Bread Financial - Q1 2023

Transcript

Operator (participant)

Good morning, welcome to Bread Financial's first quarter earnings conference call. My name is Daisy. I'll be coordinating your call today. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for questions. To register a question, please press star followed by one on your telephone keypad. It is now my pleasure to introduce Mr. Brian Vereb, Head of investor relations at Bread Financial to begin. Brian, please go ahead.

Brian Vereb (Head of Investor Relations Contact)

Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the investor relations section of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Bread Financial, and Perry Beberman, Executive Vice President and Chief Financial Officer of Bread Financial. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors.

Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our investor relations website at breadfinancial.com. With that, I would like to turn the call over to Ralph Andretta.

Ralph Andretta (President and CEO)

Thank you, Brian. Good morning to everyone joining the call. I will begin today's call by reviewing our key focus areas as we continue to execute our business transformation. Given the recent volatility in the banking sector, I will highlight the company's strong financial standing and the actions we have taken to improve our stability. Finally, Perry will review the financials for the first quarter. We have made great progress in the first quarter, including building our total company TCE to TA capital ratio above the 9% level. Starting on slide 3, our current initiatives center on four key focus areas, growing responsibly, strengthening our balance sheet, optimizing data and technology, and strategically investing in our business. Sustainable, profitable growth has been a focal point for our management team over the past 3 years and that will continue moving forward.

Our business development pipeline remains active with first quarter new partner launches, including All Pet Card, the Cleveland Cavaliers, Michaels, the New York Yankees, and World Market. We are pleased to announce the extension of our long-standing relationship with Signet, the world's largest retailer of diamond jewelry. With the extension, our five largest brand partners based on outstanding loan balances are now secured through at least 2028. We will continue to support organic and new partner growth that we expect will deliver long-term value. We will continue to enhance our capital position, refine our funding structure, and proactively manage our credit, liquidity, and interest rate risk to strengthen our balance sheet.

Additionally, as we near the end of significant tech modernization initiatives, we have begun to leverage the innovative capabilities gained through the Fiserv platform, converting to the cloud, and Alvaria, our new collection solution, all to benefit from scale to platform optimization and speed to market. Finally, our technology and product innovation will continue in 2023. Just this month, we received industry recognition for our Bread Cashback card launch being named Best Credit Card Payment Solution by the FinTech Breakthrough Awards. This acknowledgment highlights our team's dedication to creating innovative, transparent, and easy-to-use payment solutions that serve the ever-changing needs of our consumers. We will continue this spirit of innovation with a focus on expanding our digital and mobile customer engagement to provide customers with enhanced experiences. As always, we remain disciplined in our investing to drive long-term growth. Moving to slide 4.

Through our business transformation efforts, we have made decisions to enhance financial resiliency of our company. Over the past three years, we have improved our product, partner, and funding diversification, strengthened our balance sheet, and enhanced our credit risk management and underlying credit distribution. We continuously update our credit risk management models and underwriting criteria with an emphasis on proactively managing credit lines and balances. We believe that our improved risk profile, coupled with our more diverse portfolio and brand partner base, strongly position us to manage through the entire economic cycle and outperform historic levels. Slide 5 provides additional color on our balance sheet management and disciplined financial oversight. Starting with our funding, we have a diverse, stable, and growing funding base.

Notably, we experienced net positive inflows of deposit balances on our Bread Savings direct-to-consumer platform during the first quarter, up 3% from year-end, as well as over the last two weeks of March, when many banks experienced net deposit outflows. Our program consists of nearly 100,000 accounts with more than 90% of total deposits within the FDIC insurance limits. We remain confident in our ability to efficiently fund our long-term growth objectives and further broaden our funding base with growth from direct-to-consumer deposits going forward. Our disciplined approach to financial management is reflected in our liquidity portfolio. It consists of nearly all cash held at the Federal Reserve with no held to maturity securities. We remain committed to prudent interest rate management with regard to interest rate risk, asset, and liability management.

Strengthening our balance sheet has been fundamental to our business transformation. We are pleased with our progress. We significantly improved our capital ratios, including nearly tripling our TCE to TA ratio since the first quarter of 2020 to over 9% at quarter end. We reduced our parent level debt by nearly 40% since my arrival over 3 years ago and remain committed to further reducing our leverage over the coming years. Finally, we built our credit loss absorption capacity with a 300 basis point increase in our reserve rate from our CECL day one rate in 2020. These significant accomplishments over the past 3 years are a testament and dedication and commitment that's to the entire Bread Financial team.

In closing, it is that team that has enabled Bread Financial to recently earn a spot on Newsweek's America's Most Trustworthy Companies list of 2023. The essential qualities that underpin successful companies, credibility, transparency, and trustworthiness, are consistent with our values as an organization. We are confident that leading Bread Financial with integrity and strong governance will deliver long-term value for our stakeholders. I'll now pass it to Perry to review the financials.

