Bread Financial Holdings, Inc.

Thank you for standing by. Welcome to the Bread Financial fourth quarter and full year 2024 earnings conference call. At this time, all participants are in listen-only mode. After the speaker's presentation, there will be a question and answer session. To ask a question during this session, you'll need to press star 1-1 on your telephone. If your question has been answered and you'd like to remove yourself from the queue, simply press star 1-1 again. As a reminder, today's program is being recorded. And now I'd like to introduce your host for today's program, Brian Verb, Head of Investor Relations at Bread Financial. Please go ahead, sir.

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 at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer, and Perry Bieberman, Executive Vice President and Chief Financial Officer. 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. With that, I would like to turn the call over to Ralph Vendretta.

Thank you, Brian, and good morning to everyone joining the call. Before I begin, I want to start by sending our thoughts to those impacted by the recent wildfires in California. To underscore our commitment to the customers and the communities we serve, we continue to provide financial support to the American Red Cross for emergency relief efforts. We remain committed to all of our customers impacted by the fires and are providing hardship assistance during this time. We wish the individuals and families affected as well as the first responders and those delivering relief aid continued safety. Now to our presentation, starting on slide two with our 2024 achievements. We are pleased with the progress we have made throughout the year. Our commitment to growing responsibly with our brand partners was evident as we added iconic partners like Hard Rock International, HP, and Saks Fifth Avenue while investing in our existing programs. With the addition of these new brand partners along with continued strong renewal rates, including seven renewals in 2024, we now have more than 85% of our loans secured through 2026 and nine out of our top 10 programs secured through at least 2028. We have continued to cultivate strong partner relationships and diversify both our product offerings and our industry verticals. These actions help to mitigate our risks and further ensure a solid run rate for performance in 2025. the macroeconomic and regulatory environments evolved throughout 2024. In turn, we effectively adapted to prolong inflationary pressures affecting our customers and uncertainty regarding regulatory outcomes. Our strategic proactive credit tightening actions during the year enabled us to maintain a stable credit risk distribution. Additionally, Although the outcome and timing of the CFPB late fee rule remain uncertain, we continue to execute our mitigation strategies to better position our company and offset any potential impact. Next, we made significant progress strengthening our balance sheet, executing our long-term funding plan, and growing shareholder value. We improved our capital levels and succeeded in reducing our parent-level debt including the repurchase of 97% of our outstanding convertible notes and achieving our double leverage ratio target of below 115%. These accomplishments underscore our disciplined approach to growing our business and allocating capital responsibly. Our strengthened balance sheet provides additional flexibility to further optimize our capital and debt stack as we discussed during our investor day in June of last year. Further, due to our progress, both Moody's and Fitch upgraded their rating outlooks to Bread Financial, moving from stable to positive just one year after obtaining our inaugural rating. Contributing to our success is our focus on operational excellence and technology advancement as we leverage innovation, best practices, and scale to gain efficiencies throughout the organization. We advance our technology platform anchored in customer centricity, resiliency, security, and growth. And as a result of our expense discipline and efficiency gains, we delivered on our positive operating leverage goal with lower expenses than our original 2024 full-year guidance. We achieved all of our 2024 full-year targets in spite of a more challenging than anticipated macroeconomic environment. Looking ahead, we expect to deliver solid financial results in 2025 fueled by our resilient business model, prudent capital allocation, and operational excellence initiatives. This will move us closer to achieving the medium-term financial targets we provided during our investor event. Moving to key highlights from the fourth quarter on slide three. We opportunistically repurchased an additional $44 million and principal amount of our convertible notes, leaving only $10 million of the original $360 million balance remaining. We also purchased 44 million of common shares in December, completing our board-authorized share repurchase plan. Additionally, our overall funding mix continued to improve, with strong growth in our direct-to-consumer deposits, which reached $7.7 billion at quarter end. we generated adjusted income from continuing operations of $21 million and adjusted diluted EPS from continuing operations of 41 cents. Both exclude the $13 million post-tax impact from the premium paid on our repurchased convertible notes. Tangible book value per share of $46.97 increased 7% year over year, while our common equity tier one capital ratio increased 20 basis points year-over-year to 12.4%. Further, we are pleased with our year-over-year positive fourth quarter credit sales growth, as beauty, sporting goods, and retail apparel, as well as millennial and Gen Z sales, showed signs of improvement. Spending continues to be more heavily weighted toward non-discretionary purchases, leading to strong loan growth in our co-brand and proprietary products during the holidays. While we continue to closely monitor ongoing economic and political uncertainties, including impacts from key legislative and monetary policies, we are cautiously optimistic that credit sales improvement will continue in 2025, driven by new and existing partner growth. Slide four depicts the results of our disciplined capital allocation strategy. While I have mentioned several of our accomplishments for the quarter and full year, it is worth looking at our improvements over a longer period of time to see the significant progress we have made. Our CET1 ratio has increased 210 basis points over the last three years to 12.4%. Since the fourth quarter of 2021, we have reduced our parent debt levels by 50%, paying down more than $1 billion and decreasing our double leverage ratio to 105%, achieving our targeted level. We have successfully increased our tangible book value over the past three years with an annual growth rate of 19%, resulting in a fourth quarter 2024 tangible book value of nearly $47. I will wrap up my initial remarks by sharing my sincere appreciation for the focus of the leadership team and the dedication of our thousands of talented associates throughout the year, without whom our position of strength heading into 2025 would not be possible. Bread Financial is a stronger, more resilient organization, and I am excited to continue our momentum, delivering on our commitments to key stakeholders. I will now turn it over to Perry to discuss the financials. Thanks, Ralph.

