Good morning, everyone. My name is Jeff Adelson. I'm on the Morgan Stanley Consumer Finance Research team. Before we get started, I'm just going to read some quick disclosures. For important disclosures, please see the Morgan Stanley Research Disclosure website at www.morganstanley.com/research_disclosures. The taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. Good morning, everyone. Very happy to welcome back to our conference, Ralph and Perry from Bread Financial. Good to see you guys.
Happy to be here.
Thanks for coming.
Maybe just get started with the update you guys put out this morning on the credit side. I think from what I looked at, you did report the 8.4% charge-off rate. You have talked about it going up above 8% in May, and then I think below that in June. Your loan growth was something like a 3% handle year-over-year. I know you talked about the mid-single-digit growth for the year in the guide. Maybe just give us a quick update on what you're seeing.
Yeah. The 8.4% came in exactly as we had expected. It's elevated due to the conversion noise that we've been talking about, so the post-transition of our card processing and the customer-friendly accommodations that we'd put in place. In the quarter, we expect for the NCL rate to be 100 basis points impacted in total, and the last month it will have any impact in it will be July. All that, I'll call it, noise is behind us, and really, that was all about timing. You know, expect that the third quarter will come down around 7%, so a step down from what we are anticipating in the second quarter.
You know, I think, as you talk about credit, what we're seeing is an improvement in delinquencies and expect a stabilization delinquencies at from this point forward. Some of it is the noise coming out from the conversion. That creates some elevated delinquency through some of the buckets, but it's also a function of the product mix and credit tightening actions that we've taken to position the company to, you know, be resilient through whatever economic cycle we're in now. Right now, we're in a cycle where the broader set of consumers are impacted by inflation. Later in the year into next year, it could be that, you know, that flips and there's a little bit of a pressure with the consumers as it relates to unemployment.
You know, we feel like we're in a good position to achieve what we set out for our guidance for the year, which would be around at 7% full year for the net credit losses.
Can you just remind us of the piece within the 84 that is being affected by the actions you took from the processing platform issue?
I'm sorry, say it again.
Can you just remind us of the piece within the 84 or the current run rate that's from the prior actions?
Over 100 basis points in the month of May is related to.
Okay
... the card processing. The way I think about it is, look, the consumer is still feeling pressure. What we talk about is, you know, through the cycle for our company should be around 6% net credit losses. When you're in periods of great time, you could be just below it. When you have periods of some stress, you're going to be above it. Right now, even stripping out the, you know, the conversion noise, the consumers are feeling some stress as it relates to the, yes, inflation, and that can be seen, right? We talked about this before. We talked about the K-shaped economy, right? The top part of that economy is doing really well. Some of it...
Some of them aren't even really feeling the pressure of inflation, but the bottom part and the middle are feeling the pressures of inflation. That's why, you know, with rising interest rates, that's, I mean, that's putting some more pressure on folks, but it's trying to tame inflation. I haven't seen the numbers for today yet, but hopefully we're starting to see some improvement, and that will give relief to the broader set of consumers. You can see it. You know, you talked about loan growth year-over-year, we signaled at the onset that we were targeting to achieve, I'm sorry, mid-single digit, but with an expectation, you know, what I would say is when you think about what's happening with the economy overall, consumers are slowing down their spend.
We're seeing fewer buyers, like new accounts, new applications coming in the top of the funnel, and then responsible lenders are starting to tighten the credit buy box a little bit. That's producing some fewer accounts. We're doing the responsible things, consumers are being responsible, and that's going to result in some slower, you know, originations and loan growth. I'd say we're going to be on the lower end of that mid-single-digit range.
Given the improvement that you guys are seeing in your early-stage buckets right now, and you talked about some of the incremental tightening that you're doing, how quickly, as we get beyond this year, do you think you can get back down towards that 6% level? Are there some scenarios that we should be thinking about in the macro?
