Good afternoon, everyone. Thank you for joining us. For those I haven't met, I'm Mihir Bhatia. I cover consumer finance and specialty payments companies here at Bank of America. We're very pleased to have Bread Financial Holdings joining us at the conference. Today, joining us from Bread is CEO Ralph Andretta and CFO Perry Beberman. In terms of the format, we'll do a fireside chat format. I'll ask a few questions to get it started, and then with about five to 10 minutes left, somewhere between there, we'll open it up for audience questions if anyone has any. Why don't we just get started with that? Ralph and Perry, thank you for Thank you. ...joining us today. You bet. Why don't we just hit the big topic that has been a lot of investors' heads right up front, late fees. Big news. Oh, okay. I thought you were gonna say Super Bowl. Super Bowl? Yeah. Sorry. What's your take? Yeah. I've answered this question a few times over the last couple of days. I think a couple things. One is, you know, the industry and us obviously were anticipating an announcement from the CFPB. We've been, you know, working through what-if scenarios. We were not anticipating the headline-grabbing $8. Yeah. Honestly, we, not sure how the CFPB came up with the $8 and the cost to collect. That's a, you know, an amount that we don't recognize at all. I think the ABA had an appropriate response in terms of pointing out what is the cost to collect on average, what can be the you know, the consequences or the unintended consequences of the proposal. I think the CFPB kind of neglected their own rules in not consulting with small banks and credit unions. I think that's gonna come back to haunt them and really elongate this, and may end up in legislation. I think, you know, for us, it's, you know, not an impact in 2023 and, you know, could be an impact sometime in 2024. The reality is, you know, we're fiscally responsible, and we have shareholder responsibilities, and we're gonna close the gap. There's a number of ways to close the gap. Certainly you look at raising your APRs across the board and as appropriate to price for risk. Give us the opportunity if there's a legislative or a regulatory change to go back and talk to them. You know, you don't wanna really, you know, put this on the back of your partners. You want to make a bit of difference to me on the $8. I think, you know, when you, when you charge $8 and people miss or pay late, you know, the impact could be, you know, we're gonna refer them to the credit union. I think that's an unintended consequence of, you know, of this and, you know, and we'll continue to do that. We're working through the scenarios, like we did with CARD Act. I don't think there's one silver bullet that, you know, closes the gap, but there are a number of opportunities that we will close the gap with. Do disclose the interest separately between income and fee, and fees that we don't get from Bread as much. Maybe talk about how much that gap is or at least help us dimensionalize how to think about that. You know, is it similar to other banks? Yeah. What are we looking at? I would say we're in the same neighborhood as Synchrony. Okay. Right? That's the neighborhood we're in. You know, Synchrony has spoke about the issue. We're in the same ballpark. Okay. Great. Just being my last question on late fees, I promise I'll get off it and move on. What are you hearing from merchants? Are they engaged with the issue? Do they even recognize that this is gonna impact their payments? Are they just like, "Yeah, we'll deal with it when it happens"? Yeah. I think so. You know, I mean, we've heard from the more sophisticated merchants, to be frank, in terms of similar to what would happen with CARD Act, where they see this as a, you know, less of a opportunity to cast a wider net on customers and a smaller basket at the point of sale, and I think they will similarly line up like they did around CARD Act, and voice their opinion through their associations. Okay. Great. Let's move to the business. We're halfway through the quarter. What are you seeing in your data? What are you hearing from retail partners about 1Q? How is the U.S. consumer holding up? Things trending in the direction you expected better? Yeah, let me I'll start, and then I'll turn it over to Mr. Beberman here. You know, I think we haven't seen anything really relative for February yet. We're just in the middle of February, but January was a strong month for us in terms of sales. It was stronger than, you know, obviously 2022, which was a little bit lighter. We gotta remember, we had added AAA to our portfolio, so, you know, we saw good sales growth in January of 2022. Nothing you covered. Yeah. Yeah. In terms of what consumers are buying, just their behavior, you know, one of the things, you guys get a little bit more data maybe than some others. Yep. One of the things we've heard about is, like, when the recession is coming, consumers behave a certain way. They start moving down. Maybe they're buying more private label. Are you seeing any of those consumers doing, engaging in those types of behaviors? Yeah. Three years ago, that would've really concerned us more than it does today, because if you look at our portfolio today, we're not a one-trick pony anymore in terms of private