Okay, so, I think we're going to start. Welcome everyone, to the 22nd Annual Barclays Global Financial Services Conference. My name is Terry Ma, the Consumer Finance Analyst at Barclays, and we're very pleased to have Bread Financial with us, a leading private label credit card issuer. From Bread, we have Perry Beberman, the CFO. So welcome.
Thank you for having me.
Yeah. So let's just jump right into it. Maybe just give us a mark-to-market on the third quarter. Any updates on P&L trends we should expect in the third quarter?
Yeah, I think when you're looking at what's happened with our trends, let's start with sales. Sales remaining a little softer, given what's happening in the macro environment. I think everyone's seeing what we're seeing, with, you know, retailers talking about their own trends. Big ticket purchases are down, more of those, I'll call it, discretionary large tickets are down, so that's going to impact us a little bit. But when you look specifically at the third quarter income statement for us, consistent with what we said, we expect expenses to go up a little bit in the third quarter as a result of Saks coming online, as well as an increase in marketing in the third quarter.
And then sequentially from there into the fourth quarter, there's continued to be an increase in expenses further with increased marketing and seasonal increase in our HR employee costs related largely to benefits. As we look at our tax rate, the tax rate should be around 30% for the third quarter, a little higher than the full year, but it doesn't change our full year guidance, except for the convertible. So the convertible that we repurchased, we repurchased 75% of our $316 million of the convertible outstanding. And with that will be. It'll cost us about $380 million to repurchase that 75%. That will result in a $100 million one-time charge into the P&L in the third quarter.
So that will then, when I talk about the tax rate, that will obviously put the tax rate into a different number than the 30% it would have been without that.
Got it. That's a helpful update. And you touched on this a little bit, but maybe just expand on it a little more, the trends in big ticket and discretionary spend you saw in the third quarter.
Yeah, so we were seeing some softness in some of the big ticket. You can think about that as jewelry purchases, home furnishings. That had been occurring in the second quarter as well, so it's been a consistent theme throughout the year, and it's continuing on into the third quarter.
Okay, helpful. And then, based on the trends you're seeing, what can you say about the health of the consumer? Like, we had a worse than expected unemployment rate in July. Have you seen any signs of that kind of manifest itself in borrower behavior?
Yeah, so when I think about the consumer, things are largely playing out as we would have expected, say, eighteen months ago, with, I'd say, inflation coming down slightly. But I would say that, inflation is coming down a little slower this year than what had been projected, had you been thinking about this eighteen months ago. But what we said is when inflation comes down, it was going to get offset with some increase in unemployment. So yeah, there was a print in July that got people a little worked up. I think that print in July or August was more around the inflow of people looking for jobs, not about job loss. And now you're into the print that we just had. Unemployment came down slightly. So, you know, unemployment, while it's up from its lows, it's still in a pretty good place.
And I think, you know, I know no one wants to give the Fed credit. I think they're doing a decent job navigating this. Obviously, with an expectation, there'll be some interest rate cuts. That may help the consumer and may start to, again, allow companies to, you know, invest a bit more, but, you know, we'll see. But right now, we're all talking about a soft landing, as a soft Fed economist the other day talked about. A soft landing still means the plane's coming down, right? It means the economy is getting a little weaker, but hopefully it doesn't, you know, have a hard landing. I mean, it's going to be bumpy, and I do expect there's going to be some sectors that are going to feel a little bit more with unemployment.
But when you manifest that or turn that into what it means to consumers, consumers are being responsible with credit. Obviously, there's some increased borrowing. Credit card debt is at some of its highest levels. But again, that's how credit card companies make money by borrowing it, you know, with the right return on risk, and we do a really good job with that. Consumers, you know, even with the slight uptick in unemployment, delinquencies remain stable for us as a result of credit actions we've taken. You know, I'll give you a little context on what I expect for loss rates. Loss rates we've indicated would be around 8% or slightly below for the third quarter. Still hold to that view. Fourth quarter will then increase to about 8.3%. Again, that's still our current view.
