10-K 1 synchrony1231201810k.htm 10-K Document


UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
x    
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2018
OR
o
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from         to         
001-36560
(Commission File Number)
sflogoa32.jpg
SYNCHRONY FINANCIAL
(Exact name of registrant as specified in its charter) 
Delaware
 
51-0483352
(State or Other Jurisdiction of
Incorporation or Organization)
 
(I.R.S. Employer
Identification No.)
777 Long Ridge Road
 
 
Stamford, Connecticut
 
06902
(Address of principal executive offices)
 
(Zip Code)
(Registrant’s telephone number, including area code) (203) 585-2400
Securities Registered Pursuant to Section 12(b) of the Act:
Title of each class
 
Name of each exchange on which registered
Common stock, par value $0.001 per share
 
New York Stock Exchange
Securities Registered Pursuant to Section 12(g) of the Act:
Title of class
None
 
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    Yes  ý    No  ¨

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    Yes  ¨    No  ý
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 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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.    ý   
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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 Act).    Yes  ¨    No  ý
The aggregate market value of the outstanding common equity of the registrant held by non-affiliates as of the last business day of the registrant’s most recently completed second fiscal quarter was $24,921,449,418,
The number of shares of the registrant’s common stock, par value $0.001 per share, outstanding as of February 11, 2019 was 709,862,330
DOCUMENTS INCORPORATED BY REFERENCE
The definitive proxy statement relating to the registrant’s Annual Meeting of Stockholders, to be held May 23, 2019, is incorporated by reference into Part III to the extent described therein.





Synchrony Financial
Table of Contents
CHANGES TO OUR ANNUAL REPORT ON FORM 10-K
To improve the readability of this document and better present both our financial results and how we manage our business, we have changed the order and presentation of content in our Annual Report on Form 10-K. See "Form 10-K Cross-Reference Index" on page 4 for a cross-reference index to the traditional U.S. Securities and Exchange Commission (SEC) Form 10-K format.
 
 
Page
 
Our Company
7
 
Our Sales Platforms
8
 
Our Customers
14
 
Our Credit Products
17
 
Direct Banking
19
 
Credit Risk Management
20
 
Customer Service
22
 
Production Services
22
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
New Accounting Standards
62
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

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FORM 10-K CROSS REFERENCE INDEX
____________________________________________________________________________________________
 
Page(s)
 
 
 
7 - 25, 82 -97
 
 
 
62 -81, 97 -103
 
 
 
Not Applicable
 
 
 
 
 
 
140 - 143
 
 
 
Not Applicable
 
 
 
 
 
 
 
 
145 - 148
 
 
 
25 - 27
 
 
 
25 - 54, 57 - 62
 
 
 
54 - 56
 
 
 
103 - 143
 
 
 
Not Applicable
 
 
 
 
 
 
Not Applicable
 
 
 
 
 
 
 
 
(a)
 
 
 
(b)
 
 
 
(c)
 
 
 
(d)
 
 
 
(e)
 
 
 
 
 
 
 
 
148 - 157
 
 
 
Not Applicable
 
 
 
 
157 - 160
______________________ 
(a)
Incorporated by reference to “Management”, “Election of Directors,” “Section 16(a) Beneficial Ownership Reporting Compliance,” “Governance Principles,” “Code of Conduct” and “Committees of the Board of the Directors” in our definitive proxy statement for our 2019 Annual Meeting of Stockholders to be held on May 23, 2019, which will be filed within 120 days of the end our fiscal year ended December 31, 2018 (the “2019 Proxy Statement”).
(b)
Incorporated by reference to “Compensation Discussion and Analysis,” “2018 Executive Compensation,” “Management Development and Compensation Committee Report” and “Management Development and Compensation Committee Interlocks and Insider Participation” and “CEO Pay Ratio” in the 2019 Proxy Statement.
(c)
Incorporated by reference to “Beneficial Ownership” and “Equity Compensation Plan Information” in the 2019 Proxy Statement.
(d)
Incorporated by reference to “Related Person Transactions,” “Election of Directors” and “Committees of the Board of Directors” in the 2019 Proxy Statement.
(e)
Incorporated by reference to “Independent Auditor” in the 2019 Proxy Statement.

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Certain Defined Terms
Except as the context may otherwise require in this report, references to:
“we,” “us,” “our” and the “Company” are to SYNCHRONY FINANCIAL and its subsidiaries;
“Synchrony” are to SYNCHRONY FINANCIAL only;
the “Bank” are to Synchrony Bank (a subsidiary of Synchrony);
the “Board of Directors” are to Synchrony’s board of directors;
“GE” are to General Electric Company and its subsidiaries;
the “Bank Term Loan” are to the term loan agreement, dated as of July 30, 2014, among Synchrony, as borrower, JPMorgan Chase Bank, N.A., as administrative agent, and the lenders from time to time party thereto, as amended;
the “Tax Act” are to P.L. 115-97, commonly referred to as the Tax Cut and Jobs Act, signed into law on December 22, 2017; and
“FICO” are to a credit score developed by Fair Isaac & Co., which is widely used as a means of evaluating the likelihood that credit users will pay their obligations.
We provide a range of credit products through programs we have established with a diverse group of national and regional retailers, local merchants, manufacturers, buying groups, industry associations and healthcare service providers, which, in our business and in this report, we refer to as our “partners.” The terms of the programs all require cooperative efforts between us and our partners of varying natures and degrees to establish and operate the programs. Our use of the term “partners” to refer to these entities is not intended to, and does not, describe our legal relationship with them, imply that a legal partnership or other relationship exists between the parties or create any legal partnership or other relationship. The “average length of our relationship” with respect to a specified group of partners or programs is measured on a weighted average basis by interest and fees on loans for the year ended December 31, 2018 for those partners or for all partners participating in a program, based on the date each partner relationship or program, as applicable, started. Information with respect to partner “locations” in this report is given at December 31, 2018. “Open accounts” represents credit card or installment loan accounts that are not closed, blocked or more than 60 days delinquent.
Unless otherwise indicated, references to “loan receivables” do not include loan receivables held for sale.
For a description of certain other terms we use, including “active account” and “purchase volume,” see the notes to Management’s Discussion and AnalysisResults of OperationsOther Financial and Statistical Data.” 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.
Industry and Market Data
This report contains various historical and projected financial information concerning our industry and market. Some of this information is from industry publications and other third-party sources, and other information is from our own data and market research that we commission. All of this information involves a variety of assumptions, limitations and methodologies and is inherently subject to uncertainties, and therefore you are cautioned not to give undue weight to it. Although we believe that those industry publications and other third-party sources are reliable, we have not independently verified the accuracy or completeness of any of the data from those publications or sources.

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Non-GAAP Measures
We present adjusted net earnings, which represents net earnings adjusted to exclude the additional tax expense incurred in the year ended December 31, 2017 related to the Tax Act. The additional tax expense was primarily due to the remeasurement of our net deferred tax asset due to the U.S. corporate tax rate reduction from 35% to 21%. We believe this measure helps investors understand the impact of this law change on our reported results for the year ended December 31, 2017. For a reconciliation of these adjusted measures to their nearest comparable GAAP component, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Non-GAAP Measures.

Cautionary Note Regarding Forward-Looking Statements:
Various statements in this Annual Report on Form 10-K may contain “forward-looking statements” as defined in Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), which are subject to the “safe harbor” created by those sections. Forward-looking statements may be identified by words such as “expects,” “intends,” “anticipates,” “plans,” “believes,” “seeks,” “targets,” “outlook,” “estimates,” “will,” “should,” “may” or words of similar meaning, but these words are not the exclusive means of identifying forward-looking statements.
Forward-looking statements are based on management’s current expectations and assumptions, and are subject to inherent uncertainties, risks and changes in circumstances that are difficult to predict. As a result, actual results could differ materially from those indicated in these forward-looking statements. Factors that could cause actual results to differ materially include global political, economic, business, competitive, market, regulatory and other factors and risks, such as: the impact of macroeconomic conditions and whether industry trends we have identified develop as anticipated; retaining existing partners and attracting new partners, concentration of our revenue in a small number of Retail Card partners, promotion and support of our products by our partners, and financial performance of our partners; cyber-attacks or other security breaches; higher borrowing costs and adverse financial market conditions impacting our funding and liquidity, and any reduction in our credit ratings; our ability to grow our deposits in the future; our ability to securitize our loan receivables, occurrence of an early amortization of our securitization facilities, loss of the right to service or subservice our securitized loan receivables, and lower payment rates on our securitized loan receivables; changes in market interest rates and the impact of any margin compression; effectiveness of our risk management processes and procedures, reliance on models which may be inaccurate or misinterpreted, our ability to manage our credit risk, the sufficiency of our allowance for loan losses and the accuracy of the assumptions or estimates used in preparing our financial statements; our ability to offset increases in our costs in retailer share arrangements; competition in the consumer finance industry; our concentration in the U.S. consumer credit market; our ability to successfully develop and commercialize new or enhanced products and services; our ability to realize the value of acquisitions and strategic investments; reductions in interchange fees; fraudulent activity; failure of third parties to provide various services that are important to our operations; disruptions in the operations of our computer systems and data centers; international risks and compliance and regulatory risks and costs associated with international operations; alleged infringement of intellectual property rights of others and our ability to protect our intellectual property; litigation and regulatory actions; damage to our reputation; our ability to attract, retain and motivate key officers and employees; tax legislation initiatives or challenges to our tax positions and/or interpretations, and state sales tax rules and regulations; a material indemnification obligation to GE under the Tax Sharing and Separation Agreement with GE (the "TSSA") if we cause the split-off from GE or certain preliminary transactions to fail to qualify for tax-free treatment or in the case of certain significant transfers of our stock following the split-off; regulation, supervision, examination and enforcement of our business by governmental authorities, the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) and other legislative and regulatory developments and the impact of the Consumer Financial Protection Bureau’s (the “CFPB”) regulation of our business; impact of capital adequacy rules and liquidity requirements; restrictions that limit our ability to pay dividends and repurchase our common stock, and restrictions that limit the Bank’s ability to pay dividends to us; regulations relating to privacy, information security and data protection; use of third-party vendors and ongoing third-party business relationships; and failure to comply with anti-money laundering and anti-terrorism financing laws.
For the reasons described above, we caution you against relying on any forward-looking statements, which should also be read in conjunction with the other cautionary statements that are included in “Risk Factors Relating to Our Business.” 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.

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OUR BUSINESS
Our Company
____________________________________________________________________________________________
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.” Through our partners’ over 390,000 locations across the United States and Canada, and their websites and mobile applications, we offer their customers a variety of credit products to finance the purchase of goods and services. During 2018, we financed $140.7 billion of purchase volume, and at December 31, 2018, we had $93.1 billion of loan receivables and 80.3 million active accounts. Our active accounts represent a geographically diverse group of both consumers and businesses, with an average FICO score of 716 for active accounts at December 31, 2018.
Our business benefits from longstanding and collaborative relationships with our partners, including some of the nation’s leading retailers and manufacturers with well-known consumer brands, such as Lowe’s and Ashley HomeStore and also leading e-commerce partners, such as Amazon and PayPal. We believe our partner-centric business model has been successful because it aligns our interests with those of our partners and provides substantial value to both our partners and our customers. Our partners promote our credit products because they generate increased sales and strengthen customer loyalty. Our customers benefit from instant access to credit, discounts and promotional offers. We seek to differentiate ourselves through deep partner integration and our extensive marketing expertise. We have omni-channel (in-store, online and mobile) technology and marketing capabilities, which allow us to offer and deliver our credit products instantly to customers across multiple channels.
We conduct our operations through a single business segment. Profitability and expenses, including funding costs, loan losses and operating expenses, are managed for the business as a whole. Substantially all of our operations are within the United States. We offer our credit products through three sales platforms (Retail Card, Payment Solutions and CareCredit). Those platforms are organized by the types of products we offer and the partners we work with, and are measured on interest and fees on loans, loan receivables, active accounts and other sales metrics. 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. Payment Solutions is a leading provider of promotional financing for major consumer purchases, offering primarily private label credit cards and installment loans. CareCredit is a leading provider of promotional financing to consumers for health, veterinary and personal care procedures, services and products, including dental, vision, audiology and cosmetic.
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 December 31, 2018, we had $64.0 billion in deposits, which represented 73% of our total funding sources.


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Our Sales Platforms
____________________________________________________________________________________________
We offer our credit products through three sales platforms: Retail Card, Payment Solutions and CareCredit. Set forth below is a summary of certain information relating to our Retail Card, Payment Solutions and CareCredit platforms:platformpiesx3a37.jpg
Retail Card
Retail Card is a leading provider of private label credit cards, and also provides Dual Cards, general purpose co-branded credit cards and small- and medium-sized business credit products. Retail Card accounted for $13.1 billion, or 75%, of our total interest and fees on loans for the year ended December 31, 2018. Substantially all of the credit extended in this platform is on standard (i.e., non-promotional) terms.
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-brand 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.
Retail Card Partners
We have Retail Card programs with 29 national and regional retailers, which have approximately 40,000 retail locations and include department stores, specialty retailers, mass merchandisers and e-retailers (multi-channel and online retailers). The average length of our relationship with our Retail Card partners is 20 years.