Perry Beberman (EVP and CFO)

Thanks, Ralph. Slide 6 provides our first quarter financial highlights. Bread Financial's credit sales were up 7% year-over-year to $7.4 billion. While consumers continued to spend, growth slowed during the quarter as consumer sentiment continued to decline. We are seeing that many borrowers across the credit spectrum and all income groups are making decisions to pull back on discretionary spend as a result of broad-based inflation. Our strategic shift to increase our co-brand and proprietary offerings over the past 3 years allows us to retain this non-discretionary general purpose spend. Co-brand and proprietary spend now comprise around half of our credit sales. Average and end-of-period loans increased 17% and 7% respectively year-over-year. Driven by credit sales growth, brand partner launches including AAA and the NFL, as well as normalization and further moderation in consumer payment rates.

The $2.3 billion BJ's portfolio sale in February of this year impacted these figures. As a result of the sale, we expect second quarter credit sales to be slightly lower than the first quarter despite normal seasonal uplift in the second quarter. Revenue for the quarter was $1.3 billion, up 40% versus the first quarter of 2022 resulting from the $230 million gain on portfolio sale related to the BJ's portfolio and higher average loan balances. Total non-interest expenses increased 28% year-over-year. The sale of the BJ's portfolio also resulted in a loan loss reserve release which benefited our first quarter net income. Looking at the financials in more detail on slide 7. Total net interest income was up 13% from the first quarter of 2022, resulting from higher average loan balances.

Non-interest income was $172 million in the first quarter, which included the $230 million gain on sale. Total non-interest expenses increased 20% from the first quarter of 2022 and slightly declined sequentially as expected. The year-over-year increase was the result of higher employee compensation and benefits costs driven by increased hiring, inclusive of accelerated digital and technology modernization-related hiring and customer care and collection staffing. We also saw increased transaction volume and systems-related expenses. Additional details on expense drivers can be found in the appendix of the slide deck. Overall, income from continuing operations was up $244 million for the quarter versus the first quarter of 2022. PPNR improved 50% year-over-year, driven by the gain on portfolio sale.

Excluding the sale, PPNR increased $20 million or 4%, marking the eighth consecutive quarter that we have generated year-over-year PPNR growth. We remain focused on producing quality, sustainable earnings. Turning to slide 8. Loan yields continued to increase, up 100 basis points year-over-year. Loan yields benefited from prime rate moving higher, which results in our variable price loans moving higher in tandem. This increase was partially offset by an increase in reversal of interest and fees related to elevated credit losses. Funding costs continue to be in line with our expectations. Overall, net interest margins remain strong at 19% with a risk-adjusted loan yield of nearly 20% in the quarter.

As you can see on the bottom right graph, we continue to improve our funding mix through our actions to grow our direct-to-consumer deposits and reduce our parent unsecured borrowings while maintaining the flexibility of secured, unsecured, and wholesale funding. Typical seasonal low loan balance pay downs in the first quarter, combined with the sale of the BJ's portfolio, reduced our funding requirements by over $3.3 billion from year-end. As a result, we opportunistically reduced our wholesale and brokered deposits and paid down a large portion of our secured conduit line balances. Importantly, we recently renewed two of our secured borrowing conduit facilities of approximately $5 billion and expect to renew the remaining upcoming maturing facility of $300 million this quarter. These funding lines provide valuable long-term flexibility and further diversify our company's funding needs. Turning to slide 9.

We are proud of the success and funding diversification we have achieved with our direct-to-consumer deposits. Our direct-to-consumer average deposits grew 70% year-over-year to $5.6 billion for the quarter. These deposits represented 28% of our total funding mix versus 19% a year ago. Over 90% of our direct-to-consumer deposits are FDIC-insured. Given the repricing characteristics of our credit card portfolio, we are able to offer very competitive rates to drive growth and maintain balance stability even amidst the recent market volatility. We anticipate that direct-to-consumer deposits will continue to make up a large portion of our overall funding over time. Moving on to slide 10. Our delinquency rate for the first quarter was 5.7%, up slightly from the fourth quarter, as pressure from persistent inflation continues to impact consumer payment behaviors.

The net loss rate was 7% for the quarter. We estimate the first quarter rate was elevated by approximately 40 basis points from customer accommodations made in July of 2022 related to the transition of our credit card processing services. The reserve rate increased 80 basis points sequentially to 12.3%, predominantly as a result of seasonality and the BJ's portfolio sale with its higher than average credit quality. We intend to maintain a conservative weighting of economic scenarios in our credit reserve model in anticipation of increasing macroeconomic challenges and the expected potential impact on our credit performance metrics. As previously mentioned, we estimate that our reserve rate could increase up to approximately 12.5% in the coming quarters due to continued macroeconomic pressures.

