Bread Financial Holdings, Inc. Q2 FY2023 Earnings Call

Good morning, and welcome to Bread Financial's Second Quarter Earnings Conference Call. My name is Emily, and I'll be coordinating your call today. At this time, all parties have been placed on a listen-only mode. Following today’s presentation, the floor will be open for questions. It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. The floor is yours.

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

Thank you, Brian, and good morning to everyone joining the call. I'd like to start the call today by welcoming Joyce Sinclair, a veteran Financial Services senior executive, to our Board of Directors. Joyce most recently completed a successful 30-year tenure with Northern Trust. We are thrilled to have her serve as a member of our Board as well as on our Board's compensation, human capital, and risk committees. We look forward to the value she brings to the Board through extensive insights, perspectives, and experience. Starting with the key highlights for the quarter on slide 3. We achieved another major milestone towards our long-term financial goals in the second quarter, refinancing and reducing our parent unsecured debt by more than $500 million. Our management team has made it a priority to reduce our leverage, and the company took another meaningful step forward this quarter in that regard. Tangible book value per share exceeded $38 at quarter end. Importantly, we continue to deliver improved tangible book value for our shareholders, with growth of 23% versus the same period a year ago. Earlier today, we announced we will provide a private label credit program for Dell Technologies, a leading technology provider with the industry's broadest technology and services portfolio. The definitive agreement to acquire Dell's consumer portfolio is expected to close in the fourth quarter of this year. The Dell Pay program will include a broad suite of payment solutions and expands our position in the consumer technology market. We will continue to leverage our deep financial services industry expertise, upgraded technology, and sophisticated data and analytics capabilities to drive value for our partners. Moving to the economy. Numerous macroeconomic headwinds, including prolonged inflation, rapidly rising interest rates, and a tightening job market, have weighed on our consumers and influenced a slowdown in credit sales. These headwinds tend to disproportionately impact moderate-income Americans, including our customers' spending decisions. In certain areas like beauty and travel and entertainment, we are seeing continued strong year-over-year growth. However, in other areas like specialty apparel, spending has softened, declining year-over-year. Given the ongoing macroeconomic pressures facing consumers, we continue to proactively and responsibly tighten our underwriting and credit line management. Even prior to the pandemic, we proactively managed our exposure by tightening approval rates, pausing line increases, and implementing line decreases where prudent. We will continue to closely monitor consumer health and spending behaviors and adjust to changing economic conditions. Turning to slide 4. Our current focus areas for 2023 are growing responsibly, strengthening our balance sheet, optimizing data and technology, and strategically investing in our business. Our management team is committed to driving sustainable, profitable growth that will deliver long-term shareholder value. We continue to selectively pursue new partnership opportunities that will be accretive to our business, considering both de novo and partners with existing portfolios, and enhancing our balance sheet remains a top priority and is integral to our long-term strategy. As I mentioned, we have made additional progress building capital and reducing our parent unsecured debt in the second quarter, coupled with strong free cash flow generation. Our balance sheet management actions further enhance our financial resilience and provide additional flexibility for capital utilization, including supporting continued business growth, debt reduction, and future capital distribution. We will continue to build our capital position, refine and improve our funding structure, and proactively manage our credit liquidity and interest rate risk to build our balance sheet strength. On the data and technology front, we continue to leverage innovative capabilities gained from our platform conversion, system enhancements, and expanded product portfolio. We have successfully utilized machine learning for many years to build strong credit risk models to enhance underwriting, line management, and collections. We will continue to invest in a range of technology innovations from data and customer analytics to self-service and digital capabilities as we continually strive to deliver exceptional value and experiences for our customers. Our goal is to continuously generate expense efficiencies to reinvest in our business to support responsible growth and achieve our targeted returns. Slide 5 includes financial highlights resulting from the prudent balance sheet management actions over the past three years since I've joined the company. Starting with funding, we have diversified our base with direct-to-consumer deposit growth of $4.8 billion since the first quarter of 2020, as we have reached $6 billion in consumer deposits at quarter end. We remain confident in our ability to efficiently fund our long-term growth objectives and further broaden our funding base with continued growth from direct-to-consumer deposits going forward. As mentioned previously, we have made great progress executing our parent debt plan in the second quarter. Steps included successfully refinancing our term loan and revolving line of credit, completing our convertible notes offering, executing our tender offer, and receiving bank board approval for a $500 million dividend to the parent company to facilitate debt reduction. As a result, since 2020, we have reduced our parent-level debt by 55%, paying down more than $1.7 billion. Additionally, since the first quarter of 2020, we have more than tripled our TCE to TA ratio. Finally, while our reserve rate remained steady compared to the last quarter, we expanded our credit loss absorption capacity with a reserve rate 300 basis points higher than our CECL day one rate in 2020. These significant changes over the past three years demonstrate our success in strengthening our balance sheet and managing our business responsibly to deliver long-term value for shareholders. Overall, we are pleased with our second quarter results and the progress we have achieved. Our associates continue to navigate through a changing environment with confidence and tenacity in achieving our goals, winning new partners, strengthening our balance sheet, gaining efficiencies, and providing a positive customer experience. Our leadership team appreciates their hard work and their dedication on behalf of our many stakeholders. Together, we remain focused on driving our performance to achieve sustainable, profitable growth that builds shareholder value over time. Now, I'll turn it over to Perry to discuss the financials for the quarter.