I will touch on our full year 2024 financial highlights on slide five before moving on to our fourth quarter 2024 results. For the year, credit sales of $27 billion decreased 7%, and average loans of $18.1 billion decreased 1%, reflecting moderated consumer spending, our proactive credit tightening actions, and elevated gross losses, partially offset by new partner growth. Revenue of $3.8 billion decreased $451 million, or 11%, due to a $230 million gain on sale in the comparative 2023 period, while in 2024 we had lower finance charges and late fees resulting from a gradual shift in risk and product mix, leading to a lower proportion of private label accounts. Our loan yield was impacted by lower average prime rate driven by the 100 basis points of Fed rate cuts that started in September. And lastly, reduced merchant discount fees resulting from lower bid ticket sales. Total non-interest expense, net income, income from continuing operations, and diluted EPS have all been adjusted for the impact from our repurchase convertible notes, which was primarily the premium paid for those repurchases. All adjusted figures are non-GAAP financial measures, and a reconciliation table can be found at the bottom of the slide. as well as in the appendix, along with our non-GAAP financial measures. Adjusted total non-interest expenses decreased 7%, excluding the $107 million pre-tax impact from our repurchased convertible notes. The decline was primarily driven by lower card and processing expenses, which includes lower fraud expense. Adjusted diluted EPS for the year was $7.60. Slide 6 provides our fourth quarter financial highlights. During the fourth quarter, credit sales of $7.9 billion increased 1% year-over-year, reflecting new partner growth and stronger holiday sales, while average loans of $18.2 billion decreased 1%, reflecting lower full-year credit sales and elevated gross credit losses in the year. Revenue was $0.9 billion for the quarter, down 9% year-over-year, and total non-interest expenses increased $20 million, or 4%. Income from continuing operations decreased $37 million, primarily due to the lower net interest income and a $13 million post-tax impact from our repurchased convertible notes, partially offset by a lower provision for credit losses. Adjusted income from continued operations and adjusted diluted EPS, both of which exclude the impact from our repurchase notes were $21 million and 41 cents respectively. Looking at the quarterly financials in more detail on slide seven, total net interest income for the quarter decreased 8% year over year primarily due to a lower loan yield, which I will discuss further on the next slide. Non-interest income was down $4 million, which was primarily the result of reduced merchant discount fees due to lower big-ticket credit sales. Total non-interest expenses increased $20 million, or 4%, including a $22 million increase in employee compensation and benefits costs and technology-related transformation costs, and an $11 million pre-tax impact from our repurchase convertible notes. Excluding the $11 million related to the convertible repurchases, expenses increased 1%. Additional details on expense drivers can be found in the appendix of the slide deck posted on our website. Pre-tax pre-provision earnings, or PPNR, decreased $111 million, or 22%, primarily due to lower net interest income and higher employee compensation and benefits costs. Finally, Note that the tax rate in the fourth quarter of 2024 benefited from favorable discrete items. Turning to slide eight, both loan yield of 25.7% and net interest margin of 17.8% were lower sequentially following seasonal trends. Loan yield decreased 200 basis points year-over-year primarily due to lower finance charges and late fees resulting from a gradual shift in product and risk mix leading to a lower proportion of private label accounts, lower average prime rate, and higher seasonal transactor balances related to strong holiday spend. On the funding side, we are seeing the rate on our funding costs decrease as savings accounts and new Term CD rates declined with lower Fed and U.S. Treasury rates. Note that repricing of our retail CD portfolio, which comprises over half of our direct-to-consumer deposits, will lag the rate changes in both our savings portfolio and the overall loan portfolio. Looking at the bottom right chart, you can see that our funding mix continues to improve, fueled by growth in direct-to-consumer deposits, which increased to $7.7 billion at quarter end. Direct-to-consumer deposits accounted for 43% of our average total funding, up from 35% a year ago. Concurrently, wholesale deposits decreased from 39% to 30%. Moving to credit on slide nine. Our delinquency rate for the fourth quarter was 5.9%, down 60 basis points from last year and down 50 basis points sequentially, following seasonal trends. This gradual improvement provides an early sign of potential optimism for improved credit performance in the second half of 2025, subject to macroeconomic conditions continuing to improve. The fourth quarter net loss rate was 8.0%, flat to last year, and slightly higher than the third quarter 2024 rate of 7.8%. As previously mentioned, we estimate The net loss rate benefited by more than 20 basis points or approximately $10 million from the hurricane related customer friendly actions we took in October and November, which consequently will have a negative impact on the May and June 2025 net loss rates. Our reserve rate of 11.9% improved slightly year over year as expected, which is further evidence of stabilization in our credit portfolio. We continue to maintain appropriately conservative weighting on the economic scenarios in our credit reserve modeling given the wide range of potential 2025 macroeconomic outcomes. Further, our total loss absorption capacity comprised of total company tangible common equity plus credit reserve ended the quarter at 24% of total loans, an increase of 90 basis points from a year ago demonstrating a strong margin of protection should more adverse economic conditions arise. Looking at our credit risk distribution, the percentage of cardholders with a 660 plus credit score improved slightly during the quarter to 58% up from 57% sequentially and above pre-pandemic levels despite continued inflationary pressures. This is primarily a result of our ongoing prudent credit tightening actions, as well as our more diversified product mix. We continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take. Moving to slide 10. Our 2025 outlook acknowledges the economic progress in 2024 in terms of stabilizing inflation and improvements in real wages in a stable, albeit cooling, labor market. We anticipate our consumers will continue to responsibly moderate their spending due to ongoing elevated prices. We also recognize that consumer impacts related to the new administration's legislative and monetary policies are unknown at this time. Our outlook assumes no late fee reduction related to the CFPB late fee rule given uncertainty surrounding the timing and outcome of the ongoing litigation. It also assumes further interest rate reductions by the Federal Reserve, which will pressure total net interest income. Note that as we remain slightly asset sensitive, lower recent and future Fed and prime rates will pressure net interest margin as our variable rates assets reprice faster than liabilities. We expect 2025 average credit card and other loans to be relatively flat compared to 2024 based on our current economic outlook, strategic tightening actions, anticipated elevated gross credit losses, and visibility into our pipeline and existing partner relationships. As a result of new business growth and higher credit sales in the year, we anticipate year-end 2025 loans will be slightly higher than year-end 2024. Total revenue growth, excluding portfolio sale gains, is anticipated to be up low single digits with a full-year net interest margin modestly higher than full-year 2024 rate. This is a result of the mitigation actions taken in response to the CFPB late fee rule, partially offset by an expected continued shift in product mix to co-brand, proprietary, and installment lending products, which would lead to lower finance charges and late fees as well as a lower average year-over-year prime rate. To expand a bit on a few of the key variables that are expected to drive NIM into 2025, first I would note the negative impact on loan yields from the 100 basis point reduction in prime rate in late 2024 and that impact rolling through on a quarter and full year basis, then factoring in the potential timing of potential additional Fed interest rate cuts in 2025. Next, I would highlight the expectation for lower billed late fees given better early stage delinquency trends as a result of our improving risk mix and more diversified product mix, as I mentioned previously. Third, on a quarterly basis, you have seasonality from the buildup in transactor balances, timing around tax refunds, and the level of gross losses in each quarter. For example, sequentially, the first quarter will see pressure from expected higher gross losses and expected lower early stage delinquencies resulting in lower billed late fees, but will benefit slightly from normal seasonality as holiday transactor balances pay down. Additionally, as we have said, the result of the mitigation actions we have taken in response to the CFPB late fee rule should gradually build into our portfolio over the coming quarters in the form of higher APRs. We recognize there are many moving pieces, so we will continue to provide additional insights regarding the loan yields throughout the year. From the interest expense side, we are pleased with our continued progress in growing our direct-to-consumer deposits and lowering our rates while remaining very competitive. As I mentioned, the impact from our CD rate reductions will lag relative to the changes in the yield curve, which leads to additional shorter-term pressure on net interest margins. As a result of efficiencies gained from ongoing operational excellence initiatives, along with disciplined investment and expense management, we expect to generate nominal full-year positive operating leverage in 2025, excluding portfolio sales and the 2024 $107 million pre-tax impact from our repurchase convertible notes. The degree of positive operating leverage will be macro-dependent related to credit improvement, loan growth, and pace and timing of further Fed interest cuts. We anticipate a year-over-year net loss rate in the 8.0 to 8.2% range for 2025. As I mentioned earlier, the customer-friendly hurricane actions we took in October and November in 2024 will result in a modest shift of losses from the fourth quarter of 2024 to the second quarter of 2025, negatively impacting the second quarter loss rate. We expect the net loss rate in the first half of the year to remain elevated. Given positive early indications, we project that the first quarter net loss rate will be at slightly or better than the first quarter 2024 rate of 8.5% with a peak rate in the upper 8% range in February as a result of the day waiting calculation methodology that we implemented last year. Delinquency performance over the next 90 days will help to shape our expectations for the second half of the year as there's still potential volatility in credit performance driven by the changing administration tax season, and broader macroeconomic conditions. Overall, our baseline loss outlook assumes a slow, gradual improvement in the macroeconomic environment as it will take time for the effects of a prolonged period of elevated inflation to be fully absorbed by consumers. Finally, our full-year normalized effective tax rate is expected to be in the range of 25% to 26%, with quarter-over-quarter variability to the timing of certain discrete items. Now, I will turn it back to Ralph to review our 2025 focus areas.