Our credit risk score distribution mix adjusted downward from the fourth quarter as a result of the exit of the BJ's portfolio and seasonality. Our percentage of 660-plus cardholders remains materially above pre-pandemic levels given the strategic decisions we have made to diversify our product mix with co-brand and proprietary card representing a larger portion of our portfolio. As Ralph noted, we took proactive credit management actions to protect our balance sheet in the face of more challenging economic conditions. A fundamental element of our business model is to manage our risk tolerance, ensuring that we are properly compensated for the risk we take. We closely monitor our projected returns with the expectation that we generate strong risk-adjusted margins above peer levels. We remain confident in our disciplined credit risk management and our ability to drive sustainable, profitable growth through the full economic cycle. Turning to slide 11.

We remain focused on improving our capital metrics while supporting responsible growth and reducing our debt levels in the near term. These steps further our efforts to create additional value for our shareholders and position Bread Financial for continued success. The company's actions over the past three years reflect our commitment to our stated capital priorities, and the positive results of these actions are evident in the graphs on this slide. Our TCE to TA ratio ended the quarter at 9.1%, nearly triple the first quarter of 2020 level. Our leverage continues to reduce with parent level debt down 39% over the same period. As Ralph said, we remain committed to continuing these improvement trends. As many of you know, we are currently in the process of restructuring the parent level debt that is set to mature in 2024.

The completion of this restructuring will reduce our overall leverage and provide greater flexibility to support our long-term growth plans. Additionally, we have seen substantial improvement in our tangible book value per common share with a compound annual growth rate of 36% since the first quarter of 2020. Taken together, if you look back at all the initiatives and actions taken to successfully transform this company over the past 3 years and couple that with a tangible book value per share that has more than doubled over the same time frame, we believe the results show the underlying value creation and potential inherent in Bread Financial and our commitment to unlocking this value for our shareholders over time. Finally, slide 12 provides our financial outlook for the full year of 2023. Our financial outlook remains unchanged from the guidance we provided in January.

For the full year, average loans are expected to grow in the mid-single digit range relative to 2022 based on our current new partner pipeline, marketing investment, consumer spend and payment patterns, and credit strategies given our economic outlook. We expect revenue growth to be consistent with average loan growth in 2023, excluding the gain on portfolio sale, with a full-year net interest margin similar to 2022 full-year rate of 19.2%. Our NIM outlook contemplates one more Fed increase, then holding steady for the remainder of the year. Recall, we are slightly NIM accretive with each prime rate increase. We expect to deliver full-year positive operating leverage in 2023.

Now, with the magnitude of the gain on sale, we are opportunistically investing up to $30 million of the $230 million gain on sale in the first half of 2023 as we look to accelerate our technology and digital transformation. This investment brings forward our ability to leverage the innovative technology capabilities from our new platforms and offerings to drive future operating efficiencies, product and servicing enhancements, and advanced pricing capabilities sooner than otherwise would have been possible.

Ralph Andretta (President and CEO)

To provide more color for modeling purposes, after you exclude the $230 million gain from reported full-year revenue, as well as the incremental $30 million investment from reported full-year 2023 total expenses, we expect both adjusted revenues and expenses to grow at essentially the same rate for full-year 2023.

Perry Beberman (EVP and CFO)

At this time, we expect second quarter total expenses to be approximately flat from the first quarter. We expect second half 2023 total expenses to be lower than the first half of the year, driven by lower intangible amortization expense and improved operating efficiencies related to our technology modernization efforts. With a previously capitalized software development project reaching the end of its useful life in the second quarter, we are forecasting depreciation amortization expense to decline in the third quarter to a run rate closer to $25 million per quarter. There is no change to our net loss rate outlook as we anticipate the full year 2023 rate to be approximately 7%, including impacts from the transition of our credit card processing services. As you can imagine, there are a broad range of potential outcomes for the year based on various economic scenarios.

Our outlook assumes inflation remains elevated but moderating and that these pressures will persist throughout 2023. At the same time, our outlook contemplates a gradual increase in the unemployment rate in 2023. We continue to closely monitor macroeconomic indicators, and as we gain clarity on the Federal Reserve's efforts to curb inflation, we will update our expectations accordingly. We expect the second quarter net loss rate to trend upward to around 8%, peaking above 8% in May. We are forecasting that impacts from the previously discussed customer accommodations we made in the fourth quarter of 2022 in connection with the transition of our credit card processing services will inflate the second quarter net loss rate by approximately 100 basis points.

Given current delinquency trends, the third quarter net loss rate is expected to be 7% or slightly below, with July representing the last month that is anticipated to reflect the impact from the transition of our credit card processing services. We expect our full-year normalized effective tax rate to remain in the range of 25%-26%, with quarter-over-quarter variability due to timing of discrete items. We look forward to building upon the company's strong financial results in the first quarter, we'll continue to execute on our strategic priorities to build long-term value for our shareholders. Operator, we are now ready to open the lines for questions.

