Welcome, everyone. We're here on day three of TD Cowen's Financial Services and Payments Summit, and we're very pleased to have with us the management of Bread Financial. Bread is a leading private label and co-brand issuer. Got $18 billion in receivables. It's also building a leading deposit franchise. We're very pleased to have Perry Beberman, their CFO. Perry joined Bread in 2021 as part of a revamp of management, and I would say the philosophy of the company. And we're very happy to have them here. We're going to go into some questions. And so first, just wanted to welcome you, Perry, and say thanks for joining us. Well, thanks for having us, Moshe. It's terrific to be at your inaugural conference, and we're pleased to be a part of it. Thanks. So normally we'd start off with kind of high-level comments, but the key issue that has been driving the stock over the last months, maybe even year, has been the CFPB's late fee rule. Maybe kind of just kick this off a little bit by talking about what you think are going on. What is going on right now? What steps has Bread taken? And can you talk a little bit about where you are and how that relates to kind of the guidance that you gave for 2020? Yeah. So during the quarter's earnings, we gave guidance around what would happen if the late fee rule had gone into effect in mid-May, as was had there not been a stay since then, there was a stay or is a stay. And that stay will be in place at a minimum through June 18th as the courts determine where should the litigation happen. Should it be in Texas, where it currently is, or will it go to D.C.? We're hoping and optimistic that it will stay in D.C. because the appeals court seems to, from some of the comments made, both from the lower court and the appeals court, there seems to be an agreement that there are merits to the case that the industry has against the current rule. So the extent to which that litigation drags on, it's anybody's guess. I don't have a point of view on that. Just know that there's lots of attorneys who can pay lots to litigate that. In terms of our preparation, we have guided what October 1st implementation would look like. That's still in the realm of possibility. It could delay further or not happen at all. That said, you got to prepare for this rule going into effect. We have worked with our partners, gotten agreement with a number of partners. Again, with over 100 partners, we need to be sure that each partner is in agreement with the changes we're putting in place, such as higher APRs. You're going to see that happen in effect. We've already taken some steps that started at the end of last year, continue through this year. More CITs or change- in- terms are going into effect as it continues through this year. You'll see new fees like paper statement fees being introduced in the marketplace. CIT just went out to a number of brand partners that's introducing a $2.99 paper statement fee. So you can imagine we're already starting to get some calls in about that because it's new for customers. But that's part of our longer-term strategy anyways to drive to more of a paperless environment, digital first. So there's a way for customers not to pay the fee, to sign up to be paperless. And that we benefit down the road with a lower cost to serve, which has been in our plans. This just helps to accelerate it. So I view the paper statement fee as more of a near-term revenue source, not one that we're anchoring to, but one that will certainly help mitigate a near-term effect of a lower late fee. We'll look at fees for credit, whether it's promotional fees on some big ticket purchases. Evaluating doesn't make sense for some higher-risk customers to have an annual fee. Some of this needs some testing. We'll have to see what happens in the marketplace there. But we're making progress with the partners. Some are early adopters where you have strong revenue share agreements. Clearly, we both have very aligned incentives, easier conversations. Others who are compensated more on the spend that goes through the program and less on revenue share specifically need a little bit more time to think about this and understand this is happening across the industry. It's happening to all of us. For us to go invest in the program the way we have and underwrite as deep as we have in the past, we need to have some considerations. So they're coming on board with the pricing changes and other things that need to happen to the program. I think I may have said something backwards. I think we were talking about where the litigation is occurring. We're hoping it stays in Texas, not D.C. Texas. Yeah. Gotcha. And I guess any kind of differences in your partners in terms of their preference for various types of mitigants? I mean, is it related more towards where they sit from a revenue share or how they're thinking about those types of things? I think they're all on board with the consumer was paying the late fee today, so the consumer should pay for the offset. Clearly, they don't want to take it out of their pocket to say, "Well, let's just give up their compensation." So preference is consumer pays it first. APRs, they just want to be sure that their APRs that are being priced are consistent to competitors, right? Everybody's very sensitive that they don't have something that is out of market for their type of program. So I think everyone's being very rational about this. Got it. In terms of you've mentioned, I guess you've said in the past that some higher-risk customers, you probably won't be able to originate credit for those customers. And you could be shifting the portfolio more towards higher-end consumers, co-brand type deals. Can you just talk about how the retailers are kind of thinking about that? I mean, do they have other plans for how those customers are going to access credit? Or just talk about that part of both the need to, in fact, potentially cut back on some credit and how your partners are thinking about that part of it. Yeah. I think the cutting back on credit is almost that last resort, meaning