Welcome to the Synchrony Financial First Quarter 2017 Earnings Conference Call. My name is Christine, and I will be the operator for today's call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. Please note that this conference is being recorded. I will now turn the call over to Greg Ketron, Director of Investor Relations. You may begin.

Thanks, operator. Good morning, everyone, and welcome to our quarterly earnings conference call. Thanks for joining us. In addition to today's press release, we have provided a presentation that covers the topics we plan to address during our call. The press release, detailed financial schedules, and presentation are available on our website, synchronyfinancial.com. This information can be accessed by going to the Investor Relations section of the website. Before we get started, I want to remind you that our comments today will include forward-looking statements. These statements are subject to risks and uncertainty, and actual results could differ materially. We list the factors that might cause actual results to differ materially in our SEC filings, which are available on our website. During the call, we will refer to non-GAAP financial measures in discussing the company's performance. You can find a reconciliation of these measures to GAAP financial measures in our materials for today's call. Finally, Synchrony Financial is not responsible for and does not edit nor guarantee the accuracy of our earnings teleconference transcripts provided by third parties. The only authorized webcasts are located on our website. Margaret Keane, President and Chief Executive Officer; and Brian Doubles, Executive Vice President and Chief Financial Officer, will present our results this morning. After we complete the presentation, we will open the call up for questions. Now, it's my pleasure to turn the call over to Margaret.

Thanks, Greg. Good morning, everyone, and thanks for joining us. During the call today, I will provide a review of the quarter, and then Brian will give details on our financial results. I'll begin on slide 3. First quarter net earnings totaled $499 million or $0.61 per diluted share. Our results were impacted by the 45% increase in the provision for loan losses we experienced this quarter, which was driven by growth and the normalization trends we are seeing in the portfolio and also by lower recovery pricing. Brian will describe these items in more detail later in the call. Continued execution of our business strategies helped generate strong organic growth in each of our sales platforms, which resulted in double-digit growth in loan receivable and interest and fees on loans for the company, as you can see on slide 4 of today's presentation. Furthermore, we grew purchase volume 7% and average active accounts 5% over the first quarter of last year. We are delivering value to partners and cardholders through attractive value propositions, promotional financing and strategic marketing offers, and this is helping to generate this growth. Looking at just our online and mobile purchase volume, sales grew 21%, exceeding U.S. growth trends which have been around 15%. And our Retail Card online sales penetration reached 26% in the first quarter. Net charge-offs came in at 5.33%, compared to 4.74% in the first quarter of last year. Our efficiency ratio was 30.3% for the quarter versus 30.4% last year. Strong deposit generation supported the growth we generated this quarter. Deposits increased $7 billion or 15% to $52 billion. Deposits now comprise 72% of our funding sources. With a continued focus on competitive rates and customer service, we believe we can continue to drive deposit growth, though we would expect…

Thanks, Margaret. And I'll start on slide 6 of the presentation. In the first quarter, the business earned $499 million of net income, translates to $0.61 per diluted share. We continued to deliver strong growth, with purchase volume up 7%, and loan receivables and interest and fees on loan receivables up 11% over last year. Overall, we're pleased with the growth we generated across the business. We had another strong quarter in average active accounts growth, which increased 5% year-over-year driven by the strong value propositions and promotional offers on our cards that continued to resonate with consumers. Positive trends continued in average balances and spend, with growth in average balance per average active account up 6% compared to last year and purchase volume per average active account increasing 2% over last year. The interest and fee income growth was driven primarily by the growth in receivables. The provision for loan losses increased 45% over last year. The increase was driven by higher reserve build and receivables growth. The reserve build was higher than we had expected. While most of the build continues to be driven by growth and the normalization we are seeing in the portfolio, lower recovery pricing in the quarter also drove approximately $50 million of additional reserves or 7 basis points of coverage. Regarding asset quality metrics, 30-day-plus delinquencies were 4.25% and the net charge-off rate was 5.33%. Our allowance for loan losses as a percent of receivables was 6.37%. RSAs were up $14 million compared to last year. RSAs as a percentage of average receivables were 3.7% for the quarter, compared to 4.1% last year. The lower RSA percentage compared to last year is due mainly to the retailers sharing in the incremental provision expense, which offset the increase in sharing from the year-over-year growth…

Thanks, Brian. I'll provide a quick wrap-up and then we'll open the call for Q&A. While the reserve build impacted our results this quarter, we continued to deliver strong organic growth across each of our sales platforms. We renewed key programs, made strategic acquisitions and launched new programs during the quarter. We continued to drive deposit growth and maintained a strong balance sheet. We also returned capital to shareholders through our dividend and share repurchase program. We continue to focus on our strategic priorities and believe they will help us generate additional growth and strong returns as we look ahead. I'll now turn the call back to Greg to open up the Q&A.