label. We have a good private label portfolio, but we also have a diverse portfolio of co-brands and direct-to-consumer cards. While that spend is shifting, it is still remaining, you know, within, you know, with us. I think the other thing is, you would expect with inflation that the basket would get bigger. We're seeing the basket's about the same size, so we're not buying, you know, Perry put it very If I spend $1,000 a month, I'm not spending $1,070 because of inflation. I'm spending $1,000. I must be trading down on quality on some certain things. I will tell you one of the industries that is remained strong, and it's an industry we have market share in, is beauty. That industry really has remained strong. People wanna be pretty throughout any kind of economic cycle, I think. Maybe on credit. A similar story on credit, holding up nicely or anything relative to your expectations. Analyze back to pre-pandemic behaviors, you know, resume their degree of leverage that they had previously as savings and more down from the government stimulus. As you think about, the stimulus that really benefited, those in the, I'll say, less than $100,000 in terms of their cash flows. Whereas, you know, not gonna get into the misdirection of government stimulus that's still sitting on people's balance sheets on the upper end of the income folks who really didn't need it virtually it occurred. Now it got accelerated a little bit 'cause the inflation was up there. What you're hearing is others talk about that they're not fully normalized. When I think about who's not fully normalized, it's more so upper income are starting to normalize back to pre-pandemic levels of losses, and it's accelerating a little bit because of the impacts of inflation on utility bills and rents and other things like that. What we're seeing now is the crossover where, you know, the elevated inflation is starting to, as we say, give the entire portfolio a cold. The entire nation has a cold right now because of inflation. What the Fed's trying to do is, you know, help make people feel better by getting inflation under control. Hopefully that happens by the back part of this year. You know, some of that is, you know, how much unemployment comes with that. That's, you know, that's more of a back end of the year item that perhaps is a leading indicator to what 2024 might look like. From what we're seeing now, I'd say things are tracking as expected. Our guidance of 7% losses for the year contemplated that. You know, one piece of that for us, you have two additional nuances in our numbers when we say we're gonna be up, you know, the 150-175 basis points year-over-year. You have a large portfolio coming out. That would increase your loss rate because it has better than portfolio average loss rates. That will amount to some amount. Then in the first part of the year, we've signaled that due was suppressed. That's gonna come through in February, and there's a couple more months in the back part of the year that's gonna affect a couple of months in the second quarter. That's behind us, but that also contributes to a little bit of that elevation in the first part. On credit, you mentioned the country having a cold, inflation effectively, right? Yep. Is the issue. I think on your earnings call, you talked about some of the underwriting models were really geared more towards unemployment versus accounting for this kind of inflation. Can you talk about that a little more? Just expand on that. I guess the question is: What gives you confidence that, you know, the through the cycle, 6% losses, this year, 7%, you know, if you have inflation now, okay, inflation comes down, but then you might have unemployment going up. Sure. Does that keep losses elevated and then, you know, that 7% maybe looks like 7.50%? Yeah. Great question. Let me, typically, okay, they're performing really well, and you see their trades externally look good, and they give them a line increase. Now, as you go real-time, doesn't matter if inflation's happening or unemployment, it's the condition of that consumer's balance sheet that you can observe and their payment behaviors that then say, "Ooh, they used to pay three times minimum payment. Now they're only paying minimum payment. Something may be going on." You may not give the line increase. They've missed a payment. Okay, now we're gonna look at that for a risk detection action where you might close the remaining open to buy down. Same thing with new account underwriting. You're getting real-time data all the time. For credit underwriting, that's dynamic. Right. We're always looking at that. You are also looking at, you know, your confidence in the risk scores. We use VantageScore. Sometimes, you know, and Ralph's talked about this in the past, VantageScore got a little elevated during COVID 'cause people's balance sheets looked a little bit. We didn't loosen up. We didn't loosen our underwriting. Now, you know, with inflation, we're projecting VantageScore or risk scores will start to migrate down. You're contemplating all that in your real-time underwriting. I think where I spoke about models not contemplating periods of high inflation, and they're really geared towards changes in unemployment are loss forecasting models and CECL models, where you're trying