Q4 2023 Bread Financial Holdings Incorporated Earnings Call

We have been placed on a listen only mode. Following today's presentation. The floor will be open for your questions to Register your question. Please press Star followed by one is now my pleasure to introduce Mr. Bryan <unk> head of Investor Relations at bread financial the floor is yours.

Thank you.

Ralph <unk>: Copies of the slides, we will be reviewing in the earnings release can be found on the Investor Relations section of our website on the call today, we have Ralph <unk>, President and Chief Executive Officer of bread financial and Perry P. Berman Executive Vice President and Chief Financial Officer of bread financial.

Ralph <unk>: Before we begin I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward looking statements.

Ralph <unk>: These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

Good morning, and welcome to Brett Financial's fourth quarter earnings Conference call. My name is Emily and I'll be coordinating your coke stake it's.

This time all parties have been placed on a listen only mode.

Ralph <unk>: Also on today's call our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website at bread financial Dot com with that I would like to turn the call over to <unk>.

During today's presentation the floor will be open for your questions to Register your question. Please press Star followed by one is now my pleasure to introduce Mr. Bryan <unk> head of Investor Relations at Brett financial the floor is yours.

Jeff P. Meuler: Thank you.

Copies of the slides, we will be reviewing in the earnings release can be found on the Investor Relations section of our website on the call today, we have Ralph <unk>, President and Chief Executive Officer of bread financial and Perry Bieber Executive Vice President and Chief Financial Officer of bread financial before we begin I would like to remind.

Ralph <unk>: Ralph in dry dock.

Ralph <unk>: Thank you, Brian and good morning to everyone joining the call.

Ralph <unk>: Starting with slide three I will highlight our major accomplishments for 2023.

Ralph <unk>: We continue to execute on our strategic initiatives by growing responsibly and strengthening our balance sheet. Additionally, we continue to optimize data and technology, while investing to capture future growth opportunities inclusive of the sale of the Bj's portfolio in February of 2023, and our strategic credit tightening.

Mind, you that some of the comments made on today's call and some of the responses to your questions may contain forward looking statements.

Jeff P. Meuler: These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

Brian Smith: Loans grew at a low to mid single digit rate compared to 2022 as forecasted P PNR or profit less tax and loan loss provisions grew for the full year as well as for each quarter in 2023, demonstrating our ability to deliver sustainable profitable growth during.

Perry Bieber: Also on today's call our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website at Brent financial Dot com with that I would like to turn the call over to.

Brian Smith: During 2023 relaunched and renewed several key brand partner relationships New partners included iconic brands, such as Dell technologies, and the New York Yankees, and we were pleased to renew multiple partners, including our long standing business relationship with Cigna.

Ralph: Ralph in dry dock.

Thank you, Brian and good morning to everyone joining the call.

Starting with slide three I will highlight our major accomplishments for 2023.

Brian Smith: Importantly, our top five partners are currently secured through 2028 and more than 85% of our current loan portfolio is contracted through 2025. Our continued success reflects the dedication of our associates are nimble customer first approach are enhanced and our enhanced technology capabilities.

Ralph: We continue to execute on our strategic initiatives by growing responsibly and strengthening our balance sheet. Additionally, we continue to optimize data and technology, while investing to capture future growth opportunities inclusive of the sale of the Bj's portfolio in February of 2023, and our strategic credit tightening loan.

Perry Bieber: <unk> grew at a low to mid single digit rate compared to 2022 as forecasted P PNR or profit less tax and loan loss provisions grew for the full year as well as for each quarter in 2023, demonstrating our ability to deliver sustainable profitable growth.

Brian Smith: We achieved significant progress in reducing our parent level debt during the year, while refinancing both our term loan and revolving line of credit. We also obtained our inaugural holding company issuer credit rating in November following we completed a $600 million.

During 2023, we launched and renewed several key brand partner relationships New partners included iconic brands, such as Dell technologies, and the New York Yankees, and we were pleased to renew multiple partners, including our long standing business relationship with Cigna Importantly.

Brian Smith: Senior unsecured note offering.

Brian Smith: In December that was Opportunistically upsize to $900 million earlier this month with a portion of this new financing we paid off our term loan early in December of 2023, consistent with our parent level debt reduction plan, we paid down approximately $500 million of parent unsecured debt in 2023.

Importantly, our top five partners are currently secured through 2028 and more than 85% of our current loan portfolio is contracted through 2025. Our continued success reflects the dedication of our associates are nimble customer first approach are enhanced and our enhanced technology capabilities.

Brian Smith: And an additional $100 million in January of 2024. Additionally, we strengthened our balance sheet highlighted by 18% year over year growth too.

Brian Smith: Consumer deposits of $6 $5 billion at year end. These actions coupled with our strong cash flow generation and disciplined capital allocation improve the company's financial flexibility and capital ratios further fortifying our balance sheet.

Perry Bieber: We achieved significant progress in reducing our parent level debt during the year, while refinancing both our term loan and revolving line of credit. We also obtained our inaugural holding company issuer credit rating in November following we completed a 600 million dollar.

Brian Smith: Investments in technology, and driving innovation are Paramount to our success in 2023, we hired more than 100, new engineers with cloud expertise and optimize our data and technology by adding new systems capabilities. These included API enhancements enriched software development kits unified sales.

Perry Bieber: Senior unsecured note offering.

Perry Bieber: In December that was Opportunistically upsize to $900 million earlier this month with a portion of this new financing we paid off our term loan early in December of 2023, consistent with our parent level debt reduction plan, we paid down approximately $500 million of parent unsecured debt in 2023.

Brian Smith: Force integration virtual card commercialization as well as the launch of the bread financial mobile App. We also successfully converted a majority of our commodity Mastercard portfolio to the new bread rewards American Express program for everyday spend achieving strong activation and balanced build post conversion.

Perry Bieber: And an additional $100 million in January of 2024. Additionally, we strengthened our balance sheet highlighted by 18% year over year growth too.

Perry Bieber: Direct to consumer deposits of $6 5 billion at year end. These actions coupled with our strong cash flow generation and disciplined capital allocation improve the company's financial flexibility and capital ratios further fortifying our balance sheet.

Brian Smith: Finally, we strengthened our relationships with our brand partners by delivering enhanced value propositions that helped drive sales as well as meet the evolving needs of our customers. We are pleased with the progress we achieved in 2023 and we remain focused on driving continued success throughout 2024 and beyond.

Perry Bieber: Investments in technology, and driving innovation are Paramount to our success in 2023, we hired more than 100, new engineers with cloud expertise and optimize our data and technology by adding new systems capabilities. These included API enhancements and rich software development kits unified sales.

Brian Smith: Yes.

Brian Smith: Moving to the highlights for the fourth quarter on slide four the fourth quarter marked our 11th consecutive quarter of year over year <unk> growth further demonstrating our ability to deliver sustainable profitable growth net income was $43 million, despite credit losses above or above our through the size.

Perry Bieber: Force integration virtual card commercialization as well as the launch of the bread financial mobile App. We also successfully converted a majority of our commodity Mastercard portfolio to the new bread rewards American Express program for everyday spend achieving strong activation and balanced build post conversion.

Brian Smith: Average in the current challenging macroeconomic environment. Additionally, we continued to deliver on our commitment to build long term shareholder value as our tangible book value per share approached $44, representing a 49 year, 49% year over year increase we are proud of the progress we have made.

Perry Bieber: Finally, we strengthened our relationships with our brand partners by delivering enhanced value propositions that helped drive sales as well as meet the evolving needs of our customers. We are pleased with the progress we achieved in 2023 and we remain focused on driving continued success throughout 2024 and beyond.

Brian Smith: Good in executing on our debt plan strengthening our balance sheet and enhancing our financial resilience.

Brian Smith: The economy continued to be impacted by macroeconomic headwinds, including persistent inflation high interest rates and the resumption of student loan repayments. These factors led to a moderation in consumer spending and pressured consumers' ability to pay.