One thing I would comment on, though, is when we look at what's happening with, I'll say, the inflation not coming down as much as we thought and the consumers not benefiting as much. I think we're going to see around delinquency and loss rates are going to follow more seasonal patterns. Meaning even going into the first quarter of next year, we're going to see some upward pressure on that rate just because the improvement in the macro environment really hasn't come through as much as I think people would have hoped, and until that happens, that's what I would expect.
Got it. So that's on the near term. On the long term, you reiterated your long-term charge off guide of 6%. Fiscal year twenty-four is expected to be above 8%. So maybe just talk about the drivers of getting down there in the timeline.
Terry, that's the question we're all trying to sort through, what does that timeline look like? You know, I've indicated before, I expect there to be a prolonged period of elevated delinquency and inflation, and I mean, and charge-offs. So while I'd love to say, boy, we'll exit 2025 at 6%, I just don't see a path to that. I think what's going to happen is, it took a long time for this problem to build, meaning this, you know, where cumulative inflation has compounded itself on the price of things that consumers pay for. Wage growth hasn't kept up, and so when you think about what needs to occur for the consumer to have relief, it's going to take time for wage growth to outpace inflation, for them to get a handle on their finances.
And they have, you know, accumulated more debt, so it will take, you know, I think, a prolonged number of quarters, you know, into. I'm not saying years, but it's going to take more than, you know, 12 months. You know, I wish I had the crystal ball to know how, at the speed at which that can happen. I just think it's going to be one of these slow things. Not like the great financial crisis, where you had this, you know, huge influx of, I'll say, strategic defaulting by consumers. They all went bankrupt and, you know, cleansed their debt with the mortgages they had. This is not that issue, right? This is not a problem that's a mortgage-driven issue, nor do I expect there to be a high degree of unemployment.
So it's just going to mean a slow, steady burn to, say, of improvement in time.
Got it. If you were to look at your vintage performance, any color you can kind of provide on how the more recent vintages, like 2023, are performing relative to twenty twenty-one and 2022 and even pre-pandemic?
Yeah, we do look at the vintage curves all the time, and the recent vintages are performing, you know, more in line with what we expected due to the credit actions. But I'd say all the prior vintages are, you know, the same thing. They've felt the effect of inflation, and it's just going to take time for all of them to cure. So no one particular vintage that's causing an issue in our portfolio. So we've taken actions ever since the pandemic, never really opened up the buy box, and have continued to tighten since. It just seems like, I'll say, you can't get ahead of it because the consumer, once they go delinquent, just can't seem to get out of delinquency, and the one thing we can't control, well, we can control our own credit actions.
We can't control credit actions of other underwriters, and our consumers may be looking for credit elsewhere, despite our best effort to tighten down credit that they have with us.
Got it. That makes sense. And maybe just turning to the reserve rate, ended last quarter at 12.2%, and you're expecting to exit the year lower versus 2023. But yet the reserve rate is still going to be noticeably higher than CECL Day One at 9.3%. So how should we think about the medium-term target, and do charge-offs need to hit 6% before you drift back down into that range for reserve ratio?
I'll answer the last part last. They don't have to hit 6% for our reserve rate to come meaningfully down. Near term, I expect the reserve rate third quarter to be very stable to what it was in the second quarter. It hasn't been a lot that has changed. You're going to see some, as I mentioned earlier, seasonal movement with our loss rate. So, you know, losses being lower in the third quarter, going back up in the fourth quarter. So again, the reserve rate being stable to the second quarter still should allow seasonal movement down in the fourth quarter, which would put us slightly below where we were at the end of last year. I would say earlier in the year, it might have been a little bit more below than the word slightly. It might have been modestly below.
Now it's slightly below because things haven't improved as much as we thought. But when you look towards next year, I would expect as we continue to have a better outlook on the economy, we can then unwind some of those, you know, the credit risk overlays that we put in, where we weight more of the adverse and severely adverse scenarios. Which is why, you know, when people ask me questions, "Well, what if unemployment goes to 5%?" We've got much of that cared for in our reserve rate if that were to happen, because we do have a weighting of some severely adverse scenarios in there, or not saying severely, I'll say adverse.