Thanks, Ralph. Slide 6 provides our second quarter financial highlights. Bread Financial’s credit sales were down 13% year-over-year to $7.1 billion, driven by the sale of the BJ's portfolio in the first quarter, coupled with moderating consumer spending. This was partially offset by our continued new partner growth. Additionally, we have taken action over the past year to responsibly tighten our underwriting and credit line assignments for both new and existing customers given the economic uncertainties and the economic pressures affecting a larger portion of our customer base. Average end-of-period loans increased 4% and 1% respectively year-over-year. These increases were driven by the addition of new partners as well as further moderation in the consumer payment rate, mostly offset by the sale of the BJ's portfolio. Revenue for the quarter was $1 billion, up 7% resulting from higher average credit card balances and noninterest income, partially offset by increased reversals of interest and fees resulting from higher gross losses in the quarter. Total noninterest expenses increased 12% year-over-year. Looking at the financials in more detail on slide 7. Total net interest income was up 1% from the second quarter of 2022 and with NIM nearly flat year-over-year. Total noninterest expenses increased 12% from the second quarter of 2022, yet declined 3% sequentially. The year-over-year increase was partially the result of higher employee compensation and benefits costs due to increased hiring to support our investment in both technology and digital capabilities. We also incurred elevated collection costs as well as higher carbon processing costs, including fraud. The sequential decline in expenses was driven by lower variable costs from lower sales and strategic credit tightening and expense efficiencies. We expect certain expense efficiencies to continue in the third quarter, resulting in lower sequential expenses in the third quarter, including an approximately $12 million sequential decline in depreciation and amortization costs. Additional details on expense drivers can be found in the appendix of the slide deck. Income from continuing operations was up $52 million for the quarter versus the second quarter of 2022, reflecting a lower provision for credit losses while PPNR marginally increased year-over-year. Turning to slide 8. Loan yields continued to increase, up 110 basis points year-over-year. Loan yields benefited from an upward trend in the prime rate, causing our variable price loans to move higher in tandem. Both loan yield and net interest margin were pressured by an increase in the reversal of interest and fees related to elevated credit losses. Funding costs continue to rise and remain in line with our expectations. As you can see on the bottom right graph, we continue to improve our funding mix to our actions to grow our direct-to-consumer deposits while maintaining the flexibility of secured and wholesale funding. The reduction in secured borrowings this quarter is a result of the sale of BJ's portfolio in February. As Ralph discussed, we are pleased with the progress we made during the quarter in executing our parent debt plan, including refinancing our term loan and revolving line of credit, extending certain of our debt maturities, and reducing our unsecured debt. Turning to slide 9. We are proud of the success and funding diversification we have achieved from growth in our direct-to-consumer deposits. Our direct-to-consumer average deposits grew 51% year-over-year to $5.8 billion for the quarter with current balances standing at over $6 billion. These deposits, which are over 90% FDIC insured, represented 33% of our total funding mix versus 22% a year ago. Notably, we experienced net positive inflows of direct-to-consumer deposit balances during each week of the second quarter. As expected, we are seeing more competition in the online deposit space. We'll remain opportunistic yet prudent as we continue to grow our direct-to-consumer funding. Given the repricing characteristics of our credit card portfolio and low deposit gathering costs, we are able to offer very competitive rates to drive growth and maintain balance stability. Moving to credit on slide 10. Our delinquency rate for the second quarter was 5.5%, down slightly from the first quarter as expected, with the impact from the transition of our credit card processing services abating. The net loss rate was 8.0% for the quarter. We estimate the second quarter rate was elevated by approximately 100 basis points from the customer accommodations made last year related to the transition of our credit card processing services. The reserve rate remained flat sequentially at 12.3% as key forward-looking macroeconomic indicators began showing signs of stability. We intend to maintain a conservative weighting of economic scenarios in our credit reserve model in anticipation of ongoing macroeconomic challenges and the consequential impact on our credit reserves. From what we see now, both in terms of the internal credit quality characteristics of our loan portfolio and the macro outlook, we believe the reserve rate may have peaked and will now hold steady for a period of time. Additionally, our credit risk score distribution mix improved modestly from the first quarter. Our percentage of cardholders with 660-plus credit score remains materially above pre-pandemic levels given our prudent credit tightening mix and a more diversified