Perry Bieber: Yes.

Perry Bieber: Moving to the highlights for the fourth quarter on slide four the fourth quarter marked our 11th consecutive quarter of year over year <unk> growth further demonstrating our ability to deliver sustainable profitable growth net income was $43 million, despite credit losses above or above our through the size.

Brian Smith: As we enter 2024, we maintain disciplined credit risk management, given continued economic pressures that affect consumer spending and ability to pay our ongoing prudent credit tightening is driven by both the current environment and uncertainty around future economic conditions persistent inflation pressure.

Perry Bieber: Average in the current challenging macroeconomic environment. Additionally, we continued to deliver on our commitment to build long term shareholder value as our tangible book value per share approached $44, representing a 49 year, 49% year over year increase.

Brian Smith: And the impact of elevated interest rates, we have continued to responsibly manage our underwriting and credit line management, while proactively limiting our exposure by tightening approval rates pausing line increases and prudently implementing credit line decreases although these actions impacted our 2023 sales and loan growth our credit.

Perry Bieber: We are proud of the progress we have made in executing on our debt plan strengthening our balance sheet and enhancing our financial resilience.

The economy continued to be impacted by macroeconomic headwinds, including persistent inflation high interest rates and the resumption of student loan repayments. These factors led to a moderation in consumer spending and pressured consumers' ability to pay.

Brian Smith: Distribution has stabilized above pre pandemic levels.

Brian Smith: Yes.

Brian Smith: In anticipation of the Cfpb's final rule on credit card late fees, we are proactively implementing our plans intended to address the change in regulation, which if left unmitigated would have a significant impact on our business. We are engaged with our brand partners regarding necessary mitigating actions and expect it expect to implement.

Perry Bieber: As we enter 2024, we maintain disciplined credit risk management, given continued economic pressures that affect consumer spending and ability to pay our ongoing prudent credit tightening is driven by both the current environment and uncertainty around future economic conditions persisted inflation pressure.

Many of these actions prior to the final rule, becoming effective. Additionally, we continue to strategically diverse business to be less reliant on late fees with continued growth in our co brand and proprietary products and our improved credit profile. We expect the rule to be challenged in court and will be monitoring the situation closely.

Perry Bieber: The impact of elevated interest rates, we have continued to responsibly manage our underwriting and credit line management, while proactively limiting our exposure by tightening approval rates pausing line increases and prudently implementing credit line decreases although these actions impacted our 2023 sales and loan growth our credit.

Having successfully managed through significant regulatory changes and varied credit cycles in the past our seasoned leadership team is focused on addressing the impact to our business, while continuing to generate strong returns through prudent capital and risk management.

Distribution has stabilized above pre pandemic levels.

Perry Bieber: Yes.

Perry Bieber: In anticipation of the Cfpb's final rule on credit card late fees, we are proactively implementing our plans intended to address the change in regulation, which if left unmitigated would have a significant impact on our business. We are engaged with our brand partners regarding necessary mitigating actions and expect it expect to implement.

Brian Smith: Turning to slide five as we have highlighted previously our disciplined capital allocation strategy, which focuses on profitable growth improving metrics and reducing parent level debt has driven substantial growth intangible book value over the past several years looking at the first chart you can see that since the first quarter.

Many of these actions prior to the final rule, becoming effective. Additionally, we continued to strategically diverse business to be less reliant on late fees with continued growth in our co brand and proprietary products and our improved credit profile. We expect the rule to be challenged in court and we will be monitoring the situation closely.

Brian Smith: A 2020, we have more than tripled our TCE to Ta ratio. We aim to further enhance our total company capital metrics from where we are today.

Brian Smith: Additionally, we will balance achieving these targets with continued investment in our business and long term growth consistent with our capital priorities. Later this year, we plan to host an Investor day, where we will further discuss our capital targets and allocation strategies moving to the second chart I will again highlight the progress we have made with respect to that.

Having successfully managed through significant regulatory changes and varied credit cycles in the past our seasoned leadership team is focused on addressing the impact to our business, while continuing to generate strong returns through prudent capital and risk management.

Reduction in just over three years, we have reduce parent level debt by 54% paying down more than $1 7 billion.

Perry Bieber: Turning to slide five as we have.

Brian Smith: And we paid down an additional $100 million. This week, which is not included in that figure.

Brian Smith: Finally, the improvement in our tangible book value per share has grown at a 38% compounded annual rate since the first quarter of 2020 supported by our strong cash flow generation, we expect to continue to grow our tangible book value. We believe this growth combined with a meaningfully improved financial resilience and.

Brian Smith: Strengthened balance sheet should yield the company valuation that is a multiple of our tangible book value.

Brian Smith: We are confident in our strategy and are focused on managing our business responsibly to build long term value for our stakeholders.

Brian Smith: Turning to slide six let's review our key focus areas for 2024, our initiatives build on the momentum we generated in 2023, while enabling us to proactively adapt to evolving macroeconomic conditions.

Brian Smith: Our key focus areas for 2024 include growing responsibly, managing the macroeconomic and regulatory environment.

Brian Smith: Accelerating digital and technology offerings and driving operational excellence we.

Brian Smith: We remain committed to generating responsible growth, while further scaling and diversifying our product offerings to align with the challenging economic landscape and doing so we will optimize brand partner growth and revenue opportunities.

Brian Smith: Our sales in loan growth may moderate in 2024 are responsible decisions I'll focus on creating long term value for shareholders.

Brian Smith: Managing the macroeconomic and regulatory environment effectively is fundamental to our success with the proposed CFPB credit card late fee rule, coupled with persistent macroeconomic headwinds pressuring consumers. We are executing several mitigation strategies intended to help offset the anticipated financial impact.

Brian Smith: Perry will provide more details in his remarks.

Perry: Accelerating our digital and technology capabilities remains a top priority and I am pleased to welcome <unk> to our organization as new as our new Executive Vice President and Chief Technology Officer, <unk> proven track record as an innovative envision a leader.

Perry: Combined with our deep understanding of financial services will be essential as we advance our tech innovation and monetization throughout 2024, we will focus on further building our capabilities to enhance customer experience and satisfaction.

Perry: Finally, we will intensify our focus on operational excellence to accelerate continuous improvement gains that drive improved customer experience enterprise wise efficiency reduce risk and value creation. Our goal is to consistently generate expense efficiencies that enable reinvestment in our business.

Perry: <unk> support responsible growth and achieve our targeted returns before I turn it over to Perry I want to thank our associates for their continued dedication and hard work are seasoned leadership team remains committed to generating strong returns through prudent capital and risk management as we move forward.

Perry: I will now turn it over to Perry.

Perry Smith: Thanks Ralph.

Perry Smith: Slide seven provides our 2023 financial highlights breath financials credit sale of $28 9 billion decreased 12% year over year, reflecting the sale of the Bj's portfolio in February 2023, moderating consumer spending and our ongoing strategic credit tightening, partially offset by new partner growth.

Perry Smith: Average loans of $18 2 billion increased 3% year over year, driven by the addition of new partners.

Perry Smith: As Ralph noted, we are proactively tightened our credit underwriting and credit line assignments for both new and existing customers given the economic uncertainties and pressures affecting a large portion of our customer base.

Brian Smith: Revenue increased $463 million or 12% year over year, driven by higher finance charge yields and noninterest income, including the gain on portfolio sale, partially offset by higher interest expense and reversals of interest and fees, resulting from higher gross credit losses.

Brian Smith: Income from continuing operations increased $514 million.

Brian Smith: $737 million driven by a lower provision for credit losses and gain on portfolio sale, partially offset by higher income taxes.

Brian Smith: Moving to our fourth quarter financial highlights on slide eight similar to our full year drivers fourth quarter credit sales and average loans were down year over year due to the sale of the <unk> portfolio moderating consumer spending and credit tightening.

