Bread Financial Holdings, Inc.

Good morning and welcome to Bred Financial's first quarter earnings conference call. My name is Daisy and 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 Verab, Head of Investor Relations at Bred Financial to begin. So Brian, please go ahead.

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 Beiberman, 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 bredfinancial.com. With that, I would like to turn the call over to Ralph Andretta.

Thank you, Brian, and 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. Then, 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, Peru 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 three, 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 three years and that will continue moving forward. Our business development pipeline remains active with first quarter new partner launches including All Pet Credit, the Cleveland Cavaliers, Michaels, the New York Yankees, and World Market. Also, we are pleased to announce the extension of our longstanding 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 Alveria, our new collection solution, all to benefit from scale, 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 acknowledgement 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 four. 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 five provides additional color on our balance sheet management and discipline 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 and 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 three 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 three years are a testament and dedication and commitment to the entire Bread Financial team. And in closing, it is that team that has enabled Bread Financial to recently earn a spot are 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, and 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. 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 three 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 increase 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 seven, 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 28% 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've generated year-over-year PPNR growth, we remain focused on producing quality, sustainable earnings. Turning to slide eight, loan yields continue 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 loan balance paydowns 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 broker 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 nine, 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. Again, 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 models 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 TEA 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 three years and couple that with a tangible book value per share that has more than doubled over the same timeframe, 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 sales. with a full year net interest margin similar to 2022 full year rate of 19.2%. Our NIM outlook contemplates one more Fed increase than 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. 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. 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 and amortization expense to decline in the third quarter to a run rate closer to $25 million per quarter. There's 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 2020. 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 then 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. Finally, we expect our full year normalized effective tax rate to remain in the range of 25 to 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 and will 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.

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. And if you would like to withdraw your question, please press star followed by two. So that's star followed by one on your telephone keypad to register a question. Our first question today is from Sanjay Sakharani from KBW. Sanjay, please go ahead. Your line is open.

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. How do you see that following through as we move into the back part of the year?

It's a great question, Sanjay. I think inflation is still persistent. It's still there. Obviously, some of our 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, but we've diversified our portfolio in products. You know, that non-discretionary spend is sticking with us, with our co-brand products and our direct-to-consumer products. So 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. the improvement in the back end of the year, and we'll continue to monitor it.

Okay, great. And 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 inter-quarter. I'm just curious, you know, if we think about – tapping into other forms of 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, but was it a significant cost differential on those facilities? Thanks.

Yeah, thanks, Sanjay. Yeah, so right now, again, I think what you heard is we've got a really well-diversified source of funding. And as it relates to ABS, That will again be something we get into the market on. We look at being opportunistic when it's the right time in the market. And to your point, interest rates are going up on all of the instruments, whether it's direct to consumer deposits or all the other funding aspects. But right now, I'd say that 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. But there's, I'll say, an eager bank group out there to support us, so we're excited about what's ahead.

Okay. Thank you.

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

Hey, good morning guys. This is a deep chattery on 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.

Sure. You know, our pipeline as in the past remains strong and what I, 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 sense of securing with good economics. That's a very, for me, that's a very good position to be in. And also our pipeline is not just with the larger partners. It's up and down the spectrum. So smaller, medium-sized partners, de novo partners, All of those are in play in 2023. And again, another strong pipeline. And, you know, I would expect us to, you know, to be successful as we were in 22 with new partners. And, you know, we'll announce new business wins as partners and contractual obligations allow.

Thank you. And 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 the past few quarters?

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

Thanks very much.

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

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

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 spinoff was completed, Bread Financial, we've maintained nearly a 20% stake, you know, in the standalone Loyalty Ventures business. So 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 foreseeable and quite unfortunate. We strongly believe that our process and decision making with respect to the spinoff transaction was entirely appropriate and that any allegations made in some of the loyalty ventures bankruptcy filings regarding the spin transactions are completely meritless. And we're prepared and we'll respond appropriately, including aggressively defending against any claims should they arise.

Okay, great. That's very helpful. Thank you. And for Perry, 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 and any thoughts on what you can do with that capital and if there are any restrictions on what you can do? Thank you.

Yeah, I think that's a really good observation, and you can see that in one of the slides that at the bank level, our capital has exceeded 20% capital ratios. And 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, the big element of it is also paying down a portion. So 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. We have shared our plans with the regulators and we are in constant communication to make sure that we have support.