Yeah, we will give more guidance around what 2024 looks like, hopefully when we get together during our Investor Event in September. Right now, honestly, there's so many possible outcomes, and when we look at forecasts, I think 80% of economists are predicting a recession next year in 2024. For that to happen, my expectation is, while things will improve for the broader set of, you know, Middle America, as it relates to inflation, I think you could start to see a scenario where perhaps you're at that 5% unemployment rate, and that could keep the losses above or through the cycle range, as you would expect when you're in that period of a loss.
The idea is to manage it, get it to stabilize, and you know, from the risk-adjusted margins that we have, we're at, you know, I'll say where we've targeted for this year, we're going to produce very healthy returns next year.
Yeah, I think for us it's, you know, we've been prudent pre-COVID. We've been prudent through the cycle, right, you know, right line assignments, you know, tightening where we need to tighten. Come what may, you know, in terms of the economy, I think we're, you know, focused to navigate through any scenario that's out there.
Got it. Maybe let's just kick it back to the other topic that's top of mind with everyone, with the parent debt actions you've done recently. This has been on everyone's radar for a while now, it looks like you finally got around to it. We appreciate that, looks like you're reducing your debt by half a billion. You refinance the next two slices of debt. You have another one coming up in January 2026. Just talk a little bit about why you decided to do it the way you did, why you pursued a convertible debt offering, and what you think your plans are from here.
I'm going to let Perry answer that. You know, it shouldn't go unnoticed that since 2020, we've paid down with this $500 million additional pay down, nearly 60% of our parent debt. That's a good move in that period of time. Our TCE- to- ratio is 3x what it was in 2020, we are moving in the right direction. Our tangible, you know, our tangible book value is up, our balance sheet is as strong as it's been in a number of years. I think what the actions we've taken to refinance, I think, were appropriate at the time, I'll let, you know, Perry talk to that.
You know, our focus was to, you know, reduce our double leverage at the parent, and we're going to continue to do that.
Yeah, thanks for the question, too. Ralph's exactly right. I mean, we are incredibly pleased with the actions that we've taken. I think, you know, we've been talking about reducing debt, improving our capital ratios, kind of bringing up capital from the parent to further pay down debt. We've demonstrated, because we're getting lots of questions: "Well, will the FDIC allow you to do this?" Well, we just demonstrated that we took $500 million up from the banks, and we'll further pay down debt. You know, Tom McGuire is in the audience today. Many of you have spoken with, is our Treasurer, and has done a fabulous job designing a plan that we put in place over the past six months, and we've got a three-year plan, and we plan to execute that.
Today was a major like I said, the announcement was a major first step in that direction. You know, renewing our credit agreement was important. You know, our goal is to get out of the term loan space. That means this is a great first step, and we're going to get rated is the next step of what we'll do, and then enter the traditional high yield bond market starting hopefully next year. That's how we will start to address those 2026s and then at the same time, get out of the term loan.
You know, your question around the convertible, we've gotten a ton of questions around that. I'll tell you, it was an interesting process and one when we spoke to, you know, all these banks who were pitching the ideas, it became pretty apparent that the right thing for us was to pair this refinancing with a convertible for a number of reasons. One, it demonstrated third-party capital coming into our, I'll say, to our capital stack, and that gives a validation to the lenders that, okay, that's a positive.
It also produced some additional returns because a lot of these banks are doing this on a relationship basis, and commercially, they basically, bank for bank, came in and said, "Look, the return models have gotten tighter and a lot more rigorous." They needed to do things to make their things work within their space. A lot of banks, honestly, anyone who's following these folks are tightening. I was watching CNBC today. They're talking about, "Hey, the banks are tightening credit." It's real. What we got done with the total package, we're incredibly pleased with. You know, the confidence we had, we bought a cap call on the convertible. It's 100%. You know, we have no dilution, you know, net of the cap call until it reaches, I think, $61.48.
At the same time, we went out with a tender offer to start bringing down the bonds that are coming current at the end of this year. Overall, we're real pleased with this. The other thing I liked about the convertible, it took, with the greenshoe, over $300 million past a three-year mark. It's a five-year note, but that puts something out there. When you think about laddering your debt maturities, that's another step in the right direction.
It sounds like the convertible will be dealt after the term debt and getting the high-yield issue?
That's exactly how.