Brian Smith: Revenue reached $1 8 billion in the quarter down 2% year over year due to lower late fee revenue higher interest expense and higher reversal of interest and fees, resulting from higher gross credit losses, partially offset by higher finance charge yield in noninterest income.

Brian Smith: Total noninterest expenses decreased 6% year over year, as we continued to gain operational efficiencies and better align our expenses with a more moderate growth outlook.

Brian Smith: Income from continuing operations increased by $179 million, driven primarily by a lower reserve build.

Brian Smith: Okay.

Brian Smith: Looking at the financials in more detail on slide nine total interest income for the quarter decreased 5% year over year, but increased 2% for the full year compared to 2022 fourth quarter and full year noninterest income benefited from three factors higher cardholder and brand partner engagement initiatives in the prior year post our conversion.

Brian Smith: Sure.

Higher merchant discount fees and interchange revenue earned in the current year.

Perry Smith: And lower payments under our retailers share agreements due to lower credit sales and higher losses.

Perry Smith: Total noninterest expense decreased 6% from the fourth quarter of 2022, yet was up on an annual basis as anticipated the year over year decrease in the fourth quarter was primarily driven by a decrease in card and processing call, including fraud, and a reduction in marketing expenses and depreciation and amortization costs, partially offset.

Perry Smith: By higher employee compensation and benefits cost for the full year investments in talent technology and marketing primarily drove the increase.

Perry Smith: Additional details on expense drivers can be found in the appendix of the slide deck.

Perry Smith: As Ralph mentioned pretax pre provision earnings of <unk> group for the 11th consecutive quarter, increasing 3% year over year in the fourth quarter.

Perry Smith: Turning to slide 10.

Ralph: Our loan yield increased 170 basis points year over year benefiting from the upward trend in the prime rate, causing our variable price loans to move higher in tandem.

Ralph: Both loan yield of 27, 7% and net interest margin of 19, 6% were pressured sequentially from a seasonal increase in the reversal of interest and fees related to higher sequential gross credit losses.

We expect this pressure to continue and lead to a sequential reduction in the net interest margin in the first quarter of 2024 also funding costs continue to rise, but remained in line with our expectations.

Ralph: As you can see on the bottom rates our funding mix continues to improve fueled by growth in direct to consumer deposits, which increased to $6 5 billion in the fourth quarter as well as meaningful reductions in our unsecured debt over time, while we anticipate that direct to consumer deposits will continue to grow steadily we will maintain flexibility of our diverse.

Ralph: <unk> funding sources, including secured and wholesale funding to efficiently fund our long term growth objectives.

Ralph: Moving to slide 11, our delinquency rate for the fourth quarter was six 5% up from the third quarter as expected driven by continued macroeconomic pressures.

Ralph: We expect to continue delinquency rate to move slightly higher this month before stabilizing and moving lower in 2024.

Ralph: The net loss rate was 8.0% for the quarter compared to six 3% in the fourth quarter of 2022, and six 9% in the third quarter of 2023.

Ralph: The fourth quarter net loss rate was elevated compared to last year's level due to more challenging macroeconomic conditions pressuring the consumer payment rate that I mentioned as well as ongoing credit tightening and slower responsible growth impacting the denominator.

Ralph: The reserve rate decreased sequentially to 12.0% S transact or balances increase seasonally in the fourth quarter. We expect our first quarter 2024 reserve rate to return to approximately third quarter 2023 levels as transact or balances are paid down we intend to maintain a conservative weighting of economic.

Ralph: Scenarios in our credit reserve model in anticipation of continuing macroeconomic challenges and uncertainty and the consequential impact on our future credit losses.

Ralph: Despite these headwinds our credit risk score distribution mix remained flat to the third quarter as a percentage of cardholders with a 660 plus credit score remained above pre pandemic levels due to our prudent credit tightening actions and a more diversified product mix. These dynamics reinforce our confidence that our credit metrics will show improvement in the <unk>.

Ralph: Second half of 2024, we continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk. We take we closely monitor our projected returns with the goal of generating risk adjusted margins above our peers.

Moving to slide 12.

Brian Smith: We have significantly enhanced our financial resilience strengthening our balance sheet and funding mix, while effectively managing credit risk over.

Brian Smith: Over the past few years, we've diversified our product mix through partner co brand growth. The introduction of two proprietary cards and the launch and expansion of bread pay for installment lending our co brand and proprietary products now comprise approximately 50% of our credit sales, enabling us to capture incremental general purpose sales as consumer spend.

Brian Smith: <unk> pattern shift to more non discretionary spend in response to the evolving economic conditions. Additionally, our broader product suite has increased our total addressable market and diversified our spend.

Brian Smith: Direct to consumer deposits, which have continued to grow steadily provide an additional source of funding that has strengthened our balance sheet and enhanced our financial flexibility.

Brian Smith: We have strengthened our balance sheet further by reducing debt and building capital, while maintaining a conservative loan loss reserve our loan loss reserve rate is nearly 300 basis points higher than our seasonal day, one right in 2020, our quarter end total loss absorption capacity, which we define as our allowance for credit losses plus.

Brian Smith: Tier one capital divided by total end of period loans was 23%, providing a strong margin of protection should more adverse economic conditions arise.

Brian Smith: We remain confident in our disciplined credit risk management and ability to drive sustainable value through the full economic cycle delivering responsible profitable growth remains a top priority even if doing so requires a disciplined slower rate of growth during extended economic uncertainty.

Brian Smith: Finally, slide 13 provides our 2024 financial outlook, our 2024 outlook factors in an expected slower rate of credit sales growth as a result of continued moderation in consumer spending and ongoing strategic credit tightening both of which will pressure loan growth and the net.

Brian Smith: Loss rate. In addition, our 2024 outlook assumes multiple interest rate decreases by the federal reserve in the second half of the year.

Brian Smith: Which will pressure total net interest income at this time, our outlook does not factor in the potential impacts of the proposed CFPB late fee rule.

We remain confident in our disciplined credit risk management and ability to drive sustainable value through the full economic cycle delivering responsible profitable growth remains a top priority even if doing so requires a disciplined slower rate of growth during extended economic uncertainty.

Brian Smith: Based on our current economic outlook executed an expected proactive credit tightening actions higher gross credit losses, and the visibility into new business pipeline. We expect 2024 average credit card and other loans to be down low single digits relative to 2023.

Finally, slide 13 provides our 2024 financial outlook, our 2024 outlook factors in an expected slower rate of credit sales growth as a result of continued moderation in consumer spending and ongoing strategic credit tightening both of which will pressure loan growth and the net.

Brian Smith: Excluding the Bj's portfolio, which was sold in 2023, we expect 2024 average loans would be up low single digits.

Brian Smith: Total revenue growth for 2024, excluding gains on portfolio sale is anticipated to be down low to mid single digits, driven by both lower average loans and net interest margin.

Loss rate. In addition, our 2024 outlook assumes multiple interest rate decreases by the federal reserve in the second half of the year.

Brian Smith: Note that the BJ portfolio exit in 2023 reduced our 2024 year over year revenue growth guidance by 1% to 2%.

Which will pressure total net interest income at this time, our outlook does not factor in the potential impacts of the proposed CFPB late fee rule.

Brian Smith: We expect our full year net interest margin to be below the full year of 2023 rate due to higher reversal of interest and fees given higher gross credit losses.

Based on our current economic outlook executed an expected proactive credit tightening actions higher gross credit losses, and the visibility into new business pipeline. We expect 2024 average credit card and other loans to be down low single digits relative to 2023 <unk>.

Brian Smith: The climbing interest rates and a continued shift in product mix to co brand and proprietary products.

Brian Smith: Consistent with our prior commentary the potential initial impact of the CFPB credit card late fee rule is significant to our business given our mix of private label accounts and deeper underwriting.