product mix with co-branded proprietary cards representing a larger portion of the portfolio. Turning to slide 11. We've continued to enhance our financial resilience by taking a number of actions. As Ralph mentioned in his remarks, we continue to proactively manage our credit risk to protect our balance sheet in the face of more challenging economic conditions. Consistently managing our risk tolerance ensures we are appropriately compensated for the risk we take. We closely monitor our projected returns with the goal of generating strong risk-adjusted margins above our peers. Additionally, we continue to responsibly manage risk-return trade-offs by tightening credit, which includes pausing credit line increases and implementing credit line decreases when necessary. We remain confident in our disciplined credit risk management and our ability to drive sustainable value through the full economic cycle. We are committed to delivering responsible profitable growth, even if it means slowing growth during more uncertain economic periods. Moving to slide 12. Ralph already touched on the notable improvements we've achieved in our capital metrics and debt levels. While we have made substantial improvements to strengthen our balance sheet since 2020, we still have some additional opportunities ahead. Specifically, we aim to build our total company capital metrics closer to those of our peers, while reducing our double leverage ratio from where we are today. We will balance achieving these targets with continued investments in our business and responsible growth aligned with our capital priorities. Our actions over the past three years provide greater financial flexibility to support our long-term growth plans, which we will detail during our Investor Day in 2024. Before moving to our 2023 outlook, I would highlight the improvement in our tangible book value per share as shown on the graph on the right side of slide 12. We have generated a 33% compound annual growth rate in our tangible book value per common share since the first quarter of 2020, and given our strong cash flow generation, we expect to continue to further grow our tangible book value over time. This growth, combined with our meaningfully improved financial resilience and a strengthened balance sheet, should yield a company valuation that is a multiple of tangible book value. We remain confident in our strategic direction and we'll continue to execute on our initiatives to build long-term value. Finally, slide 13 provides our financial outlook for the full year 2023. Our financial outlook has been updated to reflect slowing sales growth as a result of both self-moderated consumer spending and our targeted credit tightening. For the full year, average loans are expected to grow in the low to mid-single-digit range relative to 2022 based on the latest economic outlook impacting consumer spend, our credit strategies, and current new partner pipeline, including the announcement of the Dell consumer credit portfolio acquisition, which is expected to close in the fourth quarter of this year. That Dell-acquired portfolio is expected to be less than $500 million, which is in our historical sweet spot for portfolio acquisitions and is projected to drive strong risk-adjusted returns. We expect revenue growth to be slightly above our average loan growth in 2023, excluding the gain on sale from the portfolio sale, with a full year net interest margin similar to the 2022 full year rate of 19.2%. We continue to expect second half 2023 total expenses to be lower than the first half of the year, with third quarter expenses to be lower than the second quarter, driven by improved operating efficiencies related to our technology modernization efforts and lower intangible amortization expense. With a previously capitalized software development project reaching the end of its useful life in the second quarter, we forecast depreciation and amortization expense to decline in the third quarter to a run rate below $25 million per quarter. We have refined our net loss rate outlook as we now anticipate the full year 2023 rate will be in the low to mid-7% range, including impacts from the transition of our credit card processing services. While our tighter underwriting and credit line management should benefit future loss performance, these actions create a near-term headwind for the remainder of 2023's loss rate by lowering our projected loan balance, which forms the denominator in the net loss rate equation. Our economic outlook assumes inflation remains elevated but moderates, with a gradual increase in the unemployment rate for the remainder of 2023. We expect the third quarter net loss rate to be around 7%, which likely represents the last month that is anticipated to reflect an impact from the transition of our credit card processing services. Our full year normalized effective tax rate is expected to remain in the range of 25% to 26%, with quarter-over-quarter variability to timing of certain discrete items. Finally, this morning, we announced that the Board approved a share repurchase authorization intended to offset share count dilution in 2023 and bring our weighted average diluted share count back closer to 50 million shares for the second half of 2023. In closing, we are prudently managing risk-return trade-offs through a challenging macroeconomic environment while continuing to strategically invest and drive long-term value for our stakeholders.

