Bread Financial Holdings, Inc. Q1 FY2024 Earnings Call

Good morning, and welcome to Bread Financial's First Quarter Earnings Conference Call. My name is Shannon, and I will be coordinating your call today. It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial.

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 Beberman, 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 is included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta.

Thank you, Brian, and good morning to everyone joining the call. Starting with the key highlights from the first quarter on Slide 3. I am pleased with our solid start to the year. During the quarter, we generated net income of $134 million and earnings per diluted share of $2.70 driven by a strong risk-adjusted loan yield despite higher credit losses as expected. Importantly, we continue to strengthen our balance sheet. We increased our tangible book value by 20% year-over-year to nearly $46 per share, increased our direct-to-consumer deposits to $7 billion, and continue to improve our regulatory capital ratios. Our solid financial position was acknowledged by the investment community as evidenced by strong investor demand for our 2023 senior unsecured notes offerings, which we opportunistically upsize in January of this year. This extended the majority of our debt maturities to 2029. At the same time, we reduced our parent-level debt by $100 million. Additionally, we completed $11 million of our $30 million share repurchase authorization in the quarter. On the economic front, consumer spending in the first quarter continued to moderate given persistent inflation and higher interest rates; we observed a continued reduction in discretionary and big-ticket spending in the quarter, with many consumers focusing on nondiscretionary purchases. Although consumers increased the frequency of shopping in-store and online, average transaction value decreased on the nondiscretionary purchases, pressuring sales and loan growth. First-quarter loan growth was further impacted by elevated gross losses as well as our proactive credit tightening initiative. We remain disciplined with our credit risk management actions given economic pressures affecting consumer spending and payment capacity. Evidence of our credit action impacts can be observed through our improved late-quarter delinquency rate, which we are observing improvements, particularly in early-stage buckets. In response to the CFPB's final rule regarding credit card late fees, we have continued taking necessary steps to improve our financial resilience and adapt our pricing to the rule change. I am pleased that we have made meaningful progress in the quarter working closely with our brand partners to jointly identify necessary actions and determined timing to implement our plans. This resulted in improved financial projections and better visibility of the expected net financial impact of the rule versus what we previously disclosed, regardless of the effective date. Perry will share more details when he discusses our outlook. Some of the early mitigating actions underway include various consumer pricing actions such as increased APRs and statement fees, among others. The combination of our mitigation strategies, the diversification of our products and industry verticals, and our improved credit profile over the past five years position us well to adapt to the rule change over time. We are closely monitoring the ongoing litigation related to the final CFPB late fee rule, while we will continue to implement our mitigation strategy given the uncertainty surrounding the timing and outcome. I would like to reiterate what I have said in the past: we, along with prominent industry and business associations, continue to believe this late fee rule negatively impacts consumers. Not only will the lower late fee serve far less as a deterrent or penalty for consumers paying late, meaning more customers will pay late and, therefore, impacting their credit scores, the CFPB late fee rule change will also ultimately result in consumers paying more for credit through higher APRs and additional fees, and in some cases, consumers losing access to credit. Regardless of the litigation against CFPB, we remain