Thanks, Margaret. That concludes our comments on the quarter. We will now begin the Q&A session. So that we can accommodate as many of you as possible, I'd like to ask participants to please limit yourself to one primary and one follow-up question. If you have additional questions, the Investor Relations team will be available after the call. Operator, please start the Q&A session.

Thank you. We will now begin the question-and-answer session. Our first question comes from John Hecht from Jefferies. Please go ahead.

Hey, guys. Can you hear me?

Yeah, John.

All right. Thanks very much. So, just with respect to credit, a couple of questions. Number one is, so if I just do the math relative to our model and it sounds like the dollar increase allowance build is going to be similar to this quarter for the next couple of quarters, it gets us to an allowance range of about 7% relative to receivables. And yet you all are guiding about 25 basis points in terms of charge-off content. So I'm wondering can you reconcile more than 100 basis points build in ALL (20:30) relative to the 25 basis points build in net charge-offs.

Yeah. Sure, John. I mean, the coverage is obviously driven by a number of different factors, including whatever your growth assumption is. And there that's why we've tried to be as helpful as we can in terms of telling you how to think about it on a dollar basis. But as you think about the reserve builds for 2017, they'll continue to be driven by really two factors; growth in our receivables, which we're off to a very strong start this year; as well as the normalization trends that we're seeing. So, as you move throughout the year, you also have to factor in the fact that the reserve will start to pick up 2018 as you roll forward. And so the reserve build in this quarter as well as the next two quarters will start to pick up 2018. So we would expect that to be the dynamic really for the next couple of quarters. And then as you move into 2018, we indicated towards the back half we expect the credit trends will start to level off and we'd expect the reserve builds to kind of run in advance of that, and the reserve build in 2018 would be more reflective of growth and include a little bit less of that normalization component.

Okay. That's helpful. And then you mentioned – you gave some specifics about recovery rates, but then you also cited channel mix and so forth. And I'm wondering if you can give a little bit more detail what – is there growth at certain retail partners that has a different credit mix than maybe you've seen before, or any color on that concept would be helpful.

Yeah. Sure. I mean, portfolio mix is something that we've highlighted in the past. We've talked about the fact that our underwriting is very customized, and we underwrite differently based on the platform, the program, the channel and the product. So it's really multi-variant, if you think about it, across the spectrum there. And so our credit guidelines have been pretty consistent across those areas. But we do underwrite to different loss rates in some of those areas. So, depending on the growth rates that we're seeing in certain segments of the portfolio, mix can be a driver and certainly influences the composition of the vintages and then how those vintages subsequently perform. And if you look at it today, today we would have a larger percent of the book in those newer vintages and in those areas of the portfolio that have had higher growth rates really in 2015 and 2016. So, that's driving the dynamic that we're seeing.

Right. Thank you, guys, very much for the color.

Yeah. Thanks, John.

Thank you. Our next question comes from Sanjay Sakhrani from KBW. Please go ahead. Sanjay Sakhrani - Keefe, Bruyette & Woods, Inc.: Thanks. Good morning.

Hi. Sanjay Sakhrani - Keefe, Bruyette & Woods, Inc.: I guess, staying on credit, when we think about the step-change in the charge-off rate guidance, I just want to make sure, is it mainly the recovery pricing? And I guess, can that recovery pricing change as a result of recovery experience?

Yeah. So I would say it's a combination of a couple of things. One is, just based on how we started the year – and I wouldn't call it a step-change, Sanjay. I would say we were 4.75% to 5%. We're now saying 5% to low-5% range. So we moved it up largely based on how we started the year here in the first quarter and what we're seeing around recovery pricing. The recovery pricing itself, it can move around a little bit. We highlighted, I think it was $36 million back in the third quarter of last year. We saw an incremental decline in pricing this quarter. We believe it's driven by a combination of factors, including just the fact that you've got increased supply in the market. As charge-offs start to normalize across the industry, which we've seen, you've got that dynamic. So you've got just increased supply in the market, which we think is impacting the price. And then to probably a lesser extent, you've got the costs that some of the buyers have added to improve their processes in response to the proposed new regulations. I think that was probably a little more of a driver in the third quarter of last year. I think the dynamic that we're seeing now is probably a little more supply-driven. Look, the one thing I'd highlight is that we run a regular NPV analysis on these sales. And if we start to see more deterioration on the pricing, we may pull back on some of these sales and start to collect on the accounts or other means. Sanjay Sakhrani - Keefe, Bruyette & Woods, Inc.: Okay. And I guess when we think about – one of the questions I get a decent amount is just your reserve coverage and the differences in your reserve coverage relative to your peers. Let's just talk about your reserve coverage rate relative to your peers and how you see that kind of unfolding as charge-offs start leveling off? Does that reserve coverage rate come down?