Is there an opportunity to do that before the three years, or do you? Okay. Then as we think about that, impact for this year on the financials, I think we all understand the dilution, no impact, or you'll adjust it out once you get above the convert strike and below the capital call. Anything on the NIM or fee lines, expenses we should be aware of as well?
It's pretty neutral. I mean, it's slightly beneficial, but pretty neutral.
Okay. You know, the obvious next question is: Okay, what do you do with the capital from here? You're at 9%. You've got a healthy reserve ratio as well. The macro overhang is out there. Any kind of preference for what you want to do before you come to that step?
You know, I don't think our thesis has changed on use of capital. We're going to continue, you know, to invest wisely in the business, to grow the business. I think that's pretty important. We're still going to pay down debt at the parent. We're going to continue to pay down that debt at the parent, and then we want to return capital to shareholders and, you know, in the form of buybacks or, you know, primarily buybacks and then dividends. That hasn't changed. I don't think we're there yet. You know, I want to get that ratio, you know, to where my peers are in terms of double leverage and, you know, keep, you know, 9% TCE to ratio is, it's a start. It's not an end.
We want to continue to build that and build our capital.
Okay, look for the tangible common equity to keep building from here. The regulators you said, are aware of the three-year plan, so they're all on board with that as well, the FDIC?
Yeah.
Okay.
Absolutely.
Great. Thanks for that. One other two-to-date update I wanted to talk about was the deposit growth. Looks like you did put the $5.9 billion of retail deposits in the slides as well. It looks like you're still seeing some flows. I know you're out there with the 4.75% rate as well, which is, you know, right below the Fed Fund. What are you thinking about for your flows and your outlook on that front?
If you think about our deposit base, we had almost probably $1 billion in 2020. We're almost at $6 billion now. It's a significant part of how we're going to fund our business going forward. You know, I've stated we want at least 50% of our funding to come from, you know, direct-to-consumer deposits, and it's good funding for us. Even during the crisis, with at Silicon Valley, we had positive flows, and we had a positive intake, so we feel good about that. We think our rates are competitive, you know, they continue to be competitive 'cause we think it's a good source of funding for us.
Just on the consumer, what are you seeing of late, in the month of May? I think there's been a lot of chatter about maybe slowing discretionary spend, low-end consumer pulling back. I know your active sales were growing double digits, and you've had some noise under the hood with additions and removals. Any way to think about the trend on your consumer same store or something like that?
You know, I mentioned a little earlier, same store sales are down a little bit. Consequently, top of the funnel, we're seeing, you know, less applications come in the door, and those that come in the door, we're being very prudent in terms of underwriting. You know, for us, I think consumers are self-regulating right now. They're self-regulating their spend. They're coming in, they're spending, they're self-regulating that spend. Discretionary spend is down a bit, if you think about some of it, they're moving from, you know, when gas prices come down, they're flipping that spend to, you know, more experiential things, T&E, and a little bit of, you know, dining experiences. We're seeing that. We're lucky now because years before, we wouldn't have been able to capture that spend.
With our new products, with our direct to direct-to-consumer products and our, you know, and our cards at a co-brand card, so multipurpose cards, we're able to keep that spend, where before it would have been on private label, it would have been a switch, and we would have lost that spend, but we're able to keep that spend. We are seeing the consumer slow down a little bit. You know, given our range of underwriting, you know, we would see it first.
Is there anything to call out from April to May, since you've been looking at the data?
No.
Okay. You're talking about, I think about a Q-over-Q decline in credit sales, given the BJ's exit, which is normally a better-.
Yeah. You know, with the, you know, BJ's out, we're seeing that. You know, our, you know, our ongoing portfolios are spending well.
Any categories? I know you talked about restaurants and beauty previously.
Yeah. You know, beauty still is a very strong category for us. It's a very strong. Entertainment is a strong category as well. We're seeing continued spend. We know we have market share in beauty with our terrific partners, and we're seeing that spend continue to be strong.
Okay. Another hot topic, I'm sure you love talking about it, CFPB late fees. I think everyone's expecting something to come out later this year. Any high-level way to quantify immediate impacts to bread of this rule going through? Talk a little bit about the offsets that you have to these lost revenues, and maybe give us a little insight into conversations you're having with your retail partners at this point.