focused on ensuring we deliver long-term value for our shareholders. Turning to Slide 4, our disciplined capital allocation strategy focuses on funding responsible, profitable growth, improving our capital metrics, reducing parent debt, and driving long-term shareholder value. Looking at the chart on the left, you can see that since the first quarter of 2020, we have more than tripled our TCE TA ratio to 10.6%, and we see room for further improvement. We will host an investor event on June 18, where we will further discuss our capital targets and allocation strategies and how we will balance achieving these targets with continued investments in our business while driving long-term growth. We are also making progress on debt reduction. As shown in the second chart, in just over four years, we have reduced parent-level debt by 58%, paying down more than $1.8 billion, including the most recent $100 million pay down in January. We improved our double leverage ratio from over 400% to 118% during this time period. As previously mentioned, we have $100 million remaining in our 2026 bonds, which we intend to pay off later this year, reducing our leverage ratio. Finally, our tangible book value of $46 per share has grown at a 31% compounded annual rate since the first quarter of 2020. Supported by our strong cash flow generation, we expect to continue to grow our tangible book value further over time. We believe this growth, combined with our financial resilience, which we displayed this quarter and strengthened balance sheet, should yield a valuation that is a multiple of our tangible book value. Our experienced leadership team has a decades-long track record of successfully managing through economic cycles and regulatory changes. We remain focused on generating strong returns through prudent capital and risk management, reflecting our unwavering commitment to drive sustainable, profitable growth and build long-term value for our shareholders through challenging economic and regulatory environments. Turning to Slide 5. Our key focus areas for 2024 have not changed. To reiterate, they are growing responsibly, managing the macroeconomic and regulatory environment, accelerating digital and technology offerings, and driving operational excellence. We are laser-focused on generating responsible growth while further scaling and diversifying our product offerings to align with the challenging economic landscape. Although our sales and loan growth may moderate in 2024, reflecting ongoing challenging macroeconomic conditions, we are focused on creating long-term value for our shareholders. Managing the macroeconomic and regulatory environment effectively is fundamental to our success. With the CFPB credit card late fee rule effective date looming, we continue to execute numerous mitigation strategies intended to help offset the anticipated financial impact, as I discussed. Accelerating our digital and technology capabilities remains a top priority. Throughout 2024, we will focus on further building out our capabilities to enhance customer experience and satisfaction, including the continued rollout of our mobile app to brand partners' customers. Finally, our heightened focus on operational excellence to drive improved customer experience, enterprise-wide efficiency, and reduced risk and value creation is embedded in all our decision-making. We have seen early success in our customer care area, where we are utilizing our investments in digital technology, machine learning, and bots to better serve our customers. For example, our enhanced interactive voice response system provides cardholders with self-service options and enhanced issues classification, leading to faster call resolution, higher satisfaction, and lower cost to serve. Our goal is to consistently generate operational and expense efficiencies that enable reinvestment in our business, support responsible growth, and achieve our targeted returns. As I mentioned earlier, we will host an Investor Day on June 18, where our leadership team will provide a more comprehensive update on our business strategy and refresh long-term financial targets. Now, I'll turn it over to Perry to review the quarter's financials and discuss our outlook.

