Synchrony Financial (SYF) — Q1 2015 Earnings Call Transcript

Thanks, operator. Good morning, everyone and welcome to our first quarter earnings conference call. Thanks for joining us this morning. 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 the 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 CEO; and Brian Doubles, Executive Vice President and CFO, 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. Thank you for joining us today. I'll start on Slide 3; the overall fundamentals of the business remain strong in the first quarter with net earnings of 552 million or $0.66 per share. Our growth drivers continued their solid trends, helping to drive purchase volume growth of 10%, loan receivable growth of 7%, and platform revenue growth of 5%. We're seeing the impact of compelling new value propositions such as The Sam's Club 531 cash back program, which was recently recognized with a PYMNTS.com innovator award. Programs like this demonstrate the impact of engaging deeply with partners to help them develop innovative and effective ways to drive sales. Our focus on enhancing value for our partners and cardholders through digital offerings has also helped to drive a significant increase in online purchase volume. For the first quarter, digital purchase volume increased 18% compared to the prior year. I will spend a few moments this morning outlining how our digital, loyalty, and analytics capabilities are bringing value to our partnership. Asset quality improved with a 33 basis point decline in the net charge-off rate and a 30 basis point improvement in delinquency. Expenses were in line with our expectations, impacted by investments we made to support the build-out of our standalone infrastructure as well as to help grow the business. We continue to generate solid deposit growth, with the process increasing 8 billion or 28% over the first quarter of last year to 35 billion. Deposits now comprise 59% of our funding sources. Our balance sheet remains strong with Tier 1 common capital of 16.9% and liquidity of 14 billion at quarter end. Moving to our business highlights, we continue to capitalize on new business opportunities, forging partnerships across all three of our platforms. We extended our partnership with Amazon, and now over 85% of retail card receivables are under contract to 2019 and beyond. We also announced a new Top 40 agreement with Guitar Center, the world’s largest provider of musical instruments and recording equipment, which we expect to launch in the second half of this year. Additionally, we launched a new CareCredit exclusive endorsement agreement with VSP, the nation’s largest vision insurance provider. We are excited about these new partnerships and our ability to bring significant value to these relationships. At the same time, we still have a meaningful opportunity to drive organic growth, and we continue to pursue initiatives to promote card usage and deepen penetration. Further progress has been made in our efforts to prepare for separation, and we are on track to have the applications submitted to the Federal Reserve in the second quarter. Our plans have not changed with GE’s announcement last week that they are reducing the size of their capital asset base. We continue to target separation by the end of this year. Moving to Slide 4; I want to spend the next few minutes outlining the achievements we have made to expand the value we deliver to partners and customers, specifically concerning our digital, loyalty, and analytics capabilities. We have long viewed online and mobile as important channels for our business. These channels have evolved considerably over the last several years and will continue to evolve. As customer shopping behaviors have increasingly moved to digital, the importance of credit has solidified. Our digital strategies have helped drive a marked increase in online and mobile purchase volume, which is up 18% from last year. Nearly a third of our credit applications are done through digital channels. Our mobile capabilities cover the entire credit life cycle from acquisition to servicing to loyalty and payments. Our offerings include MFI, which allows shoppers to securely apply for credit on their mobile device and instantly access their approved credit line. We also offer end service, which allows customers to pay bills and service their account on their mobile device, including obtaining their rewards. During the first quarter, we announced that our MFI product will be available to our payment solution customers. Since launching the mobile applications in 2011, we have processed nearly 5 million applications through this channel for our retail card, CareCredit, and now our payment solutions platform. We also offer digital cards, our proprietary digital version of our cards that enables in-store count look-up and mobile payments functionality. Piloted in 2014, the digital card leverages geo-locations for authentication and home screen icon for easy access post moment for participating retailers. In March, we announced that we extended our digital card to our CareCredit platform, enabling access to a digital version of our CareCredit card on their mobile device. Since nearly half of all CareCredit purchase volume is from existing cardholders, this was an important initiative. This, coupled with our CareCredit online provider locator, which received 600,000 hits monthly, provides a powerful tool for increasing repeat purchases on this platform. Mobile wallets are an important development in the mobile payment space and we are excited to announce our participation in Samsung Pay, leveraging both MST and NFC technologies. Samsung Pay is accepted at 90% of retail merchants and allows our partners and customers to access the unique features and benefits of our cards. As you know, we also announced our participation in Apple Pay and we have partners that are engaged with MCX and their currency platform, so we plan to support that technology as well. Through our innovation and strategic partnerships, we have developed a mobile platform