you waterfall the problem statement from increased pricing to the consumer, some product redesign offering. We offer a full suite of products from co-brand to private label to the buy now, pay later. So figuring out with the partner, is there an opportunity to perhaps go deeper with co-brand because that would open up more spend coming through the program? Or is it that we can't offer a private label product anymore, but try to offer in the buy now, pay later suite? But for us, we've been looking at diversifying our products since the day I've joined, since day Ralph has joined, increasing into co-brand, increasing to some buy now, pay later to further diversify. And I think that will continue. One of the things that we're seeing is that the opportunity for more co-brands. We think about retailers. The traditional private label market isn't what it used to be. There used to be private label, which was really the, I'll say, if you think about the evolution of something that, where it might have been traditionally in a closed-loop product. Well, now they've got co-brand. And that's the big shift in the industry with these types of retailers, and just continue to lean in on that and try to find paths to have profitable programs that we can underwrite as deep as we can where the economics make sense. But there may be economic trade-offs that occur in certain risk cohorts to ensure we can continue to effectively support our partners and underwrite for them in those risk bands. Got it. Maybe could you talk a little bit about how you think this might affect either new programs or kind of competition for existing programs, both the late fee thing and the changes that you and the industry are putting forth? What we're seeing right now, because we have a very active pipeline, I'd say all the opportunities that are being evaluated are being evaluated from an economic consideration that is contemplating the lower late fee. It means you're contemplating the pricing actions, the deal construct that would ensure we're getting the right returns. And what you have to believe in this marketplace is that we have very rational peers, very rational competitors. We're a rational competitor. We're all disciplined with capital returns. And I think where you start to see some irrational behaviors is in the past where you look at the big names, there were some really thin pricing. Many of us, I'm sure you included, would look at those and, "Well, how's it going to work out in the long run?" The people who we're competing with for the size deals that we're competing with are, I'd say, rational. That's what you're seeing in terms of the economics. Those that are looking to launch a new program or in the market with an RFP, I think understand the situation right now that everybody's working through. Gotcha. You've talked a little bit about seeing some weakness in the early part of the year on big ticket purchases. Talk a little bit about what you're seeing from your consumers from a consumption standpoint. There have been some retailers, and investors have asked some retailers that have kind of recently talked a little bit about consumption being weaker. Just talk a little bit about what you're seeing from your consumer from a consumption standpoint. Then we can kind of talk a little bit about credit as well. Yeah. I think what you're seeing is, or you're hearing rather from those retailers is consistent with what we've been seeing over the past six months to a year. We've talked about the K-economy and the people we serve because we're a full-spectrum lender. We see it all. You see the high-end customer pretty much doing pretty well. Inflation really hasn't impacted them to the same degree. Inflation has really impacted middle and lower-income Americans. You're seeing that pull through where consumers are pulling back on the bigger ticket purchases, remixing their spend to more of the non-discretionary spend. Instead of going for the name brand thing on the shelf, they're going to something maybe off-brand. Consumers are doing it really as best they can. I think they have been pretty resilient through this. We continue to monitor very carefully. People are making more trips to the store with smaller transactions and living more paycheck to paycheck. That's what you would expect in this environment. Overall, they're holding up. It continues to be a soft environment. Yeah. When you kind of relate it to the consumer's credit performance, I mean, you've put some numbers out there for an expectation about losses peaking. Can you talk a little bit about that and what gives you the confidence that you're going to see that peak and a follow-through of lower losses to follow? Yeah. We had signaled and remain steadfast in the belief that May will be our peak and May's results will come out next week. It's nothing different than what we had expected that they will peak in May. Then based on the delinquency that will accompany that, gives us a good line of sight into what the next six months should look like as the roll rates hold and things of that nature that give us confidence that losses should start to come down in the second half of the year and then set us up for 2025 with a better run rate than 2024. Great. And it is kind of interesting. I mean, obviously, the impact inflation has, the rate of inflation has started to slow, but obviously, things have not really turned around. And prices haven't fallen at all. They've just increased kind of at a slower rate. And you've got wage growth. What I guess when you think about that, what is it that you're hoping to see for the consumer? You talk a little bit about, I mean, is it kind of just wage growth kind of outpacing their cost of living increases? Talk to us a little bit about that. Yeah. I think you nailed it. I mean, that's the biggest part of the issue out there is that inflation has this compounding effect. And like you just said, yeah, inflation is moderating. It's starting to slow, but it's still higher than the Fed's target of 2%. And it's still compounding off of this period