Thanks, Ralph, and good morning, everyone. Moving to Slide 6, which provides our first-quarter financial highlights. During the first quarter, credit sales and average loans were down year-over-year as the first quarter of 2023 included approximately two months of BJ's activities. The quarter was additionally impacted by moderating consumer spend and our credit-tightening actions. Revenue was $1.0 billion in the quarter, down 23% year-over-year due to the gain generated from the BJ sale in the prior year, coupled with lower net fee revenue and higher interest expense this year. Income from continuing operations decreased by $320 million as the prior year benefited from the BJ's gain on sale and related reserve release. Looking at the financials in more detail on Slide 7, total net interest income for the quarter decreased 6% year-over-year, driven by a combination of lower average loans and lower net interest margin resulting from the higher reversal of interest and fees due to elevated gross credit losses. Total noninterest income in the quarter was pressured by lower merchant discount fees as a result of moderating sales on big-ticket items. We would expect this pressure to continue in the coming quarters as consumers continue to make smaller nondiscretionary purchases versus larger big-ticket purchases. Total noninterest expense increased 12% year-over-year, primarily driven by a decrease in card and processing costs, including fraud and a reduction in marketing expenses and depreciation and amortization costs. 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 $236 million or 32%, driven by the gain on portfolio sale in the prior year. PPNR less the gain on portfolio sale was down $6 million, nearly flat to a year ago. Turning to Slide 8, loan yield increased 40 basis points year-over-year, benefiting from the upward trend in the prime rate causing our variable price loans to move higher in tandem. Both loan yield of 27.0% and net interest margin of 18.7% were pressured sequentially from an increase in the reversal of interest and fees related to higher sequential gross credit losses. This continued pressure together with normal seasonal trends and higher funding costs is expected to result in a sequential reduction in net interest margin in the second quarter of 2024. On the funding side, we are seeing total funding costs moderate as deposit costs are beginning to stabilize. Additionally, as you can see on the bottom right chart, our funding mix continues to improve, fueled by growth in direct-to-consumer deposits, which increased to $7.0 billion to end the first quarter, as well as meaningful reductions of our unsecured debt as previously disclosed. Direct-to-consumer deposits accounted for 36% of our average funding, up from 28% a year ago. While we anticipate that direct-to-consumer deposits will continue to grow steadily, we will maintain the flexibility of our diversified funding sources, including secured and wholesale funding to opportunistically and efficiently fund our long-term growth objectives. Moving to credit on Slide 9, our delinquency rate for the first quarter was 6.2%, down from the fourth quarter, and showed a linked quarter decrease beyond seasonal trend expectations. The signs of stabilization and improvement are a result of our ongoing credit tightening actions. The net loss rate was 8.5% for the quarter compared to 7.0% in the first quarter of 2023 and 8.0% in the fourth quarter of 2023. The first quarter net loss rate was elevated compared to last year's level due to more challenging macroeconomic conditions, pressure in consumer payment rates, as well as ongoing credit tightening and slower responsible loan growth impacting the denominator. We expect the net loss rate to peak in the second quarter of 2024 at around 9%, with May marking the high point for the year. Given the inflection in delinquency, we have optimism and confidence that the net loss rate will improve in the second half of the year; the degree of improvement will remain macrodependent. As expected, the reserve rate increased sequentially to 12.4% as transactor balances decreased seasonally in the first quarter, with the rate returning to levels seen in the first three quarters of 2023. We intend to maintain a conservative weighting of economic scenarios in our credit reserve model until we see sustained improvement in delinquency and improved macroeconomic outlook. Looking at our credit risk distribution mix, the percentage of cardholders with a 660+ credit score remained above pre-pandemic levels despite continued inflationary pressures. This improvement is a result of our 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 compensated for the risks we take. Moving to Slide 10, we have significantly enhanced our financial resilience by strengthening our balance sheet and balancing credit risk with returns. Our financial resilience was evident this quarter as, despite elevated losses, we generated high-quality earnings, growing our tangible book value. Our commitment to strengthening our balance sheet is highlighted by our reduced parent debt level, growing regulatory capital ratios, and conservative loan loss reserve. Our loan loss reserve rate is more than 300 basis points higher than our CECL day one rate in 2020. Our quarter-end loss absorption capacity, which we define as our allowance for credit losses plus tangible common equity divided by total end-of-period loans, was 25%, providing a strong margin of protection should more adverse economic conditions arise. We continue to proactively manage our credit risk strategy across the account lifecycle from the time of acquisition to ongoing credit line management to account closures as necessary. On a risk-adjusted basis, our new account approval rates are more than 100 basis points lower than last year and nearly 500 basis points lower than pre-pandemic. The average VantageScore of new accounts is now up 5 points year-over-year to 715, driven by continued credit tightening and improvements in our product risk mix. The product mix shift has also resulted in more than 50% of our credit sales coming from co-brand and proprietary products. Additionally, we