Bread Financial Holdings, Inc. Q1 FY2023 Earnings Call

Good morning, and welcome to Bread Financial’s First Quarter Earnings Conference Call. My name is Daisy, and I'll be coordinating your call today. It's now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial to begin. So Brian please go ahead.

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

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 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, Perry will review the financials for the first quarter. We have made great progress in the first quarter including building our total company TCE to TA capital ratio above the 9% level. Starting on Slide 3, our current initiatives centered 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 now we'll 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 long-standing relationship with Signet, the world's largest retailer of diamond jewelry. With the extension of five largest brand partners based on outstanding loan balances, they 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. We fine-tune 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 monetization initiatives, we have begun to leverage the innovative capabilities gained through the Fiserv platform, converting to the cloud and Alberia 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 acknowledgment highlights our team's dedication to creating innovative, transparent, and easy-to-use payment solutions that serve the ever-changing needs of our consumers. We will continue the spirit of innovation with a focus on expanding our digital and mobile customer engagement to provide customers with enhanced experiences. As always, we remain disciplined in our investing to drive long-term growth. Moving to Slide 4. Through our business transformation efforts, we have made decisions to enhance the 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 a more diverse portfolio and brand partner base, strongly positions us to maneuver through the entire economic cycle and outperform historic levels. Slide 5 provides additional color on our balance sheet management and disciplined financial oversight. Starting with our funding, we have a diverse, stable, and growing funding base. Notably, we experienced net positive inflows of deposit balances on our Bread savings direct-to-consumer platform during the first quarter of 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, above 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 to the dedication and commitment of the entire Bread financial team. And in closing, it is that team that has enabled Bread Financial to recently earn a spot on Newsweek's America's Most Trustworthy Companies list of 2023. The essential qualities that underpin successful companies—credibility, transparency, and trustworthiness—are consistent with our values as an organization. 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's financial credit sales were up 7% year-over-year to $7.4 billion. While consumers continue 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 spending 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-branded and proprietary spending now comprise around half of our credit sales. Averaging into period loans increased 17% and 7% respectively year-over-year, driven by credit sales growth, brand partner launches including AAA and the NFL, as well as normalization and further moderation in consumer payment rates. The $2.3 billion BJs 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 BJs portfolio and higher average loan balances. Total non-interest expense has increased 28% year-over-year. The sale of the BJs portfolio also resulted in a loan loss reserve release which benefitted our first quarter net income. Looking at the financials in more detail on Slide 7. Total net interest income was up 13% from the first quarter of 2022 resulting from higher average loan balances. Non-interest income was $172 million in the first quarter, which included the $230 million gain on sale. Total non-interest expenses increased 20% from the first quarter of 2022 and slightly declined sequentially as expected. The year-over-year increase was the result of higher employee compensation and benefits costs driven by increased hiring, inclusive of accelerated digital and technology monetization 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. PP&R improved by 50% year-over-year driven by the gain on portfolio sale. Excluding the sale, PP&R increased by $20 million or 4%, marking the eighth consecutive quarter that we have generated year-over-year PP&R growth. We remain focused on producing quality sustainable earnings. Turning to Slide 8. Loan yields continued to increase up 100 basis points year-over-year. Loan yields benefited from the prime rate moving higher, which results in our variable price loans moving higher in tandem. This increase was partially offset by an increase in the 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 bounce pay downs in the first quarter, combined with the sale of the BJs portfolio, have reduced our funding requirements by over $3.3 billion from year-end. As a result, we opportunistically reduced our wholesale and brokered deposits and paid down a large portion of our secured conduit line balances. Importantly, we recently renewed two of our secured borrowing conduit facilities of approximately $5 billion and expect to renew the remaining upcoming maturing facility of $300 million this quarter. These funding lines provide valuable long-term flexibility and further diversify our company's funding needs. Turning to Slide 9. We are proud of the success and funding diversification we have achieved with our direct-to-consumer deposits. Our direct-to-consumer average deposits grew 70% year-over-year to $5.6 billion for the quarter. These deposits represented 28% of our total funding mix versus 19% a year ago. Again, over 90% of our direct-to-consumer deposits are FDIC insured. Given the repricing characteristics of our credit card portfolio, we're 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 by 80 basis points sequentially to 12.3% predominantly as a result of seasonality and the BJs 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 distribution mix adjusted downward from the fourth quarter as a result of the exit of the BJs portfolio and seasonality. Our percentage of 660 plus cardholders remains materially above pre-pandemic levels given the strategic decisions we have made to diversify our product mix with co-brand and proprietary card representing a larger portion of our portfolio. As Ralph noted, we took proactive credit management actions to protect our balance sheet in the face of more challenging economic conditions. A fundamental element of our business model is to manage our risk tolerance, ensuring that we are properly compensated for the risk we take. We closely monitor our projected returns with the expectation that we generate strong risk-adjusted margins above peer levels. We remain confident in our disciplined credit risk management and our ability to drive sustainable profitable growth through the full economic cycle. Turning to Slide 11. We remain focused on improving our capital metrics while supporting responsible growth and reducing our debt levels in the near term. These steps further our efforts to create additional value for our shareholders and position Bread Financial for continued success. The company's actions over the past three years reflect our commitment to our stated capital priorities, and the positive results of these actions are evident in the graphs on this slide. Our TCE to TA ratio ended the quarter at 9.1%, nearly triple the first quarter of 2020 level. Our leverage continues to reduce with parent-level debt down 39% over the same period. As Ralph said, we remain committed to continuing these improvement trends. As many of you know, we are currently in the process of restructuring that 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 sale, with a full year net interest margin similar to the 2022 full year rate of 19.2%. Our new outlook contemplates one more Fed increase and then holding steady for the remainder of the year. Recall we are slightly NIM accretive with each prime rate increase. We expect to deliver a full year positive operating leverage in 2023. Now, given 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're forecasting depreciation 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 through 2023. We continue to closely monitor macroeconomic indicators, and as we gain clarity on the Federal Reserve's efforts to curb inflation, we will update our expectations accordingly. We expect the second quarter net loss rate to trend upward to around 8%, peaking above 8% in May; we are forecasting that impacts from the previously discussed customer accommodations we made in the fourth quarter of 2022 in connection with the transition of our credit card processing services will inflate the second quarter net loss rate by approximately 100 basis points. Given current delinquency trends, the third quarter net loss rate is 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 the timing of discrete items. We look forward to building upon the company's strong financial results in the first quarter, and we'll continue to execute on our strategic priorities to build long-term value for our shareholders.