Why don't I start, and I'll turn it over to Perry. Immediate impact, 2023, there is none, right? We think it's going to be a 2024 or beyond impact to us. I don't see an impact in 2023. Comment period is over. You know, we're all waiting to see what the CFPB thinks about the comments that were made. You know, we lined up with the right industry groups. We made our comments, and we'll see where that goes. Our answers have not changed, and they're consistent with other issuers. You're going to look at, you know, APR increases. You're going to look at fees for credit, fees on cards. You're going to look at, you know, partner, you know, how do we think about profit shares with our partners as we move forward?
Finally, you're going to draw that line where you're not going to underwrite people because it's too risky. That's an unintended consequence. There's a number of unintended consequences where, you know, if the late fee is low and people no longer view it a, you know, a speed bump to payment, people's credit is going to be impacted as well. You know, because it's going to report the bureau's late payments. There's a bunch of unintended consequences, but, you know, we're focused on it, just like we're focused on CARD Act. How do you close the gap that, you know, that this may open for us in terms of less late fees?
Like I said, APR increases, you work with your partners, fees for credit, you know, you decide where you're going to underwrite for profitability is our answer to whatever comes.
Yeah. The only I'll add in terms of financial impacts, you know. We've done a lot of working through the analysis and still working through it, and it depends where the final ruling comes out. If it holds up in court, obviously, we're lining up behind any litigation that comes about from this. One of the nuances that Ralph just talked about, when you start to draw that line for credit, think about this in the way credit works today, right? You know, we underwrite every account. We can see the cash flows for the next 5 years, and you make that decision, you know, on a, call it a net present value basis or shareholder value add. You feel good about that.
Under this new rule, if we say, "Hey, these customers no longer hurdle," you're actually accretive in the current period. It's like, you know, a direct mail account to a super prime customer, you got to say, cost $1,000 to put that account on, and it takes you three years to get that pay back. For the lower-end customer, you're putting up a larger, CECL credit reserve, and it draws a higher amount of capital. Those customers that you cut out, while, you know, you lost that cash flow for the future years in the initial period, you actually get a benefit by contracting the credit a little bit on them.
I'm not saying that's a great thing overall from the long term, but nearer term, it doesn't dig as deep a hole as you're, you know, working to do the offsets and the burning periods of higher APRs as CARD Act, you know, basically prescribes payment hierarchy.
Is the APR route the most likely for you if this were to go through, or could you envision doing some more fees in the card?
I think it'll be all of the above.
Yeah
as Ralph talked about.
I don't think there's a silver bullet. There's a number of tactics that we would, you know, we would employ.
That is, you know, and that is one of the consequences, is everybody in this room will be paying a higher amount on your credit cards for those that.
Yeah
-were paying their late fees before.
The $80 will pay for the $20 at the end of the day. I'll just cut you a check.
Not that any of you guys have all balances.
Yeah.
Just in case you did.
Okay. All right. We won't spend too much more time on that one, what's, you know, sort of a related subject, tightening. You've been doing that for a few quarters. Can you talk a little bit about approval rates, where they stand versus a year or two ago, historical?
Yeah.
What factors, when you're taking customers into that funnel, are you looking at most closely at this point in turning them down or approving them?
Yeah, look, one of the things that we've talked about, and Ralph's talked about for a long time, is, we had never reopened our buy box from pre-pandemic. You know, the proof point in that is, we have lower, I'll say tighter underwriting and approval rates today than what we did pre-pandemic. We're about. Again, if you risk-mix the portfolio, I want to say we're about 500 basis points tighter than what we were pre-pandemic and 300 basis points tighter than what we were during the pandemic. That's kind of a demonstration of, again, risk-adjusted, the tightening that's occurring. You know, we've talked about proactive credit management, whether it's initial, you know, at the time of approval, initial line assignment.
We're at, I'll say, some of the highest levels of line decreases that we've done, so we've been decreasing, more, and the lowest amount of line increases. That's the way you dynamically manage both on the front end and through, you know, the existing portfolio, to make sure you're trying to manage that future exposure. Then, as things improve, customers demonstrate, you know, they can pay. Like you said, what are you watching for?
