, financial position and cash flows. The results reported in these condensed consolidated financial statements should not be considered as necessarily indicative of results that may be expected for the entire year. These condensed consolidated financial statements should be read in conjunction with our 2017 annual consolidated financial statements and the related notes in our Annual Report on Form 10-K for the year ended December 31, 2017 (our "2017 Form 10-K").

New Accounting Standards

Newly Adopted Accounting Standards

In May 2014, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09, Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. The new revenue recognition guidance became effective January 1, 2018 for the Company. The scope of ASU 2014-09 excludes interest and fee income on loans and as a result, the majority of the Company's revenue is not in the scope of the standard. The new guidance did not impact the timing or measurement of the Company's revenues, and as a result, the Company did not present any restated prior period results as a result of the standard becoming effective.

In November 2016, the FASB issued ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash, which requires restricted cash and restricted cash equivalents to be included within beginning and ending total cash amounts reported in the consolidated statements of cash flows. Disclosure of the nature of the restrictions on cash balances is required under the guidance. This standard is effective for annual and interim reporting periods for fiscal years beginning after December 15, 2017. We adopted the guidance retrospectively effective as of January 1, 2018. Upon adoption, changes in restricted cash, which had previously been presented as investing activities, are now included within beginning and ending cash and equivalents, including restricted amounts, balances in our Consolidated Statements of Cash Flows. Additionally, in August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments, which provided guidance on certain cash flow issues. This standard is effective for annual and interim reporting periods for fiscal years beginning after December 15, 2017. We adopted the guidance retrospectively effective as of January 1, 2018, which did not have a material impact on our consolidated financial statements.

Effective January 1, 2018, we have adopted the provisions of ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities, which require equity investments (except those accounted for under the equity method of accounting or that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in the Consolidated Statements of Earnings. However, in accordance with the new guidance, the company has elected to measure certain equity investments that do not have readily determinable fair values at cost minus impairment, if any, plus or minus changes resulting from observable price changes for similar investments of the issuer. The adoption of this new guidance did not have a material impact on the consolidated financial statements.

Recently Issued But Not Yet Adopted Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). The ASU requires lessees to recognize most leases on their balance sheet. Leases which are identified as capital leases currently, will generally be identified as financing leases under the new guidance but otherwise their accounting treatment will remain relatively unchanged. Leases identified as operating leases currently, will generally remain in that category under the new standard, but both a right-of-use asset and a liability for remaining lease payments will now be required to be recognized on the balance sheet. This guidance will be effective for the Company on January 1, 2019. Management does not expect this guidance to have a material impact on the consolidated financial statements.

In June 2016, the FASB issued ASU 2016-13, Financial Instruments-Credit Losses: Measurement of Credit Losses on Financial Instruments. This ASU replaces the existing incurred loss impairment guidance with a new impairment model known as the Current Expected Credit Loss ("CECL") model, which is based on expected credit losses. The CECL model requires, upon origination of a loan, the recognition of all expected credit losses over the life of the loan based on historical experience, current conditions and reasonable and supportable forecasts. This standard is effective for annual and interim reporting periods for fiscal years beginning after December 15, 2019, with early adoption permitted for annual and interim periods for fiscal years beginning after December 15, 2018. We plan to adopt the standard on its effective date. The amendments in this standard will be recognized through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective. While we are evaluating the effect that ASU 2016-13 will have on our consolidated financial statements and related disclosures, this standard is expected to result in an increase to the Company's allowance for loan losses given the change to expected losses for the estimated life of the financial asset. The extent of the increase will depend on the asset quality of the portfolio, and economic conditions and forecasts at adoption.

See Note 2. Basis of Presentation and Summary of Significant Accounting Policies to our 2017 annual consolidated financial statements in our 2017 Form 10-K, for additional information on our significant accounting policies, including discussion of the nature of the restrictions on our cash balances.

NOTE 3. DEBT SECURITIES

All of our debt securities are classified as available-for-sale and are held to meet our liquidity objectives or to comply with the Community Reinvestment Act (“CRA”). Our debt securities consist of the following:



	September 30, 2018									December 31, 2017
			Gross		Gross							Gross		Gross
	Amortized		unrealized		unrealized			Estimated		Amortized		unrealized		unrealized			Estimated
($ in millions)	cost		gains		losses			fair value		cost		gains		losses			fair value
U.S. government and federal agency	$	4,300	$	—	$	(9	)	$	4,291	$	2,419	$	—	$	(3	)	$	2,416
State and municipal	40		—		(1		)	39		44		—		—			44
Residential mortgage-backed^(a)	1,216		1		(56		)	1,161		1,258		1		(28		)	1,231
Asset-backed^(b)	1,791		—		(3		)	1,788		781		—		(1		)	780
U.S. corporate debt	2		—		—			2		2		—		—			2
Total	$	7,349	$	1	$	(69	)	$	7,281	$	4,504	$	1	$	(32	)	$	4,473

_______________________


(a)	All of our residential mortgage-backed securities have been issued by government-sponsored entities and are collateralized by U.S. mortgages. At September 30, 2018 and December 31, 2017, $310 million and $344 million of residential mortgage-backed securities, respectively, are pledged by the Bank as collateral to the Federal Reserve to secure Federal Reserve Discount Window advances.


(b)	All of our asset-backed securities are collateralized by credit card loans.

The following table presents the estimated fair values and gross unrealized losses of our available-for-sale debt securities:



	In loss position for
	Less than 12 months					12 months or more
			Gross					Gross
	Estimated		unrealized			Estimated		unrealized
($ in millions)	fair value		losses			fair value		losses
At September 30, 2018
U.S. government and federal agency	$	4,092	$	(8	)	$	199	$	(1	)
State and municipal	33		(1		)	3		—
Residential mortgage-backed	296		(6		)	849		(50		)
Asset-backed	1,338		(3		)	8		—
Total	$	5,759	$	(18	)	$	1,059	$	(51	)

At December 31, 2017
U.S. government and federal agency	$	2,416	$	(3	)	$	—	$	—
State and municipal	—		—			29		—
Residential mortgage-backed	142		(1		)	1,026		(27		)
Asset-backed	626		(1		)	—		—
Total	$	3,184	$	(5	)	$	1,055	$	(27	)

We regularly review debt securities for impairment using both qualitative and quantitative criteria. We presently do not intend to sell our debt securities that are in an unrealized loss position and believe that it is not more likely than not that we will be required to sell these securities before recovery of our amortized cost.