Thank you. Our first question today is from Sanjay Sakhrani 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 related to what you guys mentioned on the call. I know Perry talked about a pullback in discretionary spend. I mean, how do you see that sort of following through as we move into the back part of the year?

Yes. It's a great question, Sanjay. I think inflation is still persistent, and it's still there and obviously, some of our current members are feeling the impact more than others. The move from discretionary to non-discretionary spend three years ago would have been more concerning to us, but we've diversified our portfolio of products, so that non-discretionary spend is sticking with us with co-brand program products and a direct-to-consumer product. So we're seeing that as we move forward. We talked about the loss rates, and I think we're not changing our guidance on loss rates. We see 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 concerned going into the quarter. I'm just curious, if we think about tapping into other forms of unsecured debt, like ABS and such, what are the plans, and maybe just the cost differential? I mean, I assume that's been incorporated into the guidance, but was it a significant cost differential on those facilities? Thanks.

Thanks, Sanjay. Yes. 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 is 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 an eager banker out there to support us. So we're excited about what's ahead.

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

Good morning, everyone. On behalf of Bob Napoli, I would like to ask about the business development and partner pipeline. Can you provide some insights into what you expect for sales momentum for the remainder of the year? Thank you.

Sure. Our pipeline, as in the past, remains strong, and what I do really enjoy about our pipeline is a couple of things. One, it's a reality pipeline. We pursue particular partners or new partners. We have a really good chance of securing them, and a really good sense of securing good economics. 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 small and medium-sized partners, de novo partners, all of those are in play in 2023. I think we have another strong pipeline, and I would expect us to be successful as we were in '22 with new partners, and 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 sort of two plus three quarters? Thanks.

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

Thank you. Next question is from Vincent Caintic from Stephens. Vincent, please go ahead. Your line is open.

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

Sure, sure. And thanks for the question. Clearly, we're aware, and we continue to monitor the situation with Loyalty Ventures. As soon as the spinoff was completed, Bread Financial, we've maintained nearly a 20% stake in the standalone Loyalty Ventures business. So we are its largest shareholder from inception, and our interest has always been aligned with Loyalty Ventures' interests. We had hoped and expected the business would grow and thrive. As repeatedly cited in its public disclosures and its bankruptcy filings, Loyalty Ventures' business was 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 are prepared to 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 your bank, which 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.

Yes. I think that's a really good observation. And you can see that in one of the slides that we've had 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 too. As I mentioned, as we look to restructure the parent debt, a big element of it is also paying down a portion. So we will be able to dividend up a significant portion to the parent that's in excess of ratios that we are trying to hold at the banks by the middle level. We can look back historically at the low points 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.

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

Great, thanks. You guys have mentioned that 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 looking for to get increased confidence in the 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 are 14 basis points of that impact inherent in the first quarter. And then there's about 100 basis points still impacting the second quarter. So even as you look at our delinquency numbers right now, they are a little elevated for what you can see as in the later stage delinquency. So that’s what's going to affect the losses in the second quarter and part of July. So you're going to just have to continue. Like, I think if you look at March's loss rate, you can see what largely an 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 going to continue to guide along the way, and every time we have an opportunity, we'll share what we're seeing. But what we can see, which obviously, you can't see, the early stage buckets are looking really good, and the roll rates have improved. And that's what gives us really good line of sight into the third quarter. Again, don't have a lot of great line of sight into the fourth quarter, because fourth quarter losses haven't entered the delinquency stage yet.