Excluding the Bj's portfolio, which was sold in 2023, we expect 2024 average loans would be up low single digits.

For context, while not included in our 2024 outlook, assuming a hypothetical October one 2024 effective date, if the rule were to be implemented as proposed our current estimate is that the rule would reduced fourth quarter 2020 for total revenue by approximately 25%.

Total revenue growth for 2024, excluding gains on portfolio sale is anticipated to be down low to mid single digits, driven by both lower average loans and net interest margin.

Note that the BG portfolio exit in 2023 reduced our 2024 year over year revenue growth guidance by 1% to 2%.

Perry Smith: Relative to the fourth quarter of 2023. This estimate is net of certain mitigation actions that we will proactively implement this year. It should be noted that the estimated revenue impact is not yet include any contractual changes to the retailers share arrangements with partners. Once the final rule is published we will take further mitigating actions and.

We expect our full year net interest margin to be below the full year of 2023 rate due to higher reversal of interest and fees given higher gross credit losses.

Climbing interest rates and a continued shift in product mix to co brand and proprietary products.

Perry Smith: Nation with our brand partners to preserve program profitability over long term, we expect the financial impact to be increasingly mitigated over time as our actions take effect with substantial progress expected within the first four quarters post implementation.

Consistent with our prior commentary the potential initial impact of the CFPB credit card late fee rule is significant to our business given our mix of private label accounts and deeper underwriting.

For context, while not included in our 2024 outlook, assuming a hypothetical October one 2024 effective date, if the rule were to be implemented as proposed our current estimate is that the rule would reduce fourth quarter 2020 for total revenue by approximately 25%.

Perry Smith: As I discussed in December at an industry conference certain mitigation actions will require a longer timeframe to reach full mitigation value such as APR changes. Therefore, we will proactively implement certain actions in advance of the final rule implementation inclusive of fee and policy changes. Additionally, we expect.

Relative to the fourth quarter of 2023.

There will be impacts of future loan growth due to the necessary underwriting changes to ensure we maintain profitability thresholds, which unfortunately will restrict access to credit for some consumers.

This estimate is net of certain mitigation actions that we will proactively implement this year. It should be noted that the estimated revenue impact does not yet include any contractual changes to the retailer share arrangements with partners. Once the final rule is published we will take further mitigating actions in coordination with our brand partners to preserve program profitability overall.

Perry Smith: All that said given that a final rule has not yet been published an industry litigation is expected the timing of the rule implementation and resulting financial impact will vary in fact, it is possible. There is no financial impact in 2024.

Long term, we expect the financial impact to be increasingly mitigated over time as our actions take effect with substantial progress expected within the first four quarters post implementation.

Perry Smith: Shifting to operating leverage as a result of efficiencies gained from ongoing investments in technology modernization and digital advancement along with disciplined expense management, we aim to deliver nominal positive operating leverage for 2024, Despite net interest margin headwinds with our focus on expense discipline and operational excellence we expect.

As I discussed in December at an industry conference certain mitigation actions will require a longer timeframe to reach full mitigation value such as APR changes. Therefore, we will proactively implement certain actions in advance of the final rule implementation inclusive of fee and policy changes. Additionally, we expect.

Total expenses will be lower in 2024, and 2023, assuming our current economic outlook remains intact.

Perry Smith: We expect and we.

Perry Smith: We expect a net loss rate in the low 8% range for 2024, peaking in the first half of the year with each of the first two quarters of the year in the mid to high 8% range as inflation continues to pressure consumers' ability to pay and moderate their spend.

There will be impacts of future loan growth due to the necessary underwriting changes to ensure we maintain profitability thresholds, which unfortunately will restrict access to credit for some consumers.

All that said given that a final rule has not yet been published an industry litigation is expected the timing of the rule implementation and resulting financial impact will vary in fact, it is possible. There is no financial impact in 2024.

Perry Smith: Our outlook is inclusive of our ongoing credit tightening actions and expected slower loan growth impacting the net loss rate.

Perry Smith: Finally, our full year normalized effective tax rate is expected to be in the range of 25% to 26% with quarter over quarter variability due to the timing of certain discrete items.

Shifting to operating leverage as a result of efficiencies gained from ongoing investments in technology modernization and digital advancement along with disciplined expense management, we aim to deliver nominal positive operating leverage for 2024, Despite net interest margin headwinds with our focus on expense discipline and operational excellence we expect.

In closing the executive leadership team and I are confident in our ability to successfully manage risk return trade offs to this challenging economic environment, while continuing to make strategic investments that drive long term value for our stakeholders.

Perry Bieber: Total expenses will be lower in 2024, and 2023, assuming our current economic outlook remains intact.

Perry Smith: Operator, we are now ready to open up the lines for questions.

Perry Bieber: We are expecting.

Perry Smith: Thank you, ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad now.

Perry Bieber: We expect a net loss rate in the low 8% range for 2024, peaking in the first half of the year with each of the first two quarters of the year in the mid to high 8% range as inflation continues to pressure consumers' ability to pay and moderate their spend.

Perry Smith: Your line. Please press star followed by case.

Thanks, you asked your question. Please ensure you're fine is unlimited lately.

Perry Smith: Our first question today comes from the line of Vincent <unk>.

Jeff P. Meuler: Our outlook is inclusive of our ongoing credit tightening actions and expected slower loan growth impacting the net loss rate.

Perry Smith: With Stephens. Please go ahead your line is open.

Vincent <unk>: Hey, good morning, Thanks for taking my questions.

Perry Bieber: Finally, our full year normalized effective tax rate is expected to be in the range of 25% to 26% with quarter over quarter variability due to the timing of certain discrete items.

Vincent <unk>: I appreciate the CFPB late key estimate and putting a new tech number out there and so I wanted to unpack that a bit.

Vincent <unk>: On the 25% I guess.

Perry Bieber: In closing the executive leadership team and I are confident in our ability to successfully manage risk return trade offs to this challenging economic environment, while continuing to make strategic investments that drive long term value for our stakeholders.

Vincent <unk>: Stan the confidence level on that as well as how how much further lower it can go.

Vincent <unk>: Thinking about the 25%.

Vincent <unk>: You have I guess, how much of that how much mitigating impacts are influenced by 25% So maybe like.

Ralph: Operator, we are now ready to open up the lines for questions.

Ralph: Thank you.

Ralph: Ladies and gentlemen, if you would like to ask a question. Please press star followed by one on your telephone keypad now if you change your mind. Please press star followed by case.

Stan: What would it be without the mitigating impacts and then how low do you think it could go and what impacts on what mitigation. So we need to happen to get to that lower rate. Thank you.

Ralph: You ask a question. Please ensure your phone is on mute lately.

Vincent Caintic: Our first question today comes from the line of Vincent <unk> with Stephens. Please go ahead. Your line is open.

Stan: Thanks, Vincent for the question I'm glad you appreciate us, giving some guidance and increasing transparency there.

Vincent Caintic: Hey, good morning, Thanks for taking my questions and I appreciate the COPD late key estimate and putting a new tech number out there and so I wanted to unpack that a bit.

Vincent <unk>: What we've provided is what I'd say the downside scenario, meaning.

Vincent <unk>: Meaning it's.

Vincent <unk>: Assuming the late the rule comes out as proposed at $8, 25%.

Vincent Caintic: The 25% I guess I wanted to.

Cap with an effective October one with no partner adjustment considerations are there where program considerations.

Vincent Caintic: Understand the cause.

Vincent Caintic: And several on that as well as how how much further lower it can go.

Vincent <unk>: And as we've talked about and what I provided at one of the past conferences. Some of the mitigating actions just going to take time right APR changes take time to burn through so there is.

Vincent Caintic: So thinking about the 25%.

<unk>.

Vincent Caintic: You have I guess, how much of the how much mitigating impacts are influenced by 25% So maybe like.