Operator (participant)

Thank you. As a reminder, if anyone would like to register a question, please press star followed by one on your telephone keypad. When preparing to ask your question, please ensure you are unmuted locally. If you would like to withdraw your question, please press star followed by two. That's star followed by one on your telephone keypad to register a question. Our first question today is from Sanjay Sakhrani from KBW. Sanjay, please go ahead. Your line is open.

Sanjay Sakhrani (Managing Director and Senior Equity Research Analyst)

Thank you. Good morning. I guess, Ralph, maybe we'll start with your perspectives on the economy. Obviously, a lot happening in the backdrop, some of what you guys mentioned on the call. I know Perry talked about a pullback in discretionary spend. I mean, how do you see that sort of following through as we move into the back part of the year?

Ralph Andretta (President and CEO)

It's a great question, Sanjay. You know, I think inflation is still persistent. It's still there, you know, and obviously some of our card members are feeling the impact, some greater than others. You know, the move from a discretionary to non-discretionary spend three years ago would have been more concerning to us. As we've diversified our portfolio and products, you know, that non-discretionary spend is sticking with us with our co-brand products and our direct-to-consumer products. We're seeing that, you know, as we move forward. You know, we talked about the loss rates. I think they're... You know, we're not changing our guidance on loss rates. We see, you know, improvement in the back end of the year, and we'll continue to monitor it.

Sanjay Sakhrani (Managing Director and Senior Equity Research Analyst)

Okay. Great. Then, maybe a follow-up for Perry. I think it was positive that you guys were able to renew these conduit facilities because I think that was a little bit there was some chatter interquarter. I'm just curious, you know, if we think about tapping into other forms of sorry, just debt period like ABS and such, what the plans are, maybe just the cost differential? I mean, I assume that's been incorporated into the guide, was it a significant cost differential on those facilities? Thanks.

Perry Beberman (EVP and CFO)

Yeah. Thanks, Sanjay. Yeah. Right now, again, I think what you heard is we've got a really well-diversified, you know, source of funding. As it relates to ABS, that will again be something we get into the market on. You know, we look at being opportunistic when it's the right time in the market. To your point, you know, interest rates are going up on all of the instruments, whether it's direct to consumer deposits or all the other, you know, funding aspects. Right now I'd say that, you know, we're in a good position. There's a lot of interest in what we're doing with the parent debt plan, and we'll continue to update the group as we have more to share over the coming months.

There's a, I'll say an eager bank group out there to support us, so we're excited about what's ahead.

Sanjay Sakhrani (Managing Director and Senior Equity Research Analyst)

Okay. Thank you.

Operator (participant)

Thank you. Our next question is from Robert Napoli from William Blair. Robert, please go ahead. Your line is open.

Adib Choudhury (Senior Equity Research Associate)

Hey, good morning, guys. This is Adib Choudhury, for Bob Napoli. Just wanted to ask on the business development and partner pipeline. Could you just give some broader comments in terms of what you're seeing for the remainder of the year in terms of sales momentum? Thank you.

Ralph Andretta (President and CEO)

Yeah, sure. You know, our pipeline as in the past remains strong. What I do really enjoy about our pipeline is a couple of things. One, it's a reality pipeline. We go after particular partners or new partners that we have a really good chance of securing and a really good chance of securing with good economics. That's a, you know, very, you know, for me, that's a very good position to be in. Also our pipeline is not just with the, you know, larger partners. It's up and down the spectrum. Small and medium-sized partners, de novo partners, all of those are in play in 2023.

I think I had another strong pipeline and, you know, I would expect us to, you know, to be successful as we were in 2022, with new partners. You know, we'll announce new business wins as partners and contractual obligations allow.

Adib Choudhury (Senior Equity Research Associate)

Thank you. Just as a quick follow-up, is there anything to call out in terms of changes to underwriting standards or incremental tightening action throughout the quarter, just relative to past few quarters? Thanks.

Ralph Andretta (President and CEO)

You know, we're, you know, we're not quite underwriting at pre-pandemic levels. You know, we continue to monitor on a daily basis and adjust accordingly. We'll continue to do that. You know, we've, you know, we're maintaining a little bit higher standards than we did pre-pandemic. That will continue. You know, we're very focused and surgical on our focus is long term and not short term. We'll continue to make adjustments appropriately as, you know, as the economy trends move.

Adib Choudhury (Senior Equity Research Associate)

Thanks very much.

Operator (participant)

Thank you. Our next question is from Vincent Caintic from BTIG. Vincent, please go ahead. Your line is open.

Vincent Caintic (Managing Director)

Good morning. Thanks for taking my questions. Ralph, could you provide an update on the situation with Loyalty Ventures?