that can rapidly integrate with mobile wallets while preserving the benefits of our cards. We recently made a strategic investment in GPShopper, an innovator developer of mobile apps focused on the retail industry. This partnership helps us build on our existing mobile platform to more easily integrate credit into the shopping experience with personalized offers, enhanced account servicing, and loyalty programs. We continue to design and launch new loyalty and value propositions for our partners. We are enhancing our loyalty capabilities by leveraging a proprietary platform to provide multi-tender loyalty programs, allowing us to create a single seamless fully integrated loyalty solution regardless of tender type. Multi-tender loyalty programs are enabling our partners to market to an extended customer base, give our cardholders access to a more seamless loyalty rewards program, and it allows us to access additional prospective cardholders. Our analytics capabilities are an important component of the value we bring to our partners and customers. Currently, we receive SKU or category level data on over half of all transactions that occur on our network. We offer our retailers actionable analytics, market research, and creative services to help them drive sales. Our data access affords us a wide array of opportunities to better analyze cardholder spending to understand what they are buying and how they are shopping. We then work with our partners to customize offers that will increase engagement, sales, and loyalty. Underlying our ability to provide distinct value to our partners and cardholders is our proprietary closed-loop network. Our private label and co-branded dual cards run on our network, which means that the transaction comes directly to us, enabling us to see the date of the purchase, name of the retailer, what brands and items were purchased, and the channel through which this transaction occurred in-store, online, or via a mobile device. The volume of data to which we have access is immense and we've built the capabilities to transform this information into actionable insights. In summary, we will continue to seek ways to build, partner, and invest in the latest technologies to further benefit our partners and customers. It's an exciting time in the evolving digital landscape and we’re committed and positioned to continue to deliver value. Slide 5 highlights the performance of our key growth metrics this quarter. Purchase volume was 23 billion, an increase of 10% over last year. This helped to drive non-receivable growth of 7% to 58 billion. Our average active accounts were up to 62 million, a 4% increase from last year. Platform revenue was up 5% over the first quarter of last year. Many of our partners had positive growth in purchase volume and we continued to drive incremental growth for our value propositions and promotional financing offers. On the next slide, I will spend a few minutes discussing the performance with each of our sales platforms before turning it over to Brian to give you more details on our financial results. We delivered solid performance across all three of our sales platforms in the first quarter. To our Retail Card platform, we offer private label credit cards and proprietary Dual Cards as well as small business products. The addition of DP, which we announced last quarter, will bring us to 20 retail card partners nationwide. Our retail card platform accounts for 68% of receivables and 69% of platform revenue. Our retail card performance was strong, with purchase volume growth of 10%, receivable growth of 7%, and platform revenue growth of 5%. Renewing and extending our programs has been a key priority in this business. As I outlined earlier, we have been very successful in this regard, and we now have over 85% of our retail card receivables under contract to 2019 and beyond. The strong position we maintain in this space and the partnerships we have developed provide a solid foundation for future growth. Payment solutions, which accounts for 20% of our receivables and 15% of our platform revenue, is a leading provider of promotional financing for major consumer purchases, primarily in the home furnishing, consumer electronics, jewelry, automotive, and power product markets. Purchase volume was up 10%, and average active accounts were up 8% over the same quarter last year, driving receivable growth of 11% and platform revenue growth of 8%. The majority of our industries experienced solid growth in both purchase volume and receivables including home furnishing, automotive products, and power equipment. We’ve recently signed a new partnership with Guitar Center and extended our Top-40 partnership with MEGA Group USA, a 1,700 member national home furnishings buying group of independent retailers. We also extended our Pep Boys partnerships, a key partner in our CarCareONE auto network. We continue to actively pursue a solid pipeline of potential new partnership opportunities in this platform. CareCredit, which accounts for about 12% of our receivables and 16% of our platform revenue, is a leading provider of financing to consumers for selective healthcare procedures that include dental, veterinary, cosmetic, vision, and audiology services. Our partners in this platform are largely individual and small groups of independent healthcare providers; the remainder are national and regional healthcare providers. During the quarter, the majority of our specialty showed year-over-year growth in both purchase volume and receivables, with dental and veterinary showing the highest receivable growth. Purchase volume and average active accounts both increased 6%, helping to drive receivables growth of 4% and platform revenue growth of 5% over the same quarter of last year. Across each of our sales platforms, we delivered solid performance and continued the momentum of signing new partners, renewing and extending partners, and working to drive organic growth. I will now turn the call over to Brian to provide a review of our financial performance for the quarter.