Vincent <unk>: A lot more value that will.

Vincent Caintic: What would it be without the mitigating impacts.

Brian Smith: Come from mitigating actions so within you can imagine.

Vincent Caintic: Then how low do you think it could go and what impacts on what mitigation would need to happen to get to that lower rate. Thank you.

Brian Smith: Do you think about the six months of impact that might be in place. If we start to do some pricing changes if the.

Brian Smith: Rule comes out pretty soon.

Vincent Caintic: Thanks, Vincent for the question I'm glad you appreciate us, giving some guidance on the increasing transparency there.

Brian Smith: Not a ton.

Ton of mitigation within that number the value is going to come over time.

Vincent Caintic: What we've provided is what I'd say the downside scenario.

Vince's, Ralph I think.

Perry Bieber: Meaning it's.

Brian Smith: Thing to remember is we have a.

Perry Bieber: Sumit the late fee.

A really seasoned team here that has been through.

Vincent Caintic: It comes out as proposed at $8, 25%.

Ralph: Card Act and is manage through that managed to return to profitability. So.

Vincent Caintic: Cap with an effective October one with no partner adjustment considerations. There there were program considerations.

Perry Smith: What we're going to do we're going to focus on what it takes to return to profitability, it's going to take a little bit of time.

Vincent Caintic: And as we talked about and what I provided at one of the past conferences. Some of the mitigating actions just going to take time right APR changes take time to burn through so there is.

Perry Smith: We thought it was important today to kind of put it out the worst case scenario out there, but we're really focused on closing the gap over over time.

Perry Smith: We've been working on it since February of 2023.

A lot more value that will.

Brian Smith: Okay I appreciate it so it sounds like the 25% you only really have six months of higher APR.

Come from mitigating actions so within you can imagine.

Perry Bieber: You think about six months of impact that might be in place. If we start to do some pricing changes if the.

Brian Smith: In there.

Brian Smith: But could you maybe discuss.

Perry Bieber: Rule comes out pretty soon.

Brian Smith: What actions you expect to take once the once it becomes finalized and.

Not a ton.

Perry Bieber: <unk> of mitigation within that number the value is going to come over time.

Brian Smith: And.

Brian Smith: The impact of those mitigation strategies can be and then also what what the merchants are.

Speaker Change: Vince as Ralph I think.

Vince Ralph: Thing to remember is we have a.

Brian Smith: In your discussions with your merchants on all these thank you.

Vince Ralph: A really seasoned team here that has been through.

Yes.

Perry Bieber: Card Act and is managed through that managed to return to profitability so that.

Brian Smith: Do you think about the actions it will.

Brian Smith: Yes.

What we're going to do we're going to focus on what it takes to return to profitability, it's going to take a little bit of time.

When you think about pricing actions some of those require partner agreements. So <unk> and her team have been very active in working with these partner meeting with them all trying to figure out what the right solution is for them showed this will go into effect and so part of is you need to have the rule actually come out with the final parameters and then.

Perry Bieber: We thought it was important today to kind of put it out the worst case scenario out there, but we're really focused on closing the gap over over time and we've been working on it since February of 2023.

Perry Bieber: Okay I appreciate it so it sounds like the 25% you only really have six months of higher apr's.

Perry Smith: Each partner will work with our team to figure out what's the right level for them to to work through this I mean, it could be promotional fees for some partners and not havent changed pricing others are gone wall lean in harder on Apr's and some may want to give up some royalties to make sure. We still underwrite deeper there's going to be credit actions that are taken so all the things that we've talked.

Perry Bieber: In there.

Perry Bieber: Could you maybe discuss.

Perry Bieber: What actions you expect to take once the once it becomes finalized and.

Perry Bieber: And.

Perry Bieber: The impact of those mitigation strategies can be and then also what what the merchants are.

About all the different levers are going to be in play and it's really going to be partner dependent product dependent in terms of what that will look like so it's hard to nail that down with a lot of specificity until the rule comes out until.

Perry Bieber: In your discussions with your merchants on all of these thank you.

Perry Bieber: Yes.

Perry Bieber: Do you think about the actions it will.

Val <unk>: When you think about pricing actions some of those require partner agreements. So Val <unk> and her team have been very active in working with each partner meeting with them all trying to figure out what the right solution is for them showed this will go into effect and so part of it is you need to have the rule actually come out with the final <unk>.

Perry Smith: The team gets to work with each partner and urged to figure out what's the right path for them.

Brian Smith: Okay I appreciate it very helpful I'll get back in the queue. Thank you.

Brian Smith: Our next question comes from Mihir Bhatia with Bank of America Merrill Lynch.

Val <unk>: Parameters and then each partner will work with our team to figure out what's the right level for them to to work through this I mean, it could be promotional fees for some partners are not havent changed pricing others are gone wall lean in harder on Apr's and some may want to give up some royalties to make sure we still underwrite deeper there's going to be credit actions that are.

Brian Smith: Please go ahead.

Hi, Thank you for taking my question and good morning.

Mihir Bhatia: Just to start maybe just staying on the late <unk>.

Mihir Bhatia: The net.

Mihir Bhatia: The mitigation actions that would be 25% and we appreciate the.

Mihir Bhatia: Specificity of the disclosure, but I was wondering if you could maybe take.

Val <unk>: Take us all the things that we've talked about all the different levers are going to be in play and it's really going to be partner dependent product dependent in terms of what that will look like so it's hard to nail that down with a lot of specificity until the rule comes out until.

Kevin: Thank you Kevin.

Kevin: What would be the gross impact if you don't implement the net.

Kevin: The mitigation actions, what I'm trying to understand how much of you mitigating proactively.

Kevin: What it would be if you did because it also sounds like.

Kevin: Hey, drew might not come in there will be litigation. So just trying to understand what is the I guess I don't know if the insurance and the right word but like by.

Vince Ralph: The team gets to work with each partner and Earth to figure out what's the right path for them.

Perry Bieber: Okay I appreciate it very helpful I'll get back in the queue. Thank you.

Kevin: By proactively mitigating you up.

Kevin: Taking a bit of a revenue hit too so.

Kevin: Maybe getting revenue boost I guess.

Perry Bieber: Our next question comes from Mihir Bhatia with Bank of America Merrill Lynch.

Kevin: Yes, yes, I'm here I appreciate that question right I think some of it is.

Perry Bieber: Please go ahead.

Kevin: <unk>.

Mihir Bhatia: Hi, Thank you for taking my question and good morning.

Kevin: We're giving you the hypothetical.

Kevin: Downside risk.

Perry Bieber: Just to start maybe just staying on the <unk> topic.

Mihir Bhatia: For the fourth quarter of this year.

Perry Bieber: Net.

Mihir Bhatia: Look.

Mihir Bhatia: I don't bet and so but some that do we say.

Perry Bieber: The mitigation actions it will be 25% and we appreciate.

Perry Bieber: <expletive> the.

Mihir Bhatia: Highly unlikely.

Mihir Bhatia: Specificity of the disclosure, but I was wondering if you could maybe take a step.

Mihir Bhatia: It's highly unlikely that rule would actually impact this year, but for US. We wanted to give you a sense of what it would look like or could look like if it came out as proposed impacted that particular quarter that we mentioned because we just released the fourth quarter of 'twenty. Three so we're giving you a comparable quarter, whereas if we rolled it forward to first quarter of 'twenty five.

Mihir Bhatia: What would be the gross impact if you don't implement the net.

Mihir Bhatia: The mitigation actions, what I'm trying to understand how much of you mitigating proactively.

Perry Bieber: What it would be if you did because it also sounds like.

Perry Bieber: Hey, drew might not come in there will be litigation. So I'm just trying to understand what is the I guess I don't know if the insurance is the right word but like.

Perry Smith: Our second quarter, a 25% it becomes much harder to provide a degree of estimation. So.

Perry Bieber: Proactively mitigating you up.