Thanks, Perry. Before we open it up for questions, I wanted to provide a refreshed view of our focus areas for 2025 as seen on slide 11. While our focus areas have remained fairly consistent over the last few years, they continue to evolve with our transformation and the ever-changing business environment. First, our commitment to responsible growth will not change. We have made significant progress diversifying our product suite over the last few years. This enables us to appropriately scale, improve our risk mix, and grow our partnerships, expanding revenue generation opportunities. Second, we will leverage our sophisticated end-to-end credit management process to continue balancing risk and reward and effectively manage changes in a macroeconomic environment. We will continue to adapt to regulatory uncertainty and closely monitor the potential impacts from legislative and monetary changes. Third, due to the successful execution of our long-term debt plan, including the pay down of more than $1 billion of debt over the last three years and our disciplined approach to allocating capital, our balance sheet is stronger than ever. This provides a necessary foundation and flexibility for continued business growth and resiliency. We look for opportunities to optimize our capital and debt stack, and as we continue to generate capital, we will ensure appropriate returns on our investments and maintain the balance sheet strength we have worked so hard to build. Then, over time, we will look to return excess capital to our shareholders. In the last five years, we have made substantial progress enhancing our enterprise risk management practices, including capital planning as well as interest rate risk management. We will continue to strengthen and advance all aspects of risk management to ensure we are a prudent and well-run financial services company. Finally, the successful integration and execution of our operational excellence efforts We will look to accelerate continuous improvement and transform initiatives to deliver technology advancements, improve customer satisfaction, enterprise-wide efficiency, and value creation. In summary, our experienced leadership team remains focused on generating strong returns through prudent capital and risk management. This reflects our unwavering commitment to drive sustainable profitable growth and build long-term value for our shareholders and other stakeholders throughout dynamic economic and regulatory environments. We are proud of what we accomplished in 2024 and look forward to building on our momentum in 2025. Operator, we are now ready to open up the lines for questions.