Got it. As a follow-up to that, is there a level of the unemployment rate that your reserve rate currently contemplates?
The reserve rate contemplates a weighting of the Moody's baseline, which has the reserve rate around, you know, 4.1%-4.2% as a baseline rate. And then we weight the scenarios, which are an adverse, called an S3, S4, adverse and severely adverse, that have reserve-- that have unemployment rates jumping up to 7%-8% in a pretty quick fashion. So those are weighted into the overall reserve. But the baseline model is using the Moody's baseline unemployment, you know, considerations, which is only, you know, basically where it is today.
Got it. Maybe turning to loan growth. You're targeting low- to mid-single-digit growth in the medium term, and mid- to high single-digit growth longer term. Maybe just talk about what products or verticals that's driving that outlook.
Yeah. So a couple things. Near term, as the macro environment improves, we got a couple tailwinds happening, right? Right now, our loss rates are, as you mentioned, elevated well above the 6% target. And that's... You think about losses, it's gross losses. So the 6% is really more like a, you know, 8-9% when you factor in the reversal of interest and fees, that's gross losses. Today's 8% might be more like a 12% gross loss rate. That's 12% of your loans coming out as a result of losses. As losses improving, migrates back down to the 6% target, that's a tailwind to growth. Then you, in that environment, you have consumers who are healthier, spending more, tailwind to growth. At the same time, that means more consumers will be looking for credit.
Top of the funnel applications improve. And then also our approval rates will improve. Another tailwind of growth. And then as well, the last piece would be you would stop the right now risk detection actions that continue to suppress credit access to customers. We can unwind some of that, including increasing the lines again to consumers and then increasing initial line assignments. So there's a lot of things without even booking a new partner, that should be a tailwind to growth. And then we'll, you know, around the mix of product, we'll continue to diversify our products. You know, you can see the progress that we've made over the past few years, trying to move away from soft goods private label as a concentration. More broadly, getting to more general purpose cards, including proprietary cards, more co-brand cards.
You've seen us establish more of that, I'll say, travel and entertainment vertical with AAA, NFL, and as well, more recently, it's called a technology vertical, where you have, you know, HP and Dell in there.
Okay, that's helpful. Maybe just switching gears and turning to late fees. What's the update on that, and more importantly, the revenue impact? I think the last guide you gave was a decline of 20%, but I also assumed an October first implementation date, which looks highly unlikely, at least to me. So maybe just talk about the update there.
Yeah. I'm surprised you're asking a question about late fees. In fact, maybe this long into the twenty-sixth minute. Mark, you know, what we know is what you guys know, right? That the parties are still debating over where the litigation will occur. That happened on, you know, August twenty-seventh. There was a hearing with Judge Pittman. He heard the case from each party. We're waiting on his ruling. We didn't know if he was going to come out with a ruling the very next morning, because often it seems as though he already has a preordained decision. This time, it seems he's taking some time. Not sure. We're hearing that, you know, again, I don't know. We know he doesn't want the case. He wants to kick the case to DC.
But it's pretty clear from the appellate court that they believe the course has merits to be in, you know, Judge Pittman's court. So whether or not he decides to kick it again or try to, it's anybody's guess. From what I understand, the industry is ready to file an appeal as soon as a ruling comes out, if it goes against the industry. You know, nobody knows how long this is going to play out. Not sure if this is going to wait till after the elections, what happens, but, you know, I think everybody, you know, who's been around litigation tells us things take a long time, and I think you're starting to see that play out. So your point on it not being October first, I think that's a guarantee. There will be no impact October first.
Back in our second quarter earnings, we gave guidance that we removed the impact of 20% from this year because we do not believe there will be an impact. Right now we're building out our base case for what that might be for 2025. Thinking the impact could maybe occur mid-year, but we'll give some guidance when we give 2025's, you know, financial guidance around what we would assume and when that might impact. Because the numbers would possibly look a little different because we'll be, you know, hopefully accreting and building some revenue in advance through some early mitigation actions. And we'll have a better hand on what exactly that would be, and then what the assumptions would be if the late fees were to go into effect in a particular quarter.