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

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

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

Thanks for the question. So part of the challenge with our numbers, as you know, there's noise in it from the transition-related items. As I mentioned, there's 40 basis points of that impact inherent in the first quarter and then there's going to be about 100 basis points still impacting the second quarter. Even as you look at our delinquency numbers, right now they're a little elevated for what you can see in the later stage delinquencies because that's what's going to impact the losses in the second quarter and part of July. I think if you look at March's loss rate, you can see what a largely unimpacted month looks like. And so 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 along the way, every time we have an opportunity for what we're seeing. But 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. Again, 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.

Got it. Thanks. And maybe, you know, I know that, you know, there hasn't been any kind of public discussion 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 you know to kind of think about um you know ways of you know uh you know of offsetting any impacts or any other things that are going on internally i'll address that i think um you know along with the financial services industry you know we continue to assess the rulemaking proposal and 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. But, you know, those proposed changes, you know, they may be challenged in court. It could be a lengthy process before any new rules become effective. But us, like the rest of the industry, you know, are looking at strategies to, you know, to mitigate any impact. So there, you know, across the board, higher APR changes, different pricing and tier strategies, fees for credit, some restructuring of brand partner contracts, and lastly, 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 at this time. When it gets closer to when the rules become final, we'll be happy to share our approach to the impact and how we intend to close that impact.

Thank you.

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

Good morning. Thank you for taking my question. I did want to ask about just our purchase volume trend in the 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?

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

got it and then uh i just wanted to go back to the last rate uh discussion i understand you're seeing some favorable trends in your uh early stage delinquencies and roll rates i think that's what's giving you confidence in the back half um is it your view that as you exit the year you'll be closer to that normalized six percent rate or are we still looking at an elevated

uh loss rates here in the near term given the macro pressures and like you know to get back to that midpoint or the sub six percent it's gonna take a little bit of while into 2021. yeah i think you said it well um when you when you look to the back half of the year again uh thinking that should be in that seven hopefully a little bit below things break away again we're actively managing credit strategies to get that uh that rate down as well but what leads you into next year is, as you said, the macro environment and how long does the elevated inflation persist? Where does unemployment go? 2024 will be its own set of circumstances and environment, and we'll give guidance for that as we get towards the end of the year. But what we do expect is, compared to the first half of this year for what we're seeing, where you have those system-related, the conversion-related accommodations in there for the customers, that will not be there. So I expect things to stabilize. We are committed to getting to less than 6% through the cycle. It's just a matter of when we'll be based on the depth and length of the cycle.

Thank you.

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

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 going to see a 100-bip 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 have kept the NCO rate more elevated. And 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 want to confirm that because I know you do get that seasonality at the end of the year as well.

I think the way you're thinking about the year, This sounds correct, right? And so when I talked about the marks being largely unimpacted or far less impacted from the conversion, we had July, which had a very discreet action. And you saw that in July's loss of last year being suppressed by over 100 basis points. And then you saw February, that spiked up. Then 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 do customer-friendly actions. That is what's impacting April, May, June, and July. So those four months are impacted by things that we did in the back part of last year. And there wasn't anything discrete that really impacted March. So that's why I said it's the least impactful year month that we've had other than January.

Got it. That's super helpful. Thanks for laying that out. And then just going back to the comment around the slowdown in credit sales this quarter, I just want to make sure that that's a core number stripping out BJs and anything else. And I guess is that 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? And then I guess, you know, as we think about the different cohorts that you lend to and that spend with you, are you noticing any sort of shifts by income or by credit FICO?

Yeah, good question. And 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. But you know, more broadly, it kind of ties back the question around the economy, and what's going on, right. So obviously, GDP is forecasted to continue to slow down 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 has been strong, which has helped the consumer, but it's just not keeping up with inflation. So for that portion of the population, that's creating some stress. And again, I think wages are going to come under pressure as companies start pulling back. So even though for now unemployment remains strong, we're all reading the headlines that there could be more layoffs and higher interest rates. or 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. So you think about, I've talked about this before, that K economy and, you know, excess savings for related to stimulus. You talk about laughing 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. So there is a growing cohort in the population that's doing their best to keep up with inflation, but are struggling a little. And so you think about the basics of shelter costs, food, and utilities. Those are still, those are up a lot from inflation. So I think that's what's putting pressure on. And so we look at consumers, you know, we are definitely seeing a little bit of the decline that happened in the first quarter because you see the decline in consumer sentiment and there's the decline in foot traffic. So those slowing trends, you know, across the broader consumer group, but are definitely a little more exaggerated for the lower risk scores. So I think that's what's happening. But consumers are doing the best they can to manage a budget. They're rotating, as you mentioned, back from discretionary to more non-discretionary, and that's where we feel good about the way we've diversified our portfolio.