Certainly, and our first question comes from the line of Sanjay Sakrani from KBW. Your question, please.

Thank you. Good morning. Perry, I just wanted to talk about the path to your medium-term targets. I guess as we think about mitigation and no-lead fee regulation, I would think that that accelerates the path to this potential. Maybe you could just talk about how you're thinking about that and Give us a sense of some of the points that you made on NIM and how much mitigation is coming through over the next couple of years.

Sure. Yeah, I'd say, and thanks, Andy, for the question. I'd say we're well on the path to achieving those medium-term targets. You know, I think some of the key things to look at is when you start to look at what happened in the fourth quarter and how we expect that to pull through in the first half of the year, we're still operating in a period of elevated losses, right? And so gross losses, you have that higher period of reversal of interest and fees from prior periods. So that was occurring and will continue to occur into the first part of the year when we're still north of 8% on gross losses. So that needs to come back down to that 6% level to really achieve those targets. And then you take into consideration that we did see marked improvement in delinquency. So, you know, the 50 basis point improvement linked quarter or 56 basis points, you're starting to bend the curve. And so in that period, you're starting to have lower billed late fees. So you're kind of getting that double whammy in that transition period as credit quality is improving. You're getting billed late fees that is pulling back on your net interest margin a little bit. But at the same time, you still have elevated reversal of interest and fees from prior periods when you had more of those billed fees. So that's going to play through in that transitional period as you start to work towards that more normalized credit as that starts marching downward. At the same time, you did have the 100 basis points of Fed cuts and translating to prime cuts that happened pretty rapidly in the fourth quarter. Us being, you know, asset sensitive, that's pulling through an impacted yield. As the liabilities catch up in terms of repricing, you'll start to see NIM normalize as well. And then to your point, the CFPB late fee mitigation actions that are in flight, you know, when we put this out, it was years of building to get all those APRs. higher APRs translating into the interest income on those revolving balances. So we're moving closer to those medium-term targets, but really it's going to be largely credit-dependent. Feel very confident with the way we're managing expenses to deliver positive operating leverage. A lot of that will be macro-dependent to the degree of which we deliver positive operating leverage, as we talk about, and we talk more about what those impacts of the possible economy are. But that's kind of the way I think about the glide path as we march through the back half of this year and really be set up nicely to start to hit those medium-term targets.

Got it. And then just a follow-up, maybe, Ralph. I'm just trying to think about how we see a re-acceleration in NIM accretive loan growth. I know there's been some mixed impacts. You guys are growing in co-brand, which is definitely helping credit. But as I look ahead, how do we get loan growth to accelerate? Is it a function of credit? You know, like, are you guys tightening so that's having an impact as well? Or can we see some loosening that can drive that? I mean, you talked a little bit about the spending trends specifically. And then are there any portfolio acquisition opportunities? Thank you.

Yeah, you know, if you think about, you know, let me answer that with, you know, the fourth quarter shows a lot of green shoots, right? We saw some pick up in specialty apparel, T&E. millennial spend and Gen Z, we were really comfortable with that. And if you think about what we executed in 2024, those portfolios are going to mature as we move through 2025. And we do have a robust pipeline. So if I look at, you know, year end, you know, our loans were, our end of period loans were up, end of period sales were up. I was pretty encouraged by that. I'm cautiously optimistic as we move forward through 2025 that sales will increase and then consequently loan growth will increase.

Thank you.

Thank you.

And our next question comes from the line of Vincent Kaintyk from BTIG. Your question, please. Oh, sorry. I'm you. Good morning. Thanks for taking my questions.

First one, actually, just a follow-up on the NIM and on the Mitigin's rollout. If you could maybe update us on the progress there and With the new administration coming in and I think expectations now with the CPB going away, I'm just wondering how your conversations are going with maybe some of the merchants who have not yet signed up, just how that progress is and how much more could we see in mitigants?

Yeah, so as it relates to the mitigation, we have taken a thoughtful approach with our brand partners In terms of how we phase these in, we said previously this was a phased-in approach. It wasn't going to be a big bang where it all happened at some point last year. So there's still, I'll say, like APR increases rolling out this year. But we have 95% of the brand partners understand the contractual commitments of what's going to happen should the late fee rule go into effect. And Vincent, to your point, there's optimism just from the litigation that was in flight in terms of hoping for a positive outcome, but we got to keep marching forward because the timing and the outcome of what's going to play forward in the courts is It's still uncertain, but Judge Pittman's early indication that late fees should be a deterrent gives us some encouragement that that would be where it goes. So more broadly, obviously, I think the industry-wide is feeling more optimistic with the change in administration on the regulatory side, but there's other consequences that could be out there with policy changes, things that we just don't know. But as it rolls, you know, we do think there's going to be some positivity in terms of what that means to net interest margin over time and how that plays forward into 2026 as well. But there's still, you know, some pressures on this year with rate cuts, you know, the compression that we'll see from that, improved delinquency, lowers late fees. So you've got all these moving parts within that, you know, which is why we're guiding where we are. But we do expect NIM to be slightly higher this year than last year. largely because of the mitigation playing through.

Okay, great. Thanks for that update. And then maybe asking just on the medium-term guidance again, I think sitting back in the investor day and all the great detail you gave there, I think we were looking at kind of getting to a run rate 20%, 25% ROE by the fourth quarter of 2025. And so I'm just wondering with, you know, NIM is coming up a bit and then you have the losses improving as well as credit reserves coming down. So it's nice to see the 30 basis points benefit. Just wondering if we're on track of that and what other pieces maybe we need to get to that medium term. Thank you.