Thank you. Our first question today comes from Sanjay Sakhrani from KBW. Sanjay, please go ahead.

Thanks. Good morning, and good results in a tough backdrop. First question is for Ralph. It seems we are moving towards this final rule around late fees. Pretty much at the same level as the preliminary proposal. Maybe you could just give us an update on the plan to offset the impact and what kind of feedback you're getting from your partners?

Yeah, so now I’ll let Perry chime in. We've been anticipating this for a while and we continue to look at alternative ways to close that gap, displaying opening with our organization, so the themes haven't changed. We're looking at APRs. We're looking at fees for credit and we're looking at other things such as where we draw the line on underwriting for credit. Those are all things that we've been looking at from the beginning, and we'll continue to look at as we move forward. Anything to add, Perry?

No, I was going to say similar to what you're probably already aware of when you've heard the rules aren't final, expecting something probably in October. Expect those rules are likely to be challenged in the court by industry associations, and that can result in a lengthy process before any new rules become effective. I think Ralph talked about all the different things but throughout this, the team is working closely with partners, and our objective is to really try to make sure that our partner economics are not impacted by this. We're in this together as what's called a partnership.

Okay. And then just a follow-up for you, Perry. The slower growth, I assume a lot of this slower growth is being driven by your tightening the box a little bit. I'm just curious if that’s the right assumption, or do you see diminishing demand for loans? And then maybe you could just also help us think about the capital return. It's a good positive step, the small capital return, but at what point can you ramp it up in terms of the TCE ratio? Thanks.

Yeah. So, related to the outlook we gave on the consumer loan growth. I'd say it's a combination of two things. One, our own credit tightening, but also when you think about things we talked about with the key economy and the people who are most impacted by inflation, they're self-moderating their spend. So, we are seeing some slowing in moderating spend, and that's built into our outlook. So, it's a combination of those two things that are impacting loan growth when you have periods of elevated gross losses that also can temper growth by, say, a percentage point at this time. As it relates to the capital returns, I think Ralph has stated very clearly in the past what our capital priorities are. We're going to continue to strengthen our balance sheet, make sure we improve our capital ratios as we set those targets. Continue to use capital, pay down debt, support growth in the business. So really, this repurchase is nothing more than what is already in our capital plan, and we'll call it good housekeeping and keeping our share count around that $50 million range.

Great. Thank you.

Thank you. Good morning. And congratulations on the dramatic improvement in the balance sheet. That's really appreciated, pretty substantial. So, on your in your presentation, Ralph and Perry, you do kind of reiterate you're comfortable with a 6% charge-off rate through the cycle. What we're above 6% now. What gives you the confidence in that? It looks to me like your mix from a couple of years ago has actually become a little bit more subprime. So I just would like to understand how you have confidence in that type of a charge-off rate through a cycle.

Yes. I think the way to think about it is when you look at through the cycles, and when we've evaluated cycles, a cycle can be a 10-year from peak-to-peak, trough-to-trough, 10 to 15 years. So you're going to have periods when it runs through the cycle average of 6%. You’re going to have quarters and years where you’re above 6%, and then you're going to have years when you’re below 6%. Our credit profile continues to improve compared to where we were pre-pandemic. Some of the movement that you just noted, when you look back a year ago, we had BJ's in our portfolio, which was a greater mix in there. So that had a better-than-average credit score. So that coming out, new partners coming in, each partner has a different set of credit profile, but we are managing this over time to achieve that 6%. So really, in terms of when we come back below 6%, is going to be much dependent on when the economy improves. A prolonged period will be at or below 6%, so you blend back out.