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rcbycategorya43.jpg rcpartnersa43.jpg
Our five largest programs are with Retail Card partners. Based upon interest and fees on loans for the year ended December 31, 2018, excluding the Walmart program discussed below, our five largest programs are: Gap, JCPenney, Lowe’s, PayPal and Sam’s Club. These programs accounted in aggregate for 44% of our total interest and fees on loans for the year ended December 31, 2018, and 44% of loan receivables at December 31, 2018. Our program with Lowe's accounted for more than 10% of our total interest and fees on loans for the year ended December 31, 2018.
The length of our relationship with each of these five Retail Card partners is over 14 years, and in the case of Lowe's, 39 years. The current expiration dates for these agreements range from 2022 through 2028. During the year ended December 31, 2018, and to date, we extended our Retail Card program agreements with JCPenney, Lowe's and Sam's Club.
PayPal Transaction
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”). 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. Following the acquisition our partnership with PayPal became one of our five largest programs in 2018, based upon interest and fees on loans, excluding the Walmart program discussed below.
Other New and Extended Partner Programs
During the year ended December 31, 2018, in addition to our extension agreements with JCPenney, Lowe's and Sam's Club discussed above, we also extended our Retail Card program agreements with Amazon and Google. We also announced our new partnerships with Crate and Barrel, Harbor Freight Tools and with Qurate Retail Group, which included a new program agreement with HSN and multi-year extensions of our existing program agreements with QVC and zulily.
A total of 22 of our 28 ongoing Retail Card program agreements, which does not include the Walmart program, now have an expiration date in 2022 or beyond. These 22 program agreements represented in the aggregate 97% of both our Retail Card interest and fees on loans for the year ended December 31, 2018 and of our Retail Card loan receivables at December 31, 2018 attributable to our ongoing programs.
Walmart Program

In July 2018, we announced that we will not be renewing our Retail Card program agreement with Walmart and on January 23, 2019, we announced our agreement to sell the outstanding loan receivables related to the program. The sale of the portfolio, which is subject to customary closing conditions, is expected to be completed late in the

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third quarter or early in the fourth quarter of 2019. We no longer include the Walmart program in our count of ongoing partners in our Retail Card sales platform. Our program with Walmart accounted for more than 10% of our total interest and fees on loans for the year ended December 31, 2018. Sam’s Club is a subsidiary of Walmart that is a separate contracting entity with its own program agreement with us, which we report separately from the Walmart program. For purposes of the information provided in this paragraph with respect to Walmart, the interest and fees on loans from the Sam's Club program have not been included. See “Management's Discussion and Analysis—Results of Operations—Business Trends and Conditions”, for further discussion of the Walmart program.

Retail Card Program Agreements

Our Retail Card programs are governed by program agreements that are each negotiated separately with our partners. Although the terms of the agreements are partner-specific, and may be amended from time to time, under a typical program agreement, our partner agrees to support and promote the program to its customers, but we control credit criteria and issue credit cards to customers who qualify under those criteria. We own the underlying accounts and all loan receivables generated under the program from the time of origination. Other key provisions in the Retail Card program agreements include:
Term
Retail Card program agreements typically have contract terms ranging from approximately five to ten years. Many program agreements have renewal clauses that provide for automatic renewal for one or more years until terminated by us or our partner. We typically seek to renew the program agreements well in advance of their termination dates.
Exclusivity
The program agreements typically are exclusive for the products we offer and limit our partners’ ability to originate or promote other private label or co-branded credit cards during the term of the agreement.
Retailer Share Arrangements
Most of our Retail Card program agreements contain retailer share arrangements that provide for payments to our partner if the economic performance of the program exceeds a contractually-defined threshold. Economic performance for the purposes of these arrangements is typically measured based on agreed upon program revenues (including interest income and certain other income) less agreed upon program expenses (including interest expense, provision for loan losses, retailer payments and operating expenses). We may also provide other economic benefits to our partners such as royalties on purchase volume or payments for new accounts, in some cases instead of retailer share arrangements (for example, on our co-branded credit cards). All of these arrangements align our interests and provide an additional incentive to our partners to promote our credit products.
Other Economic Terms
In addition to the retailer share arrangements, the program agreements typically provide that the parties will develop a marketing plan to support the program, and they set the terms by which a joint marketing budget is funded, the basic terms of the rewards program linked to the use of our product (such as opportunities to receive double rewards points for purchases made on a Retail Card product), and the allocation of costs related to the rewards program.

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Termination
The program agreements set forth the circumstances in which a party may terminate the agreement prior to expiration. Our program agreements generally permit us and our partner to terminate the agreement prior to its scheduled termination date for various reasons, including if the other party materially breaches its obligations. Some program agreements also permit our partner to terminate the program if we fail to meet certain service levels or change certain key cardholder terms or our credit criteria, we fail to achieve certain approval rate targets with respect to approvals of new customers, we elect not to increase the program size when the outstanding loan receivables under the program reach certain thresholds, we are not adequately capitalized, certain force majeure events occur or certain changes in our ownership occur. Certain program agreements are also subject to early termination by a party if the other party has a material adverse change in its financial condition. Historically, these rights have not typically been triggered or exercised. Some of our program agreements provide that, upon termination or expiration, our partner may purchase or designate a third party to purchase the accounts and loan receivables generated with respect to its program at fair market value or a stated price, including all related customer data.
Payment Solutions
Payment Solutions is a leading provider of promotional financing for major consumer purchases, offering consumer choice for financing at the point of sale, including primarily private label credit cards and installment loans. Payment Solutions accounted for $2.4 billion, or 13%, of our total interest and fees on loans for the year ended December 31, 2018. Substantially all of the credit extended in Payment Solutions 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 the foregone interest income associated with promotional financing. The types of promotional financing we offer include deferred interest (interest accrues during a promotional period and becomes payable if the full purchase amount is not paid off during the promotional period), no interest (no interest on a promotional purchase) and reduced interest (interest is assessed monthly at a promotional interest rate during the promotional period). As a result, during the promotional period we do not generate interest income or generate it at a lower rate, although we continue to generate fee income relating to late fees on required minimum payments.
Payment Solutions Partners
In Payment Solutions, we create customized credit programs for national and regional retailers, local merchants, manufacturers, buying groups, industry associations and our own individually-branded industry programs, which are available to local, small and medium size merchants to provide financing offers to their customers.
At December 31, 2018, our Payment Solutions partners had approximately 130,000 retail locations. Payment Solutions is diversified by program, with no one Payment Solutions program accounting for more than 1.2% of our total interest and fees on loans for the year ended December 31, 2018. At December 31, 2018, the average length of our relationships with our ten largest Payment Solutions programs was 13 years.

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psbycategorya39.jpg pspartnersa48.jpg
_____________________
(1)
Based on interest and fees on loans for the year ended December 31, 2018.
In Payment Solutions, we generally partner with sellers of “big-ticket” products or services (generally priced from $500 to $25,000) to consumers where our financing products and industry expertise provide strong incremental value to our partners and their customers. We also promote all of our programs to sellers through direct marketing activities such as industry trade publications, trade shows and sales efforts by dedicated internal and external sales teams, leveraging our existing partner network or through endorsements from manufacturers, buying groups and industry associations. Our broad array of point of sale technologies and quick enrollment process allow us to quickly and cost-effectively integrate new partners.
During the year ended December 31, 2018, we extended our program agreements with American Signature Furniture, Ashley HomeStore, Associated Materials, Briggs & Stratton, Generac, Havertys, Nationwide Marketing Group, Robbins Brothers, Sleep Number and Mohawk and announced our new partnerships with Fanatics, Furniture Row, Fred Meyer Jewelers, Mahindra and jtv.
 
Payment Solutions Program Agreements
National and Regional Retailers and Manufacturers
The terms of our program agreements with national and regional retailers and manufacturers are typically similar to the terms of our Retail Card program agreements in that we are the exclusive program provider of financing for the national or regional retailer or manufacturer with respect to the financing products that we offer. Some program agreements, however, allow the merchant to use a second source lender after an application has been submitted to us and declined, or in the case of some of our programs, may allow the manufacturer to have several primary lenders. The term of the program agreements generally run from three to five years and are subject to termination prior to the scheduled termination date by us or our partner for various reasons, including if the other party materially breaches its obligations. Some of these programs also permit our partner to terminate the program if we change certain key cardholder terms, exceed certain pricing thresholds, certain force majeure events occur, certain changes in our ownership occur or there is a material adverse change in our financial condition. A few of these programs also may be terminated at will by the partner on specified notice to us (e.g., several months). Many of these program agreements have renewal clauses which allow the program agreement to be renewed for successive one or more year terms until terminated by us or our partner. We typically negotiate with program participants to renew the program agreements well in advance of their termination dates.
We control credit criteria and issue credit cards or provide installment loans to customers who qualify under those credit criteria. We own the underlying accounts and all loan receivables generated under the program from the time of origination. Our Payment Solutions program agreements set forth the program’s economic terms, including the merchant discount applicable to each promotional finance offering. We typically do not pay fees to our Payment Solutions partners pursuant to any retailer share arrangements, but in some cases we pay a sign-up fee to a partner or provide volume-based rebates on the merchant discount paid by the partner.

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Buying Groups and Industry Associations
The programs we have established with buying groups and industry associations, such as the Home Furnishings Association, Jewelers of America and Nationwide Marketing Group, are governed by program agreements under which we make our credit products available to their respective members or dealers, but these agreements generally do not require the members or dealers to offer our products to their customers. Under the terms of the program agreements, buying groups and industry associations generally agree to support and promote the respective programs. These arrangements may include sign-up fees and volume-based incentives paid by us to the groups and their members.
Individually-Branded Programs
Our individually-branded programs are focused on specific industries, where we create either company-branded or company and partner-branded private label credit cards that are usable across all participating locations within the industry-specific network. For example, our Synchrony Car Care program, comprised of merchants selling automotive parts, repair services and tires, covers over 32,000 locations across the United States, and cards issued may be dual branded with Synchrony Car Care and partners such as Midas, Michelin Tires or Pep Boys. Under the terms of these programs, we establish merchant discounts applicable to each financing offer, and, in some cases, the fees we charge partners for their membership in the network. In addition, the Synchrony Car Care program allows for expanded use outside of the program network at certain related merchants, such as gas stations. Similarly, the Synchrony HOME credit card is now accepted at more than one million home-related retail locations nationwide, including both partner locations and retailers outside of our program network.
Dealer Agreements
For the programs we have established with manufacturers, buying groups, industry associations and individually-branded programs described above, we enter into individual agreements with the merchants and dealers that offer our credit products under these programs. These agreements generally are not exclusive and some parties who offer our financing products also offer financing from our competitors. Our agreements generally continue until terminated by either party, with termination typically available to either party at will upon 15 days’ written notice. Our dealer agreements set forth the economic terms associated with the program, including the fees charged to dealers to offer promotional financing, and in some cases, allow us to periodically change the fees we charge.
CareCredit
CareCredit is a leading provider of promotional financing to consumers for health, veterinary and personal care procedures, services and products. CareCredit accounted for $2.2 billion, or 12%, of our total interest and fees on loans for the year ended December 31, 2018. Substantially all of the credit extended in CareCredit is promotional financing.
We offer customers a CareCredit-branded private label credit card that may be used across our network of CareCredit providers and our CareCredit Dual Card offering. We generate revenue in CareCredit primarily from interest and fees on our loan receivables and from merchant discounts paid by providers to compensate us for all or part of the foregone interest income associated with promotional financing.
CareCredit Partners
The vast majority of our partners are individual and small groups of independent healthcare providers, which includes networks of healthcare practitioners that provide elective and other procedures that generally are not fully covered by insurance. The remainder are primarily national and regional healthcare providers and health-focused retailers, such as pharmacies. At December 31, 2018, we had a network of CareCredit providers and health-focused retailers that collectively have over 220,000 locations.

