Thank you for having me.
We don't have any drama to deal with?
Nothing's going on globally. I think we're pretty steady as we go.
Okay. Well, there's a lot to talk about, but I'd like to start these out, Perry. We have a lot more generalist interest in the financials, so give us kind of a 30,000-foot overview of what Bread Financial is all about.
Yeah. At Bread, we've been on a multi-year transformation of the company to really get focused on being a pure-play financial services company. There was consumer finance offering credit cards, some, I'll say Buy Now, Pay Later offerings in the form of installment loans, not really in the split payment space. Focused on direct-to-consumer deposits as a funding mechanism that's grown substantially over the years to now where it's getting close to 50% of our overall funding. We've really focused on our tech transformation efforts, tech modernization. A lot of investment in that in both talent and capabilities that we've been leaning in on.
Actually more recent, over my tenure, which is now almost five years, has been on, you know, completely transforming the capital stack of the company. That we really have gotten to a point of it's basically completed with the last leg being a little bit more preferred issuance over the course of the year. The company overall has really been very disciplined and it's reflected in the ratings we've had in terms of the way we run the place. We're real proud of what we've accomplished.
Yeah.
What's gonna go?
It's been amazing, the transformation.
I appreciate that.
We'll get into a lot of that in a couple of minutes. Maybe also for the benefit of the audience, you touch a lot of different areas of the economy. You see a lot of the trends that probably happened before we even realized it. How are you feeling about the overall state of the consumer and the state of the economy?
Yeah, I would say up until this past week, so let's leave this past week of what's going on in the Middle East out of it just for a second. I would have said the consumer, as I've been saying for a bit, has been very resilient, and we're very pleased with the consumers that we're seeing, that we serve. They've been dealing with this higher unemployment environment for, you know, since post-COVID. They've been dealing with 30% food prices and everything being up due to inflation over that period of time. They're managing, they're making choices. You can see that reflected in continued improved credit. And that's what we look for, spend and where they're spending. They're making good choices. Everything's been stable, and I'd say stable to slightly improving.
We were on a nice glide path, I'd say on inflation. Again, we're seeing how the tariff thing is playing through. I think today's CPI post was solid.
Yeah.
Where, again, the big concern about tariffs and what it's gonna do to inflation hasn't pulled through in a meaningful way. Those concerns are a little less. You know, job markets have been, again, stable. While they may be softening a little, they're not yet weak. I think from if you believe in what the administration's intent was to drive better trade deals, it's got more investment in the U.S. economy, should create more jobs. I think it's just a matter of timing of those, if those trade deals actually come to fruition. I'd say I'm overall constructive on the consumer and what we have been seeing to this point and what the expectation was going for the rest of the year into next year. Now we'll caveat that with what's happening with oil prices and what that could mean.
It's now a matter of what do you believe in terms of how high does the cost of oil go? What does it mean for fuel not just at the gas pump, but it translates into everything in our economy.
Mm-hmm.
From plastics production. Everything's oil-based goods, whether it's fertilizer, transporting all goods across the country. It's going to have inflationary pressure. That's a matter of what does that translate into is how high does the price of oil go, and for what duration will it be an impact?
How important are gas prices to overall trends that you see?
If the gas prices, consumers, and you look at where gas prices are now, I think they're back close to where maybe where they were in 2022.
Yeah.
It's not in a bad place, but the question is, if gas prices go really high for a really long period of time, consumers have to make a choice. Like, the consumers we serve, I have pretty good confidence they'll make a good choice. Maybe they'll eat out a little less. They'll cook at home more. They might take a, you know, less of a vacation. They have choices to make, and I think they've dealt with some really high inflationary periods, so they'll adapt. Again, one of the things that pressures the middle American family is inflation. It's something to watch for, and it's really a matter of the degree of that inflation.
I mean, we did some back-of-the-envelope math that if the price of a barrel of oil goes up to about $150 and it persisted, that might translate into 200 basis points-250 basis points of upward pressure on inflation. Take the 2.5% inflation goes to 4.5%-%5. That's not a good place to be, but it kind of gives a little bit of a boundary of what this might look like. I hope it doesn't do that, but that's what we're talking about. We're not talking about COVID level in post-COVID inflation, but it's still meaningful.
Okay. Good. As all these sessions, if you have questions, just feel free to put up your hand and we can handle it. Spending volume standpoint, what are you seeing on volumes and kind of what does the mix look like so far this quarter year, you know, year to date?