Sure. So, obviously, it's hard for me to speak to how others reserve. Our reserve is based on our best estimate of the incurred losses that we have in the book at the end of the reporting period. I would say our model is to generally look out over a 12-month window. But our reserve, it includes principal as well as interest and fees. We also have qualitative and other factors that we include in there. So, when you add up those pieces, it typically equates to 14 to 15 months of coverage. But as I've said in the past, that is not how we book the reserve. It just gives you some guidepost in terms of how to think of it. It kind of equates to that 14 to 15 months. But we're not targeting that. That's really more of the output and how it ends up comparing to the next 12 months' charge-offs. Other than that, we have a lot of good disclosure in the Qs and the Ks that tell you about the factors that we consider and that we build into the models. But, again, it's kind of tough to compare to what others do. Sanjay Sakhrani - Keefe, Bruyette & Woods, Inc.: Thank you.

Yeah.

Thank you. Our next question comes from Ryan Nash from Goldman Sachs. Please go ahead. Ryan M. Nash - Goldman Sachs & Co.: Hey. Good morning, guys. Brian and Margaret. Brian, given this is now the second credit change we've had over the last three quarters, you gave us guidance looking out pretty far over the next, call it, four or five quarters. Like, what gives you the confidence that losses will actually begin to start leveling off in the back half of next year? What is it that you're seeing across vintages that would give us comfort that this could actually start to happen versus another potential to see the losses drift higher beyond your expectations?

Yeah. Sure, Ryan. I mean part of this is, if you think about our growth, it really started to accelerate in second, third quarter 2015 through the first half of 2016. And that's obviously driving the dynamic that we're seeing here. It's driven by the factors that I've highlighted in the past, portfolio mix, like program, product, channel, all those same components. However, when we look at the more recent vintages and how kind of an early read on those, as well as other factors just including things like the growth rates in some of the higher loss areas of the portfolio, that gives us some comfort that losses will start to level off in the second half of 2018. So it's really a combination of early read in the more recent vintages from the second half of 2016, as well as we have been growing in certain areas at a very healthy clip here in 2015 and 2016. And just given now that we're comping against some of those really high growth rates, they started to moderate a bit. And so the mix impact that we're feeling there should lessen as we get more towards the back half of 2018. Ryan M. Nash - Goldman Sachs & Co.: Got it. Two quick follow-ups, I guess. One, as you look at the performance of your more recent vintage relative to the older ones, are you seeing underlying deterioration in, call it, the 2015 versus the 2016? I know that there's some channel mix that obviously weighs on that. And then, just to follow-up as to the last question, if you are expecting charge-offs to begin to level off in the back half of 2018, should we expect the reserve to actually to start to begin to level off in the back half of this year or maybe into early next year? Thanks.

Yeah, Ryan. Let me take the second one first. I would expect the reserve to start to level off in advance of what we expect to see on charge-offs. Obviously, your reserve is forward-looking. So I think, not to get too specific about it, but as you start out into 2018, the reserve build should be more reflective of growth and include less of that normalization component that we expect to see for 2017. And sorry, Ryan, take me back to your first question. Ryan M. Nash - Goldman Sachs & Co.: And just underlying what are you seeing in the subsequent vintages. Are you seeing similar performance, are you seeing worse performance, any color you can provide there?

Yeah. I think, consistent to what others are seeing, 2015 and 2016 have higher loss content. I would say back half of 2016 is a little better than first half of 2016 for us. I don't know how that looks relative to others. The underwriting box for us has been largely consistent. But if you look at the past couple years, our growth rates did really accelerate in the second half of 2015 and 2016. And those vintages, second half of 2015, first half of 2016, are seasoning at somewhat higher delinquency levels, driven by the factors that we've talked about, portfolio, channel mix. But, again, the early read on the more recent vintages gives us some comfort as well as an updated view of the growth rates going forward on some of those higher loss areas of the portfolio, give us some comfort that we'll work our way out of this towards the back half of 2018. Ryan M. Nash - Goldman Sachs & Co.: Got it. Thanks for taking my questions.

Yeah.

Thank you. Our next question comes from Don Fandetti from Citigroup. Please go ahead.