Thanks, Margaret. I will start on Slide 7 of the presentation. In the first quarter, the business earned 552 million of net income, which translates to $0.66 per diluted share in the quarter. Overall, the company continued to deliver strong top-line growth with purchase volume up 10% and receivables up 7%. Net interest income was up 5% compared to last year. This includes the impact of higher interest expense driven by the funding that was issued to increase liquidity in the third quarter last year. Interest income was up 7%, which is in line with our receivables growth. RSAs were up 66 million or 11%, driven by growth in the programs and improved credit performance compared to last year. RSAs as a percentage of average receivables were 4.5% for the quarter, consistent with the trends in both 2014 and 2013. We do expect the RSAs to trend just under the 4.5% level for 2015, consistent with what we communicated back in January. The provision declined 77 million or 10% compared to last year. The decrease was driven primarily by improving asset quality trends. There are a couple of things worth pointing out here. First, 30 plus delinquencies declined 30 basis points versus last year to 3.79%. The net charge-off rates fell to 4.53%, which is 33 basis points below last year. Our reserve coverage was fairly consistent compared to the first quarter last year, up slightly from 5.52% to 5.59%. Measured against the last four quarters of net charge-offs, the coverage remained relatively stable at 1.26 times. Other income decreased 14 million versus last year. The main driver here is higher loyalty expense related to the new value propositions we launched in the third quarter of last year. Interchange was up 24 million driven by continued growth and out of stores spending on our Dual Card. This was offset by loyalty expense that was up 35 million, primarily driven by the new value proposition. As a reminder, we run the interchange and loyalty expense back through our RSAs, so there is a partial offset on each of these items. Debt cancellation fees of 65 million were down 5 million from last year due to the fact that we now only offer the product through our online channel. Other expenses increased 136 million versus the first quarter last year. Last year's results included a 44 million benefit related to a reduction in reserves for certain regulatory matters. Adjusting for that, expenses were up 92 million or 14%. The remaining increase was due to three main drivers, all of which are consistent with prior quarters. First, we're making investments to support ongoing growth, particularly in our Retail Card program. As many of you are aware, we have completed long-term extensions with many of our large partners and as part of those renewals, we set aside more dollars in the marketing and growth funds to support those programs. Second, we also launched our new branding campaign in September and continued our marketing efforts with a focus on our deposit products. Lastly, we continue to invest in the infrastructure build as we execute our plan to separate from GE. Overall, the business had a solid quarter. We had strong balance sheet growth and good top-line growth generating an ROA of 3%. I'll move to Slide 8 and walk you through our net interest income and margin trends. As I mentioned on the prior slide, interest income growth was strong at 7%, in line with our receivables growth. This was partially offset by higher funding costs related to the additional liquidity we're carrying on the balance sheet compared to last year. The net interest margin declined to 15.79%, which was a little better than our expectations. This is due to using some of the liquidity that seasonally builds up in the first quarter to pay down the bank term loan facility and pay off GE Capital loan, and I will cover this later when I discuss our funding profile. As you look at the net interest margin compared to last year, there are a few dynamics worth highlighting. The majority of the variance, approximately 250 basis points, was driven by the build in our liquidity portfolio. We increased liquidity on the balance sheet to nearly 14 billion, which is up 9 billion versus last year. We have the cash conservatively invested in short-term treasuries and deposits at the Federal Reserve, which results in a lower yield than the rest of our earning assets. The yield on our receivables declined 34 basis points as a result of slightly higher payment rates in the quarter compared to last year and the impact of portfolio mix given the strong growth we're seeing in our promotional offers and payment solutions. As Margaret mentioned earlier, payment solutions grew receivables by 11% over the last year. Lastly, on interest expense, the overall rate increased to 1.9%, up 28 basis points compared to last year. This is in line with our expectations given the changes in our funding profile. I'll walk you through our breakdown by funding source. First, the cost of our deposits was relatively stable, up 9 basis points to 1.6%. The increase was driven by extending the average tenor of our direct retail CDs, partially offset by growth in our lower rate savings account product. Our deposit base increased over 8 billion or 28% year-over-year. We continue to be very focused on growing our deposit base and making this a larger funding source going forward. Securitization funding costs increased 20 basis points to 1.5%. This is driven by extending some maturities in our Master Note Trust and the addition of 6.6 billion of undrawn securitization capacity. Our other debt costs increased 84 basis points to 3.2% due to higher rates on the GE Capital and bank term loan facility as well as the unsecured bond. It’s worth noting here that the majority of the new bonds we issued in the quarter are fixed rates, so we have replaced variable rate funding for longer-dated fixed-rate funding, and this will benefit us in a rising rate environment. Over the past several quarters, our margin has changed significantly due to the factors I just mentioned. The primary drivers are the liquidity build and the cost of the new funding sources we put in place after the IPO. While the first quarter margin was a little above the range we set out back in January, this is primarily driven by the benefit of using some excess liquidity to pay down the GE Capital and bank loans. Given we don’t expect a similar benefit in future quarters, we will likely see our margin move back in the 15% to 15.5% range we communicated back in January. Next, I will cover our key credit trends on Slide 9, but before I get to that I thought it would be helpful to provide some perspective on the seasonal trends and the impact on allowance coverage from the fourth quarter to the first quarter. As you'd expect, we typically see a significant receivables build during the holiday season. The allowance coverage as a percentage of receivables typically comes down a bit in the fourth quarter as customers pay down a significant portion of the holiday balances in the first quarter and a higher proportion of delinquent accounts don't translate into losses. Then in the first quarter, as the holiday balances are paid down, you will see the allowance coverage revert back to levels more consistent with other quarters. Looking back at the 2014 allowance coverage will give you a sense of the seasonality. The coverage was in the 5.5% range for the first three quarters, very similar to our result this quarter. Looking more specifically at the first quarter results, as I noted earlier, we continue to see stable to improving trends on asset quality. 