Perry Smith: The degree of mitigation.

Taking a bit of a revenue hit too so.

Perry Smith: Is not significant relative to the impact of.

Perry Bieber: Maybe getting revenue boost I guess, yes.

Perry Bieber: Yes, I'm here I appreciate that question right I think some of it is.

Perry Smith: The fee change itself.

Perry Bieber: <unk>.

Perry Smith: A number of things and to your point the longer litigation goes and to the extent that our partners and us to Hey, Let's go take some early action and.

Perry Bieber: We're giving you the hypothetical.

Perry Bieber: Downside risk.

Perry Bieber: For the fourth quarter of this year.

Perry Bieber: I don't bet and so.

Perry Smith: In anticipation of this could happen and get further along that mitigation curve the value curve, yes that could provide some near term benefit but in that my expectation would be with partners. There's there could be some partner sharing investment a program a different way. So I don't want to say theres, a boost because of our.

Speaker Change: But some that do we say.

Speaker Change: Highly unlikely.

Speaker Change: It's highly unlikely that rule would actually impact this year, but for US. We wanted to give you a sense of what it would look like or could look like if it came out as proposed impacted that particular quarter that we mentioned because we just released the fourth quarter of 'twenty. Three so we're giving you a comparable quarter, whereas if we rolled it forward to first quarter of 'twenty five.

Perry Smith: Our goal is not to benefit from pending what we'll call detrimental flawed rulemaking.

Vincent Caintic: Our second quarter of 25% it becomes much harder to provide a degree of estimation. So.

Perry Smith: Got it okay.

Perry Smith: And then just switching gears I wanted to talk about credit performance obviously.

Vincent Caintic: The degree of mitigation.

It is not significant relative to the impact of.

Perry Smith: But two part question first is are you still comfortable with your non good guide too.

Vincent Caintic: The fee change itself I mean, there's a number of things and to your point the longer litigation goes and to the extent that our partners and us to Hey, Let's go take some early action and.

Perry Smith: The cycle below 6%.

Perry Smith: And.

Perry Smith: How do you get there what gives you confidence you'll get.

Perry Smith: Do you think it's a.

Mihir Bhatia: <unk> faulting exiting 'twenty five seem like I'm, just trying to understand what the path to get there looks like.

Vincent Caintic: In anticipation of this could happen and get further along that mitigation curve the value curve, yes that could provide some near term benefit but in that my expectation would be with partners. There's there could be some partner sharing investment a program a different way. So I don't want to say theres, a boost because of <unk>.

Mihir Bhatia: Obviously, the credit tightening actions help but just trying to understand the Bob Thank you.

Bob: Yes, I am confident that we'll get back below 6% and some of it's math and so.

Bob: The timing by which we get there you'd have to tell me your confidence in the economic outlook and that's going to be part of a driver because when you look at any past cycle. What happens is you have a period of elevated losses and the losses, the higher loss rates and we're living through right now where it where we've just provided guidance that we're going to have a lower.

Vincent Caintic: Our goal is not to benefit from pending.

Vincent Caintic: Detrimental flawed rulemaking.

Vincent Caintic: Got it okay.

Vincent Caintic: Thank you and then just switching gears I wanted to talk about credit performance obviously.

Vincent Caintic: But a two part question first is are you still comfortable with your non good guide to the cycle below 60%.

Bob: Loans, so youre, putting on lower new account vintages, now theyre going to be better credit quality, and but they're not large enough to replace what's a trading through higher gross losses and normal normal attrition, but then as you come out the other side of a cycle. When do you have an economic improvement now.

And how do you get there and what gives you confidence you'll get.

Vincent Caintic: Currency.

Do you think.

Vincent Caintic: <unk> faulting exiting 'twenty five seem like I'm, just trying to understand what the box to get there looks like.

Brian Smith: The losses of claims or the riskier customers of clients out of the book you are putting on larger new vintages and that I'll say that growth math AIDS, a lower loss rate and now youre in a better economic cycle, coupled with for US. You also continued a product mix shift. So we have very good confidence that we'll get there now.

Vincent Caintic: Obviously, the credit tightening actions help but just trying to understand the Bob Thank you.

Vincent Caintic: Yes, I am confident that we will get back below 6% and some of it's math and so.

Vincent Caintic: The timing by which we get there you would have to tell me your confidence in the economic outlook and that's going to be part of a driver because when you look at any past cycle. What happens is you have a period of elevated losses and the losses the higher loss rates, we're living through right now right, but we've just provided guidance that we're going to have a lower.

Brian Smith: I can't pinpoint the quarter or the year, because a lot of it is the economic improvement that needs to occur in tandem with that.

Brian Smith: Got it. Thank you. Thank you for taking my questions.

Brian Smith: You're welcome thank you.

Vincent Caintic: Loans, so youre, putting on lower new account vintages, now theyre going to be better credit quality, and but they're not large enough to replace what's a trading through higher gross losses and normal normal attrition, but then as you come out the other side of a cycle. When do you have an economic improvement now.

Brian Smith: Our next question comes from the line of Sanjay <unk> with <unk>. Please go ahead Sanjay.

Brian Smith: Thanks, Good morning.

Sanjay: So I don't know Teri, Ralph I guess, when I think about the late fee impact as it stands right now could you just talk about maybe what you can do to offset this on expenses because I understand like the Apr's, probably take couple of years right. So in the absence of some kind of delay.

Vincent Caintic: The losses of cleanse or the riskier customers or clients out of the book you are putting on larger new vintages and.

Vincent Caintic: I will tell you that growth math AIDS, a lower loss rate and now youre in a better economic cycle, coupled with for US Youre also continued a product mix shift. So we have very good confidence that we'll get there now I can't pinpoint the quarter or the year because a lot of it is the economic improvement.

Sanjay: Our deferment it seems like next year.

Sanjay: If everything sort of static you could actually lose money. Our please correct me if I'm wrong.

Sanjay: Unless there's some expense offsets.

Ralph: And some of the offset sort of flowed through quicker than what we think maybe you can just talk about that plus the fact or the <unk>.

Vincent Caintic: Needs to occur in tandem with that.

Ralph: <unk> as to how can you get back to the profitability levels that you were at pre this regulation over time and sort of what the time horizon would be.

Vincent Caintic: Got it. Thank you. Thank you for taking my questions.

Vincent Caintic: Thank you.

Vincent Caintic: Our next question comes from the line of Sanjay Zaccone with <unk>. Please go ahead Sanjay.

Ralph: Yeah. Thanks Andre for the question.

Ralph: I think your question is one that again will go hypothetical because the rule is not final and where it lands.

Vincent Caintic: Thanks, Good morning.

Vincent Caintic: Perry Ralph I guess, when I think about the late fee impact as it stands right now could you just talk about maybe what you can do to offset this on expenses because I understand like the Apr's, probably take couple of years right. So in the absence of some kind of delay.

Ralph: Don't know.

Ralph: Of the expense management, I think Ralph has been pretty clear and we've all been clear where to continue to invest in this business for the long haul and not make short term decisions that would adversely impact the business and really put us at a competitive disadvantage and not be able to serve our customers with digital capabilities, our brand partners with what they need as well so I think in two.

Perry Ralph: Our deferment it seems like next year, if everything sort of static you could actually lose money Alright. Please correct me if I'm wrong.

Ralph: <unk> expense.

<unk>.

Ralph: That's in our DNA right. So that's the thing where we've talked about operational milestones are continued to focus on improvement youre seeing that come through in the second half of 2020 threes results youre going to see that in our commitment into 'twenty, four but theres nothing that would be appropriate to do to rip down expenses that would cause sacrifice.

Perry Ralph: Unless there is some expense offsets.

Perry Ralph: And some of the offset sort of flowed through quicker than what we think maybe you can just talk about that plus the fact or the <unk>.