Got it. So on that topic of mitigants, any update there as to kind of what you've implemented so far and what's kind of left in the pipeline to roll out?
Yeah. So we're still, you know, working with every partner, and as we noted previously, each partner has different motivations to take actions on certain levers sooner or later, depending on, I'll say, their profit share construct. Some are highly incented because they're on a very robust profit share. So if there's a way for them to make more money now by increasing fees or APRs, you know, they were early takers on those actions. Others are concerned about being out of market with APR increases relative to, say, programs that look like theirs, and they wanted to wait. So those other programs we're seeing in the market go up, okay, they're now safe, they're comfortable. Because what they don't want to do is do something detrimental to their customers and program that would affect their sales sooner than needs to be done.
So some are waiting for, okay, we're on board now. They've signed, you know, papered up the contracts of what it would look like if the late fee rule goes into effect. So not all programs are going to have increased APRs or introducing fees, where some get it and want to do it sooner, and they'll share in the revenue. Some cases, we will give that revenue in some part back into the program, to grow the program now. So they're all a little different. You're going to start to see some revenue accretion, I'd say, start to come through maybe a little bit in the fourth quarter, more in the first, more in the second of next year. And, we'll give some guidance around that as we get closer to it.
Got it. It sounds like it's a complicated process.
Yes.
If you had to say, like, what inning are you in with respect to implementing the actual mitigant or getting all the partners on board?
Yeah. I think we're probably in the eighth inning in terms of getting the partners on board. So all partners have had conversations. All the major partners understand what needs to get done. Nobody likes this. Let's just start with that. You know, we don't like what we have to do here to increase APRs on people who pay on time, introduce new fees. It's not what we want to do, but it's a necessary thing, you know, to get the appropriate returns on capital that all shareholders expect. And we've been very vocal about what these actions will look like, and it's playing out exactly as we said it would when this late fee rule got introduced by the CFPB. In terms of mitigation, so that you asked two questions, right?
One is, where are you at with the partners in agreeing to what needs to get done? We're very far down that path. In terms of rolling things out, probably more third, fourth inning, just because it's a sequencing and timing and the roll out and then the build of the benefit. Again, we've talked before about APRs take time, take years to get the full value out of that.
Got it. That's helpful. Maybe just touch on the customer response. Out of this stuff you have kind of implemented, have you noticed any change or early changes in customer behavior, whether it's in response to higher APRs or paper statement fees?
The higher APRs, you know, when you have customers who need credit and that are borrowing, tend to accept it, and in some cases, if they're going from, you know, a 31% APR to a 34%-35% APR, it's not as dramatic. And I think what's happening right now as well is, not I think I know, it's across the industry, APRs are going up everywhere. All issuers are increasing APRs, so this is a they can't point to any one card and say, "Well, geez, you're increasing my APR, and no one else's." It is. It's happening. Paper statement fees, there's a path to free, meaning just sign up for digital statements, and that's the goal. So we have a very liberal policy initially, right, to waive the fees, help the customer to get a digital statement.
What that does for us, it benefits the company through a lower, you know, operating cost in the future.
Got it. That's helpful. In terms of the actual kind of incremental revenue you expect to generate from your mitigants, is there any kind of framework you can give to help investors size the impact of mitigants ultimately? Obviously, you had a close peer put out an actual range. Like, is there any framework to kind of help investors get to a certain number?
I'd say a couple of things. One is we're going to give more guidance on that because the real impact and value is going to happen in 2025, based on the sequencing of how we're putting things in place for our partners. And I'm also a little bit cautious of, you know, raising a, you know, saying, "Hey, look at us, look at what how much incremental revenue we're raising." I don't think the regulator, you know, the CFPB will look too kindly on that either, but that is a natural outcome of what we said, right? I mean, I think all the issuers, the whole industry said this. They changed the late fees, and they want to save, what they say, they save the consumer billions of dollars. Okay, they're saving the consumer billions of dollars who went late.