Yeah, I think it's what you said there, right? How does the fourth quarter credit performance come in, where does reserve rate come down? I would expect if things play out positively and credit really continues to hold and even slightly improve as you march through the next 90 days, that's going to be a good indication that we'll finish the year with a lower reserve rate than where we finished this year. And if loss is coming better, obviously, then you're starting to drive those returns. And that should set us up for 2026.

Okay, great. Thanks very much. Thank you.

And our next question comes from the line of Jeff Adelson from Morgan Stanley. Your question, please.

Hey, Perry. Thanks for all the color into the moving pieces on the NIM. I just wanted to make sure we understood. So for the first quarter, should we be expecting more of a more pressure on the NIM or should that be more flat? I mean, you talked about the seasonality of transactors, which tends to benefit in the first quarter. I just want to make sure we put a finer point in that.

Yeah. Thanks for your question. So, again, the moving parts, transactor balances coming off, you know, that helps to increase NIM. We've got the prime rate pull through for the full quarter. That puts pressure on them. You've got some CFPB mitigation. So that's going to help. So you've got a couple positives offset with one negative. So I'd say we should be seasonally slightly up from fourth quarter going into first quarter.

Okay. Thanks for that. And then just around the green shoots of spending there, how do we balance that against your expectation for consumers to kind of be cautiously moderating their spend here. Um, you know, I, I got you highlighted some of the key areas of growth you're seeing, you know, is any of that coming from, um, you know, any account growth that you're maybe leaning into at this point, or, um, can you just help us understand, you know, w what that looks like? And then as related to that, like, are there any sort of trends that you're noticing under the hood, just an update on the state of the consumer, whether it be by, you know, high versus low income or FICO.

Yeah, so when I think about spend, you know, I think more broadly about, you know, the economy, right? And you think about the economy, there's clearly been signs of strength and stabilization where unemployment's remained around 4.1%. That outlook is to be consistent through next year based on what everybody's saying. We're seeing encouraging signs with CPI dropping to 3.2%, which is positive. So our consumers, I think you can probably see the same thing. The low-end consumers are actually seeing some slight improvement. Maybe you start creeping up the ladder to the prime plus or starting to feel a little pressure. We're watching things carefully with Like min pay, we're starting to see stabilization, maybe some slight improvement on the lower end of who we underwrite. But you're starting to see a little bit of an increase as you start to go up the ladder. So it's interesting to watch the two tails of the economy, right? The lower end of the tail, we've talked about the K economy in the past, we've actually seen stabilization to improvement. And that's a lot of where we live and we serve those customers. And so we're almost breaking trend a little bit with the more broad industry on that because of the actions that we've taken the past couple years around underwriting. So you think about almost called bottoming out in terms of our credit strategy and where we are at the vintages. From here, we should start to see that continued improvement and the actions we've taken to set us up for that. Again, we're just remaining, I'll say, cautious as it relates to 2025 because of the unknowns, right? And one of the unknowns, as an example, is what are customers going to do with their tax refunds? Are they going to spend more or are they going to pay down debt? Are they going to put the savings? And, you know, just giving you a little factoid on this, you know, from some past actions, In 2023, 20% of the people used their tax refunds to pay down debt. In 2024, 19% used a significant drop. That was one of the lowest that they've seen in over a decade. This year, just this morning, something came out that said of a survey, 37% plan to use it to pay down debt. So that would bode well for delinquency and creating more capacity. So there's a lot of moving parts here. And then similarly, what... going to happen with policies could it put upward pressure on inflation that would change you know how we think about things we've remained in our outlook very cautious on inflation not assuming things are going to continue to improve materially but if things remain on track as they have i think you could see some upside there okay great thank you

Thank you. And our next question comes from the line of John Pancari from Evercore ISI. Your question, please.

Morning. On the link quarter loan yield change, I know the yield was down about 170 basis points link quarter. Just to get a little bit more detail there, how much of that was the impact, the lagged impact of the Fed cuts versus how much of that was the impact from the lower big ticket sales that you cited, and then a potential impact from the shift away from private labels? Is there a way to help us kind of size that up to assess the magnitude of each?

There's a lot of moving parts in there. You know, I don't want to say it's a third, a third, a third, but the... A large part of our portfolio, you know, the vast majority is variable priced. So that quick movement in prime means that the loan yields drop almost instantaneously. You know, 45 days of those prime rate reductions, that pulls through. And as we've talked about, the liabilities catch up over time. So that will happen over the coming quarters because of the CDs and other things. Then, as we mentioned with the improvement delinquency, we saw lower billed late fee. So you take that as the other piece that dragged down the loan yield, but while not seeing material improvement in gross losses, which has that reversal of interest and fee. So it was that double whammy effect. You're kind of catching that faster reduction in loan yield than liability. So that will smooth out as we march through 2025. and then as the reversal of interest and fees improve, as gross losses improve throughout the year, then you're going to start to get that NIM expansion again following normal season out.

Right. Okay. All right. Thanks for that. And then just one more, my follow-up is kind of a two-parter. On the private label shift away towards co-brand, is that happening at about the pace you had expected or maybe at a faster clip than anticipated? And then when you look at your expectation for flat average loans, but end of period slightly higher. I was wondering if you can, it seems a bit modest, just given the backdrop that should be strengthening here. So is there anything impacting your expectation on balances here as you look at the year that you might be approaching it conservatively?