30 plus delinquencies were at 3.79%, down 30 basis points versus last year. 90 plus delinquencies were at 1.81%, down 12 basis points. We believe these improvements are driven, at least in part, by lower gas prices and generally a healthier consumer. Net charge-offs also improved to 4.53%, down 33 basis points versus last year. Lastly, the allowance from loan losses as a percent of receivables was 5.59%, which increased from the prior quarter for seasonality, but was fairly consistent with the first quarter of last year. Another metric you can use to measure reserve coverage is to compare the reserve to the 12-month charge-offs. We’re currently at 1.26 times coverage, which equates to roughly 15 months of lost coverage in our reserve. This is always fairly consistent with the level throughout 2014. Overall, we continue to feel good about the performance of our portfolio and the underlying economic trends we’re seeing. Given those factors, we believe that our credit trends will continue to be stable. Moving to Slide 10, I’ll cover our expenses for the quarter. Overall, expenses were in line with our expectations. As I noted earlier, last year’s results included a 44 million benefit related to a reduction in reserves for certain regulatory matters. After adjusting for that item, expenses were up 92 million or 14%. This increase was driven primarily by incremental investments in our programs as well as the infrastructure we’re building as part of our separation from GE. Employee costs were up 46 million as we added additional employees over the past year to support growth in the business and the infrastructure build as we prepare for separation. Professional fees were up 32 million due to both growth in the business as well as cost to separate from GE. Marketing and business development costs were essentially flat to last year. We continue to invest in our programs and our marketing efforts around our deposit platforms as well as branding. However, given the significant success in growing deposits and the excess liquidity in the first quarter, we did see an opportunity to dial back some of the marketing cost for deposits. Information processing was up 11 million on higher IT investments and transaction volumes compared to last year. Overall, our efficiency ratio was 32.2% for the quarter, which is below the 34% target we provided back in January. We continue to believe we have a very scalable platform, and while the efficiency ratio will climb modestly from here through the remainder of the year, we expect to stay below our target level of 34%. Moving to Slide 11, I’ll cover our funding sources, capital, and liquidity position. Looking at our funding profile first, one of the primary drivers of our funding strategy is the continued growth of our deposit base. We view this as a stable, attractive source of funding for the business. Over the last year, we’ve grown our deposits by 8 billion, primarily through our direct deposit program. This puts deposits at 59% of our funding; we are well-positioned to meet our long-term target of being 60% to 70% deposit funding. Funding through our securitization facilities has been fairly stable in the $14 billion to $15 billion range, which is approximately 24% of our funding. We did issue 750 million of new debt in March, the debt was five-year fixed and priced at 2.37%, which was a little better than we expected given the strong demand. Our unsecured bond offerings have also been well received. In January, we issued 1 billion of five-year unsecured bonds, 750 million of which was fixed rate priced at 2.7%. The remaining 250 million was floating rate. Lastly, I want to highlight some recent developments related to the bank term loan facility and the GE Capital loan. First, as we’ve said in the past, our strategy is to continue to reduce our reliance on the bank term loan facility and GE Capital for funding. These are more expensive forms of financing for us and not part of our long-term strategy. During the quarter, we made 3.2 billion of prepayments on the bank and GE Capital loans. This included 2.8 billion of pro rata payments in January and February, and then in March we made an additional 400 million payment on the GE Capital loan, which paid the loan off in full. Since the IPO, we have paid down the bank and GE Capital loans from 9.5 billion to 5.7 billion today, which is ahead of our original expectation. We’ve really made a lot of progress on the strategy to reduce our reliance on these sources. Overall, we feel very good about our access to a diverse set of funding sources. We’ll continue to focus on growing our direct deposit platform and using the proceeds from future unsecured bonds to further prepay the bank term loan facility. Turning to capital, we ended the quarter at 15.9% Tier 1 common under Basel I. This translates to 16.4% common equity Tier 1 under the fully phased-in Basel III guidance. Consistent with prior communication, we do not plan to return capital through dividends or buyback until we complete the separation from GE, so we do expect our capital levels will continue to increase during that time. Post-separation, we’d expect to begin returning capital in line with our peers. Moving to liquidity, total liquidity increased to 20.4 billion and is comprised of 13.8 billion in cash and short-term treasuries and an additional 6.6 billion in undrawn securitization capacity. This gives us total available liquidity equal to 28% of our total assets. We expect to be subject to the modified LCR approach, and these liquidity levels put us well above the required LCR level. Overall, we’re executing on the strategy that we outlined previously; we’ve built a very strong balance sheet with diversified funding sources and strong capital and liquidity levels. And with that, I’ll turn it back over to Margaret.