There were no other-than-temporary impairments recognized during the nine months ended September 30, 2018 and 2017.

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



	Amortized		Estimated
At September 30, 2018 ($ in millions)	cost		fair value

Due
Within one year	$	5,441	$	5,438
After one year through five years	$	652	$	644
After five years through ten years	$	167	$	165
After ten years	$	1,089	$	1,034

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 nine months ended September 30, 2018 and 2017.

Although we generally do not have the intent to sell any specific securities held at September 30, 2018, in the ordinary course of managing our debt securities portfolio, we may sell securities prior to their maturities for a variety of reasons, including diversification, credit quality, yield, liquidity requirements and funding obligations.

NOTE 4. LOAN RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES



($ in millions)	September 30, 2018		December 31, 2017

Credit cards	$	84,319	$	79,026
Consumer installment loans	1,789		1,578
Commercial credit products	1,353		1,303
Other	60		40
Total loan receivables, before allowance for losses^(a)(b)	$	87,521	$	81,947

_______________________


(a)	Total loan receivables include $27.7 billion and $26.4 billion of restricted loans of consolidated securitization entities at September 30, 2018 and December 31, 2017, respectively. See Note 5. Variable Interest Entities for further information on these restricted loans.


(b)	At September 30, 2018, loan receivables included discounts and deferred fees, net of premiums and deferred costs, of $5 million. At December 31, 2017, loan receivables included deferred costs, net of deferred fees, of $97 million.

Loan Receivables Acquired

On July 2, 2018, we completed our acquisition of the U.S. PayPal Credit financing program, comprising of $7.6 billion of outstanding loan receivables. We also extended our existing co-brand credit card program with PayPal and Synchrony Bank is now PayPal’s exclusive issuing bank for the PayPal Credit consumer financing program in the United States through 2028. This transaction was accounted for as an asset purchase and the receivables are included within Credit cards at September 30, 2018 in the table above.

Our portfolio of loan receivables includes certain consumer and commercial loans acquired that were recorded at

fair value at acquisition and subsequently accounted for based on cash flows expected to be collected, which are

referred to as purchase credit impaired (“PCI”).

At September 30, 2018, the total recorded investment in PCI loan receivables is $107 million, for which there is no related valuation allowance. Unpaid balance of the PCI loan receivables at September 30, 2018 is $221 million.

Allowance for Loan Losses



($ in millions)	Balance at July 1, 2018		Provision charged to operations		Gross charge-offs			Recoveries		Balance at September 30, 2018

Credit cards	$	5,757	$	1,427	$	(1,269	)	$	202	$	6,117
Consumer installment loans	51		9		(13		)	4		51
Commercial credit products	50		15		(13		)	2		54
Other	1		—		—			—		1
Total	$	5,859	$	1,451	$	(1,295	)	$	208	$	6,223



($ in millions)	Balance at July 1, 2017		Provision charged to operations		Gross charge-offs			Recoveries		Balance at September 30, 2017

Credit cards	$	4,906	$	1,287	$	(1,140	)	$	211	$	5,264
Consumer installment loans	34		14		(12		)	3		39
Commercial credit products	60		9		(14		)	2		57
Other	1		—		—			—		1
Total	$	5,001	$	1,310	$	(1,166	)	$	216	$	5,361



($ in millions)	Balance at January 1, 2018		Provision charged to operations		Gross charge-offs			Recoveries		Balance at September 30, 2018

Credit cards	$	5,483	$	4,016	$	(4,016	)	$	634	$	6,117
Consumer installment loans	40		39		(40		)	12		51
Commercial credit products	50		38		(39		)	5		54
Other	1		—		—			—		1
Total	$	5,574	$	4,093	$	(4,095	)	$	651	$	6,223



($ in millions)	Balance at January 1, 2017		Provision charged to operations		Gross charge-offs			Recoveries		Balance at September 30, 2017

Credit cards	$	4,254	$	3,866	$	(3,518	)	$	662	$	5,264
Consumer installment loans	37		28		(37		)	11		39
Commercial credit products	52		48		(48		)	5		57
Other	1		—		—			—		1
Total	$	4,344	$	3,942	$	(3,603	)	$	678	$	5,361

Delinquent and Non-accrual Loans



At September 30, 2018 ($ in millions)	30-89 days delinquent			90 or more days delinquent			Total past due			90 or more days delinquent and accruing			Total non-accruing

Credit cards	$	2,129		$	1,814		$	3,943		$	1,814		$	—
Consumer installment loans	25			4			29			—			4
Commercial credit products	34			15			49			15			—
Total delinquent loans	$	2,188		$	1,833		$	4,021		$	1,829		$	4
Percentage of total loan receivables	2.5		%	2.1		%	4.6		%	2.1		%	—		%



At December 31, 2017 ($ in millions)	30-89 days delinquent			90 or more days delinquent			Total past due			90 or more days delinquent and accruing			Total non-accruing

Credit cards	$	1,906		$	1,849		$	3,755		$	1,849		$	—
Consumer installment loans	25			5			30			—			5
Commercial credit products	31			15			46			15			—
Total delinquent loans	$	1,962		$	1,869		$	3,831		$	1,864		$	5
Percentage of total loan receivables	2.4		%	2.3		%	4.7		%	2.3		%	—		%

Impaired Loans and Troubled Debt Restructurings

Most of our non-accrual loan receivables are smaller balance loans evaluated collectively, by portfolio, for impairment and therefore are outside the scope of the disclosure requirements for impaired loans. Accordingly, impaired loans represent restructured smaller balance homogeneous loans meeting the definition of a Troubled Debt Restructuring (“TDR”). We use certain loan modification programs for borrowers experiencing financial difficulties. These loan modification programs include interest rate reductions and payment deferrals in excess of three months, which were not part of the terms of the original contract.