Yes. I had a question about – there's been a lot of talk about retailer bankruptcies and just wanted to kind of get your sense on, based on your history, how that plays out when a retailer does go bankrupt? How long that process takes? And then, secondarily, have you ever had any experiences where another retailer that's not part of your portfolio suffers a bankruptcy and that can lead to sort of a pickup at your retailers. Can you just talk a little bit about the dynamics?

Yeah. Sure. So, first, let me start off by saying that when we do a new transaction and we have a mix of retailers on our portfolio, we're always watching the performance of the underlying economics and balance sheet of that particular retailer. But our risk is really with the consumer, not the retailer. And so I'd say when a retailer's gone bankrupt, it's their going into bankruptcy where they're going to restructure their debt and kind of come out in the end, and maybe less stores but continue to run the operation, we work very closely with them on that whole process. They usually let us know ahead of time. We work with them. One of the things that's important if they're coming out and want to continue operating as a retailer is, the credit card program becomes a very important element of how they drive their growth going forward. In a case where they're closing the doors and they're liquidating, in that case, our experience has shown, based on how we operate, that we can liquidate those portfolios profitably. I would say, again, we work really then with the consumer to make sure the consumer understands they're still responsible for the debt. Most consumers understand that, and they end up paying their bills. And then on the last question, I'd say I think that is an opportunity. And we've talked to some of our retailers who are strong and seeing some opportunities. As other retailers do go through bankruptcy, we do see pickup, especially in the specialty retailer market, where you'll have some of the recent closures that have happened that help some of our retailers pick up sales. So, that's both sides of the equation that we see.

Thank you.

Thank you. Our next question comes from Betsy Graseck from Morgan Stanley. Please go ahead. Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC: Hi. Good morning.

Morning.

Morning. Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC: I have a question on your commentary around the RSA trajectory. Just wondering if we're going to be continuing to increase reserves. And just to be clear, the reserve build that you did this quarter, I think that was $322 million, and you're expecting over the next several quarters that you'll be adding to reserves around that same level of $300 million, plus, minus. That's what I heard. Let me know if that's accurate. And if that's the case, why is the RSA profit share moving higher as opposed to staying where it is this quarter?

Yeah. Sure, Betsy. So the reserve build in the quarter was $332 million. And we said for the next couple of quarters, assume it's in that range. So we're not being that precise around it, obviously. We're going to have to adjust to what's happening in the quarter when we record the allowance. But in terms of the RSA, for the quarter, we were at 3.7% of receivables, which is well below the 4.4% to 4.5% that we guided to for the year. So you're definitely seeing an offset. You also have to remember that a lot of things were better year-over-year. We had good growth, higher margins, which would have resulted in a higher RSA than we had originally forecasted. However, those improvements were more than offset by the incremental provisions. As you think about it for the balance of the year, you have to factor in that in the third quarter we typically hit a high point on the RSA percentage. You typically have lower charge-offs. Just seasonally, yield comes up on the book. And so, when you factor that in, it gets us in that 4.1% to 4.2% range for the year. Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC: And then just two follow-ups on that outlook for RSA into 2018. You gave us some of your other 2018 commentary. Maybe you could help us with that one.

Yeah. It's really a little early to start giving RSA guidance beyond that. Obviously, you have to take new deals into account, renewals and things like that. So there's quite a bit that could happen here in the back half of the year that could influence that number. So I wouldn't want to start giving 2018 guidance on the RSA. Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC: And then you highlighted that RSAs are typically higher in 3Q when the NCOs are tracking down. So are you saying you're expecting normal seasonality to come through into 3Q? Is that something you could give us some color on?

Yeah. There's still going to be a seasonal component to the book. I'm not going to range the magnitude or give quarterly guidance on the NCO rate. But that seasonal component we would expect to still be there, both on the top line as well as what we're seeing on credit. So, it tends to be relatively stable in the first half of the year. You see charge-offs come down in the third quarter. They tick back up in the fourth. On the margin side, you see yield come up in the third quarter, comes back down in the fourth a bit with the seasonal build in receivables. So we would expect those trends to still play through for the year. Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC: Okay. And then, just lastly on the RSA, so the 3.6% this quarter did reflect some of the share that you had with your retailers for the reserve build that you did in 1Q. Would you be sharing that reserve build that you're doing over the next several quarters with them as well?