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

I'll address that. I think along with the financial services industry, we continue to assess the rulemaking proposal and its potential impacts. The rules are not final yet, and they are currently in a comment period. I think that ends May 3, which could result in some revisions. But those proposed changes 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, are looking at strategies to mitigate any impact. So they are across the board: higher APR changes, different pricing and tier strategies, fees for credit, some restructuring brand partner contracts, and lastly tightening 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 mitigate 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 purchase volume trends 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 to call out? Anything you're paying attention to?

Yes. 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 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 their buying habits. And I think that holds true for online as well.

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

I think you said it well. When you look to the back half of the year, again, thinking that should be in that seven, hopefully a little bit below. Things break away, and we're actively managing credit strategies to get that rate down as well. 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 have 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 prepared to the first half of this year for what we're seeing, where you have those system-related or the conversion-related accommodations in there for the customers, that will not be there. So I expect things to stabilize. We're committed to getting to less than 6% through the cycle. It's just a matter of when will it be based on the depth and length of the cycle.

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 luxury unimpacted month would look like. Just trying to square that with the fact that you're still going to see 100 basis points impact in the next quarter approaching 8%. Was there anything in the number this month for charge-offs that was benefiting you? I know BJs is out of there now. But I thought BJs 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 sounds correct. And so when I talked about March being a largely unimpacted month, it was far less impacted from the conversion. I mean, we had July, which had a very discrete action, and you saw that in July of last year being suppressed by over 100 basis points. Then you saw February spike up. What happened is there were further accommodations made in the fourth quarter. And those accommodations as it related to whether consumers being able to access their accounts or communications or whatever were made, and it caused us to do some things to do customer-friendly actions. That is what's impacting April, May, June, and July. So all four months are impacted by things that we did in the back part of last year, and there wasn't anything too discrete that really impacted March. So that's why I said this was the least impactful 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 we're seeing some other issuers talk about a slowdown in March and April. Is that more of a lapping effect coming out of Omicron? Or are you seeing some continued caution on the part of the consumer? And then as we think about the different cohorts that you've learned to, are you noticing any sort of shifts by income or by credit FICO?

Yes, 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 more broadly, it kind of ties back to the question around the economy and what's going on. 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, 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 are putting pressure on companies, but they're also driving higher loan payments for consumers for their auto loans, home loans, or credit cards. So, you think about, I've talked about this before, that K-economy and excess savings related to stimulus, you talked about lapping that period; that's been depleted largely by middle to lower income Americans, even while the 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, and utilities those are still up a lot from inflation. So, I think that's what's putting pressure on. So we look at consumers. 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 a decline in foot traffic. So those loan trends across the broad consumer group are happening across all consumers but are definitely a little bit more exaggerated for the lower risk scores. So I think that’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 how we've diversified our portfolio.

Got it. Thank you for taking my questions.

Thank you. Our next question is from Bill Carache from Wolfe 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?

Yes. We have really strong relationships with our partners. And I know we're aligned to mitigate any potential changes or impacts that will help both parties if appropriate. I think one of the things we talked about, pushback extending Signet is a true sign that it's a good partnership. 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 all 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-deposit betas are at 44%, which is better relative to your consumer finance peers, who 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 frame how high you expect your cost of interest bearing deposits to rise from here, if your outlook for one more hike is correct?

Yes. I think the way I'd categorize it is we will continue to remain competitive on price. As you know, we have 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. Again, it goes back to the fact that we are variable price, credit card assets. So we're fine continuing to pass along a lot of those increases along the way.

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

Good morning, guys. Thanks for taking the question. I’d like to kind of take your temperature on share repurchases. We obviously recognize that 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 today how are you thinking about share repurchases? 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?

Yes. I appreciate you taking my temperature, Regi. I think a couple of things—as I said, I think we've tripled our TCE to TA ratio in three years. I think that it's the beginning. It's partly we've hit the minimum. And 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. So we'll continue to pay down that debt. And we want to build our capital. So we want to build our capital so we can continue to add partners and have profitable growth. The excess capital will be, of course, returned to our shareholders at some point in time. But I think strengthening the balance sheet, investing in the business, and building our capital is our focus right now.

Understood. And one follow-up, I guess, on Bread Pay. You guys put out a presentation during the quarter. Maybe my math is off, but it suggested that credit sales for Bread Pay were probably below $500 million. Now I know you guys are giving a $10 billion sales figure a while ago and kind of pulled back from that. But is my math right? And so what’s happened? What’s your thinking on Bread Pay? Why has that kind of not materialized as the market has kind of grown?

I mean, I think the way we think about Bread Pay, particularly as the markets move, 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 installment loans. It's an option for people, but it's not the only product we have. We've diversified our portfolio, and we've diversified our partners. So it's part of a 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 consider there?

Well, I'll answer that and I'll let Perry back me up. There is performance at a level that there is not a risk of impairment.

Correct.

Thank you. We have no further questions. So I'd like to hand back to Ralph Andretta for closing remarks.

So 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.