to build your reserves around that. Industry models have traditionally been highly correlated to changes in employment, and you can look back at past cycles and calibrate to that. The regulators look at that, say, "Hey, how are you demonstrating that you've used those past cycles to inform your current future look?" There's an element of that that does also then feed back into your underwriting 'cause certain characteristics would, you know, lead to losses. That's what scenarios to care for what we don't believe the models care for with in inflation. We've looked at a, you know, couple of more severe scenarios, which has a peak of 7.8%, and an 8.9% unemployment rate in the next 24 months and weighted those into a risk overlay to establish. See consumers making minimum payments. Are you seeing any of the other worrying or- Yeah. signs that give you pause? I think that is exactly the correlation. When you start to see an increase in delinquency, yes. Okay. Just going back to the late fee proposal, have you made any changes already to your underwriting, to your credit decisioning, to your business in case that does get implemented? For now it's still early, let's see how that shakes out. Not changing any planning for it, but not changing it? No. At this point, we are operating like we have. You know, where you're underwriting for profit. Getting prepared, as Ralph said, you know, readying the playbook with the right levers, so we then once we know what the final proposals are, then we'll act. Yeah, we may take some actions ahead of when. Going back again to credit through the, through the cycle loss rate below 6%, right? What's the average unemployment rate that you consider when you say something like that? Like, you know, what is it through the cycle loss rate? Are we talking about what we've had for the last five, six years, or are we talking about longer-term? We've had 3%, 4% unemployment for large periods. Is that the kind of unemployment backdrop? Yeah, I think it goes to that. It goes to the portfolio construct. When we say through the cycle, look, you're gonna have periods if we say through the cycle average of 6%. That means you're gonna have periods of time above 6%, and you're gonna have periods of time below 6%. That's how you get to that average. It also comes to the composition of the portfolio, product mix, partner mix, the underwriting, the economic conditions. It's trough to trough, peak to peak. It, you know, could be a 10-year window. It really depends, but that's the logic behind the concept of that. If the- System conversion. You're getting past. Yep. You're past it now. I understand there's some credit issues left, but for day-to-day operations-wise, you're past it. From the outside, you know, looking in, obviously very difficult for us to say what that actually means for your business. Maybe help us out. What are some of the capabilities it has added to you, to your, you know, tool kit? Yeah. You know, it was a, you know, it was a very big undertaking to start. Let's just start there. It's like we're converting a legacy system that, you know, ADS ran on for years, you know, to a state-of-the-art, you know, system we were outsourcing. Why were we doing that? RoCo migrating to the cloud. You know, very, very complex. I think there's a number of things that the conversion does for us. One, it gives us better co-brand capabilities that are... we would've had to develop ourselves. Speed to market, tiered pricing, better bank, you know, bank consolidation capabilities, all those are really good capabilities that drive, you know, that can drive incremental revenue and bring on partners quicker and bring on, you know, the speed to market is much, much better. Very sophisticated fraud tools, very sophisticated tools around fraud and other types of, you know, preventative measures. If you think about it, you know, there is a cost-saving element to it, of course. That cost savings element we'll, you know, we'll look at that and we look at that using as product development money. That's the right thing to do. If you think about... go back to CARD Act and how much money all of the issuers had to use to kinda convert their systems to, you know, to CARD Act exchanges, which were regulatory and statutory changes. That helped us a great deal. Our mind share is focused on, you know, doing the right thing for our customers and being very focused on, you know, intellectual capital, not on maintaining, you know, kind of a basic system that everybody has. A lot of examples coming. CFPB rule change, the Fiservs of the world are going to have to put that in place across all their partners. It's a, you know, it was an ambitious undertaking. You know, we're glad that we've done it. You know, it wasn't without bumps in the road and, you know, we expected that. You know, some bumps are bigger than others. I think we did the right thing by our customers and our partners through the conversion. I think, you know, it's a 10-year, you know, it's a 10-year horizon. I think you'll see the benefits coming, starting very soon in terms of the, the dynamics of that system. When you talk to people who've gone through these types of major conversions, we had done this where I had come from to another card platform. There's a burn-in period