of elevated inflationary time. So you have these prices that are still way higher than what they were historically. And there's not any company out there that they can enjoy a higher price margin that isn't going to take it. So for prices to come, I see a couple of things. Wage growth needs to continue to go up. But when wage growth goes up, does that manifest itself into higher pricing to support higher wages? You know the cycle of economics. And then when do companies bring down pricing because demand is slowing? Now they're competing for the dollars for scarce dollars. And I think that's what needs to continue to happen. Rents need to start coming down. There's just going to be continued pressure for longer. And I think that's consistent with what our outlook has been, that inflation was going to be a little stickier. It's going to take some time for it to come down. Interest rates will remain higher longer. So all these things are going to continue to put some pressure on the consumer, but through disciplined underwriting, remixing our portfolio a little bit, it should continue to help us to see some improved credit optics. Maybe I think I neglected to actually ask about that. As you are looking, maybe you could expand on that theme a little bit. As you are kind of implementing what people call credit tightening or just as you're looking at the portfolio, what steps have you taken from a growth standpoint, new accounts in terms of to reflect what we're seeing in the current environment? Yeah. So we have, and this is consistent with what I think we've been saying for over the past year around. I say we're like the canary in the coal mine because we saw the pressure the consumer was going to feel as the COVID stimulus was unwinding and normalization. So when you are a full-spectrum lender, we saw that normalization faster. And then we saw the effect of inflation on the lower-end consumer sooner as well. So as that was happening, we were getting ahead of that through credit tightening and the actions. And what that means is, like for like, you're assuming certain risk scores are going to migrate lower, and they have. So you get ahead of that by treating certain risk scores as if they're not as strong as what they may have indicated on paper, and you reduce approval rates in that segment. Similarly, you provide lower line assignments, initial line assignments at the time a new account is underwritten. So you can then manage that risk, see how that customer performs, and then grow that line over time. We also reduced line increase programs. Basically, shut them down for a period of time until we get through this period to ensure the consumer is healthy and then strategically go back in and provide those line increases, which will help growth in the future. And then also risk detection where you shut down accounts. So all those things have been happening for the past couple of years as we've been working through this. And then at the same time, consumers are self-regulating and pulling back on their own in terms of spend and credit seeking. You have these couple of issues happening at the same time, impacting applications and then approval rates, which is moderating our growth in some of these programs. Is there a way to kind of measure, maybe not measure is the wrong word, but to kind of describe where you are in that process, the stuff that's been affected by the company in terms of its impact on growth? And in other words, are you at kind of recent peak? Is it the highest it's been, or is that something that probably will get to be greater as we go through 2024? When you say peak, referring to? I mean, the biggest impact on Bread's growth from the steps you've taken. Oh, yeah. Yeah. I think we have, I'll say, taken the most impactful actions are behind us. And now you're continuing to strategically look on the edges. And you always do. I mean, in any cycle. But yes, I'd say that's fair. So the impact to growth is that's largely behind us. That said, the CFPB late fee rule change could have some additional credit actions. And that's more so binary yes, no, where it just doesn't make sense to underwrite where it did before. Okay. You had made some comments about expecting the reserve rate to start to decline during 2024. Can you talk a little bit about what it takes for that to have that happen given where your losses are, your reserves are, and maybe how you think about your credit loss, getting the timeframe over which it can get back to something into your historical kind of normal range? Yeah. Our reserve rate has held pretty steady for the past year outside of fourth quarter seasonality. I think what we're hoping is that if it happens as we expect where we are peaking in second quarter and the economic outlook remains pretty steady, that should indicate that the reserve rate shouldn't need to go higher. Then it should start to drift down in time as delinquency continues to come down and the expected losses come down. We would expect the outlooks that we rely on for the models starts to improve for 2025, 2026. All these things coming together should start to have the reserve rate moderating down. I'll say hopefully by the end of the year, it starts to drift downward and then continue through next year. Got it. And in terms of the timeframe over which you think you might be getting into that range of your normal loss rate? Yeah. It's really based on the macroeconomic conditions. I don't think it's in 2025. I think it's probably just because I think this inflation and interest rates persist longer. I mean, you and I probably sit here and have a wager in terms of when that happens. It's just. Right. Gotcha. Okay. I did want to mention that if there are questions from the audience, you can kind of click on the link and they'll come directly to me, or you can email me if you'd like us to ask Perry a question. We've got a few minutes left. So, I guess one of the things that you as a management team have done at Bread is kind of worked on the right-hand side of the balance sheet also, both deposits and