I hear you. Unemployment is quite low, which presents a challenge. I don't foresee unemployment dropping much lower in the future. Regarding the Dell win, it's encouraging to see DEP, and it might provide insight into the pipeline of potential new business. Also, does Dell bring along a portfolio?

Yes. This is Ralph. Dell comes with a portfolio around our sweet spot. So, we're very excited to onboard them in the fourth quarter. The pipeline remains very robust, and it's robust up and down the line from de novos to those partners with portfolios. One of the things that we are really excited about is we can compete up and down that line for the $100 million portfolio and the $500 million portfolios and above because we have an array of products now that can address all consumers' needs. So we're excited about it. We're getting invited to a lot of RFPs, and business development continues to be strong.

I want to follow back up on your point about that unemployment is low right now. That's absolutely a fair point. And the thing that we've talked about for the past year is what's driving our loss rate up right now is the elevated level of inflation and that persistently high inflation that consumers are experiencing. If you think about what consumers have experienced recently, the average American earns $67,000. Well, their monthly bills are up $250 from a year ago and $750 two years ago. And that's what's putting pressure on consumers and their ability to pay. So, while unemployment is low, the real problem is inflation and persistent inflation that's impacting moderate and lower-income Americans. We're all focused on what the Fed is doing, are they going to get inflation under control? If inflation eases, that can give relief to consumers. You'd expect then wage growth to outpace inflation, and then consumers can feel that relief. These are all different periods when you're in different economic cycles, and this one is really inflation-driven, causing the pressure. Over time, I expect inflation to come down, which will create some relief for our broader consumers. Yes, unemployment may tick up, but I don't expect it to be a compounding impact.

Thank you. Just to sneak in one more, student loans. What's your effect, your view, and your analysis of the effect on your business from the repayment of student loans?

Yeah. So we have good line of sight to that around student loans. When we underwrite customers, who have a student loan, we can see that. We monitor their performance and then we take action as necessary. What I'd say is less than one-quarter of our portfolio has a student loan, but what I think is going to happen while we expect there — we know what happened with the ruling that they can't forgive debt outright. The administration is working to come up with other ways to give some relief to consumers, and that's something that we're watching. The Department of Education has within their rights to recalculate how the payment requirements are determined in terms of minimum payment as a percent of discretionary income. They're able to look at how they calculate the per income and then moving from 10% of discretionary income to pay down student debt to 5% and then making it $0 for people who have minimum wage or waiving that entirely for people at 20 to 25 years of it. I don't think it's going to have a large impact, but it's something we actively will monitor.

Good morning, and thank you for your questions. I want to start by discussing the second quarter. What specifically changed during this time? Are there data points that are causing you concern? It appears that you tightened underwriting even further this quarter, which is contributing to lower sales growth. This, in turn, is affecting loan growth. You've also raised your credit guidance, which seems to suggest some denominator effect is at play. What exactly has changed in the last three months? Did the second quarter perform below your expectations? Are you observing any shifts in the macro environment or in your internal data? I'm trying to understand what's different today compared to three months ago, especially since many investors are optimistic about a soft landing. What changes are you seeing in your data?