We have both internal and external loan modification programs. We use long-term modification programs for borrowers experiencing financial difficulty as a loss mitigation strategy to improve long-term collectability of the loans that are classified as TDRs. The long-term program involves changing the structure of the loan to a fixed payment loan with a maturity no longer than 60 months and reducing the interest rate on the loan. The long-term program does not normally provide for the forgiveness of unpaid principal but may allow for the reversal of certain unpaid interest or fee assessments. We also make loan modifications for customers who request financial assistance through external sources, such as consumer credit counseling agency programs. These loans typically receive a reduced interest rate but continue to be subject to the original minimum payment terms and do not normally include waiver of unpaid principal, interest or fees. The following table provides information on loans that entered a loan modification program during the periods presented:



	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2018		2017		2018		2017
Credit cards	$	227	$	210	$	644	$	557
Consumer installment loans	—		—		—		—
Commercial credit products	1		1		3		3
Total	$	228	$	211	$	647	$	560

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 September 30, 2018 ($ in millions)	Total recorded investment		Related allowance			Net recorded investment		Unpaid principal balance
Credit cards	$	1,149	$	(510	)	$	639	$	1,034
Consumer installment loans	—		—			—		—
Commercial credit products	4		(2		)	2		4
Total	$	1,153	$	(512	)	$	641	$	1,038



At December 31, 2017 ($ in millions)	Total recorded investment		Related allowance			Net recorded investment		Unpaid principal balance
Credit cards	$	1,038	$	(444	)	$	594	$	925
Consumer installment loans	—		—			—		—
Commercial credit products	5		(2		)	3		5
Total	$	1,043	$	(446	)	$	597	$	930

Financial Effects of TDRs

As part of our loan modifications for borrowers experiencing financial difficulty, we may provide multiple concessions to minimize our economic loss and improve long-term loan performance and collectability. The following table presents the types and financial effects of loans modified and accounted for as TDRs during the periods presented:



Three months ended September 30,	2018						2017
($ in millions)	Interest income recognized during period when loans were impaired		Interest income that would have been recorded with original terms		Average recorded investment		Interest income recognized during period when loans were impaired		Interest income that would have been recorded with original terms		Average recorded investment
Credit cards	$	13	$	67	$	1,122	$	13	$	57	$	954
Consumer installment loans	—		—		—		—		—		—
Commercial credit products	—		1		5		—		1		5
Total	$	13	$	68	$	1,127	$	13	$	58	$	959




Nine months ended September 30,	2018						2017
($ in millions)	Interest income recognized during period when loans were impaired		Interest income that would have been recorded with original terms		Average recorded investment		Interest income recognized during period when loans were impaired		Interest income that would have been recorded with original terms		Average recorded investment
Credit cards	$	37	$	194	$	1,089	$	36	$	161	$	916
Consumer installment loans	—		—		—		—		—		—
Commercial credit products	—		1		5		—		1		6
Total	$	37	$	195	$	1,094	$	36	$	162	$	922

Payment Defaults

The following table presents the type, number and amount of loans accounted for as TDRs that enrolled in a modification plan within the previous 12 months from the applicable balance sheet date and experienced a payment default during the periods presented. A customer defaults from a modification program after two consecutive missed payments.



Three months ended September 30,	2018			2017
($ in millions)	Accounts defaulted	Loans defaulted		Accounts defaulted	Loans defaulted
Credit cards	18,719	$	43	19,466	$	41
Consumer installment loans	—	—		—	—
Commercial credit products	74	—		58	—
Total	18,793	$	43	19,524	$	41




Nine months ended September 30,	2018			2017
($ in millions)	Accounts defaulted	Loans defaulted		Accounts defaulted	Loans defaulted
Credit cards	43,361	$	101	42,569	$	90
Consumer installment loans	—	—		—	—
Commercial credit products	340	1		124	1
Total	43,701	$	102	42,693	$	91

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 September 30, 2018 and December 31, 2017, respectively, as a percentage of each class of loan receivable. The table below excludes 0.5%, 0.6% and 0.7% of our total loan receivables balance at each of September 30, 2018, December 31, 2017 and September 30, 2017, respectively, which represents those customer accounts for which a FICO score is not available.



	September 30, 2018						December 31, 2017						September 30, 2017
	661 or		601 to		600 or		661 or		601 to		600 or		661 or		601 to		600 or
	higher		660		less		higher		660		less		higher		660		less

Credit cards	74	%	18	%	8	%	73	%	19	%	8	%	73	%	19	%	8	%
Consumer installment loans	81	%	14	%	5	%	79	%	15	%	6	%	79	%	15	%	6	%
Commercial credit products	91	%	5	%	4	%	88	%	7	%	5	%	88	%	7	%	5	%

Unfunded Lending Commitments

We manage the potential risk in credit commitments by limiting the total amount of credit, both by individual customer and in total, by monitoring the size and maturity of our portfolios and by applying the same credit standards for all of our credit products. Unused credit card lines available to our customers totaled approximately $414 billion and $370 billion at September 30, 2018 and December 31, 2017, respectively. While these amounts represented the total available unused credit card lines, we have not experienced and do not anticipate that all of our customers will access their entire available line at any given point in time.

Interest Income by Product

The following table provides additional information about our interest and fees on loans, including merchant discounts, from our loan receivables, including held for sale:



	Three months ended September 30,				Nine months ended September 30,
($ in millions)	2018		2017		2018		2017
Credit cards	$	4,538	$	4,111	$	12,647	$	11,780
Consumer installment loans	41		35		114		101
Commercial credit products	37		36		107		104
Other	1		—		2		1
Total	$	4,617	$	4,182	$	12,870	$	11,986

NOTE 5. VARIABLE INTEREST ENTITIES

We use VIEs to securitize loan receivables and arrange asset-backed financing in the ordinary course of business. Investors in these entities only have recourse to the assets owned by the entity and not to our general credit. We do not have implicit support arrangements with any VIE and we did not provide non-contractual support for previously transferred loan receivables to any VIE in the three and nine months ended September 30, 2018 and 2017. Our VIEs are able to accept new loan receivables and arrange new asset-backed financings, consistent with the requirements and limitations on such activities placed on the VIE by existing investors. Once an account has been designated to a VIE, the contractual arrangements we have require all existing and future loan receivables originated under such account to be transferred to the VIE. The amount of loan receivables held by our VIEs in excess of the minimum amount required under the asset-backed financing arrangements with investors may be removed by us under random removal of accounts provisions. All loan receivables held by a VIE are subject to claims of third-party investors.

In evaluating whether we have the power to direct the activities of a VIE that most significantly impact its economic performance, we consider the purpose for which the VIE was created, the importance of each of the activities in which it is engaged and our decision-making role, if any, in those activities that significantly determine the entity’s economic performance as compared to other economic interest holders. This evaluation requires consideration of all facts and circumstances relevant to decision-making that affects the entity’s future performance and the exercise of professional judgment in deciding which decision-making rights are most important.