Now, consumers who are paying on time are going to pay billions of dollars in higher interest and fees. We've said all along, this is going to be net neutral in a period of time. It's just a matter of when, and we'll give more guidance on, you know, the impact to our revenues as we give 2025 guidance.
Okay, fair enough. Switching gears and maybe just talking about partnerships. You recently announced the Saks partnership, partnership with HP with a BNPL option. Maybe just talk about the market for both co-brand and private label partnerships. What are you seeing there with respect to competition?
I think with competition in this industry, and I've shockingly been in this industry for over thirty-five years, yeah, it always ebbs and flows. You have some competitors leaning in more heavily at times. Sometimes you see irrational pricing. Some then lean out, depending upon what's going on with their particular bank or balance sheet, capital rules. Right now, what happens in the co-brand and private label space is there's just a timing of when contracts come up for renewal, right? So the pipeline remains pretty steady, and you can project out three years. You know, I'll say the industry consultants, we know the brands that are going to come up for renewal at different times, and it's just a matter of being ready, being engaged, and we get a look at almost every deal that comes to market.
So the pipeline's robust. We have to be selective. We have to be disciplined. And what's different today with these opportunities is when you make a proposal because of the CFPB pending late fee rule, you have to say, "Okay, well, here is, you know, the construct if there is no late fee change, and then here's plan B." If that late fee change goes into effect, you're basically papering what actions need to happen. So there's not this debate that may be happening with some of your existing partners, and so through negotiation, it's basically predetermined.
Got it. If I were to look at your credit sales by categories, about 51% co-brand, 44% private label, guess what looks more attractive longer term for growth? Is there... Are you trying to tilt it one way or the other?
I like more general purpose spend because it gives you more diversification of spend. And so as consumers flex between discretionary, non-discretionary, that gives more value to us, and I think they tend to tilt to be a little bit lower-risk customer. So when we think about what's happening in the private label industry as a whole, you'll hear I get questions where private label tends to be shrinking. But what people are kind of missing with that is not exactly, right? The retail partnership or retail cards, it's not shrinking. If you take private label, think about those as your down-sell products. People who are not eligible for a co-brand, where you don't want to give them a higher line where they can go use the card anywhere.
So often, what's happening is, say, twenty years ago, private label is just a store card. You can only use it in the store. Now, most retailers want to have a store card where they have their brand as a co-brand, and then you downsell to a private label. So you really have to stack the private label plus the co-brand together to see what is truly the trajectory of brand partner programs. And I think it's still a very attractive business model for retailers.
Got it. And what are you seeing from new entrants? We've seen some newer entrants, like Imprint, pick up some retail relationships. What can you say about those entrants?
Yeah, I think. We'll see how some of those play out. I think the more sophisticated players with bigger balance sheets, who have the analytics, who can underwrite deeper, who, you know, understand how the return model works, when you look at the industry, they have tended to be the ones who have persevered the longest. I've seen a lot of new entrants come in over the past few years, and you're watching a lot of entrants fade away. So, this is a hard business. It has a, I'd say, with a regulatory environment, a pretty high barrier to entry. So, you know, wish these guys luck, obviously, and competition's good, but not overly concerned about what it means to us.
Got it. Switching gears again and going to capital allocation. Bread's made strides in balance sheet management, paying down parent company debt, increasing deposits, and improving overall capital ratios. Can you maybe just talk about your near-term and intermediate-term priorities?
Yeah. Near term, I think you could tell that we are still very focused on taking care of our parent debt. As the recent announcement of reducing 75% of our convertible, we still have $100 million of a stub that we will take out, probably by the first quarter of next year. Our capital ratios will be impacted a little bit. You know, we won't make as much ground in increasing them because of the $100 million one-time charge in this quarter. We will have a 65 basis point impact from the final CECL phase-in in the first quarter of next year. So those are near-term capital priorities to make sure we're tackling all these things.