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During 2018, over 195,000 locations either processed a CareCredit application or made a sale on a CareCredit credit card. No one CareCredit partner accounted for more than 0.2% of our total interest and fees on loans for the year ended December 31, 2018.
We enter into provider agreements with individual healthcare providers who become part of our CareCredit network. These provider agreements are similar to the dealer agreements that govern our relationships with the merchants and dealers offering our Payment Solutions products in that the agreements are not exclusive and typically may be terminated at will upon 15 days’ notice. Multi-year agreements are in place for larger multi-location relationships across all markets. There are typically no retailer share arrangements with partners in CareCredit.
At December 31, 2018, we had relationships with over 120 professional and other associations (including the American Dental Association and the American Veterinary Medical Association), manufacturers and buying groups, which endorse and promote our credit products to their members. Of these relationships, over 70 were paid endorsements linked to member enrollment in, and volume under, the relevant program.
We screen potential partners using a variety of criteria, including whether the potential provider specializes in one of our approved specialties, carries the appropriate licensing and certifications, and meets our underwriting criteria. We also screen potential partners for reputational issues. We work with professional and other associations, manufacturers, buying groups, industry associations and healthcare consultants to educate their constituents about the products and services we offer. We believe our ability to attract new partners is aided by our customer satisfaction rate, which our research in 2018 showed is 94%. We also approach individual healthcare service providers through direct mail, advertising, and at trade shows.
During the year ended December 31, 2018, we renewed LCA Vision in our network of providers and expanded our network to include American Med Spa Association, the American Veterinary Medical Association, Eargo, The Good Feet Store, the Spa Industry Association and Walgreens. The network also expanded by over 6,000 provider locations and grew average active cardholder accounts by 5%.

Our Customers
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Acquiring and Marketing to Retail Card & Payment Solutions Customers
We work directly with our partners using their distribution network, communication channels and customer interactions to market our products to their customers and potential customers. We believe our presence at our partners’ points of sale (in-store, online and mobile) and our ability to make credit decisions instantly for a customer that is already predisposed to make a purchase enables us to acquire new customer accounts at a lower cost than general purpose card issuers.

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To acquire new customers, we collaborate with our partners and leverage our marketing expertise to create marketing programs that promote our products to creditworthy customers. Frequently, our partners market the availability of credit as part of (and with little incremental cost to) the advertising for their goods and services. Our marketing programs include marketing offers (e.g., 10% off the customer’s first purchase) and consumer communications that are delivered through a variety of channels, including in-store signage, online advertising, retailer website placement, associate communication, emails, text messages, direct mail campaigns, advertising circulars, and outside marketing via television, radio, print, along with digital marketing (search engine optimization and paid search). We also employ our proprietary Quickscreen acquisition method to make targeted pre-approved credit offers at the point-of-sale. Our Quickscreen technology allows us to run customer information that we have obtained from our partners through our risk models in advance so that when these customers seek to make payment for goods and services at our partners' points-of-sale, we can make a credit offer instantly, if appropriate. Based on our experience, due to the personalized and immediate nature of the offer, Quickscreen significantly outperforms traditional direct-to-consumer pre-approved channels, such as direct mail or email, in response rate and dollar spending.
In Payment Solutions we also market the value of cross-network benefits to our partners. For example, the Synchrony Car Care credit card offers motorists the convenience of one card to pay for comprehensive auto care at thousands of service and parts locations, as well as fuel at gas stations nationwide.
Acquiring and Marketing to CareCredit Customers
We market our products through our provider network by training our network providers on the advantages of CareCredit products and by making marketing materials available for providers to use to promote the program and educate customers. Our training helps our providers learn to discuss payment options during the pre-treatment consultation phase, including the option to apply for a CareCredit credit card and the offer of promotional credit. According to a 2018 survey of our CareCredit customers, 42% indicated that they would have postponed or reduced the scope of treatment if financing was not offered by their provider. Consumers can apply for our CareCredit products in the provider’s office or online via the web or mobile device.
We also market our products to potential and existing customers directly using digital marketing (search engine optimization and paid search). Our provider locator, on our website, allows customers to search for healthcare service providers that accept the CareCredit credit card by desired geography and provider type. According to our records, our CareCredit provider locator averaged over 1.1 million searches per month during the year ended December 31, 2018. We believe our partners recognize the locator as an important source of new customer acquisition.
Enterprise Customer Engagement ("ECE") / Analytics
After a customer obtains one of our products, our marketing programs encourage ongoing card usage by communicating the benefits of our products’ value propositions. Examples of such programs include: promotional financing offers, cardholder events, product discounts, dollar-off certificates, account holder sales, reward points and offers, new product announcements and previews, and free or reduced cost gift wrapping, alteration or delivery services. These programs are executed through our partners’ and our own (direct to consumer) distribution channels.
Through our ECE and data analytics teams, we optimize these programs through detailed test-and-learn tracking of cardholder responsiveness and subsequent behavior. This data is leveraged by applying machine learning and other analytic techniques to create tools that allow for customized marketing messages and promotional offers to cardholders. For example, if a cardholder consistently responds to a coupon sent by text message versus other channels, we will tailor future marketing messages to be delivered by text message and use such insight to identify other populations that are likely to behave in similar ways. Our Dual Card and general purpose co-branded credit card programs are further enhanced by the collection and analysis of data on customers' spend patterns at both our partners and at other retailers. The objective of these efforts is to drive incremental volume for our programs while maximizing return on investment.

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Our extensive marketing activities targeted to existing customers have yielded high levels of re-use across both our Payment Solutions and CareCredit sales platforms. During the year ended December 31, 2018, 29% and 53% of purchase volume across our Payment Solutions platform and CareCredit network, respectively, resulted from repeat use at one or more retailers or providers.
Digital and mobile capabilities
We continued our focus and investments on our digital and mobile capabilities, bringing to market new features, channels and experiences for our customers and enhancing our existing digital design and user experience. Our approach continues to be customer and partner-centric to reach our customers in unique ways at home, in store, online or wherever they prefer.
In 2018 we introduced multiple new ways for our customers to interact with their account. The first example is our Store Card Skill on Amazon Alexa which provides our Amazon customers the ability to check their account information, review recent purchases and charges, get payment due details and pay their bill through voice commands, using Alexa. We plan to expand our voice payment technology through additional features and partners in the future. In addition, we introduced our mobile point-of-sale ("POS") platform to help our partners move beyond the traditional POS and acquire new credit customers from anywhere in the store and from any device.
We also expanded the use of our dApply and mobile POS platforms to our commercial credit customers, to offer an entirely revamped and streamlined credit acquisition experience for our business customers. For our merchants and providers in our Payment Solutions and CareCredit businesses, we launched redesigned and responsive online platforms to support the full life-cycle of credit capabilities from acquiring accounts to processing sales and reports on whatever device best suits their business environment.
In recent years, we have continued to implement digital enhancements to make it faster and easier for our customers to interact with all aspects of the credit life-cycle, including capabilities such as our dApply application with data pre-fill and instant provisioning of new accounts to retailer digital wallets, and Pay Without Login, which uses background device authentication to let customers make a payment on their account without the need to log in.
We have made strategic business acquisitions to assist in our digital and mobile enhancements. Through our acquisition of GPShopper in 2017, we continued to expand on the capabilities of our Synchrony Plug-In ("SyPI"), adding features such as the ability to apply for credit from within the plug-in, as well as a Persistent Login feature for retailers’ apps, allowing customers to stay logged in and manage their account without needing to remember their password. At December 31, 2018, SyPI was being used in over 20 of our retail partners’ apps. In June 2018, we completed our acquisition of Loop Commerce, a provider of digital and in-store gifting services.

Finally, we’ve also significantly expanded the reach of our virtual assistant, Sydney, across our digital platforms and deepened her knowledge and ability to respond to the questions and tasks that our customers ask.

Loyalty Programs
The credit rewards loyalty programs we manage typically provide cardholders with statement credit or cash back rewards. Other programs include rewards points, which are redeemable for a variety of products or awards, or merchandise discounts that are earned by achieving a pre-set spending level on their private label credit card, Dual Card or general purpose co-branded credit card. The merchandise discounts can be mailed to the cardholder, accessed digitally or may be immediately redeemable at the partner’s store. These loyalty programs are designed to generate incremental purchase volume per customer, while reinforcing the value of the card to the customer and strengthening customer loyalty. We continue to support and integrate into our partners’ loyalty programs to customers that utilize non-credit payment types such as cash, debit or check. These multi-tender loyalty programs allow our partners to market to an expanded customer base and allow us access to additional prospective cardholders.

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Commercial Customers
In addition to our efforts to acquire consumer cardholders, we continue to increase our focus on small to mid-sized commercial customers. We offer these customers private label credit cards and Dual Cards that can be used primarily at our Retail Card partners and are similar to our consumer offerings. We are also increasing our focus on marketing our commercial pay-in-full accounts receivable product that supports a wide range of business customers.
Our Credit Products
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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 December 31, 2018.
 
 
 
Promotional Offer
 
 
Credit Product
Standard Terms Only
 
Deferred Interest
 
Other Promotional
 
Total
Credit cards
66.8
%
 
16.7
%
 
13.1
%
 
96.6
%
Commercial credit products
1.4

 

 

 
1.4

Consumer installment loans

 

 
2.0

 
2.0

Other

 

 

 

Total
68.2
%
 
16.7
%
 
15.1
%
 
100.0
%
Credit Cards
Our credit card products are loans we extend through open-ended revolving credit card accounts. We offer the following principal types of credit cards:
Private Label Credit Cards
Private label credit cards are partner-branded credit cards (e.g., Lowe’s or Amazon) or program-branded credit cards (e.g., Synchrony Car Care or CareCredit) that are used primarily for the purchase of goods and services from the partner or within the program network. In addition, in some cases, cardholders may be permitted to access their credit card accounts for cash advances.
Credit under a private label credit card typically is extended either on standard terms only in our Retail Card sales platform, which means accounts are assessed periodic interest charges using an agreed non-promotional fixed and/or variable interest rate, or pursuant to a promotional financing offer in our Payment Solutions and CareCredit sales platforms, involving deferred interest, no interest or reduced interest during a set promotional period. Promotional periods typically range between six and 48 months, but we may agree to longer terms with the partner. In almost all cases, we receive a merchant discount from our partners to compensate us for all or part of the foregone interest income associated with promotional financing. The terms of these promotions vary by partner, but generally the longer the deferred interest, reduced interest or interest-free period, the greater the partner’s merchant discount. Some offers permit customers to pay for a purchase in equal monthly payments with no interest or at a reduced interest rate, rather than deferring or delaying interest charges. For our deferred interest products, approximately 75% to 80% of customer transactions are typically paid off before interest is assessed. In CareCredit, standard rate financing generally applies to charges under $200.

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We typically do not charge interchange or other fees to our partners when a customer uses a private label credit card to purchase our partners’ goods and services through our payment system.
Most of our private label credit card business is in the United States. For some of our partners who have locations in Canada, we also support the issuance and acceptance of private label credit cards at their locations in Canada and from customers in Canada.
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 make purchases of goods or services from our partners, and as general purpose credit cards when used to make purchases from other retailers wherever cards from those card networks are accepted or for cash advance transactions. We currently issue Dual Cards for use on the MasterCard and Visa networks and we currently have the ability to issue Dual Cards for use on the American Express and Discover networks.
We have been granted two U.S. patents relating to the process by which our Dual Cards function as a private label credit card when used to make purchases from our partners and function as a general purpose credit card when used on the systems of other credit card associations.
We also offer general purpose co-branded credit cards that do not function as private label credit cards.
Credit extended under our Dual Cards and general purpose co-branded credit cards typically is extended on standard terms only. Dual Cards and general purpose co-branded credit cards are primarily offered through our Retail Card platform. At December 31, 2018, we offered Dual Card or general purpose co-branded credit cards through 21 of our 28 ongoing Retail Card programs, of which the majority are Dual Cards. We expect to continue to increase the number of partner programs that offer Dual Cards or general purpose co-branded credit cards and seek to increase the portion of our loan receivables attributable to these products.
Charges using a Dual Card or general purpose co-branded credit card generate interchange income for us in connection with purchases made by cardholders other than in-store or online from that partner.
We currently do not issue Dual Cards or general purpose co-branded credit cards in Canada.
Terms and Conditions
As a general matter, the financial terms and conditions governing our credit card products vary by program and product type and change over time, although we seek to standardize the non-financial provisions consistently across all products. The terms and conditions of our credit card products are governed by a cardholder agreement and applicable laws and regulations.
We assign each card account a credit limit when the account is initially opened. Thereafter, we may increase or decrease individual credit limits from time to time, at our discretion, based primarily on our evaluation of the customer’s creditworthiness and ability to pay.
For the vast majority of accounts, periodic interest charges are calculated using the daily balance method, which results in daily compounding of periodic interest charges, subject to, at times, a grace period on new purchases. Cash advances are not subject to a grace period, and some credit card programs do not provide a grace period for promotional purchases. In addition to periodic interest charges, we may impose other charges and fees on credit card accounts, including, as applicable and provided in the cardholder agreement, cash advance transaction fees and late fees where a customer has not paid at least the minimum payment due by the required due date.
Typically, each customer with an outstanding debit balance on his or her credit card account must make a minimum payment each month. A customer may pay the total amount due at any time without penalty. We also may enter into arrangements with delinquent customers to extend or otherwise change payment schedules and to waive interest charges and/or fees.