In determining whether we have the right to receive benefits or the obligation to absorb losses that could potentially be significant to a VIE, we evaluate all of our economic interests in the entity, regardless of form (debt, equity, management and servicing fees, and other contractual arrangements). This evaluation considers all relevant factors of the entity’s design, including: the entity’s capital structure, contractual rights to earnings or losses, subordination of our interests relative to those of other investors, as well as any other contractual arrangements that might exist that could have the potential to be economically significant. The evaluation of each of these factors in reaching a conclusion about the potential significance of our economic interests is a matter that requires the exercise of professional judgment.

We consolidate VIEs where we have the power to direct the activities that significantly affect the VIEs' economic performance, typically because of our role as either servicer or administrator for the VIEs. The power to direct exists because of our role in the design and conduct of the servicing of the VIEs’ assets as well as directing certain affairs of the VIEs, including determining whether and on what terms debt of the VIEs will be issued.

The loan receivables in these entities have risks and characteristics similar to our other financing receivables and were underwritten to the same standard. Accordingly, the performance of these assets has been similar to our other comparable loan receivables, and the blended performance of the pools of receivables in these entities reflects the eligibility criteria that we apply to determine which receivables are selected for transfer. Contractually, the cash flows from these financing receivables must first be used to pay third-party debt holders, as well as other expenses of the entity. Excess cash flows, if any, are available to us. The creditors of these entities have no claim on our other assets.

The table below summarizes the assets and liabilities of our consolidated securitization VIEs described above.



($ in millions)	September 30, 2018		December 31, 2017
Assets
Loan receivables, net^(a)	$	25,958	$	24,990
Other assets^(b)	74		62
Total	$	26,032	$	25,052

Liabilities
Borrowings	$	14,187	$	12,497
Other liabilities	35		30
Total	$	14,222	$	12,527

_______________________


(a)	Includes $1.7 billion and $1.4 billion of related allowance for loan losses resulting in gross restricted loans of $27.7 billion and $26.4 billion at September 30, 2018 and December 31, 2017, respectively.


(b)	Includes $65 million and $55 million of segregated funds held by the VIEs at September 30, 2018 and December 31, 2017, respectively, which are classified as restricted cash and equivalents and included as a component of other assets in our Condensed Consolidated Statements of Financial Position.

The balances presented above are net of intercompany balances and transactions that are eliminated in our condensed consolidated financial statements.

We provide servicing for all of our consolidated VIEs. Collections are required to be placed into segregated accounts owned by each VIE in amounts that meet contractually specified minimum levels. These segregated funds are invested in cash and cash equivalents and are restricted as to their use, principally to pay maturing principal and interest on debt and the related servicing fees. Collections above these minimum levels are remitted to us on a daily basis.

Income (principally, interest and fees on loans) earned by our consolidated VIEs was $1.3 billion and $1.0 billion for the three months ended September 30, 2018 and 2017, respectively. Related expenses consisted primarily of provision for loan losses of $261 million and $303 million for the three months ended September 30, 2018 and 2017, respectively, and interest expense of $86 million and $65 million for the three months ended September 30, 2018 and 2017, respectively.

Income (principally, interest and fees on loans) earned by our consolidated VIEs was $3.7 billion and $3.1 billion for the nine months ended September 30, 2018 and 2017, respectively. Related expenses consisted primarily of provision for loan losses of $1.1 billion and $904 million for the nine months ended September 30, 2018 and 2017, respectively, and interest expense of $240 million and $193 million for the nine months ended September 30, 2018 and 2017, respectively.

NOTE 6. INTANGIBLE ASSETS



	September 30, 2018							December 31, 2017
($ in millions)	Gross carrying amount		Accumulated amortization			Net		Gross carrying amount		Accumulated amortization			Net
Customer-related	$	1,566	$	(765	)	$	801	$	1,242	$	(679	)	$	563
Capitalized software and other	546		(242		)	304		368		(182		)	186
Total	$	2,112	$	(1,007	)	$	1,105	$	1,610	$	(861	)	$	749

During the nine months ended September 30, 2018, we recorded additions to intangible assets subject to amortization of $534 million, primarily related to customer-related intangible assets, as well as capitalized software expenditures.

Customer-related intangible assets primarily relate to retail partner contract acquisitions and extensions, as well as purchased credit card relationships. During the nine months ended September 30, 2018 and 2017, we recorded additions to customer-related intangible assets subject to amortization of $342 million and $175 million, respectively, primarily related to payments made to acquire and extend certain retail partner relationships. These additions had a weighted average amortizable life of 9 years and 10 years for the nine months ended September 30, 2018 and 2017, respectively.

Amortization expense related to retail partner contracts was $34 million and $28 million for the three months ended September 30, 2018 and 2017, respectively, and $92 million and $83 million for the nine months ended September 30, 2018 and 2017, respectively, and is included as a component of marketing and business development expense in our Condensed Consolidated Statements of Earnings. All other amortization expense was $29 million and $25 million for the three months ended September 30, 2018 and 2017, respectively, and $84 million and $63 million for the nine months ended September 30, 2018 and 2017, respectively, and is included as a component of other expense in our Condensed Consolidated Statements of Earnings.

NOTE 7. DEPOSITS



	September 30, 2018				December 31, 2017
($ in millions)	Amount		Average rate^(a)		Amount		Average rate^(a)

Interest-bearing deposits	$	62,030	1.9	%	$	56,276	1.6	%
Non-interest-bearing deposits	287		—		212		—
Total deposits	$	62,317			$	56,488

____________________


(a)	Based on interest expense for the nine months ended September 30, 2018 and the year ended December 31, 2017 and average deposits balances.

At September 30, 2018 and December 31, 2017, interest-bearing deposits included $19.7 billion and $16.2 billion of certificates of deposit of $100,000 or more, respectively. Of the total certificates of deposit of $100,000 or more, $6.7 billion and $5.3 billion were certificates of deposit of $250,000 or more at September 30, 2018 and December 31, 2017, respectively.

At September 30, 2018, our interest-bearing time deposits maturing for the remainder of 2018 and over the next four years and thereafter were as follows:



($ in millions)	2018		2019		2020		2021		2022		Thereafter
Deposits	$	5,402	$	23,439	$	4,352	$	2,802	$	2,460	$	2,397

The above maturity table excludes $18.0 billion of demand deposits with no defined maturity, of which $16.7 billion are savings accounts. In addition, at September 30, 2018, we had $3.2 billion of broker network deposit sweeps procured through a program arranger who channels brokerage account deposits to us that are also excluded from the above maturity table. Unless extended, the contracts associated with these broker network deposit sweeps will terminate between 2020 and 2021.