Ralph Andretta (President and CEO)

Sure. Sure. Thanks for the question. You know, clearly, we're aware and we continue to monitor the situation with Loyalty Ventures. You know, since the spin-off was completed, Bread Financial, we've maintained nearly a 20% stake, you know, in the standalone Loyalty Ventures business. We are its largest shareholder from inception, and our interest has always been aligned with Loyalty Ventures interest. We had hoped and expected the business would grow and thrive. You know, as repeatedly cited in its public disclosures and its bankruptcy filings, Loyalty Ventures business, you know, is affected by the macroeconomics, geopolitical, and other factors that were not so foreseeable and quite unfortunate.

We strongly believe that our process and decision-making with respect to the spin-off transaction was entirely appropriate and that any allegations made in some of the Loyalty Ventures bankruptcy filings regarding the spin transactions are completely meritless. We're prepared and will respond appropriately, including aggressively defending against any claims should they arise.

Vincent Caintic (Managing Director)

Okay, great. That's very helpful. Thank you.

Ralph Andretta (President and CEO)

You're welcome.

Vincent Caintic (Managing Director)

For Perry Beberman, you know, thank you. Taking into account the recent bank industry volatility, but looking at Comenity, your bank has a very high excess capital ratio. Can you talk about your flexibility to dividend excess capital from the bank to the parent? Any thoughts on what you can do with that capital and if there are any restrictions on what you can do. Thank you.

Ralph Andretta (President and CEO)

Yeah. I think that's a really good observation, and you can see that in one of the slides that, you know, we at the bank level, our capital has exceeded 20% capital ratios. That will be a source of being able to dividend up a portion of that to, as I mentioned, as we look to restructure the parent debt, a big element of it is also paying down a portion. We will be able to dividend up a big, I'll say, slug of that to the parent that's in excess of ratios that we are trying to hold at the bank's bottom. We can look back historically what the low points were and think that that's available to then dividend up to the parent to further support our debt plans.

I'd say we have shared our plans with the regulators and, you know, we are in constant communication to make sure that, you know, we have support.

Vincent Caintic (Managing Director)

Great. Great. That's very helpful. Thanks very much.

Operator (participant)

Thank you. Our next question is from Moshe Orenbuch from Credit Suisse. Moshe, please go ahead. Your line is open.

Moshe Orenbuch (Managing Director)

Great. Thanks. You guys had mentioned that, you know, that the delinquency performance in the first quarter kind of gave you confidence into the, you know, the outlook for lower losses in the second half of the year. Can you know, can you just talk a little bit about, you know, what we're likely to see and what things you would have us be looking for, you know, to get increased confidence in that outlook and to kind of be able to carry that into 2024?

Ralph Andretta (President and CEO)

Thanks for the question. Part of the challenge with our numbers is, you know, there's noise in it from the transition-related items. As I mentioned, there'll be just 40 basis points of that impact inherent in the first quarter, and then there's gonna be about 100 basis points still impacting the second quarter. Even as you look at our delinquency numbers, you know, right now they're a little elevated for what you can see, let's say in the later stage delinquencies, because that's what's going to impact the losses in the second quarter and part of July. You're gonna just have to continue. Like, I think if you look at March's loss rate, you could see what a largely unimpacted month looks like.

That's part of what gives the confidence of when we get through this transition-related stuff. Again, I continue to look at the delinquency numbers. We're gonna continue to guide, you know, along the way every time we have an opportunity for what we're seeing. What we can see, which obviously you can't see, the early stage, you know, buckets are looking really good and the roll rates have improved, and that's what gives us really good line of sight into third quarter. Don't have a lot of great line of sight to fourth quarter because the fourth quarter losses haven't really entered the delinquency stage yet.

Moshe Orenbuch (Managing Director)

Got it. Thanks. Maybe, you know, I know that, you know, there hasn't been any kind of public movement on the whole late fee issue, but maybe you could talk a little bit about some of the things, you know, that Bread's been doing, you know, to kind of think about, you know, ways of, you know, offsetting any impacts or any other things that are going on internally.

Ralph Andretta (President and CEO)

Let me address that. I think, you know, along with the financial services industry, you know, we continue to assess the rulemaking proposal and the potential impacts. You know, where the rules are not final yet, and they are currently in a comment period, I think that ends May 3rd, which could result in some revisions. Those proposed changes, you know, they may be challenged in court. It could be a lengthy process before any new rules become effective. Us like the rest of the industry, you know, are looking at strategies to, you know, to mitigate any impact. They're, you know, across the board, a higher APR changes, different pricing and tier strategies, fees for credit, some restructuring of brand partner contracts, and, lastly, you know, tightening our credit standards.

We don't expect any of that to be effective in 2023, and so our financials are not impacted by that, you know, at this time. You know, when it gets, you know, closer to, when the rules become final, we'll be happy to share, you know, our approach to the impact and how we intend to close that impact.