Yeah. That's just part of how they work. For all the programs where we have an RSA, all of our partners share in net charge-offs and the majority of them share in the reserve build as well. We have a couple of programs where that's not the case. So there can be a little bit of a lag in terms of the offset, but, for the most part, they're sharing in that and that's really what drove the RSA percentage down from that 4.4% to 4.5% range that we had guided to down to 3.7% for the quarter. Elizabeth Lynn Graseck - Morgan Stanley & Co. LLC: Okay. Thank you.

Yeah.

Thank you. Our next question comes from Moshe Orenbuch from Credit Suisse. Please go ahead. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC: Great. Thanks. I guess, first, maybe from a high level, could you just talk about what things you're doing differently, if anything, in response to this? Like, are you doing things either to tighten from a credit perspective or from a profitability perspective to kind of mitigate some of these results?

Yeah. Sure, Moshe. So we're always making refinements to the underwriting models across the portfolio based on the trends that we're seeing. And while I'll say that overall our underwriting standards and the cutoffs have been largely consistent, you see that if you look at the FICO stats (37:45) on the portfolio, which has been pretty consistent for a number of years now. But given we're still seeing attractive risk-adjusted returns, we haven't made what I would call significant changes to our underwriting model to tighten up. The changes that we've been making, we'll continue to make, are pretty surgical in nature. They're specific to certain portfolios, certain credit strategies. We're always adjusting things like line assignments, refining upgrade strategies and things like that. So, yeah, we tightened a bit in the second half. We'll continue to refine our strategies here as we move throughout 2017. We saw that actually improve some of the performance in the more recent vintages. So, look, we're obviously adapting to what we're seeing as these high growth vintages mature. But I wouldn't say it's anything dramatic that's going to slow the growth rate of the business. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC: Okay. And then maybe just to come back from a reserving perspective. I mean, you've gotten this question really in a bunch of different ways. But I guess I still kind of struggle, the $50 million that you referred to with respect to recovery pricing, is that something that becomes part of a consistent reserve build? Like, it seems like that should be something that's more or less one-time. And so maybe why is it that you're talking still about reserve builds that are comparable to this level?

Yeah. Look, the $50 million is one-time based on the market pricing that we got in the quarter. Hard to tell when we go back out if we'll see another adjustment there. We don't have any visibility into that at this point. And we're really not trying to be that specific. We're saying, look, assume the magnitude of reserve build for the next couple of quarters will include a component for the strong growth that we continue to have as well as normalization. And that puts the reserve build in the same range as what we have this quarter. But that's about as specific as we can be. We're trying to give you a way to think about it over the next couple of quarters. But I can't pinpoint a dollar amount today and tell you what exactly we're going to book in the second and the third quarters. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC: Right. And I appreciate that. Just a quick comment and that is that you have to appreciate our perspective that the impact of the reserve build is kind of four times as important as an effective change in charge-offs because it's – and so it puts us in just a difficult position. So, as you go forward, future guidance and information on that would be helpful.

Yeah. No, Moshe, we understand that. And the reserve build in the quarter, as we said, was higher than we expected and that's why we're giving you a framework for how to think about it for the next couple of quarters, which is all predicated again on the net charge-off trends that we're seeing, so. Moshe Ari Orenbuch - Credit Suisse Securities (USA) LLC: Thanks.

Thank you. Our next question comes from Mark DeVries from Barclays. Please go ahead.

Yeah. Thanks. It's going to be another question on reserve build because I'm still kind of confused about why we're talking about this kind of reserve build. Maybe I misheard your comments. Brian, did you indicate you also expect 5% to low-5% charge-offs for 2018 as well or did I mishear that?

For 2018, we're in low- to mid-5s. So we do expect the charge-offs.

Okay. Low- to mid-5s.

Yeah. So we expect the charge-offs to continue to trend up in 2018, leveling off in the back half. So, as you start to build reserves for that, you're picking up more of the 2018 dynamic as well as the fact that we moved our forecast up for 2017 as well.

Okay. So the thing that I'm most confused about then is, if we talk about the same type of reserve build for the next two quarters, you basically added 60 basis points of coverage in one quarter, right? So, if we did that two more times, we'd be at like 7.5% coverage on 5.5% charge-offs at the high-end of that range for 2018. So why are we building so much incremental cushion over kind of what you're guiding to in terms of an 18-month forward charge-offs here?

Yeah, Mark. I think you might be missing the growth component that would bring that percentage down. We wouldn't be in that kind of range on the reserve coverage. But you also have to factor in the seasonality, right? The reserve coverage typically increases second quarter, third quarter, and comes down in the fourth quarter. And when you get to the fourth quarter of 2017, your reserve coverage should look largely in line with that low- to mid-5% range of charge-offs for 2018. That's just another way to think about it is as you move throughout the year, your reserve coverage at the end of the fourth quarter should reflect what we expect to see for 2018, which is at low- to mid-5% range.