NOTE 8. BORROWINGS



	September 30, 2018							December 31, 2017
($ in millions)	Maturity date	Interest Rate		Weighted average interest rate		Outstanding Amount^(a)		Outstanding Amount^(a)

Borrowings of consolidated securitization entities:
Fixed securitized borrowings	2019 - 2023	1.58% - 3.87%		2.47	%	$	8,662	$	8,347
Floating securitized borrowings	2019 - 2021	2.75% - 3.22%		2.91	%	5,525		4,150
Total borrowings of consolidated securitization entities				2.64	%	14,187		12,497

Synchrony Financial senior unsecured notes:
Fixed senior unsecured notes	2019 - 2027	2.60% - 4.50%		3.59	%	7,316		7,310
Floating senior unsecured notes	2020	3.58	%	3.58	%	249		250

Synchrony Bank senior unsecured notes:
Fixed senior unsecured notes	2021 - 2022	3.00% - 3.65%		3.33	%	1,490		742
Floating senior unsecured notes	2020	3.01	%	3.01	%	499		—
Total senior unsecured notes				3.51	%	9,554		8,302

Total borrowings						$	23,741	$	20,799

___________________


(a)	The amounts presented above for outstanding borrowings include unamortized debt premiums, discounts and issuance cost.

Debt Maturities

The following table summarizes the maturities of the principal amount of our borrowings of consolidated securitization entities and senior unsecured notes for the remainder of 2018 and over the next four years and thereafter:



($ in millions)	2018		2019		2020		2021		2022		Thereafter
Borrowings	$	—	$	6,385	$	6,800	$	4,525	$	1,634	$	4,457

Third-Party Debt




2018 Issuances ($ in millions):
Synchrony Bank
Issuance Date	Principal Amount		Maturity	Interest Rate
January 2, 2018	$	500	2020	Floating rate (three-month LIBOR plus 0.625%)
May 24, 2018	$	750	2021	3.650	%

Credit Facilities

As additional sources of liquidity, we have undrawn committed capacity under credit facilities, primarily related to our securitization programs.

At September 30, 2018, we had an aggregate of $4.6 billion of undrawn committed capacity under our securitization financings, subject to customary borrowing conditions, from private lenders under our securitization programs, and an aggregate of $0.5 billion of undrawn committed capacity under our unsecured revolving credit facility with private lenders.

NOTE 9. FAIR VALUE MEASUREMENTS

For a description of how we estimate fair value, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies in our 2017 annual consolidated financial statements in our 2017 Form 10-K.

The following tables present our assets and liabilities measured at fair value on a recurring basis.

Recurring Fair Value Measurements



At September 30, 2018 ($ in millions)	Level 1		Level 2		Level 3		Total^(a)

Assets
Debt securities
U.S. Government and Federal Agency	$	—	$	4,291	$	—	$	4,291
State and municipal	—		—		39		39
Residential mortgage-backed	—		1,161		—		1,161
Asset-backed	—		1,788		—		1,788
U.S. corporate debt	—		—		2		2
Other assets^(b)	15		—		11		26
Total	$	15	$	7,240	$	52	$	7,307

Liabilities
Contingent consideration	—		—		31		31
Total	$	—	$	—	$	31	$	31

At December 31, 2017 ($ in millions)

Assets
Debt securities
U.S. Government and Federal Agency	$	—	$	2,416	$	—	$	2,416
State and municipal	—		—		44		44
Residential mortgage-backed	—		1,231		—		1,231
Asset-backed	—		780		—		780
U.S. corporate debt	—		—		2		2
Other assets^(b)	15		—		—		15
Total	$	15	$	4,427	$	46	$	4,488

_______________________


(a)	For the nine months ended September 30, 2018, there were no fair value measurements transferred between levels.


(b)	Other assets primarily relate to equity investments measured at fair value.

Loop Commerce

The contingent consideration in the table above relates to the acquisition of Loop Commerce, a provider of digital and in-store gifting services, which was completed in June 2018. Under the acquisition agreement, the actual amount of contingent consideration to be paid to prior investors is dependent on certain future revenues of Loop Commerce over each annual period during the three-year period ending June 30, 2021. The fair value of the contingent consideration was estimated by applying the income approach based upon significant Level 3 inputs not observable in the market. The assumptions used in the analysis are inherently subjective, and thus the ultimate amount of the contingent consideration liability may differ materially from the most recent estimate. The contingent consideration obligation has been subsequently remeasured to fair value at each reporting date following the acquisition, with changes to fair value recognized in the Consolidated Statement of Earnings. At the date of acquisition, the range of potential payments of this contingent consideration was between zero and $126 million. The higher end of this range would be payable in the event the future revenues of Loop Commerce meet the required targets for all three annual periods during the earnout term.

Additionally, as part of the acquisition of Loop Commerce, the Company entered into compensation arrangements with certain employees of Loop Commerce which are also contingent on certain future revenues of Loop Commerce over each annual period during the three-year period ending June 30, 2021.

Level 3 Fair Value Measurements

Our Level 3 recurring fair value measurements primarily relate to state and municipal debt instruments, which are valued using non-binding broker quotes or other third-party sources, CRA investments which are valued using net asset values, as well as the contingent consideration obligation discussed above. For a description of our process to evaluate third-party pricing servicers, see Note 2. Basis of Presentation and Summary of Significant Accounting Policies in our 2017 annual consolidated financial statements in our 2017 Form 10-K. Our state and municipal debt securities are classified as available-for-sale with changes in fair value included in accumulated other comprehensive income.

The changes in our Level 3 assets and liabilities that are measured on a recurring basis for the three and nine months ended September 30, 2018 and 2017 were not material.