Yeah. It's a really good question. And so let me start by telling you what's going on with the economy more broadly and then how that informs the way we think about credit and how that, how we're seeing that play itself through an actual performance of consumers. So when we think about the economy, look, we think the economy and the consumer is resilient. So we'll start with that. But there's a lot of uncertainty in terms of how they're dealing with the persistent headwinds that are out there. While some of the signs are steadying and even showing signs of improvement, the economy is starting to slow. If we look at U.S. retail sales year-over-year since March, they're only up 1% to 2%, and that's with inflation north of 3%. So that means real spending is down. That's the lowest level since 2019. A lot of economists were concerned about a potential recession back then before it was preempted by the pandemic. During this period of time, inflation has remained elevated, while it's been improving. If you think about shelter and food, they're still significantly up year-over-year. And if you think about the comment I made about that average consumer income is $67,000 and how much more they're paying in their monthly bills today. We're seeing some headlines out there. There are more layoffs coming. You see the impact of higher interest rates starting to pull through. Consumer sentiment fell in April and May, but the good news is you're starting to see, okay, we had June sentiment improved; wage growth outpaced inflation for the first time since February of 2021. But that compounding effect over that period of time is weighing on consumers. So that's forward while the market is steady, both in terms of the job market and the stock market. So those factors are influencing improving consumer sentiment in the month of June. That said, we’re seeing pressure in sales in July, and we hear and listen to our partners. I think that's kind of caused a little bit of a contraction in the third quarter. This is all about the economy that we've talked about many times in the past where you think about us as a full spectrum lender, right? Modern middle-income Americans are more affected by the economic conditions than upper, I'll say, middle-class Americans. Most of these folks have depleted their savings. It's a growing cohort of people who are struggling to make their costs every month due to things like shelter and food prices that are way up. We're observing consumers are doing the best they can to work through this, but they're feeling the pressure, and they're adjusting their spending. The slower spend that we're observing is happening across all the consumer groups, but really exaggerated for lower-risk score customers. That’s what we're watching. Then we're doing credit pullbacks along the way, not like we just started this quarter. But as a compounding effect of those credit pullbacks now we're getting more line of sight into consumer demand pulling back, coupled with our actions gives us better line of sight into what the back half of the year is looking like. Honestly, we need a prolonged period where household wage growth outpaces this inflation with employment remaining steady for these customers, I think, to resume the type of robust spending. While they're still spending, we’re saying that it's a little more tempered than what we thought it was going to be. We’ve stated Ralph and I have said many times, we're focused on responsible growth.

No, I appreciate that. It's quite helpful for us. I just wanted to follow up quickly on Sanjay's question. In the answer, I think Perry mentioned something about ensuring that partners' economics are not affected by the late fee rule. Can you expand on that? Additionally, could you discuss your conversations with your partners regarding this issue? How are they perceiving it? How much attention are they giving to it? How willing are they to adjust the program accordingly? Thank you.

Yes. What I would say is that we're having productive discussions with the partners. I think they appreciate the fact that we have to make some contractual changes, pricing changes, and the ones that Ralph mentioned. Without some of those adjustments, there's going to, or perhaps even with some of their own contracts, we may have to reduce the people we're able to underwrite. That would mean restricting credit, which then could also impact our ability to enable sales. Those are conversations that probably look different for each partner. Some partners are going to be more impacted by this proposed rule change than others. So again, it looks different for each partner. None of us like the proposed rule change, partners included, but I think they're all starting to better understand it and working jointly to figure out how do we mitigate it. So we're able to continue to lend to the customers who they serve.

Hey, good morning, guys. Appreciate you taking my question here. Just wanted to understand a little bit better what you're seeing under the hood in your portfolio. I think there has been a bit of a narrative that the lowest quality, lowest income credits are maybe starting to stabilize a little bit. Are you guys seeing that? I know, Perry, you just alluded to some pressure on the low mid-income consumer. Maybe just an update on the internals there. And then maybe more specifically, can you give us an update on what percentage of your borrowers are maybe doing a minimum payment now versus last quarter or a year ago?

Yes, when we look at our delinquency rates, we see stabilization, which gives me confidence in guiding the second quarter loss rate to be about 100 basis points lower. The third quarter loss ratio is also projected to be 100 basis points below the second quarter loss rate due to our insight into delinquency formation. Payment rates continue to decline compared to the first quarter. We are closely monitoring these trends, and we're observing some stabilization in part due to the credit actions we've taken. We need to keep a watchful eye on this, and hopefully, improvements in inflation will provide some relief. However, certain categories remain elevated, so we remain vigilant.

Okay. And then just in terms of spending, I know BJ's is kind of distorting the year-over-year noise of that 30% decline. But any way to think about kind of the BJ's growth you're seeing and how July is trending so far in the consumer spending front? I know your comment thinks about some weakness in the retail sales for July. I'm just trying to get a better sense of how consumers are spending within your book and whether they’re still continuing to kind of trade down, like you said before?

Yes. This is Ralph. I think, let's put BJ's in perspective: it was a high spend, high transactor book. Those are the effects that you're seeing. We have new partners coming on. We're seeing growth with some new partners as they came on the book. Spending in July was a little softer than June. We've turned the corner in June; spending was a little softer. What I see is that consumers are still spending, but they're self-regulating. So, they're spending thoughtfully instead of spending in a different way, which I think is a good thing. So, they're managing their budget in a period of time when they have to with high inflation and high interest rates. So, I expect that will continue for some period of time. But as we bring on new partners, we see growing spend.