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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 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. The terms of our installment loans are governed by customer agreements and applicable laws and regulations.
Installment loans are assessed periodic interest charges using fixed interest rates. In addition to periodic interest charges, we may impose other charges and fees on loan accounts, including late fees where a customer has not made the required payment by the required due date and returned payment fees.
Debt Cancellation Products
We offer a debt cancellation product to our credit card customers via online, mobile and, on a limited basis, direct mail. Customers who choose to purchase this product are charged a monthly fee based on their ending balance on each billing statement. In return, the Bank will cancel all or a portion of a customer’s credit card balance in the event of certain qualifying life events.
Direct Banking
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Through the Bank, we offer our customers a range of FDIC-insured deposit products. The Bank also takes deposits through third-party securities brokerage firms that offer our FDIC-insured deposit products to their customers. At December 31, 2018, we had $64.0 billion in deposits, $49.4 billion of which were direct deposits and $14.6 billion of which were brokered deposits. During 2018, direct deposits were received from approximately 449,000 customers that had a total of approximately 900,000 accounts. Retail customers accounted for substantially all of our direct deposits at December 31, 2018. The Bank had a 86% retention rate on certificates of deposit balances up for renewal for the year ended December 31, 2018. FDIC insurance is provided for our deposit products up to applicable limits.
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. Our online platform is highly scalable allowing us to expand without having to rely on a traditional “brick and mortar” branch network. We expect the continued growth in our direct banking platform to come primarily from retail deposits.
We continue to grow our direct banking operations and believe we are well-positioned to continue to benefit from the consumer-driven shift from branch banking to direct banking. According to the 2018 American Bankers Association survey, approximately 75% of customers primarily use direct channels (internet, mail, phone and mobile) to manage their bank accounts.
Our deposit products include certificates of deposit, IRAs, money market accounts and savings accounts. We market our deposit products through multiple channels including digital and print. Customers can apply for, fund, and service their deposit accounts online or via phone. We have dedicated banking representatives within our call centers to service deposit accounts. Fiserv, Inc. ("Fiserv") provides the core banking platform for our online retail deposits including a customer-facing account opening and servicing platform.

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To attract new deposits and retain existing ones, we intend to introduce new deposit products and enhancements to our existing products. These new and enhanced products may include the introduction of checking accounts, overdraft protection lines of credit, bill payment and person-to-person payment features, and Synchrony-branded debit cards. Our focus on deposit-taking and related branding efforts will also enable us to offer other branded direct-banking products more efficiently in the future.
We seek to differentiate our deposit product offerings from our competitors on the basis of brand, reputation, convenience, customer service and value. Our deposit products emphasize reliability, trust, security, convenience and attractive rates. We offer rewards to customers based on their tenure or balance amounts, including reduced fees, travel offers and concierge telephone support.
Credit Risk Management
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Credit risk management is a critical component of our management and growth strategy. Credit risk refers to the risk of loss arising from customer default when customers are unable or unwilling to meet their financial obligations to us. Our credit risk arising from credit products is generally highly diversified across approximately 144 million open accounts at December 31, 2018, without significant individual exposures. We manage credit risk primarily according to customer segments and product types.
Customer Account Acquisition
We have developed programs to promote credit with each of our partners and have developed varying credit decision guidelines for the different partners. We originate credit accounts through several different channels, including in-store, mail, internet, mobile, telephone and pre-approved solicitations. In addition, we have, and may in the future acquire, accounts that were originated by third parties in connection with establishing programs with new partners.
Regardless of the channel, in making the initial credit approval decision to open a credit card or other account or otherwise grant credit, we follow a series of credit risk and underwriting procedures. In most cases, when applications are made in-store or by internet or mobile, the process is fully automated and applicants are notified of our credit decision immediately. We generally obtain certain information provided by the applicant and obtain a credit bureau report from one of the major credit bureaus. The credit report information we obtain is electronically transmitted into industry scoring models and our proprietary scoring models developed to calculate a credit score. The credit risk management team determines in advance the qualifying credit scores and initial credit line assignments for each portfolio and product type. We periodically analyze performance trends of accounts originated at different score levels as compared to projected performance and adjust the minimum score or the opening credit limit to manage credit risk.
We also apply additional application screens based on various inputs, including credit bureau information, our previous experience with the customer and information provided by our partner, to help identify potential fraud and prior bankruptcies before qualifying the application for approval. We compare applicants’ names against the Specially Designated Nationals list maintained by the Office of Foreign Assets Control of the U.S. Department of the Treasury (“OFAC”), as well as screens that account for adherence to USA PATRIOT Act of 2001 (the “Patriot Act”) and Credit Card Accountability Responsibility and Disclosure Act of 2009 (the “CARD Act”) requirements, including ability to pay requirements.
We also use pre-approved account solicitations for certain programs. Potential applicants are pre-screened using information provided by our partner or obtained from outside lists, and qualified individuals receive a pre-approved credit offer by mail or email.

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Acquired Portfolio Evaluation
Our risk management team evaluates each portfolio that we acquire in connection with establishing programs with new partners to ensure the portfolio satisfies our credit risk guidelines. As part of this review, we receive data on the third-party accounts and loans, which allows us to assess the portfolio on the basis of certain core characteristics, such as historical performance of the assets and distributions of credit and loss information. In addition, we benchmark potential portfolio acquisitions against our existing programs to assess relative current and projected risks. Finally, our risk management team must approve the acquisition, taking into account the results of our risk assessment process. Once assets are migrated to our systems, our account management protocols will apply immediately as described below under “—Customer Account Management,” “—Credit Authorizations of Individual Transactions” and “—Collections.”
Customer Account Management
We regularly assess the credit risk exposure of our customer accounts. This ongoing assessment includes information relating to the customer’s performance with respect to its account with us, as well as information from credit bureaus relating to the customer’s broader credit performance. To monitor and control the quality of our loan portfolio (including the portion of the portfolio originated by third parties), we use behavioral scoring models that we have developed to score each active account on its monthly cycle date. Proprietary risk models, together with the FICO scores obtained on each active account no less than quarterly, are an integral part of our credit decision-making process. Depending on the duration of the customer’s account, risk profile and other performance metrics, the account may be subject to a range of account actions, including limits on transaction authorization and increases or decreases in purchase and cash credit limits.
Credit Authorizations of Individual Transactions
Once an account has been opened, when a credit card is used to make a purchase in-store at one of our partners’ locations or online, point-of-sale terminals or online sites have an online connection with our credit authorization system, which allows for real-time updating of accounts. Each potential sales transaction is passed through a transaction authorization system, which considers a variety of behavior and risk factors to determine whether the transaction should be approved or declined, and whether a credit limit adjustment is warranted.
Fraud Investigation
We provide follow up and research with respect to different types of fraud such as fraud rings, new account fraud and transactional fraud. We have developed a proprietary fraud model to identify new account fraud and deployed tools that help identify transaction purchase behavior outside a customer’s established pattern. Our proprietary model is also complemented by externally sourced models and tools used across the industry to better identify fraud and protect our customers. We also are continuously implementing new and improved technologies to detect and prevent fraud such as utilizing embedded security chips ("EMV") for our active Dual Card and general purpose co-branded credit card products with all our retail partners.
Collections
All monthly billing statements of accounts with past due amounts include a request for payment of these amounts. Collections personnel generally initiate contact with customers within 30 days after any portion of their balance becomes past due. The nature and the timing of the initial contact, typically a personal call, e-mail, text message or letter, are determined by a review of the customer’s prior account activity and payment habits.
We re-evaluate our collection efforts and consider the implementation of other techniques, including internal collection activities, use of external vendors and the sale of debt to third-party buyers, as a customer becomes increasingly delinquent. We limit our exposure to delinquencies through controls within the transaction authorization processes, the imposition of credit limits and criteria-based account suspension and revocation processes. In certain situations, we may enter into arrangements to extend or otherwise change payment schedules, decrease interest rates and/or waive fees to aid customers experiencing financial difficulties in their efforts to become current on their obligations to us.

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Customer Service
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Customer service is an important feature of our relationship with our partners. Our customers can contact us via phone, mail, email, eService and eChat. During the year ended December 31, 2018, we handled approximately 319 million inquiries.
We assign a dedicated toll-free customer service phone number to each of our Retail Card programs. Our Payment Solutions customers access customer service through one general purpose toll-free customer service phone number (except for a few large Payment Solutions programs, which have dedicated toll-free numbers). Our CareCredit platform has its own, dedicated toll-free customer service phone number. We also have dedicated toll-free customer service phone numbers for our deposit business.
We service all programs through our nine domestic and three off-shore call centers. We blend domestic and off-shore locations as an important part of our servicing strategy, to maintain service availability beyond normal work hours in the United States and to seek optimal costs. Customer service for cards issued to customers in Canada is supported through agents based in the United States.
Given the nature of our business and the high volume of calls, we maintain several centers of excellence to ensure the quality of our customer service across all of our sites. These centers of excellence consist of quality assurance, customer experience, training, workforce and capacity planning, surveillance and process control, tactical operations center, business solutions and technology support.
Production Services
____________________________________________________________________________________________
Our production services organization oversees a number of services, including:
payment processing (more than 672 million paper and electronic payments in 2018);
embossing and mailing credit cards (more than 59 million cards in 2018);
printing and mailing and eService delivery of credit card statements (more than 766 million paper and electronic statements in 2018); and
other letters mailed or sent electronically (more than 93 million in 2018).
All U.S. customer payments received by mail are processed at one of two centers located in Atlanta, Georgia and Longwood, Florida, both of which are operated by the Bank. U.S. credit card statement printing and mailing, card embossing and mailing and letter production and mailing for customers are provided through outsourced services with First Data Corporation (“First Data”). While these services are outsourced, we monitor and maintain oversight of these other services. First Data also produces our statements and other mailings for deposit customers.
Card production embossing, mailing, statement printing and mailing services related to cards issued to customers in Canada are outsourced to Canadian suppliers.

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Technology and Data Security
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Products and Services
We leverage information technology to deliver products and services that meet the needs of our customers and partners and enables us to operate our business efficiently. The integration of our technology with our partners is at the core of our value proposition, enabling, among other things, customers to “apply and buy” at the point of sale, and many of our partners to settle transactions directly with us without an interchange fee. A key part of our strategic focus is the continued development of innovative, efficient, flexible technology and operational platforms to support marketing, risk management, account acquisition and account management, customer service, and new product innovation and development. We believe that the continued investment in and development of these platforms is an important part of our efforts to increase our competitive capabilities, reduce costs, improve quality and provide faster, more flexible technology services. Therefore, we continuously review capabilities and develop or acquire systems, processes and competencies to meet our business needs.
As part of our continuous efforts to enhance our technological capabilities, we may either develop these capabilities internally or in partnership with third-party providers. Our internal approach involves deployment of cross-functional product teams, often in collaboration with our retail partners, focused on driving rapid delivery of in-house product innovation and development, and the commercialization of new products. In addition, at times we also partner with third-party providers to help us deliver systems and operational infrastructure based on strategies and, in some cases, architecture, designed by us. These relationships include First Data for our credit card transaction processing and production, and Fiserv for our retail banking operations.
Data Security
The protection and security of financial and personal information of our consumers is one of our highest priorities. We have implemented a comprehensive information security program that includes administrative, technical and physical safeguards and provides an appropriate level of protection to maintain the confidentiality, integrity, and availability of our Company's and our customers' information. This includes protecting against any known or evolving threats to the security or integrity of customer records and information, and against unauthorized access to or use of customer records or information.
Our information security program is continuously adapting to an evolving landscape of emerging threats and available technology. Through data gathering and evaluation of emerging threats from internal and external incidents and technology investment, security controls are adjusted on a continuous basis. We work directly with our partners on an ongoing basis to expand our intelligence ecosystem and facilitate awareness and communications of events outside of the Company.
We have developed a security strategy and implemented multiple layers of controls embedded throughout our technology environment that establish multiple control points between threats and our assets. Our security program is designed to provide oversight of third parties who store, process or have access to sensitive data, and we require the same level of protection from such third-party service providers. We evaluate the effectiveness of the key security controls through ongoing assessment and measurement.
In addition, we identify risks that may threaten customer information and utilize both internal and external resources to perform a variety of vulnerability and penetration testing on the platforms, systems and applications used to provide our products and services. We employ backup and disaster recovery procedures for all the systems that are used for storing, processing and transferring customer information, and we periodically test and validate our disaster recovery plans. Further, we regularly utilize independent assessors to evaluate the appropriateness of our overall program. We are compliant with the Payment Card Industry (PCI) program.
Intellectual Property
____________________________________________________________________________________________
We use a variety of methods, such as trademarks, patents, copyrights and trade secrets, to protect our intellectual property, including our brand, "Synchrony." We also place appropriate restrictions on our proprietary information to control access and prevent unauthorized disclosures. Our brands are important assets, and we take steps to protect the value of these assets and our reputation.
Employees
____________________________________________________________________________________________
At December 31, 2018, we had over 16,500 full time employees. None of our employees are represented by a labor union or are covered by a collective bargaining agreement. We have not experienced any material employment-related work stoppages and consider relations with our employees to be good. We also have relationships with third-party call center providers in the United States and other countries that provide us with additional contractors for customer service, collections and other functions.
Regulation
____________________________________________________________________________________________
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 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 Office of the Comptroller of the Currency of the U.S. Treasury (the “OCC”), which is its primary regulator, and by the CFPB. In addition, the Bank, as an insured depository institution, is supervised by the FDIC. For a discussion of the specific regulations related to our business see “Regulation—Regulation Relating to Our Business” of this Form 10-K Report.
Competition
____________________________________________________________________________________________
Our industry continues to be highly competitive. We compete for relationships with partners in connection with retaining existing or establishing new consumer credit programs. Our primary competitors for partners include major financial institutions such as Alliance Data Systems, American Express, Capital One, JPMorgan Chase, Citibank, TD Bank and Wells Fargo, and to a lesser extent, potential partners’ own in-house financing capabilities. We compete for partners on the basis of a number of factors, including program financial and other terms, underwriting standards, marketing expertise, service levels, product and service offerings (including incentive and loyalty programs), technological capabilities and integration, brand and reputation. In addition, some of our competitors for partners have a business model that allows for their partners to manage underwriting (e.g., new account approval), customer service and collections, and other core banking responsibilities that we retain.