Okay. Got it. And then just a question on the seasonality you're assuming in your guidance for this year. As I look back at the last two years, the back-half seasonality was pretty different in 2015 versus 2016. It was much more muted in 2016. So, if I use the seasonality of 2016, I'm getting to like a 5.175% average charge-off for 2017, assuming no incremental upward bias for normalization. Are you kind of implicitly assuming a little bit more pronounced seasonality than we saw in 2016?

Yeah. I don't think we're assuming anything incremental on seasonality. That charge-off range would be in the range of what we're indicating in the 5% to low-5% range.

Okay. Got it. Thank you.

Yeah.

Thank you. Our next question comes from Rick Shane from JPMorgan. Please go ahead.

Hey, guys. Thanks for taking my questions.

Hey, Rick.

One of the things that is unique about your portfolio is the idiosyncratic risk associated with the different retailers. And I know that you say that you're tied to the consumer, but there is a utility factor tied to the specific retailers. When you look at the recovery pricing that you're describing, is one of the things that's causing the tiering of your sales into the secondary market a function of which retailer portfolios you're selling off?

Yeah. We don't think so, Rick. I think it really is driven by the factors that I mentioned earlier. We know for a fact that there's increased supply in the market. You've seen charge-offs normalize across the entire industry. We think that's probably the primary driver this quarter. And remember, we're coming off of historically low loss rates. So there was definitely a supply-demand imbalance in 2014, 2015, a little bit into 2016, and now that's started to come back and normalize a bit. And we think that's driving the majority of what we're seeing on pricing. And then I think the secondary factor is just buyers have added a lot of cost to get out in front of some of these proposed new regulations and we think that that's probably secondary driver. But I don't think it's specific to anything idiosyncratic or anything related to any of our retail partners.

Got it. In that vein, not only in terms of secondary pricing, but how much churn do you see from a credit performance perspective related to retailers? And again, the question came up before, but I assume in a scenario where a retailer is at risk, the utility of that card to the consumer goes down and that impacts willingness to pay.

Yeah. There's definitely some of that, Rick. Typically, if a retailer is going to go through bankruptcy and then liquidate, we usually adjust our reserve modestly to accommodate for that dynamic. But then we always liquidate properly because the vast majority of the consumers want to protect their credit rating. They know they still owe the debt and they pay us back. And so we've been through a few of these over our history and they always liquidate profitably, and again, because the consumer knows that they're still obligated on the debt.

Okay. That's it for me. Thanks, guys.

Thanks, Rick.

Thank you. Our next question comes from David Ho from Deutsche Bank. Please go ahead.

Hi. Good morning. Again on the reserve build, I fully appreciate the commentary, but in terms of the kind of build over the charge-off acceleration, just want to clarify that, again, the $300 million is kind of the incremental reserve build even with the higher guide in charge-offs for next couple of quarters?

That's right. The higher guide on charge-offs for 2017 and the new outlook we put out there for 2018 inform kind of the reserve build over the next couple of quarters. So, that's exactly how to think about it. You're picking up both 2017, what we expect to see for the balance of the year in net charge-offs, as well as every quarter as we move forward you're picking up another quarter of 2018.

And then in terms of the credit normalization that has accelerated, do you believe that that could slow – or is that part of your assumption in terms of the leveling off in 2018 in terms of the loss rate guide, that credit normalization, more underlying even if you had adjusted for a portfolio mix and some of the things you're seeing would start to level off maybe if overall kind of consumer leverage and the economy start to scale off as well?

Yeah. I mean, all of our comments are based on a relatively stable macro environment. So we're really talking about based on dynamics that we've seen and the vintage curves and the portfolio mix. That gives us some comfort that losses will start to level off in the second half of 2018. But, again, it's predicated on a stable macro environment and nothing really changing there.

Okay. And then quickly, any late fee benefit from them, just given the acceleration in credit?

Yeah. You do see – that's part of what gave us better yield than we were expecting. It was relatively flat year-over-year, but better than our expectations. And that's what's pushing our guidance on NIM up from, in January, we were at 15.75% to 16% and now we're saying probably 16% to 16.25% in a quarter for the year. So it's a combination and more revolved on the book. It's one of the natural offsets in the portfolio. So, as credit starts to normalize and trend up, that is one of the natural offsets that you'll see in the business.

Got it. So it's not like pricing for lower quality loans, just some of the natural progression of credit normalizations flowing through there. Got it.