Thanks, Brian. I’ll close with the summary of the quarter on Slide 12 and then we’ll begin the Q&A portion of the call. During the quarter, we exhibited strong broad-based growth across several key areas, continuing the momentum we've generated over the last several quarters. We continue to make our cards valuable to consumers, retailers, and merchants. Notably, in the first quarter, we announced that our card would be available on the new Samsung Pay mobile wallet, leveraging the early investment we made in mobile. From our business development perspective, we continue to win and renew important partnerships, as well as sign key endorsements and maintain a healthy pipeline of additional opportunities. Our focus is steadfast; we will continue to deliver value to our partners and customers while leveraging strong engagement, innovation, and advanced analytics to drive growth. At the same time, we remain acutely focused on our preparation for separation from GE and look forward to providing updates as we move closer to the finish line. I will now turn the call back to Greg to open up the Q&A.

Thanks, Margaret. That concludes our comments on the quarter. Operator, we’re now ready to begin the Q&A session.

I guess you had 7% growth in receivables and in core platform, and across the company, in what is now turning out to be a little bit more sluggish, probably industry setting than we had been thinking just a couple of months ago. Can you talk a little bit about how much the industry setting affects that and what might happen if things were to get a little better from a consumer standpoint?

This is Brian. I think it certainly impacts it a little bit. Retail sales in January and February were pretty soft. They came back a little bit in March; we saw a little bit pickup as well in our sales, which is maybe a positive. I don't think it's enough to really read too much into it. If you look at our growth year-over-year, certainly the value proposition that we rolled out in the third quarter helped us a bit. If you adjust for portfolio exits, our active accounts were up 8%. We’re also seeing pretty good purchase volume per active account; it was up 6% versus last year. So that tells you that even though we’re in a relatively weak retail sales environment, consumers are still seeing real value on our cards and they are spending more on their accounts, which is a positive. Online sales were up 18%. That continues to be a positive for us. If you look at CareCredit and payment solutions specifically, as we talked about in the past, one of the things that’s benefiting our results here a little bit is just the amount of reuse that we’re getting on the cards. The reuse for CareCredit as a percent of purchase volume was about 49%; that’s up from 45% last year. So that continues to grow, which is helpful. The payment solutions reuse was 26%, which is up a little bit versus last year as well. A lot of what we’re doing to market to consumers in both of those platforms and create awareness around where you can use the cards is helping. As we said back in January, we were calling for retail sales to be in the 2% to 3% range, so our 6% to 8% receivable forecast was really based on that. So we didn't really have a lot of lift in the numbers based on retail sales. I would say they are coming in a little bit below what we expected but not dramatically off.

Got it. Just on a completely separate topic, Brian. You mentioned marketing growth, it looks I guess from the slides that the marketing expense was actually flat in that; was it investments in other areas that were part of marketing?

There are a couple of things going on there. If you look at just the marketing line, we made continued investments in the program that was offset by lower marketing spend on retail deposits. One of the dynamics that you see when you look year-over-year, when we were in the first quarter of 2014, we were really ramping up the deposit platform ahead of the IPO. We were spending a lot on marketing related to retail deposits. Fast forward to the first quarter of 2015, we were still growing retail deposits but we were in an excess liquidity position, so we saw that as an opportunity to dial back a little bit on the marketing spend related to deposits. What you really got is incremental investments in the programs offset by lower spend on retail deposits.

I guess I had a question on liquidity, understanding you guys want to stay on the conservative side. Could you just talk about how liquidity will ramp or not going forward just based on growth and then maybe how you might be able to reallocate some of the investments that you are investing in towards a little bit higher return type of assets? Thanks.

Sure, transitioning from the fourth quarter to the first quarter typically results in an increase in liquidity due to the reduction of receivables. We experienced this in the first quarter. We utilized about 2 billion of that surplus liquidity to make prepayments on GE Capital and the bank loan. As mentioned previously, we actively seek opportunities to optimize our liquidity levels. Looking ahead, I wouldn't anticipate significant changes in the overall amount of liquidity on our balance sheet. We plan to maintain a very conservative balance sheet, as we believe this is wise given that we are still establishing our reputation in the capital markets and must consider rating agencies and regulatory requirements. We dedicate considerable time to this area, conducting numerous internal stress tests. The LCR guidance is not a constraint for us, and we assess our maturity coverage consistently. In quarters where we see the chance to utilize some of that liquidity to eliminate higher-cost funding, we will pursue that. Currently, we have around 40 billion in liquidity, with 4 billion in short-dated treasuries and about 10 billion in cash deposits at the Federal Reserve. We are not generating much return on our liquidity portfolio, which presents an opportunity for improvement. We plan to focus on high-quality liquid assets for our investments, where we receive full credit under the LCR guidelines, but there may be opportunities in the future to extend duration slightly for better yields.

Okay, that's helpful. Just one quick follow-up; it's on the opportunities out there for portfolio acquisitions within the private label area or the co-brand area. Maybe Margaret, you can talk about what's out there. I've heard there are a number of deals up or out for renewal at some point in 2016 through 2017, do you guys have an eye on those as well? Thanks.