23



We also compete for customer usage of our credit products. Consumer credit provided, and credit card payments made, using our cards constitute only a small percentage of overall consumer credit provided and credit card payments in the United States. Consumers have numerous financing and payment options available to them. As a form of payment, our products compete with cash, checks, debit cards, Visa and MasterCard credit cards, as well as American Express, Discover Card, other private-label card brands, and, to a certain extent, prepaid cards. We also compete with non-traditional providers such as financial technology companies. In the future, we expect our products may face increased competition from new emerging payment technologies, such as Apple Pay, Chase Pay, Samsung Pay and Square, to the extent that our products are not, or do not continue to be, accepted in, or compatible with, such technologies. We may also face increased competition from current competitors or others who introduce or embrace disruptive technology that significantly changes the consumer credit and payment industry. We compete for customers and their usage of our deposit products, and to minimize transfers to competitors of our customers’ outstanding balances, based on a number of factors, including pricing (interest rates and fees), product offerings, credit limits, incentives (including loyalty programs) and customer service. Some of our competitors provide a broader selection of services, including home and automobile loans, debit cards and bank branch ATM access, which may position them better among customers who prefer to use a single financial institution to meet all of their financial needs. In addition, some of our competitors are substantially larger than we are, may have substantially greater resources than we do or may offer a broader range of products and services than we do. Moreover, some of our competitors, including new and emerging competitors in the digital and mobile payments space, are not subject to the same regulatory requirements or legislative scrutiny to which we are subject, which also could place us at a competitive disadvantage.
In our retail deposits business, we have acquisition and servicing capabilities similar to other direct-banking competitors. We compete for deposits with traditional banks, and in seeking to grow our direct-banking business, we compete with other banks that have direct-banking models similar to ours, such as Ally Financial, American Express, Capital One 360 (ING), CIT, Discover, Marcus by Goldman Sachs, PurePoint, Sallie Mae and United Services Automobile Association (“USAA"). Competition among direct banks is intense because online banking provides customers the ability to quickly and easily deposit and withdraw funds and open and close accounts in favor of products and services offered by competitors.

24



MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this report. The discussion below contains forward-looking statements that are based upon current expectations and are subject to uncertainty and changes in circumstances. Actual results may differ materially from these expectations. See “Cautionary Note Regarding Forward-Looking Statements.”
 
Selected Five-Year Financial Data
____________________________________________________________________________________________
Consolidated and Combined Statements of Earnings Information
 
Years Ended December 31,
($ in millions, except per share data)
2018
 
2017
 
2016
 
2015
 
2014
Interest income
$
17,988

 
$
16,407

 
$
14,778

 
$
13,228

 
$
12,242

Interest expense
1,870

 
1,391

 
1,248

 
1,135

 
922

Net interest income
16,118

 
15,016

 
13,530

 
12,093

 
11,320

Retailer share arrangements
(3,099
)
 
(2,937
)
 
(2,902
)
 
(2,738
)
 
(2,575
)
Net interest income, after retailer share arrangements
13,019

 
12,079

 
10,628

 
9,355

 
8,745

Provision for loan losses
5,545

 
5,296

 
3,986

 
2,952

 
2,917

Net interest income, after retailer share arrangements and provision for loan losses
7,474

 
6,783

 
6,642

 
6,403

 
5,828

Other income
265

 
288

 
344

 
392

 
485

Other expense
4,095

 
3,747

 
3,416

 
3,264

 
2,927

Earnings before provision for income taxes
3,644

 
3,324

 
3,570

 
3,531

 
3,386

Provision for income taxes
854

 
1,389

 
1,319

 
1,317

 
1,277

Net earnings
$
2,790

 
$
1,935

 
$
2,251

 
$
2,214

 
$
2,109

Weighted average shares outstanding (in millions)
 
 
 
 
 
 
 
 
 
Basic
742.3

 
795.6

 
829.2

 
833.8

 
757.4

Diluted
746.9

 
799.7

 
831.5

 
835.5

 
757.6

Earnings per share
 
 
 
 
 
 
 
 
 
Basic
$
3.76

 
$
2.43

 
$
2.71

 
$
2.66

 
$
2.78

Diluted
$
3.74

 
$
2.42

 
$
2.71

 
$
2.65

 
$
2.78

Dividends declared per common share
$
0.72

 
$
0.56

 
$
0.26

 
$

 
$


25



Consolidated and Combined Statements of Financial Position Information
($ in millions)
At December 31,
2018
 
2017
 
2016
 
2015
 
2014
Assets:
 
 
 
 
 
 
 
 
 
Cash and equivalents
$
9,396

 
$
11,602

 
$
9,321

 
$
12,325

 
$
11,828

Debt securities
6,062

 
4,473

 
5,095

 
3,127

 
1,583

Loan receivables
93,139

 
81,947

 
76,337

 
68,290

 
61,286

Allowance for loan losses
(6,427
)
 
(5,574
)
 
(4,344
)
 
(3,497
)
 
(3,236
)
Loan receivables held for sale

 

 

 

 
332

Goodwill
1,024

 
991

 
949

 
949

 
949

Intangible assets, net
1,137

 
749

 
712

 
701

 
519

Other assets
2,461

 
1,620

 
2,137

 
2,095

 
2,273

Total assets
$
106,792

 
$
95,808

 
$
90,207

 
$
83,990

 
$
75,534

Liabilities and Equity:
 
 
 
 
 
 
 
 
 
Total deposits
$
64,019

 
$
56,488

 
$
52,055

 
$
43,367

 
$
34,859

Total borrowings
23,996

 
20,799

 
20,147

 
24,279

 
27,383

Accrued expenses and other liabilities
4,099

 
4,287

 
3,809

 
3,740

 
2,814

Total liabilities
92,114

 
81,574

 
76,011

 
71,386

 
65,056

Total equity
14,678

 
14,234

 
14,196

 
12,604

 
10,478

Total liabilities and equity
$
106,792

 
$
95,808

 
$
90,207

 
$
83,990

 
$
75,534


26



Results of Operations for the Three Years Ended December 31, 2018
____________________________________________________________________________________________
Key Earnings Metrics
niandearnings.jpg
nimefficiency.jpg
Growth Metrics
purchesvolumeloanreceivables.jpg
activeaccountsandifa01.jpg

27



Asset Quality Metrics
a30andncoa01.jpg
a90andall.jpg
Capital and Liquidity
capitalliquiditya03.jpg

28



Highlights for Year Ended December 31, 2018
Below are highlights of our performance for the year ended December 31, 2018 compared to the year ended December 31, 2017, as applicable, except as otherwise noted.
Net earnings increased 44.2% to $2,790 million for the year ended December 31, 2018, primarily 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 13.7% to $93,139 million at December 31, 2018 compared to December 31, 2017, primarily driven by the PayPal Credit acquisition, higher purchase volume and average active account growth.
Net interest income increased 7.3% to $16,118 million for the year ended December 31, 2018, 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 5.5% to $3,099 million for the year ended December 31, 2018, primarily due to growth of the programs in which we have retailer share arrangements, including the PayPal Credit acquisition, partially offset by the impact from the Toys "R" Us bankruptcy.
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased 9 basis points to 4.76% at December 31, 2018 from 4.67% at December 31, 2017, and net charge-off rate increased 26 basis points to 5.63% for the year ended December 31, 2018.
Provision for loan losses increased by $249 million, or 4.7%, for the year ended December 31, 2018, primarily due to the reserve build for the PayPal Credit portfolio, as well as higher net charge-offs. These increases were partially offset by a lower loan loss reserve build for our existing portfolio. Our allowance coverage ratio (allowance for loan losses as a percentage of end of period loan receivables) increased to 6.90% at December 31, 2018, as compared to 6.80% at December 31, 2017.
Other expense increased by $348 million, or 9.3%, for the year ended December 31, 2018, primarily driven by the PayPal Credit acquisition and business growth.
Provision for income taxes decreased by $535 million, or 38.5%, for the year ended December 31, 2018. This decrease was primarily due to the reduction in the 2018 U.S. corporate tax rate included in the Tax Act and $160 million of additional tax expense recognized in 2017 primarily related to the remeasurement of our net deferred tax asset.
We continue to invest in our direct banking activities to grow our deposit base. Total deposits increased 13.3% to $64.0 billion at December 31, 2018, compared to December 31, 2017, primarily driven by growth in our direct deposits of 15.7% to $49.4 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 year ended December 31, 2018, we repurchased $1.9 billion of our outstanding common stock, and also declared and paid cash dividends of $0.72 per share, or $534 million.
During the year ended December 31, 2018, we announced our acquisition of Loop Commerce, a provider of digital and in-store gifting services.
2018 Partner Agreements
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.

29



In July 2018, we announced that we will not be renewing our Retail Card program agreement with Walmart and on January 23, 2019, we announced our agreement to sell the outstanding loan receivables related to the program. The sale of the portfolio, which is subject to customary closing conditions, is expected to be completed late in the third quarter or early fourth quarter of 2019.
During the year ended December 31, 2018, and to date, we extended our Retail Card program agreements with Amazon, Google, JCPenney, Lowe's and Sam's Club and announced our new partnerships with Crate and Barrel, Harbor Freight Tools and with Qurate Retail Group, which included a new program agreement with HSN and multi-year extensions of our existing program agreements with QVC and zulily.
We extended our Payment Solutions program agreements with American Signature Furniture, Ashley HomeStore, Associated Materials, Briggs & Stratton, Generac, Havertys, Mohawk, Nationwide Marketing Group, Robbins Brothers and Sleep Number and announced our new partnerships with Fanatics, Furniture Row, Fred Meyer Jewelers, Mahindra and jtv.
In our CareCredit sales platform, we renewed our agreement with LCA Vision in our network of providers and expanded our network to include American Med Spa Association, the American Veterinary Medical Association, Eargo, The Good Feet Store, the Spa Industry Association and Walgreens.
Highlights for Year Ended December 31, 2017
Below are highlights of our performance for the year ended December 31, 2017 compared to the year ended December 31, 2016, as applicable, except as otherwise noted.
Net earnings decreased 14.0% to $1,935 million for the year ended December 31, 2017, primarily driven by increases in provision for loan losses and other expense, as well as the impact related to the Tax Act enacted in December 2017, partially offset by higher net interest income. Adjusted net earnings, excluding the additional tax expense related to the Tax Act, was $2,095 million.
Loan receivables increased 7.3% to $81,947 million at December 31, 2017 compared to December 31, 2016, primarily driven by higher purchase volume and average active account growth.
Net interest income increased 11.0% to $15,016 million for the year ended December 31, 2017, primarily due to higher average loan receivables.
Retailer share arrangements increased 1.2% to $2,937 million for the year ended December 31, 2017, primarily as a result of growth and margin improvement of the programs in which we have retailer share arrangements, largely offset by higher provision for loan losses associated with these programs.
Over-30 day loan delinquencies as a percentage of period-end loan receivables increased 35 basis points to 4.67% at December 31, 2017 from 4.32% at December 31, 2016, and net charge-off rate increased 80 basis points to 5.37% for the year ended December 31, 2017.
Provision for loan losses increased by $1,310 million, or 32.9%, for the year ended December 31, 2017, primarily due to an increase in net charge-offs and higher loan loss reserve. Our allowance coverage ratio (allowance for loan losses as a percentage of end of period loan receivables) increased to 6.80% at December 31, 2017, as compared to 5.69% at December 31, 2016.
Other expense increased by $331 million, or 9.7%, for the year ended December 31, 2017, primarily driven by business growth and marketing.
The enactment of the Tax Act in December 2017 resulted in additional tax expense of $160 million primarily due to the remeasurement of our net deferred tax asset and impacted certain financial measures for the year ended December 31, 2017 as follows:
($ in millions)
 