Thanks. Yeah, I think what you just said there, that last point, it is conservative, right? Because we just don't know what, the economy and policies are going to hold and what that means to consumer growth. But as we've talked about and we've been talking about the diversification of our portfolio and the continued move to more co-brand, within co-brand, and I give a lot of credit to our business development team working with existing brand partners, many used to have only a private label account or card which is going to be used in the store. So a lot of the brand partners now have some co-brand as well as private label. So you can think about taking the top tiers of private label and now they're getting the co-brand card and they get to now use that card for more general purpose spend outside of the store. So that's given us a nice diversification of spend. And that's helping to create the shift. Then on top of that, we're signing some new partners who have just co-brand. So that is just pure. So it is a slow migration. I wouldn't say it's moving faster or slower. And then you would imagine as you are having this period of elevated losses, your highest risk customers are the ones charging off and you're not filling them back in with the same type of product because we're still in a tighter credit environment. So you're not even underrunning as deep into the private label base. So you're charging more of those off, replacing them with a better credit quality, and that's part of what's happened with this natural migration right now. I hope that answers your question.

It does. All right. Thank you.

Thank you. And our next question comes from the line of Bill Karkachi from Wolf Research. Your question, please.

Hi. Good morning, Ralph and Perry. Following up on The comments you just made, Perry, around the increase in co-brand versus private label and remixing towards higher credit quality customer that we're seeing, is the return profile of the business and the risk-adjusted yields you generate changing with a less volatile but potentially a bit lower yielding revenue stream? Any color that you can give on sort of how to think about the persistence of those trends and if this is something we should think about as structural, and does that align with the expectations with the guidance that you gave at Investor Day?

Yeah, what I'd say is that 100% aligns to the guidance we gave at Investor Day. That was all contemplated in our long-term targets. I would say I'm making this up completely, but if there was something where we bought a $10 billion portfolio, which we're not, but if we were and it had a very different profile, we'd have to come back and revisit that. But no, with what we put out there for our growth targets and the business that we're in, again, we underwrite for profit. We're making sure we get paid for the capital. We are committed to those returns. And something would have to move very large and chunky to really move us off those targets. You know, we expect to deliver the returns. We're focused on operational excellence and continue to manage our expense base to deliver positive operating leverage, as well as making sure that we get the right return for the risk we take.

That's great. As a follow-up question, If the loan growth outlook remains flat as you expect, how should we think about your buyback capacity over the course of the year, Perry? And then Ralph, could you give some color around the renewal process and how you think that potentially could change as a result of some of the mitigating actions that have been taken?

Yeah. When you think about loan growth, again, really an excellent question, right? You have to take care of anticipated loan growth throughout the year and into 2026. First, we have to hit our capital ratios, right? So let's start with that. We're not quite there yet. We need to get there. And then we'll have a better line of sight in the pipeline, consumer behavior, and that will really, I'll say, dictate you know, what type of capacity there would be and if credit quality continues to improve or does it weaken. All those things factor into our discussions around capital planning and, you know, we'll get more insight on that as we march through the year.

Yeah, so good to talk to you. I'm really pleased with our renewal process and the results that we have. If you think about where we are. I think we talked about it earlier. We got 85% of our portfolios renewed through 2026. nine out of our ten biggest programs, let's call it almost to the end of the decade, really, really well. We're proactive on renewals, you know, starting them well before they're due and, you know, kind of sidestepping RFPs, which, you know, gets a little crazy out there. You know, there's a little bit of compression, but nothing that is unexpected, nothing that we, you know, haven't, you know, kind of incorporated in our outlook. And the team does a terrific job. And unlike years in the past, we don't give away our piece of the pie. We grow the pie, and we both benefit from a positive renewal with new data, new information, new products. So I feel very, very positive about what we do on renewals.

Great. Thank you for taking my questions.

Thank you. And our next question comes from the line of Moshe Orembek from TD Calend. Your question, please.

Great. Thanks. Ralph, in the guide, you talked about positive operating leverage in an environment of kind of low single-digit revenue growth. And you made some comments in your closing remarks about operating efficiency. I was wondering if you can expand on that, because I think it's going to take on some increased importance.

Yeah. Last year, we focused on operational excellence. And For us, that means looking at everything we do and doing it more effectively and more efficiently. And we've had some really good success in 2024. That success rolls into 2025. We continue to look at everything we do from a process perspective, from an automation perspective, using artificial intelligence to do things better, faster, and quicker. And all that results in reducing our cost to serve, reducing our cost to acquire, all results in a positive operating leverage. We'll continue to invest in our tech modernization, which drives down our operating expenses. We'll look at expanding mobile and web-based account generation, drives down our expenses, and we'll continue to deploy the right efficiencies across the organization. And I think operating leverage will be something we're focused on every day. So I'm confident that we'll have as we said, positive operating leverage in 2025. The level of positive operating leverage will depend on the macroeconomic environment.

Okay. Maybe as a follow-up and to an earlier question, could you just talk a little bit specifically about the pricing impacts on your expected margin for 2025 and perhaps how much by the end of 2025 you would have expected of the impact of late fees to have been in, you know, your pricing and yield?

Yeah, so what we try to articulate is all the moving parts that we're going to see throughout the year. You know, the headwinds, as we said, it was going to be NIM compression from the current Fed rate cuts as well as what may be a couple more throughout the year. We expect delinquency to hopefully continue to improve. That would have lower billed fees, which means you'll have less loan yield from that. And then, you know, as you go through the year and start to hopefully have better credit losses, you'll get some offset with the lower reversal of interest and fees. And then, to your point, it's the... Yeah, I will then ask you that you still have a product and risk mix shift going on, which will also, you know, the higher quality customer has a lower contractual APR. So those things combined would put pressure on them. Then you have the offset being the mitigation on APRs. And as, you know, we put out on the slide a while ago, it just takes years for the burn-in of all the APR increases to come through. And if you were dealing with a like-for-like population, from, say, two years ago, when you had more private label, who had the highest APRs. Yes, you maybe see a bit more of an impact, but when you're doing a little bit of a tighter, and you're operating in a tighter credit environment with, say, fewer new accounts or higher credit quality, the burning of the new vintage at the higher APRs is less impactful than what it would have been had we been mixed a lot more to private label, as an example. So there's a lot of moving parts, and we will continue to provide more refinements on guidance as we march through the year.