have also prudently paused line increases and expanded line decreases for vulnerable segments, all of which have reduced our risk exposure. We remain confident in our disciplined credit risk management and ability to drive sustainable value through the full economic cycle. Delivering responsible, profitable growth remains a top priority, even if doing so requires a disciplined, slower rate of growth during periods of economic uncertainty. Finally, Slide 11 provides our 2024 financial outlook. We have updated our 2024 financial outlook to include the potential impacts from the final CFPB late fee rule. While uncertainty remains regarding the final outcomes of the legal proceedings regarding the rule's implementation and timing, we felt it would be helpful to provide a full-year outlook with a May 14 assumed implementation date. Our outlook contemplates continued slower credit sales growth as a result of further moderation in consumer spending and ongoing credit tightening, both of which pressure loan and revenue growth and net loss rate in the near term. In addition, our 2024 outlook still conservatively assumes three interest rate decreases by the Federal Reserve in the second half of the year, which is expected to slightly pressure total net interest income. We acknowledge an increasing likelihood that rates will remain higher for longer, which would be a slight tailwind to our net interest margin but would also indicate more persistent inflation, which would continue to pressure consumer spend, ability to pay, resulting loan growth, and potentially credit losses. Based on our current economic outlook, proactive credit tightening actions, higher gross credit losses, and visibility into our new business pipeline, we expect 2024 average loans to be down low single digits on a percentage basis relative to 2023. Moving to revenue, I will share three possible outcomes. First, a scenario where the CFPB fee does not take effect in 2024, implying a legal stay decision before May 14. Second, our current updated guidance, which assumes the CFPB rule goes into effect on May 14; and third, a hypothetical October 1 rule effective date for a consistent comparison to what we shared on our last earnings call in January. So first, assuming the CFPB late fee rule does not go into effect this year, we expect full-year revenue growth, excluding gain on portfolio sales, to be down around mid-single digits for the year, in line with our previous guidance. The year-over-year revenue reduction is driven by lower average loans, higher reversal of interest and fees due to expected higher gross losses, lower merchant discount fees from lower big-ticket originations, and is inclusive of three projected interest rate reductions by the Federal Reserve. In the next scenario, which is our current updated guidance outlook, we are assuming a May 14 effective date for the late fee rule. Full-year total revenue growth for 2024, excluding gains on portfolio sales, is anticipated to be down in the mid- to high-teen range. Additionally, when looking specifically at the fourth quarter of this year and still assuming a May 14 effective date, the CFPB late fee rule is expected to reduce fourth-quarter total revenue in the mid-teen range on an isolated basis relative to the fourth quarter of 2023. Our estimates are net of mitigation actions that we believe will positively impact this year's results. Lastly, assuming a temporary stay is granted and using a hypothetical effective date of October 1, 2024, our updated estimate is that the rule would be expected to reduce fourth quarter 2024 total revenue by approximately 20% on an isolated basis relative to the fourth quarter of 2023 net of mitigation actions. The improvement from the 25% impact we announced on our fourth quarter earnings call to the 20% now incorporates final rule details and highlights the continued progress we have made since the final rule was released. As a result of discussions with our brand partners regarding customer pricing actions and clarity on the timing of implementation, we have higher levels of confidence in the success of our actions. We continue to expect the financial impact of the late fee rule to lessen over time as our full spectrum of mitigation actions are phased in and mature. As we adapt and evolve our products, our mitigating actions are focused on preserving program profitability and returns over the long term and ensuring the safety and soundness of our banks throughout all periods. Going back to our guidance scenario of a May 14 effective date for the CFPB late fee rule, we expect total noninterest expenses to be down low to mid-single digits for the year as we remain focused on expense discipline and operational excellence. As Ralph highlighted, we continue to strategically invest in technology modernization, digital advancement, and product innovation that will drive future growth and efficiencies. In the year, we expect certain CFPB late fee mitigation strategies to include additional expense. Estimates for these expenses are included in our updated guidance. We expect a net loss rate in the low 8% range for 2024, peaking in the second quarter at around 9% as inflation continues to pressure consumers' ability to pay and moderates their spend. Our outlook is inclusive of our ongoing credit tightening actions and expected slower growth impacting the net loss rate. We are projecting a lower loss rate in the second half of 2024 versus the first half as a result of the credit actions we have taken and I assume gradual modest improvement in economic conditions throughout the year. Finally, our full-year normalized effective tax rate is now expected to be in the range of 27% to 30%, higher than the previously guided 25% to 26% range due to the CFPB late fee rule change, lowering earnings before tax. Quarter-over-quarter variability will continue due to the timing of certain discrete items. In closing, we are confident in our ability to successfully manage risk-return trade-offs through this challenging macroeconomic and regulatory environment while continuing to make strategic investments to drive long-term value for our stakeholders.