Then we still need to hit the capital ratios that we laid out in our investor day, as well as make sure we have enough capital for potential growth. You know, we talked about a robust pipeline. You know, again, we generate a lot of capital that should be able to support that. The one thing you're obviously watching for is what's going to happen with macro and then the CFPB late fee change. So if that goes into effect, you know, you might see us hold a little more capital in advance of going into that, if we believe that could be an effective question: is when does that happen? Does it happen mid-next year? Does it get pushed out to 2026? It's something, though, that will impact our readiness to do anything more meaningfully with our capital.
Got it. That's helpful. CET1's about 13.8% last quarter. You mentioned the 65 basis points from the last CECL phase-in, and then obviously moving pieces around regulatory. So at what point should investors start thinking about a buyback? How do we think about that?
Yeah. Really, the what I just said in the, the last response kind of lays it out, right? It's, it's the unknowns. I would say that, okay, if the macro improves really well and the CFPB weren't happening at all, wasn't even on the horizon, you know, that's a sooner than later. If you believe the CFPB effect could happen, then that has a meaningful reduction in revenue in the initial quarter. So, that's the big wild card for me. The other thing we'll do at some point, hopefully, you know, we've commented that we'd like to do some subordinated debt. That will improve the capital stack.
You know, we'll be opportunistic in what we do with our balance sheet, but we've got a couple big unknowns out there that are just giving me caution to be too specific around when a more meaningful share repurchase could happen.
Got it. At your investor day, you highlighted your ability to underwrite deeper in the non-prime space-
Mm-hmm.
Which has led to higher risk-adjusted returns. Maybe just talk about your, what you see your competitive advantages, in that area that allows you to do that.
Yeah. Some of it is, you know, the partners we have are terrific partners, and we make sure that, you know, we're able to unlock credit sales for them. And that's done through our ability to have lower lines, appropriate APRs for the risk, along with the late fees. It produces a revenue yield that allows for that risk-adjusted margin. And I don't know if it's, you know, they have different risk appetites. Like, you could think about the big banks certainly have different risk appetites. They don't want to go near near-prime customers, where us, we're comfortable going there because we get paid for the risk and, you know, we know how to manage it.
Got it. We have about nine minutes left. I'll just queue up the one audience response question we have. So the question is: Over the next year, would you expect your position in Bread to, one, increase, two, decrease, or three, stay the same?
Is this for me to answer? Mine's going to increase.
... Oh, so it's actually fairly evenly split. 35% increase, 31% decrease, and 35% stay the same. Any comments? Okay. That's a big ask. Okay, so we have nine minutes left. I'll just open it up to the audience for questions if there are any. We have one up in the front, second row.
I think of your retail partnerships as being kind of smaller and very diversified. How big a partnership could you go after? I mean, on the one hand, you know, a lot of potential revenue on the table if you win a much bigger partnership. On the other hand, it kind of. There's always risk with kind of concentration in a small number of bigger partners. So how do you think about that?
Yeah, I think about it pretty much as you just said it, right? If and there's a number of big partnerships out there you could always think about, and the ones that could be a Walmart, you know, Amazon, Apple Card more recently. Those are so big, one, they would require a capital infusion to take on something, you know, about 10 billion or above. And they often come with really thin returns. So to do something like that, you know, you probably want to be in a position where you can offer other types of products to the broader firm, or you just have-- you're just accepting much lower return on capital.
You know, from my seat right now, that's not really the position to be in, because then five years, seven years, when that contract comes up for renewal, you've got the concentration risk that you just said, so either you're going to continue to pay more to keep that partner, or you're going to lose the partner, and then it creates a pretty disruptive environment, and I think when I look at the opportunity in front of us, I have a good line of sight into the pipeline over the next few years: what's coming to market, where we're engaged with conversations, and we want to be very disciplined with that.
Because going back to the conversation we had earlier around, you know, hitting our own internal capital ratios and self-generating capital that we could use to pursue new opportunities, it, you want to fit that within your organic structure. Otherwise, to go after something big, it would take some other type of capital work to make that happen.