Financial Assets and Financial Liabilities Carried at Other than Fair Value



	Carrying		Corresponding fair value amount
At September 30, 2018 ($ in millions)	value		Total		Level 1		Level 2		Level 3
Financial Assets
Financial assets for which carrying values equal or approximate fair value:
Cash and equivalents^(a)	$	12,068	$	12,068	$	12,068	$	—	$	—
Other assets^(a)(b)	$	203	$	203	$	203	$	—	$	—
Financial assets carried at other than fair value:
Loan receivables, net^(c)	$	81,298	$	90,048	$	—	$	—	$	90,048

Financial Liabilities
Financial liabilities carried at other than fair value:
Deposits	$	62,317	$	62,235	$	—	$	62,235	$	—
Borrowings of consolidated securitization entities	$	14,187	$	14,081	$	—	$	8,565	$	5,516
Senior unsecured notes	$	9,554	$	9,332	$	—	$	9,332	$	—

	Carrying		Corresponding fair value amount
At December 31, 2017 ($ in millions)	value		Total		Level 1		Level 2		Level 3
Financial Assets
Financial assets for which carrying values equal or approximate fair value:
Cash and equivalents^(a)	$	11,602	$	11,602	$	11,602	$	—	$	—
Other assets^(a)(b)	$	215	$	215	$	215	$	—	$	—
Financial assets carried at other than fair value:
Loan receivables, net^(c)	$	76,373	$	85,871	$	—	$	—	$	85,871

Financial Liabilities
Financial liabilities carried at other than fair value:
Deposits	$	56,488	$	56,754	$	—	$	56,754	$	—
Borrowings of consolidated securitization entities	$	12,497	$	12,475	$	—	$	8,323	$	4,152
Senior unsecured notes	$	8,302	$	8,471	$	—	$	8,471	$	—

_______________________


(a)	For cash and equivalents and restricted cash and equivalents, carrying value approximates fair value due to the liquid nature and short maturity of these instruments.


(b)	This balance relates to restricted cash and equivalents, which is included in other assets.


(c)	Under certain retail partner program agreements, the expected sales proceeds related to the sale of their credit card portfolio may be limited to the amounts owed by our customers, which may be less than the fair value indicated above.

NOTE 10. REGULATORY AND CAPITAL ADEQUACY

As a savings and loan holding company and a financial holding company, we are subject to regulation, supervision and examination by the Federal Reserve Board and subject to the capital requirements as prescribed by Basel III capital rules and the requirements of the Dodd-Frank Act. The Bank is a federally chartered savings association. As such, the Bank is subject to regulation, supervision and examination by the Office of the Comptroller of the Currency of the U.S. Treasury (the “OCC”), which is its primary regulator, and by the Consumer Financial Protection Bureau (“CFPB”). In addition, the Bank, as an insured depository institution, is supervised by the Federal Deposit Insurance Corporation.

Failure to meet minimum capital requirements can initiate certain mandatory and, possibly, additional discretionary actions by regulators that, if undertaken, could limit our business activities and have a material adverse effect on our consolidated financial statements. Under capital adequacy guidelines, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices. The capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors.

Quantitative measures established by regulation to ensure capital adequacy require us and the Bank to maintain minimum amounts and ratios (set forth in the table below) of Total, Tier 1 and common equity Tier 1 capital (as defined in the regulations) to risk-weighted assets (as defined), and of Tier 1 capital to average assets (as defined).

For Synchrony Financial to be a well-capitalized savings and loan holding company, the Bank must be well-capitalized and Synchrony Financial must not be subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the Federal Reserve Board to meet and maintain a specific capital level for any capital measure.

At September 30, 2018 and December 31, 2017, Synchrony Financial met all applicable requirements to be deemed well-capitalized pursuant to Federal Reserve Board regulations. At September 30, 2018 and December 31, 2017, the Bank also met all applicable requirements to be deemed well-capitalized pursuant to OCC regulations and for purposes of the Federal Deposit Insurance Act. There are no conditions or events subsequent to September 30, 2018 that management believes have changed the Company's or the Bank’s capital category.

The actual capital amounts, ratios and the applicable required minimums of the Company and the Bank are as follows:

Synchrony Financial



At September 30, 2018 ($ in millions)	Actual				Minimum for capital adequacy purposes
	Amount		Ratio^(a)		Amount		Ratio^(b)

Total risk-based capital	$	13,315	15.5	%	$	6,875	8.0	%
Tier 1 risk-based capital	$	12,178	14.2	%	$	5,156	6.0	%
Tier 1 leverage	$	12,178	12.3	%	$	3,945	4.0	%
Common equity Tier 1 Capital	$	12,178	14.2	%	$	3,867	4.5	%



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

Total risk-based capital	$	13,954	17.3	%	$	6,454	8.0	%
Tier 1 risk-based capital	$	12,890	16.0	%	$	4,840	6.0	%
Tier 1 leverage	$	12,890	13.8	%	$	3,724	4.0	%
Common equity Tier 1 Capital	$	12,890	16.0	%	$	3,630	4.5	%

Synchrony Bank



At September 30, 2018 ($ in millions)	Actual				Minimum for capital adequacy purposes				Minimum to be well-capitalized under prompt corrective action provisions
	Amount		Ratio^(a)		Amount		Ratio^(b)		Amount		Ratio

Total risk-based capital	$	11,588	15.7	%	$	5,910	8.0	%	$	7,387	10.0	%
Tier 1 risk-based capital	$	10,607	14.4	%	$	4,432	6.0	%	$	5,910	8.0	%
Tier 1 leverage	$	10,607	12.5	%	$	3,390	4.0	%	$	4,237	5.0	%
Common equity Tier I capital	$	10,607	14.4	%	$	3,324	4.5	%	$	4,802	6.5	%



At December 31, 2017 ($ in millions)	Actual				Minimum for capital adequacy purposes				Minimum to be well-capitalized under prompt corrective action provisions
	Amount		Ratio^(a)		Amount		Ratio^(b)		Amount		Ratio

Total risk-based capital	$	10,842	16.2	%	$	5,340	8.0	%	$	6,675	10.0	%
Tier 1 risk-based capital	$	9,958	14.9	%	$	4,005	6.0	%	$	5,340	8.0	%
Tier 1 leverage	$	9,958	12.9	%	$	3,083	4.0	%	$	3,854	5.0	%
Common equity Tier I capital	$	9,958	14.9	%	$	3,004	4.5	%	$	4,339	6.5	%

_______________________


(a)	Capital ratios are calculated based on the Basel III Standardized Approach rules which, at December 31, 2017, also included applicable transition provisions.

(b)

At September 30, 2018 and at December 31, 2017, Synchrony Financial and the Bank also must maintain a capital conservation buffer of common equity Tier 1 capital in excess of minimum risk-based capital ratios by at least 1.875 percentage points and 1.25 percentage points, respectively, to avoid limits on capital distributions and certain discretionary bonus payments to executive officers and similar employees.

The Bank may pay dividends on its stock, with consent or non-objection from the OCC and the Federal Reserve Board, among other things, if its regulatory capital would not thereby be reduced below the applicable regulatory capital requirements.