Yeah. Year to date, spend has continued to be strong. We exited last year with decent spend growth. We're continuing to see that pull through into, you know, February to date, even with a little bit of impact from the storms that happened, you know, across the country at the end of January and a little bit of the Northeast storms in February has not really impacted growth in a meaningful way. I'd say spend growth in a meaningful way.
Mm-hmm.
You can see that translating now to the point where we've inflected to loan growth. Now it's pulling through.
Okay, good. You gave an update this morning on credit trends. Your stock's up. Brian's happy, you're happy. What can we pull from these credit trends that you think would send the stock up, and what are you generally seeing from a credit point of view?
Of course, it's always nice when the stock is holding strong and going up. Again, for us,
It could change in five minutes.
I know. It probably already has because you said something. Yeah, what you know we're looking for is honestly, it's just delivering consistent, good, improving results. We're on a path to continue to improve our credit metrics. The credit team's doing a terrific job. You know, we're on a glide path, right? We had a 90 basis point improvement in our loss rate versus last year. We're down to 7.7%. It's seasonally high in February. It'll come down in March.
Because of the credit trends that we've already seen in January and February with our line of sight with where delinquency is and what that means, you know, for the next six months, you know, we have confidence that we'll be at the lower end of the guide for the year, where we had 7.2%-7.4% already with what we've seen so far this quarter should put us in a place to be on the low end of that guide.
Yeah.
Feeling good about that. Again, the resilient consumer, even if there was some pressure on inflation for some of this year, still feel pretty good about where that is. That, where we feel good about the loss side and delinquency, does not contemplate what could be incremental benefits from tax refunds.
Mm-hmm.
We gave a guide for the year. You know, we assume more of a, you know, say, prior year or so tax refund season because you just don't know how consumers are gonna use the 10% higher refund check. It's too early to see that, but I'm hoping in the next couple of weeks and then into April and May, we'll have a really good handle on whether they use it to spend more or do they use it to pay down debt, improve delinquency, which then further improves the loss.
Do you have a preference? Is there one that's better for the?
I'll always take those dollars coming in to pay down delinquent balances that then improves the losses.
Okay. Good. Just to remind us of where the credit metrics are today. We'll talk a little bit more about credit, but just kinda remind people, you alluded to it, but where are you at today and where do you wanna be?
Overall for the year, I alluded to the fact that we are trending to that 7.2%-7.4% range. Hopefully the low end. We're trying to get down to around 6% is what we call our target range, and that's just gonna take time to get there. You know, we were up as high as 8.5% and, you know, because of inflation, it was again a strong labor market. It wasn't that. That wasn't the issue. Now it's just taking time to continue to book new vintages. You think about new vintages that we put on, we target them to be around 6%. But in the first 12 to 18 months, they kinda hit that peak level, which is well above 6%. That's called seasoning.
They're still seasoning in, and they'll help get us down to where we need to be. The credit risk mix of the newer vintages are very strong with some of the highest VantageScore that we've ever had in the new vintages, as well as the average income's close to $95,000 on those new vintages. Again, that's stronger than the, I'll say, the average of the entire portfolio around $78,000 average income. Feel very confident in the path that we're on.
Mm-hmm. We see the numbers, you know, obviously we pay attention to it every month and what you print and what you say. But what do you guys look for behind the scenes to kind of project and indicate that losses are generally trending in the right direction or maybe potentially going up? What do you guys look at behind the scenes?
Obviously it's the distribution of credit scores. Any migration of credit scores up, down, sideways. You're looking at payment behaviors. How are payment rates coming in on the different risk cohorts? Look at the product mix. Product risk mix distribution matters. One thing you really focus on are the payments as you're rolling into different stages of delinquency. Our early-stage delinquency is now better than pre-pandemic, but as has been the problem, when somebody gets delinquent, they have a hard time getting out of delinquency, and you call those straight rollers, where they go right to charge-off.
That had been the problem the past couple of years, and that has been continuing to improve, which is what still needs improvement for us to get down to that 6% target, is consumers being able to make payments once they go delinquent, get back out of delinquency. I'm hopeful that this tax refund season will help some consumers, you know, get back out of delinquency a little bit.
I don't wanna go off script here, but you made a comment earlier that I thought was interesting. You said that a lot of the clients you serve are used to dealing with inflation, and they're used to kind of managing through difficult times. I think you said maybe earlier in the quarter that it's maybe the middle income that you worry about a little bit more if the jobs market gets weaker.
Sorry. When you think about the distribution of consumers and up and down, risk scores from, you know, subprime through super prime, and then you think about the income cohorts. You know, we talk about the K-shaped economy. You've heard that.
Yeah.