Hi there. Thanks for being here today. Just a quick question back to late fees. Several of the analyses we've seen that have been performed suggest that Bread's share of income from late fees is a good deal higher than some of the other major issuers, and so aside from the sort of, let's call it short-term tactical steps that frankly, all issuers are taking regarding APRs, other forms of fees, given that fact that I just stated, are there any longer-term, more strategic things that you're contemplating in terms of your business – a change to the business model, a change to that sort of risk-return base that you talked about? Thank you.
Yeah, excellent question, and exactly right. Given who we underwrite, we do have a larger % of our revenue that's associated with late fees than all the major peers. And so that means we have to take APRs up a little bit higher. We have to have, you know, the willingness to do the, you know, little bit higher statement fee and eventually drive down operating costs associated with it. We may have to introduce promotional fees on big-ticket purchases, annual fees for, you know, people who are higher-risk credit. So those things could happen. And yes, we've contemplated a little bit, possibly lower return, if that's what happens, because we're also then going to tighten credit.
We may no longer underwrite certain portions of the portfolio who really had strong returns before, which means it does free up capital to pursue other things in the pipeline. So I don't think it structurally changes who we are. But then within that, to get the right returns, there's also going to be partner compensation adjustments, where we can no longer make certain programs work. If they want us to keep underwriting deep, there's going to be concessions on that front. So it will evolve, you know, the entire program, but again, that's all been contemplated in the return targets that we laid out during our Investor Day.
One question here.
I'm curious what's going on with the Walmart partnership. I mean, it ended badly with Synchrony, and then it ended badly with Cap One. I mean, is it still... I think it's still open, isn't it? What, we haven't partnered with anybody yet. Is that right?
I'm not aware of who they are partnering with, but you would think it's going to be someone that's of a larger size. It's certainly something that we were asked to contemplate. But to your point, exactly. That's a tough partnership, right? It doesn't seem to end well for anyone, and it's one that you know is going to have a thin return, that will be a very demanding partner, and you know, where it sounds like an attractive partnership for a company like ours, given our underwriting capabilities, just our capabilities overall, but it's something strategically you have to really think long and hard about.
Okay, a few minutes left. One last question over there.
Thank you. You noted uncertainty in macro. Sorry if I missed... If I did, you can question with where, where are we? What are you watching, thinking about your buy box and so forth, your reserve levels? Thank you.
Yeah. So I'll just reiterate some of what we said earlier. You know, I'm watching the pace at which inflation's come down. Well, I'd say earlier in the year or the end of last year, we expect it to come down a little faster. It has remained sticky. While improving, that's very encouraging. I'm watching wage growth against that, obviously watching payroll. Unemployment is pretty good, right? It's 4.1%, I'd say that's a pretty good environment overall. If that starts to really step up, that would be concerning. But if it starts to creep up to 4.5%-5%, I think that can be expected, presuming that inflation really comes down, interest rates come down, some relief comes to the average American household. That's what I'm looking for.
I think the reserve rate is gonna remain elevated until which time you see those indicators come down. Now, when you run a reserve model, unemployment is one of those indicators. So if, you know, the unemployment starts to, you know, get up towards that 5%, the core baseline model will produce a higher output, meaning the rate, the reserve rate should be higher. However, you may be going to that, running that model with a better credit quality pool of the portfolio, so that might offset a little lower. And then the overlays that we put in, which are for higher interest rates, now would be lower interest rates. That would be a benefit.
At the same time, you would also then be able to unwind some of the credit risk overlays that you put in place to assume there could be an environment with that getting that 5%. So you would unwind some of those weightings of the adverse and severely adverse, so, you know, the reserve is, from what I can see right now, will remain pretty stable, coming down modestly in time as both credit quality improves and our confidence in the macro environment remains stable to improving.
Okay, great. Any more questions? Okay, so we'll wrap it up there.
Thank you, Terry. Appreciate it.