So actually we see that our pipeline is pretty strong. I think we've mentioned we invested in additional business development resources and we've really aligned ourselves around the three platforms, so I would say from a pipeline perspective in all three platforms, we feel pretty good. I would also tell you that we're seeing opportunities in really two key areas; one is the first one you're saying, which is portfolios that are up for renewal; that are with competitors that we can go after, and the second is startup partnerships. I’ve mentioned in the past that we like startups; many of our big portfolios that we have today were actually startups. So I think the team is diligently focused on growth. I think for us, the real opportunity is really ensuring that we pick those portfolios that really work for us. As we've said in the past, we have — the biggest opportunity is really in organic growth. So as we continue to focus on organic, we can be a bit choosier on the portfolios we go after to make sure they really align with the returns we're trying to achieve for the overall business.

I just had a question on credit. The provision, I think, came in at the low-end of expectations, and your delinquency trends continue to show improvement. Brian, I think you've said your outlook is for relatively stable, but how should we think about the trajectory of provisions for the remainder of the year? Should we expect to see losses show any further improvement, and could we actually start to see some of the level of reserves coming down a bit just given the positive improvement in credit losses?

I think, as I've mentioned, the charge-offs for the quarter—30 plus, 90 plus—were probably a little bit better than we expected. We do believe we're getting a little of the benefit here on lower gas prices, and improving employment helps, but it's really — it's one quarter, so it's hard to draw much of a trend from it at this point. Studies around gas prices say the consumers are — they’re using 25% of those gas savings to reduce debt. We definitely feel like we're seeing a piece of that in the numbers; that’s why you see the reserve coverage has held pretty stable. We didn't make a big move up or down; it's 5.59%, it was really more or less flat compared to where we trended all last year, up a little bit for seasonality, but very consistent with where we were last year. I don't think — we're not seeing anything absent a little bit of improvement from gas that would prompt us to call anything other than we think we’re in a pretty stable environment right now, and we don't see losses creeping up in the next 12 months; we don't see them getting a lot better from here, add to that the significant change on gas prices.

Got it. And then just on your comment, Brian, about the net interest margin moving back into the 15% to 15.5% range, does that assume any further pay downs to the term loan? And could we end up seeing more term loans paid down, and maybe replace that with deposits so we could actually see if the net interest margin maybe running above the top end of the range?

We had kind of the base plan that assumed a certain level of prepayments on the bank loan. That’s already — a portion of that’s already incorporated in the guidance that we provided back in January. In the first quarter, we had an incremental opportunity to what we originally forecast, and we took advantage of that in the quarter. We don’t see anything incremental to the plan right now, but if we were to find ourselves with excess liquidity again, our strategy is to make some additional prepayments if we can. The bank term loan facility runs out until 2019. We’re obviously going to prepay it well in advance of that maturity, and we’ll just kind of go quarter-by-quarter here and see if we can lean into it a little bit more.

Got it. If I can squeeze one quick one, last one in there. Margaret, just given what we’ve seen across the industry competitively, you guys are simply in a very good position in terms of your maturities, your partnerships, but has there been any consideration to trying to extend some of your bigger partnerships to lock in the relationships?

I think we mentioned that we actually have locked in many of our relationships as we were going through the IPO process and into this year. We’re always looking at ways to extend our partnerships, and usually opportunities pop up along the way, whether it’s a new product they want to roll out or maybe a different value proposition. This is kind of how we run the business. We’re always looking at ways to really expand and strengthen the relationships. Right now, we feel pretty good where we are; 85% of the retail card relationships are locked up to 2019 and beyond. We just did Amazon, which was a really nice win for us. There are a couple more we’re working on. This is kind of how we run the business, and we're always looking to see how we can lock those up for longer terms.

Good morning. Thanks for taking my questions. A little bit — talk to Moshe’s question on growth; is there any way to attribute either the loan growth or the purchase volume growth to increase penetration in various accounts versus average balance trends at the customer level?

I would say if you look at the industries or the platform themselves, we actually saw very nice growth in our payment solution business, and a lot of that was attributed to things related to housing, where we saw good and solid furniture sales, as well as our auto business in that vertical. So I think the positive is that it seems like consumers are back spending on their home and reinvesting in their homes; so we see that as a positive trend. I’ll turn it over to Brian and see if he would add anything else on penetration.

I think the most helpful thing might just be to describe a little bit how we measure our platforms. So if we take retail card, we start at the beginning of the year with a sales plan for the retailer that we work with, and then we measure those retail programs based on gaining penetration. So if the retailer is growing 2%, we’re looking to grow sales on our card at least 4% to 6%, and that’s how we measure ourselves. If you think about how we built the plan, I would assume generally retail sales 2% to 3%, and purchase volume for us was 10%, and the delta there is largely tender shift from general purpose cards and other payment types onto our card.