Moshe Orenbuch (Managing Director)

Great. Thanks, Ralph.

Operator (participant)

Thank you. Our next question is from Mihir Bhatia from Bank of America. Mihir, please go ahead. Your line is open.

Mihir Bhatia (Managing Director and Senior Equity Research Analyst)

Good morning. Thank you for taking my question. I did want to ask about just our purchase volume trends intra-quarter, and if you can give an April update. Are you seeing any changes in customer behavior, what they're buying, how frequently they're buying, ticket sizes, anything call out, anything you're paying attention to there?

Ralph Andretta (President and CEO)

Yeah. A couple of things there. Excuse me. We talked a little bit about it. We're seeing a slight move from discretionary to non-discretionary. We're seeing that move. You know, this week we were with a couple of our retail partners, and they said while they see some a little bit less traffic in their stores, the people that come in are there to buy. People are purposely going to, you know, the retail partner establishments to buy and not to browse. That's kind of the change we're seeing in their, you know, in their buying habits. I think that holds true for online as well.

Mihir Bhatia (Managing Director and Senior Equity Research Analyst)

Got it. Then, just wanted to go back to the loss rate discussion. I understand you're seeing some favorable trends in your early stage delinquencies and roll rates. I think that's what's giving you confidence in the back half. Is it your view that as you exit the year, you'll be closer to that normalized 6% rate, or are we still looking at an elevated loss rates here in the near term, given the macro pressures and, like, you know, to get back to that midpoint of the sub 6%, it's gonna take a little bit of while into 2024?

Ralph Andretta (President and CEO)

Yeah. I think you said it well. When you look to the back half of the year, again, thinking that should be in that 7%, hopefully a little bit below if things break our way. Again, we're actively managed credit strategies to get that rate down as well. What leads you into next year is, as you said, it's the macro environment and how long does the elevated inflation persist? Where does unemployment go? 2024 will be its own, you know, set of circumstances and environment, and we'll give guidance for that as we get towards the end of the year.

What we do expect is, you know, compared to the first half of this year for what we're seeing, where you have those system-related or the conversion-related, accommodations in there for the customers, that will not be there. I expect things to stabilize. We are committed to getting to less than 6% through the cycle. It's just a matter of when will be based on the depth and length of the cycle.

Mihir Bhatia (Managing Director and Senior Equity Research Analyst)

Yeah. Thank you.

Operator (participant)

Thank you. Our next question is from Jeffrey Adelson from Morgan Stanley. Jeff, please go ahead. Your line is open.

Jeffrey Adelson (Executive Director and Senior Equity Research Analyst)

Hey, good morning. Perry, just wanted to go back to the comment you made on March being a largely unimpacted month or what a largely unimpacted month would look like. Just trying to square that with the fact that you're still gonna see 100 basis points impact in the next quarter approaching 8%. Was there anything in the number this month for charge-offs that was benefiting you? I know BJ's is out of there now, but I thought BJ's would've kept the NCO rate more elevated. Just with all the other commentary, I know you're expecting some more favorable trends from here, but are we still thinking more like a 7% loss rate as we exit the year?

I mean, I just wanna confirm that because I know you do get that seasonality at the end of the year as well.

Perry Beberman (EVP and CFO)

I think the way you're thinking about the year sounds correct, right? When I talked about the March being a largely unimpacted or, you know, far less impacted from the conversion, we had July, which had a very discrete action. You saw that in July's losses last year being suppressed by over 100 basis points. You saw February, that spike up. What happened is there were further accommodations made in the fourth quarter, and those accommodations as it related to whether consumers being able to access their accounts or communications or whatever it be, caused us to do some things to customer friendly actions. That is what's impacting April, May, June and July. Those four months are impacted by things that we did in the back part of last year.

There wasn't anything discrete that really impacted March. That's why I said it's the least impactful month that we've had other than January.

Jeffrey Adelson (Executive Director and Senior Equity Research Analyst)

Got it. That's super helpful. Thanks for laying that out. Then just going back to the comment around slowdown in credit sales this quarter, I just wanna make sure that that's a core number stripping out BJ's and anything else. I guess, we're seeing some other issuers talk about a slowdown in March and April. Is that more of a lapping effect with coming out of Omicron or are you seeing some continued caution on the part of the consumer? Then I guess, you know, as we think about the different cohorts that you lend to and you that spend with you, are you noticing any sort of shifts by income or by credit FICO?

Perry Beberman (EVP and CFO)

Yeah, good question. You're right. There's a lot going on in the economy, and I think Ralph gave a good answer earlier on what we're seeing from brand partners. You know, more broadly, it kind of ties back to question around the economy and what's going on, right? Obviously, GDP's forecast is a continuous slowdown throughout the year. Inflation is remaining elevated. Again, there's hopes that that's going to moderate as we move through the year and into 2024. Wage growth's been strong, which is helped the consumer, but it's just not keeping up with inflation. For that portion of the population, that's creating some stress. Again, I think wages are gonna come under pressure as companies start pulling back.