 
 
 
Net earnings
$
(160
)
 
Return on assets
(0.2
)%
Effective income tax rate
4.8
%
 
Return on equity
(1.1
)%

30



We continue to invest in our direct banking activities to grow our deposit base. Total deposits increased 8.5% to $56.5 billion at December 31, 2017, compared to December 31, 2016, primarily driven by growth in our direct deposits of 12.7% to $42.7 billion, partially offset by a reduction in our brokered deposits.
On May 18, 2017, the Board announced plans to increase our quarterly dividend to $0.15 per share commencing in the third quarter of 2017 and approval of a share repurchase program of up to $1.64 billion through June 30, 2018. During the year ended December 31, 2017, we repurchased $1,496 million of our outstanding common stock, and also declared and paid cash dividends of $0.56 per share, or $446 million.
During the year ended December 31, 2017, we announced our acquisition of GPShopper, a developer of mobile applications that offers retailers and brands a full suite of commerce, engagement and analytical tools.
2017 Partner Agreements
We extended our Retail Card program agreements with Belk, Evine, Men's Wearhouse and QVC, and launched our new programs with At Home, Cathay Pacific, Nissan and Infiniti and zulily.
We launched our Synchrony Car Care program and our new Synchrony HOME credit card network in our Payment Solutions sales platform and extended our program agreements with BrandsMart U.S.A.; City Furniture; Home Furnishings Association; Husqvarna Viking; MEGA Group USA, subsequently merged with Nationwide Buying Group to form Nationwide Marketing Group; Midas; Nautilus; Sweetwater and Yamaha.
In our CareCredit sales platform, we acquired the Citi Health Card portfolio, renewed Bosley, Mars Petcare, National Veterinary Associates and Sono Bello in our network of providers and launched our new CareCredit Dual Card.




31



Other Financial and Statistical Data
The following table sets forth certain other financial and statistical data for the periods indicated.    
At and for the years ended December 31 ($ in millions)
2018
 
2017
 
2016
Financial Position Data (Average):
 
 
 
 
 
Loan receivables, including held for sale
$
83,304

 
$
75,702

 
$
68,649

Total assets
$
99,568

 
$
91,107

 
$
84,400

Deposits
$
59,498

 
$
53,400

 
$
47,399

Borrowings
$
21,951

 
$
20,151

 
$
20,142

Total equity
$
14,386

 
$
14,427

 
$
13,620

Selected Performance Metrics:
 
 
 
 
 
Purchase volume(1)
$
140,657

 
$
131,814

 
$
125,468

Retail Card
$
113,066

 
$
106,239

 
$
101,242

Payment Solutions
$
17,427

 
$
16,160

 
$
15,641

CareCredit
$
10,164

 
$
9,415

 
$
8,585

Average active accounts (in thousands)(2)
73,847

 
69,968

 
66,928

Net interest margin(3)
15.97
%
 
16.35
%
 
16.10
%
Net charge-offs
$
4,692

 
$
4,066

 
$
3,139

Net charge-offs as a % of average loan receivables, including held for sale
5.63
%
 
5.37
%
 
4.57
%
Allowance coverage ratio(4)
6.90
%
 
6.80
%
 
5.69
%
Return on assets(5)
2.8
%
 
2.1
%
 
2.7
%
Return on equity(6)
19.4
%
 
13.4
%
 
16.5
%
Equity to assets(7)
14.45
%
 
15.84
%
 
16.14
%
Other expense as a % of average loan receivables, including held for sale
4.92
%
 
4.95
%
 
4.98
%
Efficiency ratio(8)
30.8
%
 
30.3
%
 
31.1
%
Effective income tax rate
23.4
%
 
41.8
%
 
36.9
%
Selected Period End Data:
 
 
 
 
 
Loan receivables
$
93,139

 
$
81,947

 
$
76,337

Allowance for loan losses
$
6,427

 
$
5,574

 
$
4,344

30+ days past due as a % of period-end loan receivables(9)
4.76
%
 
4.67
%
 
4.32
%
90+ days past due as a % of period-end loan receivables(9)
2.29
%
 
2.28
%
 
2.03
%
Total active accounts (in thousands)(2)
80,339

 
74,541

 
71,890

__________________
(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.



32



Average Balance Sheet
The following table sets 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
2016
Years ended December 31  ($ in millions)
Average
Balance
 
Interest
Income /
Expense
 
Average
Yield /
Rate(1)
 
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)
$
11,059

 
$
207

 
1.87
%
 
$
11,707

 
$
129

 
1.10
%
 
$
12,152

 
$
63

 
0.52
%
Securities available for sale
6,566

 
137

 
2.09
%
 
4,449

 
59

 
1.33
%
 
3,220

 
33

 
1.02
%
Loan receivables(3):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale
80,219

 
17,342

 
21.62
%
 
72,795

 
15,941

 
21.90
%
 
65,947

 
14,424

 
21.87
%
Consumer installment loans
1,698

 
156

 
9.19
%
 
1,491

 
137

 
9.19
%
 
1,274

 
117

 
9.18
%
Commercial credit products
1,333

 
144

 
10.80
%
 
1,366

 
139

 
10.18
%
 
1,372

 
139

 
10.13
%
Other
54

 
2

 
3.70
%
 
50

 
2

 
4.00
%
 
56

 
2

 
3.57
%
Total loan receivables
83,304

 
17,644

 
21.18
%
 
75,702

 
16,219

 
21.42
%
 
68,649

 
14,682

 
21.39
%
Total interest-earning assets
100,929

 
17,988

 
17.82
%
 
91,858

 
16,407

 
17.86
%
 
84,021

 
14,778

 
17.59
%
Non-interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Cash and due from banks
1,224

 
 
 
 
 
887

 
 
 
 
 
965

 
 
 
 
Allowance for loan losses
(5,900
)
 
 
 
 
 
(4,942
)
 
 
 
 
 
(3,872
)
 
 
 
 
Other assets
3,315

 
 
 
 
 
3,304

 
 
 
 
 
3,286

 
 
 
 
Total non-interest-earning assets
(1,361
)
 
 
 
 
 
(751
)
 
 
 
 
 
379

 
 
 
 
Total assets
$
99,568

 
 
 
 
 
$
91,107

 
 
 
 
 
$
84,400

 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
59,216

 
$
1,186

 
2.00
%
 
$
53,173

 
$
848

 
1.59
%
 
$
47,194

 
$
727

 
1.54
%
Borrowings of consolidated securitization entities
12,694

 
344

 
2.71
%
 
12,179

 
263

 
2.16
%
 
12,428

 
244

 
1.96
%
Bank Term Loan(4)

 

 
%
 

 

 
%
 
556

 
31

 
5.58
%
Senior unsecured notes
9,257

 
340

 
3.67
%
 
7,972

 
280

 
3.51
%
 
7,158

 
246

 
3.44
%
Total interest-bearing liabilities
81,167

 
1,870

 
2.30
%
 
73,324

 
1,391

 
1.90
%
 
67,336

 
1,248

 
1.85
%
Non-interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Non-interest-bearing deposit accounts
282

 
 
 
 
 
227

 
 
 
 
 
205

 
 
 
 
Other liabilities
3,733

 
 
 
 
 
3,129

 
 
 
 
 
3,239

 
 
 
 
Total non-interest-bearing liabilities
4,015

 
 
 
 
 
3,356

 
 
 
 
 
3,444

 
 
 
 
Total liabilities
85,182

 
 
 
 
 
76,680

 
 
 
 
 
70,780

 
 
 
 
Equity
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total equity
14,386

 
 
 
 
 
14,427

 
 
 
 
 
13,620

 
 
 
 
Total liabilities and equity
$
99,568

 
 
 
 
 
$
91,107

 
 
 

 
$
84,400

 
 
 
 
Interest rate spread(5)
 
 
 
 
15.52
%
 
 
 
 
 
15.96
%
 
 
 
 
 
15.74
%
Net interest income
 
 
$
16,118

 
 
 
 
 
$
15,016

 
 
 
 
 
$
13,530

 
 
Net interest margin(6)
 
 
 
 
15.97
%
 
 
 
 
 
16.35
%
 
 
 
 
 
16.10
%
____________________
(1)
Average yields/rates are based on total interest income/expense over average balances.
(2)
Includes average restricted cash balances of $512 million, $642 million and $436 million for the years ended December 31, 2018, 2017 and 2016, respectively.

33



(3)
Interest income on loan receivables includes fees on loans of $2,723 million, $2,609 million and $2,458 million for the years ended December 31, 2018, 2017 and 2016, respectively.
(4)
The effective interest rates for the Bank Term Loan for the year ended December 31, 2016 was 2.48%. The Bank Term Loan's effective rate excludes the impact of charges incurred in connection with prepayments of the loan.
(5)
Interest rate spread represents the difference between the yield on total interest-earning assets and the rate on total interest-bearing liabilities.
(6)
Net interest margin represents net interest income divided by average total interest-earning assets.
The following table sets forth the amount of changes in interest income and interest expense due to changes in average volume and average yield/rate. Variances due to changes in both average volume and average yield/rate have been allocated between the average volume and average yield/rate variances on a consistent basis based upon the respective percentage changes in average volume and average yield/rate.
 
2018 vs. 2017
 
2017 vs. 2016
 
Increase (decrease) due to change in:
 
Increase (decrease) due to change in:
($ in millions)
Average Volume
 
Average Yield / Rate
 
Net Change
 
Average Volume
 
Average Yield / Rate
 
Net Change
Interest-earning assets:
 
 
 
 
 
 
 
 
 
 
 
Interest-earning cash and equivalents
$
(7
)
 
$
85

 
$
78

 
$
(2
)
 
$
68

 
$
66

Securities available for sale
35

 
43

 
78

 
15

 
11

 
26

Loan receivables:
 
 
 
 
 
 
 
 
 
 
 
Credit cards, including held for sale
1,607

 
(206
)
 
1,401

 
1,497

 
20

 
1,517

Consumer installment loans
19

 

 
19

 
20

 

 
20

Commercial credit products
(3
)
 
8

 
5

 
(1
)
 
1

 

Other

 

 

 

 

 

Total loan receivables
1,623

 
(198
)
 
1,425

 
1,516

 
21

 
1,537

Change in interest income from total interest-earning assets
$
1,651

 
$
(70
)
 
$
1,581

 
$
1,529

 
$
100

 
$
1,629

 
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing liabilities:
 
 
 
 
 
 
 
 
 
 
 
Interest-bearing deposit accounts
$
103

 
$
235

 
$
338

 
$
96

 
$
25

 
$
121

Borrowings of consolidated securitization entities
11

 
70

 
81

 
(5
)
 
24

 
19

Bank term loan

 

 

 
(31
)
 

 
(31
)
Senior unsecured notes
47

 
13

 
60

 
29

 
5

 
34

Change in interest expense from total interest-bearing liabilities
161

 
318

 
479

 
89

 
54

 
143

Total change in net interest income
$
1,490

 
$
(388
)
 
$
1,102

 
$
1,440

 
$
46

 
$
1,486

 
 
 
 
 
 
 
 
 
 
 
 