to, as Ralph said, to get all those benefits fully operational. It could be, you know, a couple of years before you're really seeing the full, you know, pull-through of all the expected benefits. You know, tiered pricing for one is a great capability, right? We're talking about pricing for risk. Clearly, that's a great way to price for risk. Exactly. As we think about loan growth, what are the big opportunities within the portfolio? Maybe give us a peek under the hood. Are there some large portfolios with low penetration rates where you can grow? Is it cross-selling? Yeah. different products to those portfolios? Where, where's the opportunity? Yeah. I think it's all of the above, right? If you think about three portfolios we brought on, big portfolio. You know, we brought on the NFL. Again, iconic brand, but the predecessor, you know, it kind of was just limping along. I think we've sold more, you know, acquired more cards last year than they did in their, you know, three previous years. You have AAA, again, a large portfolio, 56 million members. A lot of that's untapped. If I look at the penetration of AAA, you know, there's opportunity there. Right away, we revamped AAA with, you know, two value props that are top of wallet. I think there's opportunity to grow those portfolios. You've got your ancillary products like installment loan, where we can offer those to our existing partners as we move forward. I think we announced today Michaels has just come on to Novi, and that'll grow in 2023 as well. I think if you think about growth, I think 75% of our growth will come from increased penetration in our current partners, offering other products to our existing customer base, and probably 25% will be, you know, inorganic growth as I think about our growth. Now, our growth in 2023, I think is responsible. It's mid-single digit growth. I think in an environment where there's uncertainty, I think that's a right level of growth for us to pull back a little bit on the expense side. You know, I think we're, you know, we've got the right levers, and I think 2023 is a year of responsible growth as we move forward. You mentioned inorganic growth, and I was curious, given the uncertainty, what are you seeing in terms of just the competitive intensity for programs that are coming up for bid? What's that like right now? Yeah. Are you seeing big opportunities there? Or you're now focused on- There's always opportunities. If you look at our receivables and you know, discount BJ's, 'cause that's coming out, 85% of our book is secure through 2025. That's a nice base to have, right? The remaining 15%, we're working on, you know, in terms of renewals and stuff. There's always gonna be one or two portfolios out there that are, you know, in play. The competitive environment hasn't, you know, hasn't lessened. There's still a competitive environment for these types of portfolios. What I like about our business is that we can compete really up and down the food chain. We can compete with the big boys and win like we did with, I'm sorry, like we did with the NFL and AAA. We can look at those $100 million portfolio de novos, where you grow with a, with a long tail and, you know, you put together that string of pearls, and we can compete up and down that level. Competition, obviously, at the top end is very high. When you move down lower, it's, you know, a little bit less. We're able to kind of do all of, all of the above. Michaels is a clear example of something that will grow with them. I think it's a really nice portfolio. It's got a nice brand, and we'll end up, you know, helping them grow that portfolio in a, in a meaningful way. Same thing with PNH. On the de novo programs or the smaller programs, you know, one concern for a lot of people had been all these fintechs. Yeah. The new age companies coming in and, you know, hey, maybe you don't need a store card anymore. You don't need this private label card. Now, with, you know, maybe valuations getting a little more rational in that space, those companies focusing a little bit more on credit underwriting. Yeah. -than maybe they are you seeing more opportunities there, less competition there, or? No, that not. I think we're seeing opportunity. I think we were very thoughtful of how we entered the buy now, pay later market. If you think of buy now, pay later, it's really, you know, two products. You have the paying for product, and you have installment loans, right? There was a big rush by competitors on the Bread Pay. They paid irrational fees to, you know, to retailers, and the returns were not very good. In a frenzy to have eyes on glass, that's what they did. We took a step back and said, "There's not margin in that market. The margin is in installment loan, and that's where we're gonna focus." First thing we did was say, "Let's get our regulatory and compliance house in order. Let's make sure our systems are compliant. We're a bank, and we're regulated. High, high loss rates, high funding costs, and high competition in the market. that's, you know, that's a, you know, that's a bad hat trick, if you will. I think we're seeing opportunity with our, you know, with our current retailers. Our solution is a white label solution. We're not looking to dis-intermediate the partner. We're looking to