Perry Ralph: As to how can you get back to the profitability levels that you were at pre this regulation over time and sort of what the time horizon would be.

Perry Ralph: Yeah. Thanks, Sanjay for the question.

Ralph: Our future. This is one of the things you have to work through and you got to work with the revenue side of this while you are making tighter underwriting changes.

Perry Ralph: I think your question is one that again will go hypothetical because the rule is not final and where it lands.

Clearly accelerate things with its digital capabilities mobile deployment things that help improve expenses, but you will do that any ways that this company, but it's just one of these things that you just have to as Ralph said, you've got to work through this.

Perry Ralph: Don't know.

Perry Ralph: Terms of the expense management I think Ralph has been pretty clear and we've all been clear we're going to continue to invest in this business for the long haul and not make short term decisions that would adversely impact the business and really put us at a competitive disadvantage and not be able to serve our customers with digital capabilities, our brand partners with what they need as well so I think in <unk>.

Ralph: And some of it will result in tighter underwriting sure Youll have some maybe fewer accounts. So that gives you a little bit of expense boost but it is grinding your way back through the revenue side of the equation and perhaps others.

Ralph: <unk> expense.

Ralph: Less risk in the portfolio. So you have lower losses, you have less provision build or low reserve rate. All of this is going to play out you need the final rule and we need to work with each partner to figure out what are those mechanics going to look like so we understand the resulting.

Ralph: <unk>, that's that's in our DNA right. So that's the thing where we've talked about operational milestones are continuing to focus on improvement you are seeing that come through in the second half of 2020 threes results youre going to see that in our commitment into 'twenty, four but theres nothing that would be appropriate to do to rip down expenses that would.

Ralph: As a front book coming out the other side as a result, as your comment around getting back to return.

Perry Ralph: Cause sacrifice of our future. This is one of the things you have to work through and you got to work with the revenue side of this while you are making tighter underwriting changes.

Ralph: It is possible the returns could be a little lower than they would have been pre CFPB, but expect strong returns.

Ralph: Clearly accelerate things with its digital capabilities mobile deployment things that help improve expenses, but you would do that any ways that this company, but it's just one of these things that you just have to as Ralph said, you've got to work through this.

Mihir Bhatia: Because you would have a less slightly less risky business in that process too because a number <unk>.

Brian Smith: Americas and consumers will no longer have access to credit that were on the riskier side of that spectrum.

Ralph: And some of it will result in tighter underwriting sure Youll have some maybe fewer accounts. So that gives you a little bit of expense boost but it is grinding your way back through the revenue side of the equation and perhaps theirs.

Brian Smith: Okay.

Mihir Bhatia: Maybe just to follow up on credit.

Mihir Bhatia: I think when we look at the peers. It seems like they are kind of turning the corner on credit. It seems like this gradual progress on your front. It just seems like when you just qualitatively talk about your loan portfolio. It seems that there is a little bit more pressure on your end customer.

Ralph: Less risk in the portfolio. So you have lower losses, you have less provision build or low reserve rate. All of this is going to play out, but you need the final rule and we need to work with each partner to figure out what are those mechanics going to look like so we understand the resulting.

Mihir Bhatia: Is it is it fair to say that.

Mihir Bhatia: The inflation and the higher rates, so really hit them, a little bit more disproportionately relative to other issuers in the space or when you parse out same customers inside those portfolios. They are behaving the same way and whats the light at the end of the tunnel as inflation is receding are you seeing better.

Ralph: As a front book coming out the other side as a result, as your comment around getting back to returns.

Perry Ralph: It is possible the returns could be a little lower than they would have been pre CFPB, but expect strong returns because you would have a less a slightly less risky business in that process too because a number <unk>.

Mihir Bhatia: Behavior.

Mihir Bhatia: Just curious just thinking through your credit performance and then maybe just sorry follow up on that.

Perry Bieber: Americas and consumers will no longer have access to credit that were on the riskier side of that spectrum.

Mihir Bhatia: The reserve rate progression over the course of this year, maybe you can just talk about how youre thinking about it.

Perry Bieber: Okay.

Perry Bieber: Maybe just to follow up on credit.

Mihir Bhatia: Yeah. So.

Perry Ralph: I think when we look at the peers. It seems like they are kind of turning the corner on credit. It seems like this gradual progress on your front. It just seems like when you just qualitatively talk about your loan portfolio. It seems that there is a little bit more pressure on your end customer.

Mihir Bhatia: It's interesting to hear you comment that others are turning the corner.

Mihir Bhatia: I've actually been thinking a little bit the opposite.

Mihir Bhatia: But what we've been looking at we've been seeing competitors have erosion.

Mihir Bhatia: <unk> loss rates and delinquencies that a little faster pace than we have and we're still obviously seeing some pressure.

Perry Ralph: Is it is it fair to say that.

Mihir Bhatia: But when you look at lag loss rates and other things fourth quarter of this year versus fourth quarter last year.

Perry Ralph: The inflation and the higher rates really hit them, a little bit more disproportionately relative to other issuers in the space or when you parse out same customers inside those portfolios, they're behaving the same way and whats the light at the end of the tunnel as inflation is receding or are you seeing better.

Mihir Bhatia: I don't think that statement holds so but your point is right is that because of consumers that we serve.

Mihir Bhatia: Think about the consumers that are driving the.

Mihir Bhatia: Driving engine within the economy as the top third of the consumers and yes, theyre seeing a little bit of higher rates on things and it's an inconvenience for them but.

Perry Ralph: Behavior.

Perry Bieber: I'm just curious just thinking through your credit performance and then maybe just.

Perry Bieber: Sorry follow up on that.

Mihir Bhatia: Two thirds of Americans that are feeling the pressure and as you noted.

Perry Bieber: The reserve rate progression over the course of this year, maybe you can just talk about how youre thinking about it. Thanks.

Is it inflation.

Mihir Bhatia: The products are costing where we I saw something the other day from an E. Wi study, where I think I said it.

Perry Bieber: Yeah. So it's interesting to hear you comment that others are turning the corner.

Mihir Bhatia: The monthly cost for consumers they are up $1000 per month compared to what they were in 2019.

Perry Bieber: I've actually been thinking a little bit the opposite.

Perry Bieber: Ben.

Perry Bieber: What we've been looking at we've been seeing competitors have erosion of loss rates and delinquencies at a little faster pace than we have and we're still obviously seeing some pressure.

Mihir Bhatia: $12000, a year and their wages haven't kept up now what's happening.

Mihir Bhatia: Wage growth is starting to outpace inflation inflation is coming down and that's going to benefit in the two thirds that we serve and I'd say, we probably serve the middle third in there and but the pressure they're feeling in the lagged effect of higher interest rates are coming through so they're seeing the drawdown in your savings are seeing mounting debt there is pressure.

Perry Bieber: But when you look at lag loss rates and other things fourth quarter of this year versus fourth quarter last year.

Perry Bieber: I don't think that statement holds so but your point is right that because of consumers that we serve when you think about the consumers that are driving the.

Mihir Bhatia: And Thats why.

Perry Bieber: The driving engine within the economy as the top third of the consumers and yes. They are seeing a little bit of higher rates on things and it's an inconvenience for them, but it's the other two thirds of Americans that are feeling the pressure and as you noted.

Mihir Bhatia: The credit actions that we take we will take a little time to take hold but that's what gives us the confidence as we move into the second half of next year.

Perry Smith: That answer that first part of your question.

Perry Smith: And then as it relates to reserve reserve rate.

Perry Bieber: <unk>.

Perry Bieber: The products are costing where we I saw something the other day from an E. Wi study, where I think you said it.

Perry Smith: I think we've been very transparent about what our belief was going to be with the reserve rate and we got ahead of it a little bit right. We're looking around the corner, we increased the reserve rate recognizing that a lot of reserve models are geared towards change in unemployment.