Now there's even some discussion of the digital economy. Let's go with the K for now.
Mm-hmm.
That middle part of the K, which some people might call the middle leg of an E, is who we focus on.
Mm-hmm.
Right? We're not going after the super prime customer, the high spender, high transactor. It's very difficult to make money out of that with the products that we offer. Nor are we going after the bottom leg of the E or the bottom end of the tail of the K, which are, say, people who make $30,000-$50,000 and are really not credit qualified. We focus on the middle part of the K going slightly up, slightly down, and that's middle America.
Mm-hmm.
For us, they're the ones who've been resilient. They're the ones managing their budgets. They're the ones who real wage growth outpacing inflation makes a real difference. That's been happening for what? Almost nine quarters now. They're the ones I worry about if inflation were to go up. Now, if something happens with employment, unemployment happens, can be indiscriminate, go up and down the ladder, whether you're super prime all the way down to subprime. You know, some of the more recent job losses that you've heard about, we talk about the softening economy is more about white-collar jobs.
Mm-hmm
Professionals. Hopefully, they're able to find jobs quickly. Certainly, there's demand out there for hiring. I know, like, we're hiring engineers, we're hiring people. It's, you know, I don't know what that looks like, but it's not necessarily concentrated to the consumers we serve.
Mm-hmm.
It could probably be more of the prime, super prime customer.
Yeah. You're just saying the people you serve have been able to manage through this generally.
They've been able to manage through the inflation, and they have, and that's why you're seeing them improve at this point.
Okay. Feeling good about credit path to your guidance range.
Feeling good about that. Feel good about the fact that there is discussion around affordability and that whether it's housing affordability, other things that, you know, I think the administration and politicians in general understand that matters to the typical American.
You guys must dream about what life would be like at a 6% charge-off rate for Bread.
I don't have to dream about it. It's just a matter of when we get there.
Matter when you get there. Okay, that's good. It brings us to the topic of reserve levels. Prudent, Perry. What does it take to really start to bring the reserve levels down, kind of the mechanics of CECL, and what are the optics that need to happen before you can start to bring reserves down?
Okay. Can we roll the clock back to, about this time last year? There's something called Liberation Day.
Yep.
If we stop those tweets, if we could stop conflicts and other things, it would have helped. The issue for me is, you know, we set a very prudent and more of a conservative posture on credit risk overlays to making sure that we felt confident in the improvement in the economy and we care for downside risk. You've heard me say before that the blended weighting of our scenarios is somewhere between 7%-8% unemployment in a 12-month period. That is more weighted than it probably needs to be.
Yep.
However, every time I think that, okay, we're in a position where I can look a regulator in the eyes or a rating agency or my auditor and say, "Okay, we are now justified to, you know, start dialing back to more balanced," something comes up like the tariff situation. Now you got to wait to see how's that gonna play through and whether that's gonna cause pressure. Okay. It hasn't. I thought I was at the point now where seemed like we would be in a position to say we can start moving back to a more balance. The conflict comes up, you know, in the Middle East, and now we're worried about oil price and inflation again. It just has to get to be.
Qualitative uncertainty piece of the reserve.
That is what it is. It's the qualitative piece. Now, what will happen with the reserve rate in general, even with, if I don't have the ability to shift the weightings a little bit, I think what'll happen is just the improved credit quality, I'll say improvement that we're seeing in the metrics, that will drive the rate down.
Mm-hmm.
Right? It's just about think about the delinquency rates, the pull-through. Now, if the baseline scenario that use the S1 scenario is one of the factors, if that worsens in terms of the economic inputs from Moody's and the other ones worsen a little bit, we still may remix because some of the stress isn't pulling through baseline. It's not necessary that I'll have a larger credit risk overlay, but the mechanics of CECL are such that the core, the bulk of the reserve is predicated based on the expected losses of the book you have running a baseline scenario based on the credit, you know, that you have within that, the credit quality.
Mm-hmm.
Still feeling optimistic that it will drift down throughout the year. I think the pace at which it drifts down will be somewhat macro dependent.
Okay. Good. Speaking of unquantifiable, we haven't talked about AI yet. Opportunity or threat. First of all, talk about how you think about AI in terms of credit risk, white-collar job risk, and then also the follow-up would be how are you using it in your own business? Let's separate that into two, if you can.
Okay. The first part of AI and what it means to white-collar jobs, I think there's a lot of demand out there for people to do this type of work. There's no question that it can create some disruption of jobs, but at the same time, it's a replacement of other jobs. I'm not yet there to think that there's this massive layoff coming and it's all gonna get replaced. I think over the next 10 years, there's going to be a lot of new opportunities and there's going to be different jobs that are no longer needed. I think that rotation is what is probably more likely, and AI is gonna be a complement to the human work and make them more productive, more efficient, do different things.