Thank you. Good morning, Ralph and Perry. I wanted to follow up on your commentary around building capital closer to your peers. The growth in your tangible common equity has been impressive, but most of your peers tend to have CET1 targets in the 11% range at the enterprise level? Is there a comparable enterprise-level CET1 metric that you think about internally? It seems like you guys are getting close, but it'd be great to hear from you how close you think you are?

Yes. I mean, look, we're closing in on it, right? But for us, our total risk-based capital is our binding constraint. That's something that we are continuing to evaluate what's the right target for us. For getting closer to peers, remember, every company has a slightly different target rate based on their internal stress models and the profile of their business. We made tremendous progress, as you've noted, and we're getting close. But we still have more room to go, and as well as continue to improve that double leverage ratio, which means paying down debt a little bit further.

Thanks so much for taking my question, and good morning, everybody. A peer of yours talked about recouping some of the late fee revenue through offsets would take 'years.' I was wondering how you think about that timing? Do you think that if you've got a head start on this, it's more of a two to three quarter impact, or is this really measured in years to fully recoup the offset late fees coming down? And I just have a follow-up. Thank you.

Thanks, Dominick. Yes, I think it really goes to the dynamic of the lever that you pull. As we think about the levers we do across-the-board APR increases that we think would happen? Yes, as soon as you hear the announcement, you may start to increase APRs for new accounts and existing customers, and then say the effect goes in 12 months later. The way the CARD Act has the payment hierarchy rules, it pays off the highest APR first and then the low. So, it's going to take a bit of a burn-in period for that to happen for us to realize the benefits of the higher APRs on existing account balances. New accounts, you get that benefit as soon as you book the new account. So for those, they look a little different. What determines the phase-in of this is the amount of new volume that comes on through new accounts and the churn in your portfolio, and that existing account base is really, I think, what they're speaking to about how long it would take to fully mitigate. Transaction fees, annual fees, and things like that partner agreements will have a much faster burn in. But I think they're speaking to being 100% mitigated; just the CARD Act aspect could take a longer period on existing balances. It's really the degree to which the last dollar is fully mitigated. Maybe it does take years. It just depends on, I think, the profile of the portfolio.

It seems like if we were to calculate the turnover of the total portfolio, that's pretty much what I'm hearing. Does that sound correct?

That is an element that goes into the factor at the pace at which it gets offset.

Okay. Cool. I really appreciate that. And then if we just think about the processing expenses as a percentage of credit sales, I believe that was about 1.6% this quarter, and it was last quarter, but it's up from 1% the previous year. I'm just trying to think about some of the efficiencies that you're targeting. I know that you've talked about modest efficiency gains, and we've seen some real progress over the last few years. But maybe you could just talk about what may have changed to elevate that percentage and where you think that percentage should trend out, and some of the factors? Thanks.

Yeah. I think what I would say is, over time, I would expect us to continue to be able to see that rate come back down. It was elevated in the first half of this year, in part because of the conversion-related expense carryover driving out those efficiencies yet coupled with elevated fraud that's been seen across the industry. Again, that's something the industry always has to grapple with. It's been a little elevated across the entire industry in the first half of the year, and expect that to get back in line over time.

Good morning. I appreciate the opportunity to ask a question. Most of my inquiries have been addressed, but I wanted to explore the topic of tightening credit bands and standards. My question is whether there are any contractual limits on how high you can set APRs on new accounts. I'm curious since your business involves pricing risk, and I'm wondering if there's a possibility to accept more applicants or open additional accounts at a higher APR, or if you're already at that limit.

There are not limits, but we want to be responsible and competitive in the environment that we work in. So while there are not limits, our view is we've got to be reasonable and respectful and competitive.

Good morning. Thanks for taking my question as well. Just to return to the spending outlook discussion and observations. I’m wondering, it was helpful. You provided very early in your prepared remarks talking about the verticals that you were seeing changes to, and specifically, specialty apparel, it sounded like was where you were seeing a fair amount of the moderation. I'm wondering, I guess it's a two-part question. One is maybe just an update on some of the vertical exposure sort of the mix, and secondly, as you think about your historical exposure to very discretionary verticals like jewelry. I think you highlighted travel as holding in there, whether that's something that may be next in line for moderation. Can you just talk about whether this slowdown is likely to be more broad-based and whether there are discretionary verticals that are now representing a considerable mix of the portfolio?