That’s great color, thanks. A little bit of a homer question that I know I can get from the 10-Q, but if you have it handy, do you have the net charge-offs on cards versus installment loans versus commercial credit handy?

I don’t think we report that separately.

I guess at this point the most probable scenario is you would be regulated as a savings and loan. Is there any chance that you would have to go through formal CCAR? And then can you talk a little bit more specifically about a targeted payout ratio as the card issuers tend to have much higher payout ratios for the banks?

Yes, Don, you’re right. We’ll be regulated as a savings and loan holding company, so we’re not technically subject to CCAR. It will be up to the Fed on what they want to put us through. I can tell you, though, that we’ve been preparing as if we’ll be subject to CCAR, so we’re running the same stress tests, using the same assumptions, building the same models. We’re putting in the same governance processes around our stress tests and our capital plan. That’s how we’re preparing. We do think that whether or not we’re subject to the formal CCAR, the Fed is very likely going to regulate us just like they regulate similar banks of our size. So that’s our plan.

Okay.

In terms of payout ratio expectation, I think there are a couple of things. Obviously, we don’t report anything publicly on our stress tests, so it’s tough to get into a lot of detail, but there are a couple of things to think about. First, we’re starting up with very strong capital levels, and we reported close to 17% Tier 1 common. The business generates very strong returns; the business model is fairly resilient in the stress similar to what you see from the other credit card peers. We think we perform in a very similar fashion, and over time we would expect to have payout ratios that look very similar to our peers. Did you have one other question?

Yeah Brian, thank you. Margaret, is there any update on potential general-purpose card issuance and then maybe other additional businesses given the success of your bank so far?

I didn't hear the second part.

In terms of any other potential products that you may look at given the bank success.

So we've mentioned in the past that we would like to launch a general-purpose Synchrony Financial Card to our bank. The teams are evaluating that and working on it; that will probably be more of a 2016 launch than 2015 launch, but the teams are working on that. In terms of other products, I think we said we are really looking at the bank platform as a way to launch some other products, like checking, debit, and bill pay. That’s another whole area that team is working on; again, I think that will be more of a 2016 launch. But plans are in place for that, and the teams are hard at work figuring out the right way to do that.

Just two questions; one was on the net interest margin pressure that came from receivable yield, and I know you highlighted that that was partly driven from growth in promotional balances. So just wanted to get a sense of how you are thinking about promotional balances; is it a little bit more seasonal in the first quarter or should we anticipate a ramp as we go through the year? Just a little on how you are thinking about that.

I would — we tied it to promotional balances; it’s really driven by Payment Solutions just having a really great quarter and a lot of growth year-over-year. They were up 11%. If you look at Payment Solutions yield just compared to the average product portfolio or compared to CareCredit or Retail Card, it is a lower-yielding book. So that’s the biggest driver. I wouldn't assume a ramp or seasonality in that, Betsy; I think Payment Solutions' growth is just a little bit better than we expected, which drove a little bit of that yield decline.

Okay.

The other factor that did have an impact in the quarter was just — we did see some higher payment rates; lower delinquencies obviously have an impact on yield as well. So those are really the two drivers.

So high-quality problems?

It’s a high-quality problem; we agree.

Okay, and then separately on the plan of shifting more private label card to Dual Card. Could we please talk a little bit about plans and strategies and rollout for that? And should we be baking in an acceleration in the model?

I wouldn't bake in an acceleration. I think what we are always looking to do is look at growth both from our private label and Dual Card. One of the things we are always considering is getting more of our partners to participate in the Dual Card, and there are still some opportunities there that we are working through. Dual Card definitely is a positive for us in terms of driving growth on the overall portfolio, and the other positive it gives us is when we can offer both products to participate, a private label and Dual, if we were to hit a cycle or bump, we can always shift to getting out more private label credit cards to ensure we get the customer card in their hand but really protect us on the backend from losses. So that’s kind of our strategy and how we think about Dual Card.

Okay, and you get some nice benefits on a Dual Card as well. So again, just thinking out loud about how to model that; should we take in kind of growth rate that you have been generating recently? Or do you anticipate that there is going to be an acceleration, and I guess your point is more steady-state acceleration.

This is a strategy that we've had in place for four years, where we start consumers up with a lower line on PLCC and we upgrade them over time, and that strategy has been pretty consistent. If we are going to change that in the future and do something bigger, we would always come and describe it at that point. But it really is something that’s been fairly consistent, I would say over the last three or four years.

If you could just approach the competition for existing portfolios from a different perspective. There has been a lot of news flow over the past year plus about retailers looking for potentially a credit utility to use, a term that American Express put out there. Are you seeing any shift in your conversations or a shift in the market towards retailers who are just looking for the best possible returns for themselves, or has nothing changed in your mind?