Okay, thank you.

Thank you. And our next question comes from the line of Mihir Bhatia from Bank of America. Your question, please. Good morning, and thank you for taking my question.

I wanted to start by asking about capital returns. You've improved your CET1 ratio. You know, you've been cleaning up your balance sheet. You've talked about lowering the double leverage. So where are we in that process? What are your thoughts on capital returns here heading into 2025? What should we expect? Thank you.

Yeah. Look, we've remained very consistent for the past, I'll say, three years around our capital deployment. First and foremost, we're going to fund responsible, profitable growth. And we've done that. I don't mean I'd always feel like it because we're operating in an environment where you've had elevated losses. We've had you know, tighter underwriting and the like. But that remains our first commitment, and that is what we are doing and will continue to do throughout this year. We continue to invest in, you know, technology and digital capabilities. As Ralph said, now a lot of that now is getting funded through that operational excellence, you know, program we have instituted, you know, we still are not all the way home yet on our capital ratios, so we still need to hit those numbers. You know, we have a goal to build our total risk-based capital to around 16% with CET1, around 14%. Obviously, as we march through the year into next year, we hopefully can optimize our balance here a little bit by introducing some Tier 1 and Tier 2. You know, and then, you know, when we look at What we've achieved, if we've achieved all that, that frees us up then for how do we use capital to deploy it back to shareholders, informed buybacks, or whatever.

Got it. Thanks.

And then I wanted to talk about credit a little bit more. And so like your 2025 guidance, right, it's still about 200 bps, a little bit more than 200 bps above your long-term target. So I'm just wondering, this is a two-part question, but A, do you need to tighten underwriting further to get to your long-term target, or is your current underwriting posture sufficient to get there just from mixed shift and, I guess, a little bit more time passing and easing of the inflation and macro pressures? And then part B is, do you have a timeline you can share on when you can get to your target range, just assuming a stable macro?

Yeah. So, you know, this... It is an excellent question, one that, man, I really wish I had that crystal ball because this one, this macro environment is very different than what most of us have experienced, you know, during our decades of being in the credit card industry. You know, this period of high inflation, higher interest rates, and the pace at which this has moved, and I'll say the slow, steady improvement of inflation, it just takes time. I feel very comfortable with the credit posture we're in. Certainly not a time to loosen because, like you mentioned, we're a couple hundred basis points above where we are. I'll tell you, the recent vintages are performing really well and back in line with what we want to see out of vintage performance. So that means as those come in and as the existing portfolio, I'll say, cleanses a little bit as the riskiest customers kind of charge off, with the new vintages come on, we're bending that curve back down It's just, you know, the first part of the year, the first quarter, we're going to have a loss rate that approaches, you know, the peak we saw in the first quarter of last year of 8.5%. You know, hopefully then we can continue to improve from there. But it goes back to this being macro-dependent on the pace at which this can improve. I mean, structurally, I feel very comfortable with The actions that our credit team has taken, the new partners we're putting on, the new business we're putting on, it's just now working its way through. It's just not going to happen fast because this is not an unemployment-driven environment that's causing the pressure in loss rates, where usually that cleanses out much faster. This is because of the macro environment. It's just a slow, steady process. improving. So again, with our delinquencies trends improving, you know, we think that if that consistently holds, that's a sign that losses are going to come down. And the pace of that improvement is what will drive how quick we get back down to the 6%. But structurally around credit underwriting, the new business we're putting on, it's setting us up to definitely get there. You know, I'm not going to say at the end of the year, that's not likely, but certainly as we march through the end of next year and beyond.

Thank you for taking my questions.

Thank you. And our next question comes from the line of Terry Mott from Barclays. Your question, please.

Hey, thank you. Good morning. I appreciate all the color on NIMS, but maybe just on revenue growth for the year and the guide of low single digits. Any color you can provide on kind of the cadence as we kind of step through the year since you have the mitigants rolling in, should we expect accelerating revenue growth and then maybe you exit the fourth quarter higher than the full year guidance?

Yeah, I think what you're going to see is, you know, net interest margin is, you know, I've kind of walked through the pieces in the first quarter. You're going to have some seasonality in there. Some of this is going to be dependent on the timing of rate cuts throughout the year. Do they happen, you know, in the early part of the year or the late part? If it's later, obviously, then we won't see as much impact from that in terms of compression. If delinquency continues to improve faster, okay, that means we're going to be collecting less late fees, but that should set us up very nicely for the back part of the year with lower losses. So there's just a lot of moving parts on this. And again, we do have the mitigation action that we've got in flight from the potential CFPB late fee rule to help set us up, and that's where we've guided to the full year net interest margin being a little bit higher than what it was last year.

Got it. Okay, then maybe as a follow-up to credit, should we expect the historical relationship between delinquencies and charge-offs to kind of hold, or is there something else there? I seem to recall in prior quarters you guys may have called out elevated roll rates.