It takes a lot of people to think about how many workers you need to build data centers and
Mm-hmm
you know, blue-collar jobs. That's why I know you said, you know, white-collar jobs.
Mm-hmm
They still need engineer type. I don't know if it's, you don't want to use the word overhyped, but it's, there's a lot of bookends of what this could be.
Right.
Reality is somewhere in the middle.
Mm-hmm.
There can be a lot more cybersecurity jobs, fraud prevention jobs. You know, our jobs, I could tell you that internally to Bread Financial, like any financial institution, you're certainly paying attention to what the landscape is, could be and really fortifying the company from a protection standpoint. The good news is the industry works really well together on fraud and cyber and things like that. Internally at the company around, hey, how we're using AI, you know, I've been excited about AI and always taking advantage of emerging technology. Whether it was a number of years ago, there's always new tools coming out.
You know, we've deployed, I think you've heard me say, over 200 machine learning models that we use a lot in our credit team or when customers call in to our IVR, the interactive voice response, how it routes calls and can answer calls. It's just gonna keep getting better and better. I think we have about a 96% capture rate when customers call in that it's handled digitally through without having to speak to a representative. We're already in a very good way handling those types of experiences with a customer in a digital fashion. It does make us more efficient, more productive. I think about AI and our technology team, and you think about what it means to producing code with the engineers. It's not that we need 30% fewer people doing code.
It means I can get 30% faster throughput. When you think about the backlog of things that we want to do in terms of capabilities we can roll out to different brand partners that we can help build, things that will increase revenue or drive new capability, new ways of servicing, I think it's gonna be a while before you see the, I'll say, sheer cost reduction, but more so this helps bend the curve on, you know, employee growth. Like, we were at 8,500 employees—like, I think when I started, and we're down to 7,500. This naturally happens. Some of that is, we deployed AI bots, meaning they've taken a lot of the manual labor. It's over 1 million hours saved of manual labor. That's real savings. You need fewer, you know, lower-level people doing that work.
AI is kind of everywhere, whether you're turning on a SaaS application AI capability, 100% auditing or you know, risk controls that can listen to 100% of our calls and then synthesize it and give real-time feedback to the manager to give to the people. Our risk management team can, instead of doing sampling, do 100% sampling. It's no longer sampling. It's a 100% scan for errors and controls. It makes us all better.
Mm-hmm.
Right now I'm very encouraged by it. I think it's one of the things, though, it does require investment.
Yeah.
We're investing, and you'll see even with the investments that we're making, we're still committed to delivering our positive operating leverage this year.
Okay. Your using it predates the hype, and you're excited about it.
I'm excited about it. I'm gonna say it predates the hype, but it's always a new generation of it.
Yeah.
That's what's exciting.
Yeah.
We've got two innovation hubs going. We've got an innovation hub that we have in India, in the U.S., and have them playing in the sandbox to figure how can we leverage new capabilities. You've got to be embracing it.
Mm-hmm.
I'm very excited about the technology team that we have with our new Chief Technology Officer who joined us a couple of years ago, very modern CTO. She's brought in some amazing talent from top-tier companies. Again, we're not sleeping on this. We recognize the opportunity in front of us.
Okay, good. In terms of growth, your 26 guide calls for a little better growth than we've seen in recent years. Can you kinda walk us through the building blocks of that and how you're feeling about overall growth?
Sure. You're right. We guided that we would be up, you know, low single digits this year. You know, I think you could see the reflected in today's credit stats. I think we grew about, you know, 70-something basis points.
Yeah.
Up a little bit from January. That's the momentum that needs to happen and continue to happen throughout the year. I expect our end of period loan growth to be better than that low single digit, so it'll build throughout the year. There's a couple things behind it. One is continued credit improvement. I've been saying this for the past couple of years. I need that to improve because as good of a new vintage that we bring on to new accounts every year, if we have an extra couple hundred basis points going out the back door that's charging off, that new vintage has to fill up everything that's attrite before it inflects the growth. We are 90 basis points lower losses this month than we were a year ago.