enhance the partner. I think the partners are starting to realize that. We'll be very thoughtful about how we enter that. You know, if the buy now, pay later is back in vogue, we'll be very thoughtful how we enter that market. The installment loan part of buy now, pay later is, you know, we view as an opportunity to grow. Stability sides. Yeah. The one thing we've talked about around our funding is, you know, we're focused on growing our direct-to-consumer deposits. It's up over 70% over the past year. Ralph's put out their target of getting that up to 50% in time. I don't think that necessarily is the end game, but we'll cross that when we get there. Honestly, as we look at when this big portfolio goes off the books in the first quarter, that direct-to-consumer deposits will become a greater proportion of the mix just due to the math there. We're gonna be re-entering the asset-backed securities market shortly. We're gonna be looking to take care of some of the parent debt that is coming current around mid this year. We'll start to pay down some of that debt, restructure some of it. Overall, you know, we'll Now, that may mean some quarters are higher or lower, depending upon what's going on with losses, where are you at in the restructuring of some of the debt and so forth. That's. You know, we feel pretty good about that. We're not trying to be, you know, arbitrage interest rates one way or another. You know, as interest rates go up, we continue to benefit slightly from that, but we're trying to make sure that we're kind of neutral on interest rate moves. Yeah. We've definitely gotten a fair number of questions around the debt that's coming due. I think you wanna talk about that a little bit, just what your plans are with that? Expand on what you just said. Sure. We've, things lined up to tackle that, and we've got plans to increase the dividends from the bank that are really well-capitalized or overly capitalized. Yeah. Up to the parent. Let me share some with you. You know, one of the things that when I came in, and Ralph as well, there probably wasn't as much historical discipline on capital planning and capital policy. We've established a capital policy at the corporate level. The banks always had something. We're putting more rigor into our stress test models, and we're sharing this with the regulators to get them comfort with the way we're running this company as if we're a bank holding company, with the discipline and thoughtfulness of a leadership team that's, you know, going to be disciplined. We do what we say we're going to do. If we say we're gonna dividend up some more from the banks to the parent, we're gonna take it and pay down debt and not go do something where you know, harvest that and buy back shares, right? We're trying to get this balance sheet built in a way that is resilient. We're getting to the right capital levels. We're taking care of our debt. Obviously, we'll take care of, you know, responsible growth and shareholder returns in the future. They were very supportive of what we're talking about. You also mentioned growing consumer deposits. You also added a general purpose card. Talk about that strategy a little bit. What is the longer-term vision or end game, if you will? Is it to be more of a little bit more of a consumer brand than you've had historically? Is that not part of the equation? Yeah. You know, it's an interesting time. When I arrived at ADS, you know, great reputation with how to manage partners, but really a one-trick pony in terms of product. You know, it was a private label card, and even co-brand card was a private label card and, you know, co-brand clothing. You know, it wasn't a opportunity. It didn't have a diverse portfolio. Immediate knee-jerk reaction was, "Well, how's that gonna hurt ADS?" You know, and I... You know, we took it on ourself to really diversify the portfolio. You know, our initial foray into that was really a safe product. We were losing a portfolio upon my arrival, and I asked a simple question to the then leadership team. I said, "When you lose a portfolio and the partner and the, you know, the successor doesn't wanna buy the receivable, what do you do?" They said, "Well, we just run it off." I said, "Well, that kinda ends today. Let's think about how we can offer an alternative product to those people that qualify and see how that goes." The alternative product we offer today has 1 million customers in it and continue to spending strong. You know, that gave us some of the, you know, gave us some confidence in terms of we should go right straight to the consumer for certain things. Not everything, but certainly go right to the consumer. You know, we introduced this year, you know, the 2% Bread American Express Cashback card running on the American Express network, you know, with, you know, economics that work for both American Express and us. We're able to reward customers with 2%. Because we underwrite the way we underwrite, able to cast a wider net in terms of inclusion. American Express likes that, we like that, and it's a product that, you know, is catching on. You know, we're never gonna be, you know, you know, the corner bank. We're never gonna be out there with, you know, a billion-dollar marketing campaign. We like the name Bread Financial. It's