Yeah.
You're looking for their income. You're looking at the bureaus. You're looking at the things that are bureau-related attributes, looking at the on-us payment behaviors, and then as they demonstrate strong behavior, payment patterns, you can then do the line increases, but as well, with an eye towards what they can't see, which is, you know, those future economic outlooks, to make sure that we're protecting the balance sheet and helping them to manage their credit responsibly.
Yeah. What I will say, too, it's not a, it's not a sledgehammer to scalpel, right? We're looking at verticals, we're looking at different partners, you know, a variety of things, right? private label is a little bit different than co-brand. They act differently in terms of behavior. It's not one size fits all.
Yep
... you know, focused on, you know, where we think we need to tighten around the edges and why.
Just curious, those customers, I think you mentioned you're doing some of the highest level of line decreases at this point. How are those customers reacting at this point when those lines are cut?
I'd say, well, they're not closing their accounts. I mean, it's some of the things where, you know, you get it, and You're trying to reduce open to buy.
Yeah
which doesn't mean we're taking them all the way down to zero open to buy.
Right.
In some cases, you are. Look, if they go delinquent before, perhaps you let that go. If they go delinquent, the rule may be, okay, tighten it down to what their current balance is, so that you reduce that future exposure because you're seeing something that would say there's strain coming for that customer. That's... Look, you're seeing it in the overall loss rate. That's exactly what you'd expect us to do. In a period where you're seeing higher delinquencies rolling through those buckets or the initial delinquency, you start tightening it down just to reduce future exposure. If they get payments under control, then you can give the line increases in the future.
Student loans, we all know the more terms have to end late August, early September. Payments, I think, start in October. What % of your book do you think holds student loans? Have you done any work into kind of the cash flow impact on your portfolio from that going away or coming back?
We have a good handle on the number of accounts that have student loans, so we're not disclosing the percentage, but it's not the vast majority of our book. That said, one of the things that I think we are going to be interested in observing, we don't believe it's going to be a material impact to us. What will be interesting in observing is, what is the payment hierarchy that consumers undertake with these student loans? Those that can pay, I'm sure we'll get after it, but when some start to feel stressed, is that still at the top of the payment hierarchy they're going to pay, or is it going to be like the last financial crisis, where credit cards remained higher in the payment hierarchy than home equity or mortgages? Where does student loans fit into that?
If there's wage garnishment or something, does the Fed really put that into place? I mean, does the government to do that in this period? I think there's a lot to be seen around what's going to happen with student loans, certainly it's something we're going to monitor very carefully.
I think maybe what you're alluding to is the income-driven plan proposal, things like that. Okay, sounds like more to come there.
Yeah.
You're underwriting those consumers for that today or for that cash flow or?
Yes. Yes.
Okay. Got it.
It's on their bureau, so yeah, we know who has it...
Right
We evaluate it at the time, and assuming that they will have to make those payments.
Okay. Just as we think about the reserve on that front, I know everyone looks at the day one number. That was something like 1,260 days ago, so it doesn't feel very much like a day one anymore. The economics uncertainty there is obviously a key driver. Any signposts that we should be looking for before you start to get a little bit more confident in the outlook and maybe get that... I mean, do you just need the loss rate to come down? Is it as simple as that, or is there something else on there?
I'll say two things: One, I could see a scenario where loss rates are flat, but the reserve rate's coming down because the economic outlook is that much improved, and you could see the early-stage delinquencies improving dramatically. You have the combination of the portfolio itself, then the behavior of the accounts within the portfolio, so the credit mix and the delinquency outlook that, you know, we have for the portfolio, and then that credit risk overlay, that's still, you know, we're leaning in pretty strongly into some of the more, you know, adverse scenarios. As those outlooks improve, both in the baseline and in the stress scenarios, that is where you would start to see the reserve rate come down. Even if the loss rate was still a little higher, the reserve rate could start coming down.