Even though for now unemployment remains strong, you know, we're all reading the headlines that there could be more layoffs. You know, and higher interest rates are putting pressure on companies, but they're also, you know, driving higher loan payments for consumers for their auto loans or home loans or credit cards. You think about, I've talked about this before, that K-economy and, you know, excess savings for related to stimulus. You talk about lapping that period. That's been depleted largely by middle and lower income Americans, even while, you know, the, I'll say more affluent households seem to be doing fine. There is a growing cohort in the population that's doing their best to keep up with inflation, but are struggling a little. You think about the basics of shelter costs, food, and utilities.

Those are up a lot from inflation. I think that's what's putting pressure on. We look at consumers, you know, we are definitely seeing a little bit of the decline that happened in the first quarter as you see the decline in consumer sentiment, and there's the decline in foot traffic. Those slowing trends, you know, across the broad consumer growth are happening across the broader consumer group, but are definitely a little more exaggerated for the lower risk scores.

Jeffrey Adelson (Executive Director and Senior Equity Research Analyst)

Gotcha.

Perry Beberman (EVP and CFO)

Yeah. I think, you know, that's what's happening. Consumers are doing the best they can to manage a budget. They're rotating, as you mentioned, back to, from discretionary to more non-discretionary. That's where we feel good about the way we've diversified our portfolio.

Jeffrey Adelson (Executive Director and Senior Equity Research Analyst)

Got it. Thank you for taking my questions.

Operator (participant)

Thank you. Our next question is from Bill Carcache from Wolfe Research. Bill, please go ahead. Your line is open.

Bill Carcache (Senior Equity Research Analyst)

Good morning, Ralph and Perry. Thanks for taking my questions. Following up on your CFPB late fee comments, Ralph, can you share any early feedback you're getting from discussions with your merchant partners? Just curious whether you're expecting, you know, any pushback from merchants, particularly those that think their sales may be negatively impacted.

Perry Beberman (EVP and CFO)

Yeah. You know, we have really strong relationships with our partners. You know, we're aligned to mitigate any potential changes or impacts that, you know, that will help both parties as appropriate. I think one of the things, you know, we talk about pushback.

Ralph Andretta (President and CEO)

You know, extending Signet is a true sign that it's a good partnership, and we're gonna work through any of those issues that might be out there. As I said, you know, these are partnerships. They're not vendor relationships, and we'll work through any mitigations we have to, and that's been the, you know, the attitude of our partners as well.

Bill Carcache (Senior Equity Research Analyst)

Understood. Ralph, thank you. That, that's helpful. Then Perry, if I can squeeze 1 in for you on betas. By our math, your cycle to date, deposit beta's 44%, which is better relative to your consumer finance peers, which seem to be paying up a little bit more for deposits. Can you give us a sense of the terminal beta that you're anticipating? Or maybe at least, you know, frame how high you expect your cost of interest-bearing deposits to rise from here if your outlook for one more hike is correct?

Ralph Andretta (President and CEO)

Yeah. I think the way I'd categorize it is we will continue to remain competitive on price. You know, as you know, it's a low-cost avenue for us to generate deposits. We don't have brick-and-mortar. We don't have all these servicing of operating accounts. For us, we like it. Again, it goes back to the fact that we are a variable price credit card asset. We are fine, you know, continuing to pass along a lot of those increases along the way.

Bill Carcache (Senior Equity Research Analyst)

Very helpful. Thanks for taking my questions.

Operator (participant)

Thank you. Our next question is from Reggie Smith from JPMorgan. Reggie, please go ahead. Your line is open.

Reggie Smith (Executive Director of Equity Research)

Yeah. Good morning, guys. Thanks for taking the question. I'd like to, I guess, kind of take your temperature on share repurchases. Obviously I recognize there's a lot of uncertainty in the market with the economy, I guess Loyalty Ventures as well, and you're working through a refinancing package. You know, today, how are you thinking about share repurchases, and is there a price in your mind? Not asking you to give me that price, but is there a price where buying back the stock becomes so compelling that you have to do it?

Ralph Andretta (President and CEO)

Yeah. I appreciate you taking our temperature, Reggie. I think a couple of things. I think, you know, we've tripled our TCE to TA ratio in 3 years, I think. That was, you know, it's the beginning. You know, we've hit the minimum. Right now, given where we are, our focus is to continue doing what we've been doing. Like, we continue to invest in profitable growth. You know, continue to pay down that debt. Taking a 40% chunk out of that debt in 3 years, we're pretty proud of that, but there's more to do. We'll continue to pay down that debt. We want to build our capital, right? We want to build our capital so we can continue to add partners and have profitable growth.