34



Business Trends and Conditions
We believe our business and results of operations will be impacted in the future by various trends and conditions, including the following:
Growth in loan receivables and interest income. We believe continuing stability in the U.S. economy and employment rates will contribute to an increase in consumer credit spending. In addition, we expect the use of credit cards to continue to increase versus other forms of payment such as cash and checks. We anticipate that these trends, combined with our marketing and partner engagement strategies, will contribute to growth in our loan receivables. In the near-to-medium term, we expect our total interest income to continue to grow, driven by the expected growth in average loan receivables. Our historical growth rates in loan receivables and interest income have benefited from new partner acquisitions, and therefore, if we do not continue to acquire new partners, replace the programs that are not extended or otherwise grow our business, our growth rates in loan receivables and interest income in the future will be lower than in recent periods. On January 23, 2019, we announced our agreement to sell the outstanding loan receivables related to our Walmart program agreement. The sale of the portfolio, which is subject to customary closing conditions, is expected to be completed late in the third quarter or early fourth quarter of 2019. Beginning in the first quarter of 2019, we will present these loan receivables as loan receivables held for sale on our Consolidated Statement of Financial Position. The reclassification of these loan receivables will result in a reduction in the growth of our loan receivables, as compared to the prior year. In addition, we do not expect to make any significant changes to customer pricing or merchant discount pricing in the near term other than those associated with changes in the prime rate and LIBOR, and therefore we expect yields generated from interest and fees on interest-earning assets will remain relatively stable.
Increases in retailer share arrangement payments under our program agreements. We believe that the payments we make to our partners under our retailer share arrangements, in the aggregate, are likely to increase in absolute terms compared to the year ended December 31, 2018, primarily as a result of both the overall growth and performance of our programs. See Management’s Discussion and Analysis—Retailer Share Arrangements for additional information on these agreements.
Asset quality. In 2018, the trend of increases in our net charge-off rates and allowance coverage continued, but at a more modest rate as compared to what we experienced in 2017 and our delinquency rate remained largely in line with 2017 rates, as U.S. unemployment rates continued to stabilize and we experienced the favorable effects from certain refinements to our underwriting standards which we began to implement in the second half of 2016 and continued in 2017. Our actual net charge-off rates increased by 26 basis points to 5.63% for the year ended December 31, 2018 compared to 5.37% for the year ended December 31, 2017. In connection with the sale of the Walmart portfolio, we expect decreases to both our Allowance for Loan Losses and Provision for Loan Losses in our Consolidated Statement of Financial Position and Consolidated Statement of Earnings, respectively, beginning in the first quarter of 2019 through to the date of sale. In addition, the loan receivables held for sale will not include certain loan receivables we estimate will charge-off prior to the expected closing date of the sale of the Walmart portfolio. The effects of this, and the exclusion of the loan receivables held for sale from the denominator for certain credit quality metrics, is expected to contribute to a temporary increase to our delinquency metrics primarily in the first half of 2019. The assessment of our credit profile includes the evaluation of portfolio mix, account maturation, as well as broader consumer trends, such as payment behavior and overall indebtedness. We expect our net charge-off rate for the year ended December 31, 2019 to increase slightly, primarily due to the PayPal Credit portfolio, partially offset by the effects of the Walmart portfolio sale. We expect credit trends in the near term for our remaining portfolio to be relatively stable.
Extended duration of our Retail Card program agreements. Our Retail Card program agreements typically have contract terms ranging from approximately five to ten years, and the average length of our relationship with our Retail Card partners is 20 years. We expect to continue to benefit from these programs on a long-term basis.
A total of 22 of our 28 ongoing Retail Card program agreements, which does not include the Walmart program, now have an expiration date in 2022 or beyond. These 22 program agreements represented in the aggregate 97% of both our Retail Card interest and fees on loans for the year ended December 31, 2018 and of our Retail Card loan receivables at December 31, 2018 attributable to our ongoing programs.

35



Growth in interchange revenues and loyalty program costs. We believe that as a result of the overall growth in Dual Card and general purpose co-branded credit card transactions occurring outside of our Retail Card partners’ locations, interchange revenues will continue to increase in excess of the growth of our Retail Card loan receivables. The expected growth in these transactions is driven, in part, by both existing and new loyalty programs with our Retail Card partners. In addition, we continue to offer and add new loyalty programs for our private label credit cards, for which we typically do not receive interchange fees. The growth in these existing and new loyalty programs will result in an increase in costs associated with these programs. Overall, we expect our loyalty program costs to continue to be largely offset by our interchange revenues. These changes have been contemplated in our program agreements with our Retail Card partners and are a component of the calculation of our payments due under our retailer share arrangements.
Capital and liquidity levels. We continue to expect to maintain sufficient capital and liquidity resources to support our daily operations, our business growth, and our credit ratings as well as regulatory and compliance requirements in a cost effective and prudent manner through expected and unexpected market environments. During the year ended December 31, 2018, we declared and paid dividends of $534 million and repurchased $1.9 billion of our outstanding common stock. We plan to continue to deploy capital through both dividends and share repurchases subject to regulatory approval, as well as to support business growth. We continue to expect to maintain capital ratios well in excess of minimum regulatory requirements. At December 31, 2018, the Company had a Basel III common equity Tier 1 ratio of 14.0%. We expect that our liquidity portfolio will continue to be sufficient to support all of our business objectives and to meet all regulatory requirements for the foreseeable future.
Seasonality
In our Retail Card and Payment Solutions platforms, we experience fluctuations in transaction volumes and the level of loan receivables as a result of higher seasonal consumer spending and payment patterns that typically result in an increase of loan receivables from August through a peak in late December, with reductions in loan receivables occurring over the first and second quarters of the following year as customers pay their balances down.
The seasonal impact to transaction volumes and the loan receivables balance typically results in fluctuations in our results of operations, delinquency metrics and the allowance for loan losses as a percentage of total loan receivables between quarterly periods. These fluctuations are generally most evident between the fourth quarter and the first quarter of the following year.
In addition to the seasonal variance in loan receivables discussed above, we also experience a seasonal increase in delinquency rates and delinquent loan receivables balances during the third and fourth quarters of each year due to lower customer payment rates 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.

36




Interest Income
Interest income is comprised of interest and fees on loans, which includes merchant discounts provided by partners to compensate us in almost all cases for all or part of the promotional financing provided to their customers, and interest on cash and equivalents and investment securities. We include in interest and fees on loans any past due interest and fees deemed to be collectible. Direct loan origination costs on credit card loans are deferred and amortized on a straight-line basis over a one-year period and recorded in interest and fees on loans. For non-credit card receivables, direct loan origination costs are deferred and amortized over the life of the loan and recorded in interest and fees on loans.
We analyze interest income as a function of two principal components: average interest-earning assets and yield on average interest-earning assets. Key drivers of average interest-earning assets include:
purchase volumes, which are influenced by a number of factors including macroeconomic conditions and consumer confidence generally, our partners’ sales and our ability to increase our share of those sales;
payment rates, reflecting the extent to which customers maintain a credit balance;
charge-offs, reflecting the receivables that are deemed not to be collectible;
the size of our liquidity portfolio; and
portfolio acquisitions when we enter into new partner relationships.
Key drivers of yield on average interest-earning assets include:
pricing (contractual rates of interest, movement in prime rates, late fees and merchant discount rates);
changes to our mix of loans (e.g., the number of loans bearing promotional rates as compared to standard rates);
frequency of late fees incurred when account holders fail to make their minimum payment by the required due date;
credit performance and accrual status of our loans; and
yield earned on our liquidity portfolio.
Interest income increased by $1,581 million, or 9.6%, for the year ended December 31, 2018, and by $1,629 million, or 11.0%, for the year ended December 31, 2017. These increases were driven primarily by growth in our average loan receivables.
Average interest-earning assets
Years ended December 31 ($ in millions)
2018
 
2017
 
2016
Loan receivables, including held for sale
$
83,304

 
$
75,702

 
$
68,649

Liquidity portfolio and other
17,625

 
16,156

 
15,372

Total average interest-earning assets
$
100,929

 
$
91,858

 
$
84,021

The increase in average loan receivables of 10.0% for the year ended December 31, 2018 was driven primarily by the PayPal Credit Acquisition, higher purchase volume and average active account growth. Purchase volume and average active accounts increased 6.7% and 5.5%, respectively, including the effects of the PayPal Credit acquisition.

37



The increase in average loan receivables of 10.3% for the year ended December 31, 2017, was driven primarily by higher purchase volume of 5.1% and average active accounts growth of 4.5%.
Yield on average interest-earning assets
The yield on average interest-earning assets decreased for the year ended December 31, 2018 primarily due to a decrease in the yield on our average loan receivables of 24 basis points to 21.18% for the year ended December 31, 2018.
The yield on average interest-earning assets increased for the year ended December 31, 2017, primarily due to an increase in the percentage of interest-earning assets attributable to loan receivables and a slight increase in the yield on our average loan receivables of 3 basis points to 21.42% for the year ended December 31, 2017.
Interest Expense
Interest expense is incurred on our interest-bearing liabilities, which consisted of interest-bearing deposit accounts, borrowings of consolidated securitization entities and senior unsecured notes.
Key drivers of interest expense include:
the amounts outstanding of our deposits and borrowings;
the interest rate environment and its effect on interest rates paid on our funding sources; and
the changing mix in our funding sources.
Interest expense increased by $479 million, or 34.4%, for the year ended December 31, 2018, primarily driven by higher benchmark interest rates. Our cost of funds increased to 2.30% for the year ended December 31, 2018 compared to 1.90% for the year ended December 31, 2017.
Interest expense increased by $143 million, or 11.5%, for the year ended December 31, 2017, primarily driven by the growth in our deposit liabilities. Our cost of funds increased to 1.90% for the year ended December 31, 2017 compared to 1.85% for the year ended December 31, 2016, primarily due to higher benchmark interest rates.
Average interest-bearing liabilities
Years ended December 31 ($ in millions)
2018
 
2017
 
2016
Interest-bearing deposit accounts
$
59,216

 
$
53,173

 
$
47,194

Borrowings of consolidated securitization entities
12,694

 
12,179

 
12,428

Third-party debt
9,257

 
7,972

 
7,714

Total average interest-bearing liabilities
$
81,167

 
$
73,324

 
$
67,336

The increases in average interest-bearing liabilities for the year ended December 31, 2018 and 2017 were primarily driven by growth in our direct deposits.
Net Interest Income
Net interest income represents the difference between interest income and interest expense.
Net interest income increased by $1,102 million, or 7.3%, for the year ended December 31, 2018, and by $1,486 million, or 11.0%, for the year ended December 31, 2017, primarily driven by higher average loan receivables.

38



Retailer Share Arrangements
Most of our Retail Card program agreements and certain other program agreements contain retailer share arrangements that provide for payments to our partners if the economic performance of the program exceeds a contractually defined threshold. We also provide other economic benefits to our partners such as royalties on purchase volume or payments for new accounts, in some cases instead of retailer share arrangements (for example, on our co-branded credit cards). All of these arrangements are designed to align our interests and provide an additional incentive to our partners to promote our credit products. Although the retailer share arrangements vary by partner, these arrangements are generally structured to measure the economic performance of the program, based typically on agreed upon program revenues (including interest income and certain other income) less agreed upon program expenses (including interest expense, provision for loan losses, retailer payments and operating expenses), and share portions of this amount above a negotiated threshold. The threshold and economic performance of a program that are used to calculate payments to our partners may be based on, among other things, agreed upon measures of program expenses rather than our actual expenses, and therefore increases in our actual expenses (such as funding costs or operating expenses) may not necessarily result in reduced payments under our retailer share arrangements. These arrangements are typically designed to permit us to achieve an economic return before we are required to make payments to our partners based on the agreed contractually defined threshold. Our payments to partners pursuant to these retailer share arrangements have generally increased in recent years, primarily as a result of the growth and margin improvement of the programs in which we have retailer share arrangements, as well as changes to the terms of certain program agreements that have been renegotiated in the past few years.
We believe that our retailer share arrangements have been effective in helping us to grow our business by aligning our partners’ interests with ours. We also believe that the changes to the terms of certain program agreements in recent years will help us to grow our business by providing an additional incentive to the relevant partners to promote our credit products going forward. Payments to partners pursuant to these retailer share arrangements would generally decrease, and mitigate the impact on our profitability, in the event of declines in the performance of the programs or the occurrence of other unfavorable developments that impact the calculation of payments to our partners pursuant to our retailer share arrangements.
Retailer share arrangements increased by $162 million, or 5.5%, for the year ended December 31, 2018, driven primarily by the growth of the programs in which we have retailer share arrangements, including the PayPal Credit acquisition, partially offset by the impact from the Toys "R" Us bankruptcy.
Retailer share arrangements increased by $35 million, or 1.2%, for the year ended December 31, 2017, driven primarily by the growth and margin improvement of the programs in which we have retailer share arrangements, largely offset by higher provision for loan losses associated with these programs.
Provision for Loan Losses
Provision for loan losses is the expense related to maintaining the allowance for loan losses at an appropriate level to absorb the estimated probable losses inherent in the loan portfolio at each period end date. Provision for loan losses in each period is a function of net charge-offs (gross charge-offs net of recoveries) and the required level of the allowance for loan losses. Our process to determine our allowance for loan losses is based upon our estimate of the incurred loss period for each type of loss (i.e., aged, fraud, deceased, settlement, other non-aged and bankruptcy). See “Critical Accounting Estimates - Allowance for Loan Losses” and Note 2. Basis of Presentation and Summary of Significant Accounting Policies to our consolidated financial statements for additional information on our allowance for loan loss methodology.
Provision for loan losses increased by $249 million, or 4.7%, for the year ended December 31, 2018, primarily due to the reserve build for the PayPal Credit program, as well as higher net charge-offs. These increases were partially offset by a lower loan loss reserve build for our existing portfolio. Our allowance coverage ratio increased to 6.90% at December 31, 2018, as compared to 6.80% at December 31, 2017, reflecting the increase in forecasted losses inherent in our loan portfolio.