NOTE 11. EARNINGS PER SHARE

Basic earnings per share is computed by dividing earnings available to common stockholders by the weighted average number of common shares outstanding for the period. Diluted earnings per share reflects the assumed conversion of all dilutive securities.

The following table presents the calculation of basic and diluted earnings per share:



	Three months ended September 30,				Nine months ended September 30,
(in millions, except per share data)	2018		2017		2018		2017

Net earnings	$	671	$	555	$	2,007	$	1,550

Weighted average common shares outstanding, basic	734.9		787.3		750.2		801.3
Effect of dilutive securities	3.9		3.6		5.5		3.7
Weighted average common shares outstanding, dilutive	738.8		790.9		755.7		805.0

Earnings per basic common share	$	0.91	$	0.70	$	2.68	$	1.93
Earnings per diluted common share	$	0.91	$	0.70	$	2.66	$	1.93

We have issued certain stock based awards under the Synchrony Financial 2014 Long-Term Incentive Plan. A total of 5 million and 4 million shares for three months ended September 30, 2018 and 2017, respectively, and 3 million shares for both the nine months ended September 30, 2018 and 2017, respectively, related to these awards, were considered anti-dilutive and therefore were excluded from the computation of diluted earnings per share.

NOTE 12. INCOME TAXES

We file consolidated U.S. federal and state income tax returns separate and apart from GE. For periods up to and including the date of Separation, we were included in the consolidated U.S. federal and state income tax returns of GE, where applicable, but also filed certain separate state and foreign income tax returns. The tax provision is presented on a separate company basis as if we were a separate filer for tax purposes for all periods. The effects of tax adjustments and settlements from taxing authorities are presented in our condensed consolidated financial statements in the period in which they occur. Our current obligations for taxes are settled with the relevant tax authority, or GE, as applicable, on an estimated basis and adjusted in later periods as appropriate and are reflected in our consolidated financial statements in the periods in which those settlements occur. We recognize the current and deferred tax consequences of all transactions that have been recognized in the financial statements using the provisions of the enacted tax laws. In calculating the provision for interim period income taxes, in accordance with Accounting Standards Codification 740, Income Taxes, we estimate the effective tax rate expected to be applicable for the full fiscal year and apply that estimated annual effective tax rate to year-to-date ordinary income. Adjustments to tax expense are made for year-to-date discrete items. The effective tax rate for the three months ended September 30, 2018 decreased to 24.9%, compared to 36.9% in the same period in the prior year, primarily due to the reduction in the corporate tax rate from 35% to 21% included in the Tax Act. See “Management's Discussion and Analysis—Critical Accounting Estimates” in our 2017 Form 10-K, for a discussion of the significant judgments and estimates related to income taxes.

For periods prior to Separation, we are under continuous examination by the Internal Revenue Service (“IRS”) and the tax authorities of various states as part of their audit of GE’s tax returns. The IRS is currently auditing GE's consolidated U.S. income tax returns for 2012 to 2015. We are under examination in various states going back to 2011 as part of their 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.

Unrecognized Tax Benefits



($ in millions)	September 30, 2018		December 31, 2017
Unrecognized tax benefits, excluding related interest expense and penalties^(a)	$	258	$	255
Portion that, if recognized, would reduce tax expense and effective tax rate^(b)	$	179	$	173

____________________


(a)	Interest and penalties related to unrecognized tax benefits were not material for all periods presented.


(b)	Includes gross state and local unrecognized tax benefits net of the effects of associated U.S. federal income taxes. Excludes amounts attributable to any related valuation allowances resulting from associated increases in deferred tax assets.

We compute our unrecognized tax benefits on a separate return basis. For unrecognized tax benefits associated with periods prior to 2014, we will settle our liabilities, as required, in accordance with the Tax Sharing and Separation Agreement with GE, which we entered into in connection with our initial public offering in 2014. The amount of unrecognized tax benefits that is reasonably possible to be resolved in the next twelve months is expected to be $76 million, of which $29 million, if recognized, would reduce the Company's tax expense and effective tax rate.

NOTE 13. LEGAL PROCEEDINGS AND REGULATORY MATTERS

In the normal course of business, from time to time, we have been named as a defendant in various legal proceedings, including arbitrations, class actions and other litigation, arising in connection with our business activities. Certain of the legal actions include claims for substantial compensatory and/or punitive damages, or claims for indeterminate amounts of damages. We are also involved, from time to time, in reviews, investigations and proceedings (both formal and informal) by governmental agencies regarding our business (collectively, “regulatory matters”), which could subject us to significant fines, penalties, obligations to change our business practices or other requirements resulting in increased expenses, diminished income and damage to our reputation. We contest liability and/or the amount of damages as appropriate in each pending matter. In accordance with applicable accounting guidance, we establish an accrued liability for legal and regulatory matters when those matters present loss contingencies which are both probable and reasonably estimable.

Legal proceedings and regulatory matters are subject to many uncertain factors that generally cannot be predicted with assurance, and we may be exposed to losses in excess of any amounts accrued.

For some matters, we are able to determine that an estimated loss, while not probable, is reasonably possible. For other matters, including those that have not yet progressed through discovery and/or where important factual information and legal issues are unresolved, we are unable to make such an estimate. We currently estimate that the reasonably possible losses for legal proceedings and regulatory matters, whether in excess of a related accrued liability or where there is no accrued liability, and for which we are able to estimate a possible loss, are immaterial. This represents management’s estimate of possible loss with respect to these matters and is based on currently available information. This estimate of possible loss does not represent our maximum loss exposure. The legal proceedings and regulatory matters underlying the estimate will change from time to time and actual results may vary significantly from current estimates.

Our estimate of reasonably possible losses involves significant judgment, given the varying stages of the proceedings, the existence of numerous yet to be resolved issues, the breadth of the claims (often spanning multiple years), unspecified damages and/or the novelty of the legal issues presented. Based on our current knowledge, we do not believe that we are a party to any pending legal proceeding or regulatory matters that would have a material adverse effect on our condensed consolidated financial condition or liquidity. However, in light of the uncertainties involved in such matters, the ultimate outcome of a particular matter could be material to our operating results for a particular period depending on, among other factors, the size of the loss or liability imposed and the level of our earnings for that period, and could adversely affect our business and reputation.

Below is a description of certain of our regulatory matters and legal proceedings.