Thank you. Our first question comes from Mihir Bhatia with Bank of America.

I wanted to start by discussing the late fee rule and the mitigation actions you've implemented. Could you elaborate on the actions you've already taken and what has been effective? Where are you experiencing pushback? What feedback are you receiving from customers and retail partners? I'm trying to gauge what has happened so far compared to what is still planned and what kind of responses you're encountering.

Yes. It's Ralph. I'll start and I'll ask Perry to chime in. The actions we've taken to date already to mitigate our product and portfolio diversification. We've made certain pricing actions, inclusive of fees and some policy changes. And then we have our ongoing discussions with partners. So far, from a customer behavior perspective, we haven't seen anything dramatic. It's early days, so we haven't seen anything that would be alarming to us. It's kind of what we thought we would see. But I'll caution that with that, we need to take a longer-term view about that. Our partners realize that this is a reality now, and they're working with us collaboratively to what could be the changes we want to make and making sure that, quite frankly, that the changes are accepted by the partner and us and are well-executed as we move forward. But that's what we're seeing. Perry, do you have anything to add?

Yes. To provide some additional insight, I want to highlight that at the end of last year, we began to implement some pricing changes related to higher APRs. For instance, we lifted the previously set limit on APRs, which was not to exceed 29.99%. We also widened the spread over the prime rate index. This change is just an initial step, as we aim to remain aligned with market conditions. With the recent final rule now in effect, you can witness these adjustments in the marketplace, and we will continue to introduce more pricing changes, including additional fees and policy revisions in the coming months, as mentioned by Ralph.

I wanted to discuss the credit side. You're expecting credit to peak, but I want to understand more about the actions being taken to tighten underwriting. In looking at the credit distribution on Slide 9, the segment above 660 isn't increasing. I'm trying to reconcile the credit actions with the improvement in delinquency rates that you mentioned. Although actions to tighten credit should help with delinquencies, the risk distribution doesn't seem to be improving. Can you clarify this for me?

Yes. So we've been proactively managing our credit risk strategy across our entire lifecycle, from acquisitions to line management to account closures. On a risk-adjusted basis, our approval rates today are 110 basis points lower than nearly 50 basis points lower than pre-pandemic. Our new account average VantageScore is higher than it's ever been. So the improvement is there. We are pausing some line increases to prime and sometimes prime plus, and we are expanding line decreases where we think appropriate. However, with this broad-based inflationary pressure, it's difficult to isolate a remedy. Nevertheless, we have continued to proactively assign the right lines and manage lines to ensure people don't get overextended as they move forward.

And I'd add one more thing to what Ralph just said. When you're looking at the risk distribution that we put on the chart, everything Ralph spoke about is happening on the new accounts coming in at the best risk scores that we've seen, coupled with lower line assignments. All those things are being done to protect the existing base. But then what has happened is you have FICO or risk score migration. So as you book accounts in the past few years that were higher credit quality in an environment like this, their risk scores migrate downwards. So that's what's causing you not to see the improvement that is fully reflective of all of the actions we've taken. So the fact that it's actually stabilized is reflective of all the actions that we put in place.

Just on the back of these mitigation actions, obviously, it's very positive that you've been able to mitigate the impact in the fourth quarter as early as fourth quarter. Maybe you could just talk about how much work there is to be done to even get that impact lower? Like is it possible you can even get it lower? And then maybe, Perry, you could help with the path of offsetting the entire impact into the future, like what would be the timeline roughly as you sit here today?

Yes. I would say that in terms of the path to continue to reduce the impact, the team is feverishly working nonstop with brand partners coming up with other policy changes and other things that can help close that gap. But I think in terms of the time to implement what’s in front of us, we're trying to give you our best view at this point. And then as we move into 2025, we expect to continue to see improvements on that. The second part of your question was?

Yes. Is there a possibility to reduce that 20% even further by the fourth quarter? You have already decreased from 25% to 20%, so can it go lower with the ongoing efforts from your team? Or is this the lowest it can realistically get at this point?