39



Provision for loan losses increased by $1,310 million, or 32.9%, for the year ended December 31, 2017, primarily due to higher net charge-offs and a higher loan loss reserve. Our allowance coverage ratio increased to 6.80% at December 31, 2017, as compared to 5.69% at December 31, 2016, reflecting the increase in forecasted losses inherent in our loan portfolio.
Other Income
Years ended December 31 ($ in millions)
2018
 
2017
 
2016
Interchange revenue
$
710

 
$
653

 
$
602

Debt cancellation fees
267

 
272

 
262

Loyalty programs
(751
)
 
(704
)
 
(547
)
Other
39

 
67

 
27

Total other income
$
265

 
$
288

 
$
344

Interchange revenue
We earn interchange fees on Dual Card and other co-branded credit card transactions outside of our partners’ sales channels, based on a flat fee plus a percent of the purchase amount. Growth in interchange revenue has been, and is expected to continue to be, driven primarily by growth in our Dual Card and general purpose co-branded credit card products.
Interchange revenue increased by $57 million, or 8.7%, for the year ended December 31, 2018, and by $51 million, or 8.5%, for the year ended December 31, 2017, driven by increases in purchase volume outside of our retail partners' sales channels.
Debt cancellation fees
Debt cancellation fees relate to payment protection products purchased by our credit card customers. Customers who choose to purchase these products are charged a monthly fee based on their account balance. In return, we will cancel all or a portion of a customer’s credit card balance in the event of certain qualifying life events. We offer our debt cancellation product to our credit card customers via online, mobile and, on a limited basis, direct mail.
Debt cancellation fees decreased by $5 million, or 1.8%, for the year ended December 31, 2018, primarily as a result of lower average balances on accounts with payment protection products. Debt cancellation fees increased by $10 million, or 3.8%, for the year ended December 31, 2017, primarily as a result of higher average balances and increases in customer enrollment.
Loyalty programs
We operate a number of loyalty programs primarily in our Retail Card platform that are designed to generate incremental purchase volume per customer, while reinforcing the value of the card and strengthening cardholder loyalty. These programs typically provide cardholders with statement credit or cash back rewards. Other programs include rewards points, which are redeemable for a variety of products or awards, or merchandise discounts that are earned by achieving a pre-set spending level on their private label credit card, Dual Card or general purpose co-branded credit card. Growth in loyalty program payments has been, and is expected to continue to be, driven by growth in purchase volume related to existing loyalty programs and the rollout of new loyalty programs.
Loyalty programs cost increased by $47 million, or 6.7%, for the year ended December 31, 2018, and by $157 million, or 28.7%, for the year ended December 31, 2017, arising from the launch of new rewards programs with our partners and growth in purchase volume associated with existing loyalty programs. The increase in 2017 also included the impact from higher reward redemption rates we experienced in one of our programs.
Other
Other includes a variety of items including ancillary fees and realized gains or losses associated with investments and sales of assets.

40



Other decreased by $28 million, or 41.8%, for the year ended December 31, 2018 primarily due to the impact of a pre-tax gain of $18 million recognized in the year ended December 31, 2017.
Other increased by $40 million, or 148.1%, for the year ended December 31, 2017. The increase included a pre-tax gain of $18 million associated with the sale of contractual relationships related to processing of general purpose card transactions for certain merchants in 2017.
Other Expense
Years ended December 31 ($ in millions)
2018
 
2017
 
2016
Employee costs
$
1,427

 
$
1,304

 
$
1,198

Professional fees
806

 
629

 
638

Marketing and business development
528

 
498

 
423

Information processing
426

 
373

 
338

Other
908

 
943

 
819

Total other expense
$
4,095

 
$
3,747

 
$
3,416

Employee costs
Employee costs primarily consist of employee compensation and benefit costs.
Employee costs increased by $123 million, or 9.4%, for the year ended December 31, 2018, and by $106 million, or 8.8%, for the year ended December 31, 2017, primarily due to new employees added to support the continued growth of the business. The increase for the year ended December 31, 2017 was also impacted by the replacement of certain third-party services.
Professional fees
Professional fees consist primarily of outsourced provider fees (e.g., collection agencies and call centers), legal, accounting, consulting, and recruiting expenses.
Professional fees increased by $177 million, or 28.1%, for the year ended December 31, 2018, primarily due to interim servicing costs associated with the PayPal Credit acquisition.
Professional fees decreased by $9 million, or 1.4%, for the year ended December 31, 2017, primarily due to decreases in third-party expenses as we continued to move some processes in-house, partially offset by business growth.
Marketing and business development
Marketing and business development costs consist primarily of our contractual and discretionary marketing and business development spend, as well as amortization expense associated with retail partner contract acquisitions and extensions.
Marketing and business development costs increased by $30 million, or 6.0%, for the year ended December 31, 2018, primarily due to strategic investments in our sales platforms and increased marketing on retail deposits.
Marketing and business development costs increased by $75 million, or 17.7%, for the year ended December 31, 2017, primarily due to strategic investments in our sales platforms, card re-issuances for some of our partner programs and increased marketing on retail deposits.
Information processing
Information processing costs primarily consist of fees related to outsourced information processing providers, credit card associations and software licensing agreements.

41



Information processing costs increased by $53 million, or 14.2%, for the year ended December 31, 2018, primarily due to both business growth and strategic investments.
Information processing costs increased by $35 million, or 10.4%, for the year ended December 31, 2017, primarily due to higher information technology investment and higher transaction volume.
Other
Other primarily consists of postage, operational losses, litigation and regulatory matters expense and various other corporate overhead items such as facilities' costs and telephone charges. Postage is driven primarily by the number of our active accounts and the percentage of customers that utilize our electronic billing option. Fraud, or operational losses, are driven primarily by the number of our active Dual Card and general purpose co-branded credit card accounts.
The “other” component decreased by $35 million, or 3.7%, for the year ended December 31, 2018, primarily driven by lower operational losses.
The “other” component increased by $124 million, or 15.1%, for the year ended December 31, 2017, primarily driven by higher operational losses and business growth.
Provision for Income Taxes
Years ended December 31 ($ in millions)
2018
 
2017
 
2016
Effective tax rate
23.4
%
 
41.8
%
 
36.9
%
Provision for income taxes
$
854

 
$
1,389

 
$
1,319

The effective tax rate for the year ended December 31, 2018, decreased compared to the prior year. The decrease was primarily due to the reduction in the 2018 U.S. corporate tax rate included in the Tax Act and $160 million of additional tax expense recognized in 2017 related to the remeasurement of our net deferred tax asset. The effective tax rate for the year ended December 31, 2017, increased compared to the prior year. The increase was primarily due to the $160 million of additional tax expense described above. In each year, the effective tax rate, excluding the impact of the Tax Act in 2017, differs from the U.S. federal statutory tax rate, primarily due to state income taxes.


42



Platform Analysis
As discussed above under “Our Business—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 year ended December 31, 2018, for each of our sales platforms.
Retail Card
Years ended December 31 ($ in millions)
2018
 
2017
 
2016
Purchase volume
$
113,066

 
$
106,239

 
$
101,242

Period-end loan receivables
$
65,224

 
$
56,230

 
$
52,701

Average loan receivables, including held for sale
$
57,155

 
$
51,570

 
$
46,963

Average active accounts (in thousands)
58,223

 
55,142

 
53,344

 
 
 
 
 
 
Interest and fees on loans
$
13,137

 
$
12,023

 
$
10,898

Retailer share arrangements
$
(3,044
)
 
$
(2,904
)
 
$
(2,870
)
Other income
$
219

 
$
212

 
$
288

Retail Card interest and fees on loans increased by $1,114 million, or 9.3%, for the year ended December 31, 2018 and by $1,125 million, or 10.3%, for the year ended December 31, 2017. These increases were primarily the result of growth in average loan receivables.
Retailer share arrangements increased by $140 million, or 4.8%, for the year ended December 31, 2018 and by $34 million, or 1.2%, for the year ended December 31, 2017, primarily as a result of the factors discussed under the heading “Retailer Share Arrangements” above.
Other income increased by $7 million, or 3.3%, for the year ended December 31, 2018, primarily as a result of an increase in interchange revenue, partially offset by an increase in loyalty program costs. Other income decreased by $76 million, or 26.4%, for the year ended December 31, 2017, primarily as a result of an increase in loyalty program costs, partially offset by increases in interchange revenue, debt cancellation fees and other income.
Payment Solutions
Years ended December 31 ($ in millions)
2018
 
2017
 
2016
Purchase volume
$
17,427

 
$
16,160

 
$
15,641

Period-end loan receivables
$
18,418

 
$
16,857

 
$
15,567

Average loan receivables
$
17,093

 
$
15,752

 
$
14,110

Average active accounts (in thousands)
9,692

 
9,192

 
8,410

 
 
 
 
 
 
Interest and fees on loans
$
2,356

 
$
2,181

 
$
1,952

Retailer share arrangements
$
(43
)
 
$
(24
)
 
$
(26
)
Other income
$
12

 
$
14

 
$
13

Payment Solutions interest and fees on loans increased by $175 million, or 8.0%, for the year ended December 31, 2018 and by $229 million, or 11.7%, for the year ended December 31, 2017. These increases were primarily driven by growth in average loan receivables.

43



CareCredit
Years ended December 31 ($ in millions)
2018
 
2017
 
2016
Purchase volume
$
10,164

 
$
9,415

 
$
8,585

Period-end loan receivables
$
9,497

 
$
8,860

 
$
8,069

Average loan receivables
$
9,056

 
$
8,380

 
$
7,576

Average active accounts (in thousands)
5,932

 
5,634

 
5,174

 
 
 
 
 
 
Interest and fees on loans
$
2,151

 
$
2,015

 
$
1,832

Retailer share arrangements
$
(12
)
 
$
(9
)
 
$
(6
)
Other income
$
34

 
$
62

 
$
43

CareCredit interest and fees on loans increased by $136 million, or 6.7%, for the year ended December 31, 2018 and by $183 million, or 10.0%, for the year ended December 31, 2017. These increases were primarily driven by increases in average loan receivables.
Loan Receivables
____________________________________________________________________________________________

The following discussion provides supplemental information regarding our loan receivables portfolio.
Loan receivables are our largest category of assets and represent our primary source of revenues. The following table sets forth the composition of our loan receivables portfolio by product type at the dates indicated.
At December 31 ($ in millions)
2018
 
(%)
 
2017
 
(%)
 
2016
 
(%)
 
2015
 
(%)
 
2014
 
(%)
Loans
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Credit cards
$
89,994

 
96.6
%
 
$
79,026

 
96.5
%
 
$
73,580

 
96.4
%
 
$
65,773

 
96.3
%
 
$
58,880

 
96.1
%
Consumer installment loans
1,845

 
2.0

 
1,578

 
1.9

 
1,384

 
1.8

 
1,154

 
1.7

 
1,063

 
1.7

Commercial credit products
1,260

 
1.4

 
1,303

 
1.6

 
1,333

 
1.7

 
1,323

 
1.9

 
1,320

 
2.2

Other
40

 

 
40

 

 
40

 
0.1

 
40

 
0.1

 
23

 

Total loans
$
93,139

 
100.0
%
 
$
81,947

 
100.0
%
 
$
76,337

 
100.0
%
 
$
68,290

 
100.0
%
 
$
61,286

 
100.0
%
Loan receivables increased by $11,192 million, or 13.7%, at December 31, 2018 compared to December 31, 2017, primarily driven by the PayPal Credit acquisition, higher purchase volume and average active account growth. Loan receivables increased by $5,610 million, or 7.3%, at December 31, 2017 compared to December 31, 2016, primarily driven by higher purchase volume and average active account growth.

44



Our loan receivables portfolio had the following maturity distribution at December 31, 2018.
($ in millions)
Within 1
Year(1)
 
1-5 Years(2)
 
After
5 Years
 
Total
Loans
 
 
 
 
 
 
 
Credit cards
$
89,198

 
$
796

 
$

 
$
89,994

Consumer installment loans(3)
548

 
1,151

 
146

 
1,845

Commercial credit products
1,257

 
3

 

 
1,260

Other
5

 
16

 
19

 
40

Total loans
$
91,008

 
$
1,966

 
$
165

 
$
93,139

Loans due after one year at fixed interest rates
N/A

 
$
1,966

 
$
165

 
$
2,131

Loans due after one year at variable interest rates
N/A

 

 

 

Total loans due after one year
N/A

 
$
1,966

 
$
165

 
$
2,131

______________________
(1)
Credit card loans have minimum payment requirements but no stated maturity and therefore are included in the due within one year category. However, many of our credit card holders will revolve their balances, which may extend their repayment period beyond one year for balances at December 31, 2018.
(2)
Credit card and commercial loans due after one year relate to Troubled Debt Restructuring ("TDR") assets.
(3)