Yeah, excellent question. So that is one of the key factors in terms of how delinquency will translate into losses. And to that exact point, what we've been experiencing is some of the highest roll rates in history. So that's what we've been commenting, that we need to see some of that improve. And we are starting to see some slight improvement in all of the different buckets in terms of that roll rate improvement. And if that actually starts to reverse back to, I'll say, historical norms, there should be an acceleration of losses. Now, that trend is very recent, that we see a slight improvement, but really, to get back to that historical correlation between delinquency and losses, there needs to be more material improvement in the roll rates, and that just hasn't manifest yet.

Got it. Thank you.

Thank you. And our next question comes from the line of Dominic Gabriele from Compass Point. Your question, please.

Great. Thanks. Good morning. You guys have talked about a mix shift to higher FICO scores. Maybe just asking Bill's question earlier from a different way. You know, could there, how does this pressure your yields on a like for like basis? Because you're talking about trimming, but the portfolio, I was just curious if this trimming is really around the edges or as things normalize, will the portfolio mix, you know, on average higher, like 10% advantage scores? Like what kind of, mixed shift towards higher FICO scores are we really thinking about, and how does this affect the seasonality of the yields in the business? Nice, I'm a follow-up, thanks.

Yeah, I'd tell you it's going to be very gradual mixed shifts. You know, we've got a A lot of great new partners, de novo programs, it's going to blend in. As credit improves, you know, you can underwrite, I'll say a little deeper, but basically I think that credit scores coming in will be improved. It's just a gradual improvement. I don't think you're going to see a, to use your example, a 10% jump in, you know, Vantage score improvement in terms of mix. happen quickly, could happen over time. We expect to continue to diversify our product set and continue to drive down losses. And if we did have a material mix shift, you would expect our through-the-cycle guy to 6% to go lower than that, and that would also mean we could lower our capital targets. So a lot of these things will play together, but let's just go back to what we put out there in our investor day targets. We are committed to hitting those returns.

All right. Okay, great. And then, you know, your efficiency given the revenue growth has actually been pretty solid. You know, when the company thinks, when the company moves back towards perhaps a normal revenue growth rate, can you talk about scale benefits to the efficiency ratio you have in your business model? And are you guys going to be still focused on expense discipline? I guess I'm just kind of curious if the company, if the management team is happy with the 50 to 51% efficiency ratio as a run rate today. Thanks.

Yeah. Operational excellence is all about efficiency ratio and doing things better and taking advantage of scale and becoming expensive and elastic. So, you know, there's always room for improvement and we'll continue to focus on expense management and continue to focus on scale opportunities.

Great, thanks. Thank you.

And our final question for today comes from the line of Reggie Smith from JP Morgan. Your question, please.

Yes, thank you. Good morning. Did you guys disclose what your Fed rate cut assumption was? And then I was curious, I know that your merchant partners have to approve any APR increases, but have you guys talked about what proportion of your book has been repriced for late fees. Obviously, that takes a while to bleed in. And then on that note, like how, like what could those increases look like? Maybe frame that. And then finally, when those increases are applied, are they kind of uniform by mission, or do you actually look at the different credit tiers? So mechanically, like how does that, how are they pushed down to the consumer? And I have a follow-up. Thank you.

Great. Thanks for the question. So right now we've disclosed that we do have some Fed cuts in there. We've got two cuts in there for the year. Think about that as a mid and late year cut. It's going to be fluid, obviously. I think there's still, you know, different opinions on when that will occur. As it relates to, you know, the APR increases, it's really partner dependent. It's really partner dependent in terms of how much private label do they have. Where are they on their risk profile? A higher credit quality portfolio requires they're less late fee dependent, so they're less impacted. So that may look different. A big ticket merchant looks different in terms of whether they're promotional fees and other things. So it really does vary partner by partner. And that's why I said 95% of those partners have contractual benefits. understanding of what would occur should the late fee change go into effect. Many of those changes are phasing in in preparation for that, and that's really the best we can give you. But it burns in over the course of the year and into next year and the year after because of the way APR increases play through.

Got it. So if I'm hearing this right, 95 have agreed to it. Some have allowed you to go ahead and reprice even in advance of a change. Is that the right way that I'm hearing that correctly?

That's exactly the right way to think about it. We're still phasing in changes.

Got it. And then it sounds like at the merchant level, you're pricing these changes based on the mix. But, like, do you consider individual personal credit profile and performance as well, or is it just universal? So merchant A, like, is a 300 basis points increase, or do you slice and dice within each?

Yes, it varies based on, you know, the credit profile of the cohorts, again, whether they're more late fee-dependent cohorts or not, and then that determines the degree to which the APR increases need to happen in order to ensure appropriate returns for that account for that cohort of customers. Perfect, perfect.

And the last one for me, I wanted to hear, like, your latest thinking on the Bread BNPL product. Haven't talked about it in a while, just curious. I know you guys have tightened credit. I'm not sure if that's what's been the issue with that business, but, like, how are you thinking about that, and how is the white label BNPL resonating with merchants today, given, you know, all of the other options that are out there? I thought that that would be, you know, something really compelling for merchants, but, you know, maybe it's not. So any color there would be great. Thank you.

Yeah, I think our BNPL business will continue to grow. It's regulatory compliant. It's scalable. We're adding new partners very consistently. We're managing it in a very efficient and effective way. Rationality has come back to pricing. And as contracts... expire, we are able to work with our partners and convince them that we have this basket of products and BNPL is one of them and we can give them good pricing, good optionality as we move forward. It's a business for us and we'll continue to manage it as such. With that, I want to thank you all for joining the call today and for your interest in Bread Financial and we look forward to speaking to you the next quarter. Everybody have a terrific day. Thank you.

Thank you, ladies and gentlemen, for your participation at today's conference. This does conclude the program. You may now disconnect. Good day.