You know, then excess capital, we of course want to return that to our shareholders at some point in time. I think strengthening the balance sheet is our focus. Investing in the business and building our capital is our focus right now if, you know, if you had to ask me what my three priorities are.

Reggie Smith (Executive Director of Equity Research)

Understood. I have one follow-up. I guess on Bread Pay, you guys put out a presentation during the quarter. Maybe my math is off, but it suggested that credit sales for Bread Pay were probably below $500 million now. I know you guys had given a $10 billion sales figure a while ago and kind of pulled back from that. Is my math right? If so, you know, what's happened there? What's your thinking on Bread Pay? Why is that?

Ralph Andretta (President and CEO)

Yeah

Reggie Smith (Executive Director of Equity Research)

You know, kind of not materialized as the market has kind of grown?

Ralph Andretta (President and CEO)

Yeah. I mean, I think, you know, the way, you know, we think about Bread Pay, particularly as the market's moved, it is a product, not the product for us. It is a product that we, you know, continue to invest in. Most importantly, that is a compliant regulatory product. That's very important to us. It's a option if people want to pay in full or installment loan. It's an option for people, but it's, you know, it's not the only product we have. We've diversified our portfolio. We've diversified our partners. you know, it's part of a basket of how people will borrow and buy from us, and that... We feel good about that.

Reggie Smith (Executive Director of Equity Research)

Just to follow up on that, is there any risk of impairment there, or is it still performing at a level where there's nothing to kind of consider there?

Ralph Andretta (President and CEO)

Well, I'll answer that and I'll let Perry back me up. It's performing at a level, and there's not a risk of impairment.

Adib Choudhury (Senior Equity Research Associate)

Correct.

Reggie Smith (Executive Director of Equity Research)

Cool. Thank you.

Operator (participant)

Thank you. Before we take our next question, I'd just like to remind everyone, if you'd like to press star followed by one on your telephone keypad, you can register a question. Our next question is from Dominick Gabriele from Oppenheimer. Dominic, please go ahead. Your line is open.

Dominick Gabriele (Managing Director and Senior Analyst)

Hey. Great. Thanks so much for taking my questions. A lot of great detail here. I was just thinking about the NIM in particular. I guess it was just down a little bit year-over-year. I know we're talking about roughly flat NIM. I was wondering, you know, if there's just a little bit of, you know, further deposit expense pressure on the deposit rates from here, how do we get to that roughly flat number? Is it just the yield or is it more pay down of debt? Because that was a huge benefit, the pay down of debt. I just have a follow-up. Thanks.

Ralph Andretta (President and CEO)

Yeah. I think you're gonna see a couple things, right? And I think the largest impact, let me say different. You've got NIM that's remaining pretty steady because we try to manage

Perry Beberman (EVP and CFO)

Our NIM to be rate neutral. You've got the dynamic of the shifting in the portfolio of seasonal movements in NIM. One of the larger components that's actually, I'll say, moving that NIM around is the elevated levels of losses, credit losses, and it's called purification. When you have the reversal of interest in fees, and when you go from a period that was low losses to a period that you have elevated losses, you, during that period, have a much higher % impact or basis point impact on your NIM from those reversal of interest and fees. If you think about the first half of the year, where we've talked about because of the conversion-related items, those quarters are being more impacted from the elevated losses.

As you go into the back half of the year, you'll also have an improvement in NIM, as you no longer have as much of those reversals.

Dominick Gabriele (Managing Director and Senior Analyst)

Perfect. That makes perfect sense. If we think about the year-over-year credit sales growth, and, you know, the sale of the portfolio and how that traditionally has linked to your interchange revenue net of retailer share agreements, is it right to say that the interchange revenue net of retailer share agreements should be down year-over-year because of the loss of that or sale of that portfolio?

Perry Beberman (EVP and CFO)

What I would say is, as you kind of mentioned, right, the retail share agreements includes our net interchange fees and the unique brand contracts that are in there. The best way to correlate our RSA, it's related to sales. And I think that's it's just constantly moving. Like, every new partner that comes on has a little different construct. I think overall, I would just say it will move in line with sales.

Dominick Gabriele (Managing Director and Senior Analyst)

Okay, perfect. Really appreciate it. Thanks so much for the insight.

Perry Beberman (EVP and CFO)

Yeah.

Operator (participant)

Thank you. As one final reminder, if you would like to register a question, please press star followed by one on your telephone keypad now. We have no further questions, so I'd like to hand back to Ralph Andretta for closing remarks.

Ralph Andretta (President and CEO)

Sure. I just want to thank you all for joining the call this morning. I appreciate your interest and continued interest in Bread Financial, and I wish you all a good day.

Operator (participant)

Thank you everyone for joining today's call. You may now disconnect your lines and have a lovely day.