We haven't really seen a change there. What I would say is that the retailers that we talk to, our partners that we are going after, the number one thing that they want is for us to describe how we are going to bring more sales in and how we are going to bring more customers and how we are going to have their customers be more loyal. They really first start up by focusing on our capabilities, and I think things like mobile are becoming a much more important aspect of their business as well as where we can come in and help them from a data analytics perspective, helping them do the marketing campaigns and really driving sales. We have not seen that shift where they are asking for things that would be outside of the normal parameters in a standard contract. So I haven't really seen any of that in any of the conversations that we've had.

Okay, great. And separately, on the deposit platform, obviously strong growth year-over-year kind of flattish quarter-to-quarter, but as you’ve said, you sort of backed off a bit in the marketing. Do you have any sense or any metrics you could share with us in terms of market share gains, either of deposits or deposit growth, and how you're faring against other direct deposit gatherers?

We're definitely taking share; I don't have a specific number for you, but our growth rates have far outpaced other online direct retail program growth rates, and so that continues to be a big focus for us. We’ve been very pleased with the growth that we're seeing. I'd say, the other place we’re really focused on is on retention rates. The retention rates on our CDs have improved significantly. We bought the platform from MetLife back in January of 2013. Retention rates were around 80%. They are now up to 88%. There is evidence that our efforts are definitely paying off. We rolled out a loyalty program where our deposit customers, depending on how much they have deposited with us and how long they’ve been a customer, get access to travel savings and benefits. We think it's a really — it's a combination of paying attractive rates, getting the right advertising program in place, and then also offering something else as part of the equation, which is what we're trying to do with the loyalty programs that we've rolled out.

Just moving back on the competitive environment, any view on the emerging online lenders and marketplace lenders looking to obviously disrupt some of your channels, like CareCredit and point-of-sale financing? And also, there is obviously more talk about coalition partners in the U.S.; do you see that as a threat or, maybe on the flipside, potentially an opportunity for you guys?

Sure, I’ll take that, I'll take that separately. So the first one; I would say — we see competition really holding the way it’s been through this cycle and our pipeline continues to be strong, so we're feeling some of the pressure that I think others are seeing out there, particularly on the bigger transactions. For us, as I said earlier, our pipeline is really robust; we see it strong in all three platforms and we feel really good about where we're positioned. I think on the coalition question, I think it's a really good question. We have some experience in coalitions; we have a network called CarCareONE, which is actually a network comprised of our retail partners in the auto space. That coalition has actually turned out to be very positive for us; we're seeing nice growth in that, and that's where your card can be used at multiple places. So if you have a Pep Boys card, for instance, you can use it in some of the auto retailers that are in that coalition. We like this concept; it's something that we're evaluating to see if we could expand that into other verticals. For instance, is there an opportunity in a home vertical? That’s something we've been talking about. We're definitely keeping our eye on this. I think as consumers shop, they continue to look for rewards and feel like they need a little lift to shop, so things like creating a coalition and offering rewards across a network, I think, is really important. In terms of the competition from some of these online services, we're really not feeling the pressure from them. I think their products are different; they’re installment products, not revolving. I think Brian mentioned earlier, particularly in our CareCredit business, we're seeing multiple reuse of our cards, so we've really been able to really gain brand recognition in the marketplace. And lastly, in terms of how they have to sell into the marketplace, they have to actually sell on the CareCredit space; you're actually going dental office by dental office to try to create an overall business. We've been at this for 25 years, and we think it's going to take them a little while to catch up to us. So we feel pretty confident about where we stand against those competitors.

Operator, we have time for one more question.

Margaret, in your operating remarks, you had commented on some of the growth in digital, referencing Slide 4. I realized in the footnotes that it says digital is both online and mobile. I was just wondering if you could parse those a little bit. What do you see in terms of the dynamics of mobile versus online? Yeah, I think if you could share with us that, that would be helpful.

It's challenging to separate that out. We're attempting to determine if we can track that metric because, for example, your iPad appears differently from a mobile phone in terms of online activity, making it difficult for us to differentiate. However, we believe that a significant portion of this activity is occurring on mobile devices and iPads, so again, it's tough to break it down. Clearly, we are all aware that this is a substantial growth opportunity for us, and we need to ensure that the customer experience is as seamless as possible.

Just one quick follow-up; you say that digital growth was 18% year-over-year; is that a lot or a little? Could you give us a reference point as to what it was previously as it accelerated?

We think it’s pretty decent. If you look at it compared to what — there’s a metric out there that says overall in the U.S. it grew 15%, we grew 18%; so I think we are beating out what the norm is. That’s a measure to go on. Again, it’s just continues growth quarter-over-quarter, and it’s not only on sales; we see it in everything—the number of log-ins, the number of people who are on M-service now, the number of people who start mobile and only use mobile in terms of M-service. For us, it’s just a metric we continue to watch and know that it’s a very important one and one that just continues to grow from all aspects of the platform.

All right. Thanks everyone for joining us on the conference call this morning and your interest in Synchrony Financial. The Investor Relations team will be available to answer any further questions you may have. Have a great day.