the debt stack. Maybe we could talk about those each for a moment. Talk about where you are in terms of the deposit funding and what you think about in terms of pricing from here. Bread, obviously, you went from having a very small deposit base. So we're kind of in terms of a leader from a pricing standpoint. Talk about how you think about that over the next year or two. Yeah. I think we expect to remain towards the top of the league table on pricing. We like deposits as a strategic funding source. And if you think about it, it's really replacing some of the brokered CDs. So it's a more attractive or at least equally attractive rate for us. Regulators like it better. We like it better because of the small size of the deposits relative to a brokered CD. So that's something we believe we can continue to compete to get the flows coming in. And we have, we continue to see flows almost every week positively. Not big jumps because we don't need big jumps. But again, we've set out a long time ago that it'd be good to get to about 50% of our funding as direct-to-consumer deposits. And we're continuing to march down that direction. And because of the funding structure, we don't have brick and mortar. We don't have checking accounts and all the costs that go around it. So we can offer very attractive rates on CDs and high-yield savings. Great. One of the other things that has gone on is you've done a lot of work kind of simplifying the parent company and its debt situation, issued new debt, repaid other tranches. Talk a little bit about where you are in that and kind of what that means from an overall capital and capital return standpoint. Yeah. We're really pleased and proud since I've joined and Ralph that we have been very responsible taking care of the balance sheet and getting this company to a much stronger position, both in terms of building capital, building the capital ratios, at the same time paying down debt, and at the same time, again, having an appropriate conservative and appropriate CECL reserve. So we speak specifically to the parent debt. We've got our maturities out past 2028. We have regular way bonds in place now. We got rated back in November of last year. So having paid down over $1.8 billion of debt, we're very close to having achieved that leverage ratio of that 115% that we put out there. That should happen at some point this year. That then allows us to continue to march on along the capital priorities, which have not changed that we have shared. I'll give a little bit more insight, obviously, during our Investor Day, but it's to support responsible growth, continue to invest in our technology capabilities, improve our capital ratios, and continue to take care of debt as we need to, while at the same time supporting the dividend that we have in place. Got it. I did get a question come in going back to the late fee issue. Kind of talk a little bit about one of the things that actually my partner in our Washington research group has talked about is the potential for the CFPB to actually eliminate the safe harbor, but maybe take that to a broader question as to how you think about the costs involved in a late fee. I would assume that you believe your costs are actually higher than $8. The specific question was, what happens if the safe harbor goes away? Maybe you could broaden that and talk a little bit about the idea of the cost side from a late fee issue. Yeah. So when you think about the concept, right, there's a cost to collect, which is a very narrow interpretation of what a late fee is intended to be. And so if you go and read the CARD Act, it's a penalty fee. A penalty fee is different than a cost fee. And Congress knew what they were doing when they wrote CARD Act because when one of the Durbin Acts where they were regulating debit interchange, it was a cost approach. A penalty fee has a deterrent factor to it. So there needs to be a consideration. So yes, a component of a penalty fee can be cost, a cost to collect, but it's also a cost to lend. I think the CFPB is trying to be very narrow in their view of what a late fee should be and not what a late fee is intended to be as a penalty fee. Yeah. Perhaps the CFPB will start to force municipalities to cut speeding tickets to $8. Well, or have you ever had your accountant file your return slightly late? Have you seen what that looks like? Yeah. Okay. Maybe just if you kind of put all the things together that we've talked about in terms of things going on with respect to kind of the loan growth outlook and kind of yield, you talk a little bit about how you're looking at your net interest margin from here. Maybe think about that perhaps absent any changes kind of in the late fee thing. Just talk a little bit about where you are in that evolution of your net interest margin. Yeah. I think you could think about net interest margin is going to move around a little bit, right? So we would expect second quarter to be a little lower than first quarter. You have some seasonal movement in there, but at the same time, you also have peak losses, which means you're going to have the most amount of reversal of interest and fee, which will drag that. As you move through the year into next year, those start to improve, but if interest rates start to come down, we're going to be slightly compressed because we're asset sensitive. You also have remixing of product over time. So there's so many moving parts that will affect net interest margin. And as we have better line of sight into each of those assumptions, we'll obviously be able to give a bit more tighter guidance by quarter and by year. Right now, hopefully, it kind of stays pretty steady, but it can continue to move around a little bit with seasonal movement and the influence of rate changes. Great. And I think with that, we're largely out of time at this point. I would just thank Perry and Bread for joining us and mentioned that there will be a lot more detail coming from them in their investor day in just over a week. So thanks again. And thanks to the audience and have a great weekend.