Yeah. The FICO strats (49:20) have been very consistent. The Q will come out next week and you'll see that they're virtually unchanged compared to the prior year. We still have 72% of the portfolio with 660 score and above, no change from the prior year, 20% of the portfolio is between 600 to 660 score, no change from the prior year and 8% of the portfolio is below 600 score. So those are all very consistent year-over-year. It really is the dynamics that we've highlighted earlier.

Okay. Great. Thanks, Brian.

Thank you. Our next question comes from David Scharf from JMP Securities. Please go ahead.

Hi. Good morning, and thanks for taking my questions. Brian, I just wanted to follow-up a little more on recovery pricing. In first off, do you enter into forward flow deals with some of the larger debt buyers?

Yeah. We do in some cases, David.

Okay. And as we think about – this may have been asked by a prior caller, but inherent in your forward-looking loss guidance, we would expect as normalization continues the industry as a whole is going to continue to generate more supply. Are you factoring in additional declines in average pricing on charge-off sales or are you basing the assumption that that $50 million was sort of a one-time event?

Yeah. The way we book the reserves is you take all the best information that we have at the time, which is current market pricing, any indications that there is a trend there that is going a different way, and we try and build all of that into the reserve model. So I wouldn't call it a one-timer necessarily because it can always change in the future as we move forward. But we've booked our best estimate for what we think the market is priced for today. We've included all of that in our reserves. It will drive – it's part of what's driving the NCO guidance up a little bit beyond where we were in January, but we've included everything that we're seeing today in the market.

Got it. And when we talk about the market, can you give us a sense for how many sort of approved debt buyers there are on your list versus maybe 12, 18 months ago, because there seems to be a lot of regulatory-driven shake-out in that end of the market and whether that's one of the factors driving the pricing?

Yeah. Look, I'm not going to be specific on the number. We've got, I'll call it, a handful of buyers that we've been dealing with for a long time that we're very comfortable with. Our mix changes pretty regularly, depending on the dynamics that we're seeing in the market. I think as I've mentioned in the past, we're always looking at the best ways to optimize the value through sales of the charge-off accounts and then collecting through other means. We always run a regular NPV analysis. And, look, if we start to see pricing deteriorate further, we may take a different approach and we'll make modifications along the way.

Got it. And maybe just lastly, along the same lines, regarding sort of other means, obviously that would be your in-house collection capabilities and potentially outsourcing to contingency collection agencies. Are the settlement terms that maybe you're agreeing to with already written-off consumers changing as well? I just want to understand definitionally if recovery pricing exclusively refers to the price that the debt buyers are paying or if it also implies maybe lower settlement in full terms with the stuff you work out yourself?

It's pretty specific to the buyers.

Got it. Got it. Thanks very much.

Thank you. Our next question comes from Jamie Friedman from Susquehanna. Please go ahead.

Hi. One question we get a lot is with regard to retailer health. Margaret, you addressed this earlier, but apart from bankruptcies, it seems like retailers are frequently decreasing their storefronts. I was wondering if you could talk to how that impacts the model for Synchrony.

Sure. So we've been seeing this for quite a while. The retailers are going through a transformation. But I would say, as per our reading, it's definitely accelerated coming out of the holiday season. And I think, for us, when we look at this for the retailers that we have, when they're closing stores or reducing their footprint, it's usually stores that are not really generating the sales volume that they need, and it also means that our cards are probably not doing as well in those stores as well. So I think, for us, what we've been able to do, and we show it in the growth that we've been able to achieve in this last quarter, is while they're going through their transformation, we're going through our transformation of making sure we can really attract those customers through the online channels, whether it's through their iPad or on their mobile phone. And, as we indicated in our comments, this quarter, 26% of retail card penetration was online. So we're definitely picking up, I think, more than our fair share of consumers who are not going into the actual physical brick-and-mortar but shopping online. And I think that's really where we have to continue to work with our partners, continue to make sure we have not only the capability, but also the right value props in place, that we're giving the right marketing programs to those consumers to ensure that they're coming back. So we're working hard on those things. We purchased GPShopper. We acquired them this quarter. We did that because they've been able to demonstrate their capabilities in helping us enhance what we're driving for our retailers and also helping some of our retail partners build out their mobile assets. So I think the shift is happening and probably happening at a little more of an accelerated rate this year, but we're on top of it and one that we think we are well-positioned for as that transformation continues to happen.

Okay. And then, nothing imminent, but I believe you have some significant renewal opportunities next few years. I was just wondering when those conversations typically begin and what the methodology will be to announce or release the status when you have something to say about them.