Yes. I think since 2020, we've really diversified and derisked our portfolio. Coming back in 2020, the wrap was soft goods retail mall base. If you look at the verticals now, just take our announcement today with Dell, we’ve got a technology vertical, we’ve got AAA and tech travel entertainment, automotive. We’ve got a number of verticals, beauty as well. All those verticals, we no longer have that concentration risk. So as we think about it, travel and entertainment and beauty are really holding extremely well and actually growing. While we see a little bit of decline in soft goods, we see an increase in those areas. Remember, our portfolio is very different than it was. We now have a lot of general spend and discretionary spend because we’ve migrated to co-brand cards, and 50% of our spend and those sales and categories are up.

I think to the point you're making, it's another aspect that influences our sales growth is the growth of each partner. Partners who are growing and capturing more share, I’ll say, in favor of the consumer are clearly going to do better than others who maybe aren't. We're not giving any specifics on any one partner in particular, but partner performance is certainly something that factors in, and we have some — as Ralph mentioned, we're doing extraordinarily well and others in this environment are feeling pressure a little differently. It’s the way you're thinking of it; I'm not saying about any particular partner. But you're right, as you read their own headlines, that will influence our tender share.

Hey guys. Thank you for taking my question. Did I want to clarify a little bit on just net interest income? Maybe if you could give us a little bit of seasonality in the next few quarters. What should we assume on that? And then also on the sale portfolio, I wanted to ask if that was included already in the guide or this is on top of that? Thank you.

Well, I'll tell you, first, I'll start with the Dell portfolio that's absolutely within the guide. We were aware of that. When we talk about our guidance, we're including things that are in the pipeline as well as our best view of the economy. So Dell was certainly in our guide. As it relates to net interest margin, we talked about there are lots of moving parts, pluses and minuses. We expect the full year to be close to the same rate that we had last year. The second quarter is going to get variability with each of the quarters. It was impacted a lot by purifications related to the elevated losses, so that dragged down the net interest margin. Seasonally, the third quarter is normally a high point. In our case, you're going to also then see an improvement because of the lower loss expectation, which means less of a drag on net interest margins related to those effective losses. The second half of the year is obviously mathematically going to be higher than the first half to get to that average of 19.2. When you look at the third and the fourth quarter, I talked earlier about losses being sequentially higher than the third quarter by about 50 basis points; that means purification will be a little bit higher in the reversal of interest and fee impact and net interest margin in the fourth quarter than what it was in the third quarter. So, you'll get a little bit of bouncing around of the net interest margin. But again, with our line of sight into it, it will be higher than what we saw in the first half of the year.

Perfect. Thank you so much. And one quick last question. RFP this quarter, what drove the benefit? And should we expect to kind of the same levels going forward? Thank you.

As it related to the RFP this quarter, it's really based on lower sales originations.

Good morning.

Good morning.

Good morning.

The loss on the discontinued operations, the $16 million or $0.32 a share. What did that relate to? Was it a revenue-driven loss or just a traditional operating loss, or is there a reserve charge taken there related to LoyaltyOne?

Yeah. What's in discontinued ops this quarter is associated with some small charges that relate to discontinued legacy businesses, including LoyaltyOne and Epsilon.

Has the reserve charge been taken for any potential litigation in the Loyalty business?

No. This has nothing to do with anything related to the spin.

Okay. And at this point, we've not been sued by that litigation trust. I know everybody has been talking about.

Yes. I think I mentioned a little earlier before, that the pipeline is very robust. One of the things that we're very pleased with is we're being ported on certain initiatives, and we're winning more than our share. We're less reliant on any one partner due to our diversification as we think about it. As our renewals go, we have nearly 85% of our loans secured through 2025, and our top five brands have been renewed through 2028. We have a good outlook and are pretty secure. We look at renewals now earlier and we look at our pipeline and determine what is our percentage of winning, and how would we go about it? We have a basket of products now that we can offer our partners and their customers on how they want to borrow. We feel very, very good about the pipeline. We feel very good about our results, and we feel very good about our renewals.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.