I think we have line of sight into the final rule. There's still ongoing partner negotiations. So we'll update that as we have more information. The other part of that is, right, is with the APR changes we've said before, it just takes time for those to burn in and have their full effect. While some fees that get implemented, obviously, have the near-term impact, but we've reflected for what we have high confidence in right now. It’s possible to improve a little bit, but I don't expect material movements from that.

Okay. Got it. And just one question. I know Mihir asked about the credit, but just on the reserve rate, that went higher. And I think your credit outlook was consistent, if not slightly better. Just as we look ahead, what drives this reserve rate going forward?

Yes. And I appreciate that question. It did go higher by I think about 8 basis points, right? If you think about the reserve rate, it's been pretty steady from the first quarter of 2023 and has moved around a few basis points up and down, and that's all this is. We didn't change a lot of assumptions in the model. And what is interesting, I mean as you would imagine, there's a lot of complexities that go into the CECL reserve rate and the modeling. We didn't change our risk weightings. To your point, some of the early-stage delinquency came in better, but you're also in the model and the output is this peak second-quarter losses that are expected to materialize. But that was already accounted for. What really changed this model was the separation between the baseline economic outlook and the adverse and severely adverse outlooks that get weighted into the risk overlay. Surprisingly, when that runs through a model, it creates a little bit larger overlay by a little. It's not a ton. It didn't seem like the right time to reduce weightings in the overlays just to keep the number flat, full transparency. My expectations are as the peak losses are in the rearview mirror in the second quarter and delinquencies improve, we should start to see some improvement in the reserve rate, and I would expect to exit the year with a lower reserve rate than what we exited 2023.

Great. And with getting back on the late fee issue, could you just talk a little bit, Perry, about the steps that you've actually already taken? The steps that you expect to be taken by May 14? And how long that takes to kind of flow into the earnings? Because which I'm trying to parse through some of the things you've said about the three different scenarios, and that would be helpful.

Sure. The actions that have been implemented, as previously noted, include some early increases in APR that are already underway, and as we've discussed before, it takes some time for these to take effect. You will see further increases in the base APRs for new transactions on existing accounts and higher APRs for new accounts. We will also introduce statement fees, which will be rolled out in a sequenced manner with various partners starting in the next few months. The timing of these market entries and their value will be important. Additionally, expect to see some changes in underwriting and product strategy later this year and potentially into early next year. There will also be new fees that could apply to significant purchases and similar transactions. Yes, it's a great question. There’s a chart that I love to look at, which is a cumulative gap between inflation and wage growth. We had a couple of months this quarter where it was actually closing, which was encouraging, but then it kind of reversed course a little bit in March. I'd like to see that continue to improve. Wage growth outpacing inflation is good for the consumer, particularly those that we serve, and that's what will end up giving them relief. The encouraging part is they're not overleveraging. They're really trying to do the best they can and use discipline to repurpose their spending into things that are nondiscretionary and make sure they're able to manage their finances. I think that will help, obviously lower interest rates help consumers more broadly. But unemployment has been good. So I think I'm optimistic about the future. For us, the credit actions that we've taken will also improve our delinquency and losses. As you start to have the tailwinds of the improved economy where wage growth outpaces inflation, you'll start to see us be able to unwind some of the restrictive line increases, more approvals come through, which will be a tailwind to growth as well.

Ralph and Perry. Following up on Sanjay's question about how long it will take to mitigate the effect. Can you discuss how you're thinking about the earnings power and return-generating ability of the business? How that's evolved as we look to the other side of implementation, both in terms of ROA and ROE? You mentioned, Perry, that there would be some underwriting and product changes. Just curious how that you see that impacting returns and overall profitability.

Yes. I think what I would direct my response back to is what we've said before that our goal is to deliver strong returns on the other side of this. With all the pricing and APR changes that go into effect, particularly the APRs, if you recall that chart we put out there at one of the investor conferences, it takes a few years for the full value of APR changes to work their way through. Our goal is to get back to strong returns, obviously as fast as possible, and we'll give more guidance on that at our Investor Day. Yes. You nailed that we will give more direction on that at Investor Day, but I would tell you that we have more room for improvement in CET1. We all want to compare ourselves to different peers. Everybody has a different capital stack and structure, so we all have different binding constraints. We'll go through that more at our Investor Day.