Yeah. So those conversations go on continually, as our retailers are looking for new ways to do things and maybe different kinds of investments or a different value prop. So we're working them all the time, as evidenced by our renewal this quarter of Belk and QVC and Midas. What we would do is, once we close a deal is when we would announce that we won it. But we're working those every day. I think given the state of retail right now, it's incredibly important for us to be the best possible partner we can be for them to really ensure their success and that they feel good about the overall partnership. And hopefully, we're doing that and then we work the renewals into that process as we continue to work closely with them.

Thank you.

Okay. Christine, we have time for one more question.

Thank you. Our last question comes from Ken Bruce from Bank of America Merrill Lynch.

Thanks and good morning.

Good morning.

Yes. Thank you for all the color on the reserving and kind of what your thoughts are on that. Could you maybe elaborate in terms of within the portfolio if there are any particular parts of it that are normalizing faster than other? I mean, what you're experiencing is something we're hearing from others. So, I guess, I'm interested in knowing if there's something that you're seeing within the context of consumer credit that's beginning to change maybe more rapidly than we had seen in just a few months ago.

Yeah. I think it's pretty consistent, Ken. It's driven by the factors that we've talked about in the past. And if you look at our growth rates, everybody has had a different trajectory around growth by a quarter or two, and if you look at ours, our growth rates really accelerated in the second half of 2015 into 2016. And so those vintages are seasoning at somewhat higher delinquency levels. But it's really driven by the fact that we had really strong growth in certain areas of the portfolio that have higher loss rates. When I say areas of the portfolio, I'm really talking about a multi-variant kind of cut where it's a combination of program, channel, platform and product. It's not as simple as just saying it's one program. It's a combination of different things. However, as I mentioned, based on the early read of the most recent vintages, given some of the changes that we made in 2016 and continue to make, they're actually performing a bit better. And that gives us some comfort that this is normalization, and it will level off at some point. We think, for us, based on what we're seeing, that's the back half of 2018. Again, I think it's still important to point out that we're also getting improvement on yields. So we're still seeing pretty good risk-adjusted returns. Once we get past the reserve builds, then include both the growth and the normalization component that we're seeing now, these are going to be very profitable balances going forward once we get beyond that.

Yeah. I appreciate that. I think one of the challenges that we have in the investment community is, as you see these portfolios and credit cost normalizes, understanding ultimately if that normalization turns into something which we may characterize as deteriorating and as you've kind of mentioned there's been a lot of growth across consumer credit for a lot of companies. And we haven't seen anybody really pull back, and it's – I guess for those of us who have been around long enough, we kind of recognize that the growth tends to lead to the next credit cycle. It feels awfully close to some previous cycles, and I guess I'm kind of curious as to why we're not seeing more companies pull back before...

Well, I think we're in a good macro environment. I think you got to put the backdrop in there, Ken, which is we're in a fairly good macro environment. The consumers are getting stronger. There's confidence in the consumer. Unemployment is getting better. So I think those things certainly play in to the environment that we're in, and we expect that to continue. I don't think anyone is seeing a big macro correction in that area. So, that helps.

No. I don't disagree with that. I think the problem that we have is that we find that this deterioration is occurring when the consumer is so strong, and that's frankly the problem.

Yeah. I mean, I think part of that, Ken, if you look at the improvement we were getting in 2014 and 2015, it was significantly above our expectations. And if you go back every quarter, we said credit is not going to get better, credit is not going to get better. And I think that was fairly consistent across the industry. And so we saw historic lows for a couple of years, and we're starting to come off of that. It's a fairly gradual change. And if you look at – for us, I mean I can't speak to others, but our underwriting has been pretty consistent. And I'll walk through the FICO strats (1:01:35) earlier, but for the past few years, they've been very consistent, which says that while there's more supply in the market, we've tried to stay pretty disciplined based on the trends that we're seeing and some of the performance of the vintages from 2015 and 2016. We're making some modifications. But as I mentioned, they're pretty surgical. I think others are probably going to start to do that as well. But I don't think there's anything that we see at least in the consumer that says, by historical standards, there's a problem there. I think they're still healthy. They've continued to take on more debt, more leverage. But, again, if you look at it over time, it still appears to be fairly responsible. And so we're still seeing a lot of opportunities for growth across the credit spectrum.

Okay. Well, thank you for all your comments this morning. I really appreciate it.

Thanks, Ken.

Thanks, everyone, for joining us this morning. The Investor Relations team will be available to answer any further questions you may have.

Thank you. And thank you, ladies and gentlemen. This concludes today's conference. Thank you for participating. You may now disconnect.