Regulatory Matters

On October 30, 2014, the United States Trustee, which is part of the Department of Justice, filed an application in In re Nyree Belton, a Chapter 7 bankruptcy case pending in the U.S. Bankruptcy Court for the Southern District of New York for orders authorizing discovery of the Bank pursuant to Rule 2004 of the Federal Rules of Bankruptcy Procedure, related to an investigation of the Bank’s credit reporting. The discovery, which is ongoing, concerns allegations made in Belton et al. v. GE Capital Consumer Lending, a putative class action adversary proceeding pending in the same Bankruptcy Court. In the Belton adversary proceeding, which was filed on April 30, 2014, plaintiff alleges that the Bank violates the discharge injunction under Section 524(a)(2) of the Bankruptcy Code by attempting to collect discharged debts and by failing to update and correct credit information to credit reporting agencies to show that such debts are no longer due and owing because they have been discharged in bankruptcy. Plaintiff seeks declaratory judgment, injunctive relief and an unspecified amount of damages. On December 15, 2014, the Bankruptcy Court entered an order staying the adversary proceeding pending an appeal to the District Court of the Bankruptcy Court’s order denying the Bank’s motion to compel arbitration. On October 14, 2015, the District Court reversed the Bankruptcy Court and on November 4, 2015, the Bankruptcy Court granted the Bank's motion to compel arbitration.

On May 9, 2017, the Bank received a Civil Investigative Demand from the CFPB seeking information related to the marketing and servicing of deferred interest promotions.

Other Matters

The Bank or the Company is, or has been, defending a number of putative class actions alleging claims under the federal Telephone Consumer Protection Act (“TCPA”) as a result of phone calls made by the Bank. The complaints generally have alleged that the Bank or the Company placed calls to consumers by an automated telephone dialing system or using a pre-recorded message or automated voice without their consent and seek up to $1,500 for each violation, without specifying an aggregate amount. Campbell et al. v. Synchrony Bank was filed on January 25, 2017 in the U.S. District Court for the Northern District of New York. The original complaint named only J.C. Penney Company, Inc. and J.C. Penney Corporation, Inc. as the defendants but was amended on April 7, 2017 to replace those defendants with the Bank. Neal et al. v. Wal-Mart Stores, Inc. and Synchrony Bank, for which the Bank is indemnifying Wal-Mart, was filed on January 17, 2017 in the U.S. District Court for the Western District of North Carolina. The original complaint named only Wal-Mart Stores, Inc. as a defendant but was amended on March 30, 2017 to add Synchrony Bank as an additional defendant. Mott et al. v. Synchrony Bank was filed on February 2, 2018 in the U.S. District Court for the Middle District of Florida.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risk refers to the risk that a change in the level of one or more market prices, rates, indices, correlations or other market factors will result in losses for a position or portfolio. We are exposed to market risk primarily from changes in interest rates.

We borrow money from a variety of depositors and institutions in order to provide loans to our customers. Changes in market interest rates cause our net interest income to increase or decrease, as some of our assets and liabilities carry interest rates that fluctuate with market benchmarks. The interest rate benchmark for our floating rate assets is generally the prime rate, and the interest rate benchmark for our floating rate liabilities is generally either LIBOR or the federal funds rate. The prime rate and the LIBOR or federal funds rate could reset at different times or could diverge, leading to mismatches in the interest rates on our floating rate assets and floating rate liabilities.

As of September 30, 2018, assuming an immediate 100 basis point increase in the interest rates affecting all interest rate sensitive assets and liabilities, we estimate that net interest income over the following 12-month period would increase by approximately $67 million. This estimate projects net interest income over the following 12-month period and takes into consideration future growth and balance sheet composition.

For a more detailed discussion of our exposure to market risk, refer to “Management's Discussion and Analysis—Quantitative and Qualitative Disclosures about Market Risk” in our 2017 Form 10-K.

ITEM 4. CONTROLS AND PROCEDURES

Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures, and our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of September 30, 2018.

No change in internal control over financial reporting occurred during the quarter ended September 30, 2018 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

For a description of legal proceedings, see Note 13. Legal Proceedings and Regulatory Matters to our condensed consolidated financial statements in Part 1, Item 1 of this Quarterly Report on Form 10-Q.

ITEM 1A. RISK FACTORS

There have been no material changes to the risk factors included in our 2017 Form 10-K under the heading “Risk Factors”.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

The table below sets forth information regarding purchases of our common stock primarily related to our share repurchase program that were made by us or on our behalf during the three months ended September 30, 2018.



($ in millions, except per share data)	Total Number of Shares Purchased^(a)	Average Price Paid Per Share^(b)		Total Number of Shares Purchased as Part of Publicly Announced Programs^(c)	Maximum Dollar Value of Shares That May Yet Be Purchased Under the Programs^(b)

July 1 - 31, 2018	7,702,315	$	32.74	7,684,897	$	1,667.4
August 1 - 31, 2018	12,827,329	30.82		11,662,607	1,305.7
September 1 - 30, 2018	10,978,299	32.24		10,942,879	953.0
Total	31,507,943	$	31.78	30,290,383	$	953.0

_______________________

(a)

Primarily represents repurchases of shares of common stock under our publicly announced share repurchase programs of up to $2.2 billion of our outstanding shares of common stock through June 30, 2019 (the "2018 Share Repurchase Program"). Also includes 17,418 shares, 1,164,722 shares and 35,420 shares withheld in July, August and September, respectively, to offset tax withholding obligations that occur upon the delivery of outstanding shares underlying restricted stock awards or upon the exercise of stock options.


(b)	Amounts exclude commission costs.


(c)	On May 17, 2018, the Board of Directors approved the 2018 Share Repurchase Program.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

EXHIBIT INDEX



Exhibit Number	Description
12.1	Statement of Ratio of Earnings to Fixed Charges
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
101	The following materials from Synchrony Financial’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2018, formatted in XBRL (eXtensible Business Reporting Language): (i) Condensed Consolidated Statements of Earnings for the three and nine months ended September 30, 2018 and 2017, (ii) Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2018 and 2017, (iii) Condensed Consolidated Statements of Financial Position at September 30, 2018 and December 31, 2017, (iv) Condensed Consolidated Statements of Changes in Equity for the nine months ended September 30, 2018 and 2017, (v) Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2018 and 2017, and (vi) Notes to Condensed Consolidated Financial Statements.

______________________

Signatures

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

Synchrony Financial

(Registrant)



October 25, 2018		/s/ Brian D. Doubles
Date		Brian D. Doubles Executive Vice President and Chief Financial Officer (Duly Authorized Officer and Principal Financial Officer)