I was just wondering if we could just a little bit more head-on why the 20% came in lower than the prior 25%. I know you're expressing more confidence in that view there. But Perry, I think you mentioned before that some retailers were kind of holding out until the rule actually came through. Are you noticing maybe more retailers now coming on board with your plans given that it looks like we're sitting here less than three weeks away, and this might potentially come through? Just maybe speak to what kind of progress you're seeing on retailers that have held out on doing anything yet.

Yes. You really summarized that pretty well. Ninety days ago, it's a long time in this process. The final rule came out. When we gave our initial estimate, we tried to give an estimate based on our degree of confidence of what we believe we could execute and where we were with partner discussions. Over the past 90 days, we have more clarity into the final rule as well as it brought a lot more clarity to the discussions and actions that had to happen with partners and more of those partners' agreements in terms of what we were going to deliver with them. So it’s really just continued progress. At this point, I do not see there's any impact to our dividend. We're in a good place on that. What we provided was the revenue impact that you can assume will flow through earnings before tax. But no, I'm not expecting there to be a dividend impact.

I appreciate all the disclosure of the different scenarios. My question and to my question is, have you guys disclosed what the unmitigated impact would be in the fourth quarter? And then I have a follow-up.

No, we haven't because really, the impact is a combination of, obviously, the reduction in the late fee will be applied, how it flows through the P&L and all new pricing actions that will flow through because they kind of go hand in glove. This will act in tandem.

Got it. Understood. I was hoping you could provide some insight into the spending trends across your different segments. Can you discuss what spending looks like for higher income groups, as well as factors like different FICO scores, co-branded versus private label cards? Are there any notable trends to mention, including any weaknesses?

It's what you would expect in this type of economy, right? Your prime and prime-plus people are spending and they have some spending capacity, and you'll see that. As you move down the Vantage or FICO chain, you see people focusing on more nondiscretionary items and they're focused on budgeting and not overextending themselves. That's what we're seeing. Yes, our co-brand spend is probably on nondiscretionary items, and we're seeing some lower big-ticket spend as well.

Well, one, no, we don't provide losses by risk band, good question, though. As you think about the risk bands, it is indicative of what losses you may have in the future. But as I said before, because you have to consider the lost risk scores, they basically drive losses. So as we see improvement in the overall risk scores, that should be indicative of future improvement as well. Some of that will be how risk scores move throughout the cycle. As there is improvement in the cycle, risk scores will migrate back up. Right now, we're in a period where they're migrating down despite our risk actions.

So regarding the impact of the May 14 implementation, I heard your answer to Jeff's question that should not impact the dividend. Does that mean that you expect that you'll earn the dividend in 2024 on an after-tax bottom line basis? Because running the math that you gave in your scenario implies that you could be either not earning any money this year or in a net loss. And so I just want to get your thoughts there.

Yes. We have a capital plan with approved actions that we can take and flexibility on how we would use that capital. Again, that is where we're at. We do not expect or anticipate the need to reduce the dividend at this point.

Okay. And then just back to that the mission as putting to a possible net loss for the year. Is there something we could be underestimating in running that math that gives you some confidence on the earnings potentially being positive when you run that May 14 scenario?

I'll give more clarity around that in future discussions. But really, when you think about one of the earlier things I said, we're going to have a tailwind from the improving losses in the back part of the year. You have improving losses, you have less reversal of interest and fees. And you also will have an expected reserve rate reduction throughout the year, consistent with our responsible growth. I think all those things will aid in, I'll say, hopefully not having to post negative earnings for the year.

Thank you very much, and thank you all for joining our call today and for your interest in Bread Financial. And we, of course, look forward to speaking with you again next quarter. And everyone, have a terrific day.

This concludes today's conference call. Thank you for your participation. You may now disconnect.