better than ADS. It's a little better meaningful, you know. You know, we'll continue to offer our products direct-to-consumer. We'll offer our product, our co-brand products. I think the diversified portfolio is our goal, that's where we're moving to, right? We're always gonna have. Private label is, you know, our stock and trade, right? It's got good margins. We know how to operate it. We know how to manage it. We know how to underwrite it, there's nice margins there. To offset some of the higher cost of credit there, you look at co-brand and direct-to-consumer, where the margins are good and the losses are a bit better, you balance your portfolio. As long as it balances out to, you know, what we promised our investors is 6% through the cycle and mid, you know, mid-20s ROE, and it's all a bit of a puzzle. Now, you know, as the economy moves, we move with the economy. You know, if private label is in vogue, we can lean in heavily there. If people are looking for a general purpose card, boy, we have that for you. A co-brand card, we're there. Installment loans, we have that ability. We've revamped our entire product set over the last three years. You know, today we're not as reliant on, you know, private label. I'll open up to questions after we'll ask one last question, but you know, you can get the mic and ask the question. Just what I did wanna end with just, you know, valuation. Valuation is, you know, I'd say lagging peers a little bit. Now, I understand you obviously don't run the business to. Right. -the stock price day to day. That said, I do want you to take the opportunity to maybe highlight some of the things. You know, when you have these discussions with people like me- Yeah. -investors- Yeah. What are we missing? What are investors really missing? What is the... Well- What do you think is missing from about the stock? I love answering this question because I would ask the investors, "What are you missing from this?" If you think about the journey over the last three years, we completely revamped our board. Our board now is a board of people that are operators and have industry experience, financial services, marketing, technology. A brand-new board, really a well-engaged board. We've completely revamped our management team. We have a management team that has probably 300+ years in, you know, unsecured lending experience. Comes in pretty handy in times like this. We have a completely different management. We've built a business development team that's second to none. We've won more than our fair share of new business. We've resigned existing business. We've diversified our product set. We've strengthened our balance sheet. We've simplified our business. We've got rid of all those ancillary business. I was on the job 20 minutes, and people were asking me what I was gonna do with their BrandLoyalty and AIR MILES. We've, you know, adequately moved those businesses to operate on their own. We've posted positive PPNR for the last seven or eight quarters. I think we've done everything we've said we were gonna do. We've disclosed more. We're more transparent to investors. I don't think there's anything that we've promised that we haven't delivered on. Now, I get it. I think, you know, ADS in the past maybe disappointed investors and, you know, there's a penalty to that. You get into the penalty box. I was hoping for a 2-minute penalty, not a major. You know, I think we're gonna continue to do the things we're gonna do. We're gonna continue to be consistent. We're gonna continue to manage this business as a bank and continue to build our balance sheet. Ultimately, at some point, you know, when we feel, you know, our capital ratios are where they should be and our TC and we have a strong balance sheet, then it's time to return value to shareholders. I think that's what that's, you know. We've got to do that over the period of time to ensure that when we do that, we don't set the business back again. Anyone has any questions? Hi. Thank you. I think you all have articulated maybe some of the actions taken on credit box and tightening on the margin and what feels maybe stark to some of your less private label-focused peers is there doesn't seem to have been a ton of tightening for more kind of branded broad general purpose card. I don't know what you'd have to comment or anything you could share about that divergence. It feels like a select few have taken decisions like you have, and the rest of the industry is still pretty wide open. Thank you. Where those actions occur, it doesn't matter if it's private label, co-brand, branded product. When you see consumers starting to show signs of stress, you take action. We talked about earlier our portfolio, by the nature of where we underwrite, where we go a little deeper, we were seeing some of that normalization faster. When you cross over into things we start to see, all right, it seems a little bit stressed beyond what is normal, you take action. Even in the normal times, that's normal to see consumers, you know, having a little challenge with their ability to pay, and that's why it is a daily, process where you eval. Doesn't look like there's any other questions. I think we're good. Thank you all. I appreciate your time. Thank you. Appreciate your time. Thank you. Thanks.