What I'm seeing right now is what we had been expecting and why we had been more conservative with our risk overlay has played out. The things around inflation that wasn't really cared for in past economic cycles in terms of the modeling has remained elevated. You've got unemployment, which is gonna be one of the biggest drivers. As unemployment goes up, that's something that's gonna impact the reserve rates, but our overlay could be, you know, coming down because inflation comes under control, you also have higher interest rates. There's lots of things. I mean, so many variables that go into it, but those are the markers. I mean, just general economic improvement. At this point, I don't see the reserve rates going up material. I think everything is under control.
We've got it well cared for and should be stable at this point.
Yeah, I agree with that. I think we are, you know, we are well, you know, adequately reserved and able to absorb losses as, you know, as we navigate through this uncertain period. I, you know, I think that's the prudent right thing to do, rather than, you know, surprise the Street with, you know, an increase in reserves. I think we are adequately reserved for this uncertain time.
Are you surprised that, you know, maybe this is... You know, are you surprised at the level of strength that you're seeing in the jobs market, and how that is leading to these outcomes where you're holding a high reserve, you know, your losses are ticking up? It does seem like there's a really robust labor market in play there. I think a lot of folks are having a little bit of trouble squaring those two elements. I'm just curious if there's. I mean, obviously, there's the inflation element as well, but...
Untraditional.
I was gonna say, that's the part that I think people have a hard time squaring is 'cause traditionally, losses and reserve rates are driven by unemployment, right?
Yes.
Change in unemployment. This time, it's the stress that's caused on consumers because of inflation. You have a job, full economy, but you are hearing stories of people getting less hours than what they were getting before. You know, it doesn't surprise me that employers are hesitant to pull back on the hirings and openings because I think they learned a lesson during COVID, that if you let those jobs go, let the employees go, it's really hard to get them back. I think people are holding on, attrition rates at companies are well down. While we are starting to see some headlines of companies paring back, I think broadly, the numbers speak for themselves, that the consumers are in a pretty good spot. It's just this inflation thing has got to get under control.
You know, with what's going on, I do think you're gonna continue to see some credit tightening more broadly and more normalization of customers up and down the credit spectrum, where the lower end, I think, is already normalized.
Just maybe pulling back more high level. You know, you've had recent success in diversifying into more co-brand in recent years. I think it's something like more than 40% of your loan balance is now, when you include the proprietary, you only had less than 10% in 2009. How is this helping you today? Where do you plan to take this kind of ratio, and what are some of the other benefits you're expecting there?
One of, you know, one of the things that we as a leadership team, a new leadership team, wanted to do was balance the portfolio. You know, if you go back to 2019, early 2020, we were a one-trick pony, right? Private label credit cards, particularly soft goods in the mall. Well, that's not gonna last. What are you gonna do? What's going to happen as you move forward? COVID hit. You know, our balance book is just that, right?
We have, you know, private label, which will traditionally be always, you know, probably 50% of our business, and it's high yield, and the losses are a little higher than, you know, than you would think in co-brand, where co-brand is, you know, has good returns and the risk profile is a little bit better. That gives us the ability to manage that private label portfolio to high returns with a little bit of a higher loss rate. The direct-to-consumer card was another indication for us to just diversify our portfolio, make sure we are, you know, we're not reliant on any one partner. From that perspective, we don't share that with, you know, those returns we don't share with partners.
Those are our returns. We've diversified our portfolio. We're not dependent on any one segment or any one vertical, and we've spaced out our, you know, our renewals nicely. If you think about it, our top four partners, I'm gonna make five partners, thank you. Thank you, guy from the audience. Our top five partners are renewed, you know, for the majority of this decade. I think almost 90% of our books are 2025. That's a good place to be at this point, and we feel good about that. Again, it's a diversified portfolio. I think we'll continue to look at, you know, buy now, pay later, and installment loan is, you know, is out there.
If the consumer is gonna lean in there, we're gonna lean in with the consumer. Now we have a basket of lending products that we never had before, and it really helps us balance that portfolio. You know, you have, like I said, that private label will always be, you know, a cornerstone of our portfolio, but we have a very diversified product portfolio now that has, you know, the different types of returns, and every product does a different job in a portfolio.