Think about that as probably 100-150 basis points of gross losses. Now the new vintage has an opportunity to inflect to growth instead of, you know, more losses going out. That has always been an important piece. Getting that loss rate back down towards 6% allows the new vintages to contribute to growth rather than just backfilling. Now the new vintages as well can be a little larger because of the new brand, the new partner signings that we've had, whether it's Raymour & Flanigan, Furniture First. We announced yesterday a new co-brand partnership with Ford Motor Company. The business development team has done a phenomenal job of bringing on some new partners. Again, those are de novo programs, meaning brand new programs that are gonna just ramp over time. Again, that gives me confidence.
It's just general consumer health. I think the spend, you know, is picking up and remaining pretty stable, too, picking up.
Okay, good. We need to get to capital in a second, but just talk about maybe the partner pipeline and new business opportunities you just alluded to?
Yeah. The business development team again has done a tremendous job, and a lot of that comes down to the company's technology capabilities, being innovative, being able to bring to bear capabilities that where we're nimble, flexible, and you can see that when we were able to sign Crypto.com last year. That's a very tech-forward company, and be able to do what we did seamlessly, it's almost gave us this halo effect with other companies that we are a tech-forward company, and we'll continue to do that. That was big. To your point, we then have expanded into our home furnishing vertical with some of those brand partners I mentioned. The pipeline is good, we'll have some more announcements coming. You get the wins.
It's a long sales cycle, right? It could be 18- months plus and before you get to announce something. But the cycle's good. No, doesn't mean that every year you're gonna have these great new signings and somebody that's starting new takes some time to ramp. Overall, we're very encouraged by the pipeline. Again, it'll get us going towards our medium- and long-term growth targets.
Okay. Good. Yes.
Hi. Thanks for your presentation today. You know, President Trump's proposal about the 10% ceiling on credit card APR, would you want to comment on that?
The question was around the 10% proposed potential rate cap.
Yeah. One, I'd say we're a little surprised that he brought that up at the time when he did. It's certainly been a populist type of want. You know, I'd say that the industry has done a really good job of educating serious senators and politicians around the implications. It will contract credit materially to the U.S. consumer and be incredibly detrimental to the economy and to merchants and everybody else. I don't think there's a path where that's going to go forward, at least from what we've heard from everyone that we're connected to in Washington and when we talked to the bankers and everybody else. It seems like it is settled out for now. I expect it'll probably get a little bit of airwaves in midterms because it makes for great headlines.
The fact that it wasn't mentioned in the State of the Union, I said so. I would've lost money. I would've thought for sure he would've brought it up there. The fact he didn't kind of tells you that it's not one of the key affordability levers they're gonna be able to pull.
Okay. Thank you. Four minutes left, so we're gonna maybe not speed round, but your balance sheet strength and capital stack improvement, I'd just wanna say it's remarkable, but maybe methodical is the better word. Give us a quick update in terms of where you've been, where you are now, and then how you're thinking about repurchases from this point going forward.
Sure. I'll accept both of those words. It's been methodical and the end result's been remarkable.
Mm-hmm.
To be where we are today from where we were four years ago, where you probably couldn't find a capital ratio. We're really proud of where we've gotten to, where we've hit all of our capital targets. We're at the point of having excess available capital to fund. When I say excess, that means, you know, funding all the investments that you heard me talk about earlier on all technology, marketing, bringing on new partners, supporting growth, and then still being able to and we're taking care of paying down debt, refinancing that debt. Now at the point where we have the ability to return capital to shareholders is a really good position to be in.
We announced an additional $600 million authorization which is on top of the remaining $165 million that we had unused, so call it around $750 million unused. We did not give a timeline on when we're going to use it. Some of that is we still have one more bit of opportunity in front of us to further optimize our capital stack by doing another $225 million of preferred stock.
that would put us around $300 million in total, which is an optimal level, which allows us to, you know, I'll say, shift our binding constraint on our CET1 target from 13%-14%, so call it the midpoint of 13.5, roughly, down to 12%-13%, which is around that 12.5%. That's why that's important. In this $600 million announcement, it takes care of doing that $225. If we do the $225, there'll be more repurchases this year. If we don't, it happens next year, more of it will get shifted into next year.
Mm-hmm. Okay. We've handled growth, credit, technology, capital. Anything else you feel like is important to discuss?
I think we've covered it all, but I gotta tell you, again, I sit up here incredibly proud. I mean, you and I have had these conversations since I think, probably the first month I joined, and it has been a remarkable journey, and I'm incredibly proud of my teammates and the leadership of the company and our board for the focus that we've had. It's been a fun journey, and it's a lot more fun to be here today than what it was, you know, over four years ago.
Yeah. I remember the discussion with your board many years ago.
Yes.
You've checked every box. Nice job.
Thank you.
Thanks for being here.
I appreciate it.