Got it.

Thank you for taking my questions.

Thank you.

Our next question is from Bill Karkash from Wolf Research. Bill, please go ahead. Your line is open.

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 any pushback from merchants, particularly those that think their sales may be negatively impacted.

Yeah, you know, we have really strong relationships with our partners, and we're aligned to mitigate any potential changes or impacts that will help both parties as appropriate. I think one of the things, you know, when we talk about pushback, you know, extending Signet is a true sign that it's a good partnership and we're going to work through any of those issues that might be out there. So, as I said, these are partnerships. They're not vendor relationships, and we'll work through any mitigations we have to. And that's been the attitude of our partners as well.

Understood. Ralph, thank you. That's helpful. And Perry, if I can squeeze one in for you on betas. By our math, your cycle to date deposit beta is 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 is correct yeah I think the way I'd categorize it is we will continue to remain competitive on price you know as you know we have 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 so for us we like it and again it goes back to the fact that we are a variable price credit card asset so we are fine um you know continue to pass along a lot of those um increase along the way very helpful thanks for taking my questions thank you

Our next question is from Reggie Smith from JP Morgan.

Reggie, please go ahead. Your line is open.

Good morning, guys. Thanks for taking the question. I'd like to, I guess, kind of take your temperature on share repurchases. Now, 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, but you know, today, how are you thinking about sharing purchases? And is there a price in your mind that asks you to give me that price? Is there a price where buying back the stock becomes so compelling that you have to do it?

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 three years. I think that was, you know, It's the beginning. We've hit the minimum. Right now, given where we are, our focus is to continue doing what we've been doing. We continue to invest in profitable growth. Continue to pay down that debt. Taking a 40% chunk out of that debt in three years, we're pretty proud of that, but there's more to do. We'll continue to pay down that debt. And we want to build our capital, right? So we want to build our capital so we can continue to add partners and have profitable growth. And, you know, then excess capital, we, of course, want to return that to our shareholders at some point in time. But I think strengthening the balance sheet is our focus. Investing in the business and building our capital is our focus right now, if you had to ask me what my three priorities are.

Understood. One follow-up. I guess on BreadPay, you guys put out a presentation during the quarter. Maybe my math is off, but it suggested that credit sales for BreadPay 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. But is my math right? And if so... What's happened there? What's your thinking on BreadPay? Why is that not materialized as the market has grown?

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

You just 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?

Well, I'll answer that, and I'll let Perry back me up. If it's performing at a level, then there's not a risk of impairment, correct? Cool. Thank you.

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 Dominic Gabriel from Oppenheimer. Dominic, please go ahead. Your line is open.

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, but I know we're talking about roughly flat NIM, and so I was wondering if there's just a little bit of you know, you know, further deposit expense pressure on their, the deposit rates from here. Um, how did we get to that roughly flat number? Is it, is it just the yield or is it more pay down of debt? Cause that was a huge benefit, the pay down of debt and that's unfollowed. Thanks.

Yeah, I think you're going to see a couple of things, right? So, and I think the largest impact, Let me say different. You've got NIM that's remaining pretty steady because we try to manage our NIM to be rate neutral. So then you've got the dynamic of the shifting in the portfolio of seasonal movements in NIM. But one of the larger components that's actually, I'll say, moving that NIM around is the higher elevated levels of losses, credit losses. And that's called purification. So when you have the reversal of interest and fees, and when you go from a period that was Low losses, so here they have elevated losses. During that period, you have a much higher percent impact or basis point impact on your NIM from those reversal interest and fees. So 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. And then 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.

Perfect. That makes perfect sense. Um, if, if we, uh, think about the year over year credit sales growth, um, and, 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 that portfolio so so what i would say that as you kind of mentioned like the the retail share agreements includes our net interchange fees and the unique uh brand contracts that are in there so the best way to correlate our rsa it's related to sales And I think that it's just constantly moving. Like every new partner that comes on has a little different construct, but I think overall I'll just say it will move in line with sales.

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

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.

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.