What's in the pipeline today? I mean, what are the conversations there like? Is there maybe kind of this wait-and-see period with the CFPB late rule, or is that having no impact on the conversations?
You know, one of the things I will say, over the last 3.5 years since we've been here, and we've built an exceptional business development team, and that pipeline continues to be strong. Our pipeline is not about, you know, chasing things for the sake of chasing things. When we go after something in a pipeline, we believe that we have the, you know, the ability to win it and win it profitably for the organization. That's how we've gone after the pipeline. What I love about this company is, we can go after things at the top end, like AAA and the NFL, and win those, you know, those big portfolios.
You got the, you know, you got the magic middle, where the, you know, profitability is really good on those $100 million portfolios. You know, whether they're de novo or just startups, whatever they might be, you put 10 of those together, that's $1 billion, and you can do that with good rates. The competition there is less because the big banks tend not to focus on those, and we are able to win those and grow them profitably over a period of time. Pipeline is strong up and down the chain, so, you know, there's some big ones in the pipeline, but there's that magic middle that we continue to win on a pretty regular basis.
I think inevitably, some of those, you know, a couple of those string of pearls within those pearls are gonna actually grow to be bigger. You know, you lost one recently with BJ's. Is there anything that you feel like you need to improve upon or opportunities for you to do better, to maybe hang on to those and prevent the big banks from taking those away from you?
Yeah, you know, it's interesting with BJ's. When I walked in to the company, Wayfair was walking out, Williams-Sonoma was walking out, and BJ's was about to walk out because we weren't listening to our partners in a very big way. Partners were pushing for digital, pushing for more innovation, and the previous regime wasn't focused on that. We're focused on that now. We work with a partner to demonstrate to them that we can grow this pie for both of us profitably, grow their business as well, and lean in digitally and lean in, you know, with innovation and different types of products. We've demonstrated that with AAA.
We won AAA. I will tell you, we probably weren't the highest bidder, we were able to demonstrate AAA through different value props and things we wanted to do, that we were going to be a good partner and able to grow their book. I don't think that was happening in the way it's happening today, back in 2019 and 2020. You know, the partners like BJ's, they're, you know, two years before they go, they're chumming the market for where they might go. That was unfortunate, and I hate to lose a partner. I think we're more equipped now than we were in the past to attract partners and hold onto our current book. Ulta is a clear example of that.
We re-signed Ulta, which is a partner that was one of those string of pearls and now is growing, nicely. We re-signed Ulta recently as a, you know, as a partner.
Maybe just to wrap things up, one last question from me. Where do you see the company in five years? You know, other products you need to add to the quiver, so to speak, or how do you intend to get there?
Well, you know, we're looking at, you know, adjacencies now. Where's that next horizon for us, you know? I'm bullish on direct-to-consumer. Would we see another direct-to-consumer product possibly?
I think the answer is show up to the Investor Day in September.
Yeah.
We'll give more details.
Well, I'm gonna give a preview.
I'm gonna give you a little bit more insight into the second quarter. How's that?
Yeah.
'Cause I didn't give you a couple tidbits that I wanted to get out at bases. I talked about credit losses, right? Being 100 basis points higher, around that 8% level. With that 8% credit loss rate, you should expect a higher impact of charge-off, the reversal of interest and fees against net interest margin. About 40 basis points of impact to net interest margin will happen. Think about that versus linked quarter to first quarter, and then as you get into third quarter and losses improve, then you get that net interest margin improvement again. We talked about credit sales, we talked about loans, but wanted to make sure that was there.
As it relates to expenses, expect in the second quarter, expenses to be flat to the first quarter, and then stepping down in the third quarter and on. Just wanna make sure we gave you some of that context.
Yeah.
I didn't give you that full answer when you asked about trends we were seeing in the quarter.
I appreciate you sneaking that one in.
All right.
Well, I think in five, you'll see a stronger balance sheet and less debt. We'll talk about more of that at our Investor Day.
Got that in under the wire.
All right. Thank you, guys.
You bet.
Appreciate your time today.
Thanks, Jeff.