Perry Bieber: The monthly cost for consumers, they're up $1000 per month compared to what they were in 2019.

Perry Bieber: It is $12000 a year and their wages haven't kept up now what's happening.

Perry Bieber: <unk> growth is starting to outpace inflation inflation is coming down and that's going to benefit in the two thirds that we serve and I would say, we probably serve the middle third and there and that the pressure. They are feeling in a lagged effect of higher interest rates are coming through so they're seeing.

Perry Smith: We took an approach, which said theres a lot of things as model don't care for which is a period of rapid inflation persistently high rapid rise in interest rates. So that conservatism that we had placed in there is playing out and we feel confident that we have sufficiently cared for what's ahead of us in the first half of the year.

Perry Bieber: The drawdown in your savings are seeing mounting debt there is pressure and thats why.

Perry Smith: And candidly in the guidance that I gave where we said hey, This reserve ratios remained pretty steady through most of the year. It is possible as you enter the back half when we start to see lower delinquency formation, the roll rates start to improve and better economic outlook I would expect that the reserve rate will start to come down.

Perry Bieber: The credit actions that we take we will take a little time to take hold but that's what gives us the confidence as we move into the second half of next year.

Perry Ralph: I hopefully that answer that first part of your question.

Perry Ralph: And then as it relates to reserve reserve rate.

Perry Ralph: <unk>.

Perry Ralph: I think we've been very transparent about what our belief was going to be with the reserve rate and we got ahead of it a little bit right. We're looking around the corner, we increased the reserve rate recognizing that a lot of reserve models are geared towards change in unemployment.

Perry Smith: Okay perfect. Thank you.

Perry Smith: Thanks, Amit.

Perry Smith: Our next question comes from Moshe Orenbuch with Cowen. Please go ahead.

Perry Smith: Yeah.

Perry Smith: Great. Thanks.

Perry Ralph: We took an approach, which said theres a lot of things as models don't care for which is a period of rapid inflation persistently high rapid rise in interest rates. So that conservatism that we had placed in there is playing out and we feel confident that we have sufficiently cared for what's ahead of us in the first half of the year.

Perry Smith: Perry I'm, Ralph I'm, hoping you could talk a little bit.

Maybe unpack a little bit your expectations for balanced growth in 2024, you talked about slowing spend you talked about some other actions that you've taken maybe if you could put a little more granularity about some of those things and what that means and perhaps what that might mean in terms of relationships with you.

Perry Ralph: Year and candidly in the guidance that I gave where we said hey, This reserve ratios remained pretty steady through most of the year. It is possible as you enter the back half when we start to see lower delinquency formation, the roll rates start to improve and better economic outlook I would expect that the reserve rate will start to come down.

Partners and I've got a follow up.

Perry Smith: Yes.

Perry Smith: Some of it.

Perry Smith: Most thanks for the question.

Perry Smith: Some of it is geared towards the environment, we're operating and we've talked about this since <unk> took over this company and I joined in Val and team were focused on responsible growth and in more challenging economic times.

Perry Ralph: Okay perfect. Thank you.

Andrew: Thanks, Andrew.

You tightened the credit buy box lines and fewer new accounts and so last year, we put on a smaller vintage than we did the year before we're expecting a smaller vintage in 'twenty 'twenty four and it's kind of math right. When you have a period of time when your losses are going to be over.

Andrew: Our next question comes from Moshe Orenbuch with Cowen. Please go ahead.

Andrew: Great. Thanks.

Perry I'm, Ralph I'm, hoping you could talk a little bit.

Andrew: Maybe unpack a little bit your expectations for balanced growth in 2024, you talked about slowing spend you talked about some other actions that you've taken maybe if you could put a little more granularity about some of those things and what that means and perhaps what that might mean in terms of relationships with you.

Perry Smith: <unk>, 8% the gross losses are even higher than that so the attrition that's coming off the existing book is not getting replaced at the same rate because you are a smaller front book coming on and within the book you are.

Andrew: Gartner.

Reginald Lawrence Smith: And I've got a follow up.

Perry Smith: Putting on you have a lower lines and is also not as much economic activity as consumers are trying to moderate their spend.

Reginald Lawrence Smith: Yes, so some of it.

Reginald Lawrence Smith: Thanks for the question.

Reginald Lawrence Smith: Some of it is.

Val: Then as you get towards the back part of the year you start to have the resumption of spend lower losses, and you kind of hit that trajectory.

Reginald Lawrence Smith: Geared towards the environment, we're operating and we've talked about this since warehouses took over this company and I joined in Val <unk>, we're focused on responsible growth and in more challenging economic times.

Mihir Bhatia: That inflection point, we should start to growth again.

Reginald Lawrence Smith: Tightened credit buy box.

Mihir Bhatia: Yes.

Perry Ralph: <unk> and fewer new accounts and so last year, we put on a smaller vintage than we did the year before we're expecting a smaller vintage in.

Mihir Bhatia: As I think about it.

Mihir Bhatia: I am comfortable with the with the low single digit loan growth.

Mihir Bhatia: <unk> I think thats given the economy, given the pressures that we're seeing out there given some uncertainty.

Perry Ralph: 'twenty 'twenty four.

Perry Ralph: And it's kind of math right. When you have a period of time when your losses are going to be over 8%. The gross losses are even higher than that so the attrition that's coming off the existing book is not getting replaced at the same rate because you are a smaller front book coming on and within the bookings are.

Mihir Bhatia: I think.

Mihir Bhatia: With that growth I think it would be.

Mihir Bhatia: Concerning if we came out with something much higher than that in this type of environment.

Speaker Change: I think conservativism and.

Speaker Change: Managing our growth responsibly as what we've done from day, one we will continue to do that.

Perry Ralph: On you have a lower lines and is also not as much economic activity as consumers are trying to moderate their spend.

Speaker Change: Okay.

Speaker Change: When you think about the mitigating actions.

Perry Ralph: Then as you get towards the back part of the year you start to have the resumption of spend lower losses, and you kind of hit that trajectory that that inflection point, we should start to growth again.

Speaker Change: Post the implementation of the late season are there any issues with respect to interest rate caps either.

Speaker Change: Either statutory capture caps that you would impose in terms of the level of rates, particularly given.

Speaker Change: Right.

Speaker Change: Youre kind of average balance per account as you think about implementing those actions.

Perry Ralph: Yes.

Perry Ralph: As I think about it I am I am comfortable with.

Mihir Bhatia: Most of that's a good question and one I think the industry is grappling with.

Perry Ralph: Low single digit loan growth.

Perry Ralph: P. J, so I think thats given the economy, given the pressures that we're seeing out there given some uncertainty.

Beth: This is beth.

Beth: Basically hit the Mark on one of the.

Beth: The issues that I think that the unintended.

Perry Ralph: I think.

Perry Ralph: Comfortable with that growth I think it would be.

Beth: A consequence of the CFPB action that is going to cause.

Perry Ralph: Concerning if we came out with something much higher than that in this type of environment. So I think conservativism and managing our growth responsibly as what we've done from day, one we will continue to do that.

Beth: Much higher rates for a much broader.

Beth: Set of the population.

Beth: Everybody is going to pay for those that are late and how high the rates will go will be pretty much market dependent.

Perry Ralph: Okay.

Beth: If not comfortable pushing rates up into the <unk>.

Perry Ralph: When you think about the mitigating actions.

Beth: Mid to high 30%, but that's where.

Perry Ralph: Post the implementation of the late season are there any issues with respect to interest rate caps either.

Beth: Things are we getting pushed out.

Beth: Yes, I think unfortunately.

Perry Smith: The consequence of this action wherever it lands.

Perry Ralph: Either statutory capture caps that you would impose in terms of the level of rates, particularly given.

Perry Smith: Credit is going to be more expensive for everyone.

Perry Ralph: Right.

Perry Ralph: You are kind of average balance per account she think about implementing those actions.

Speaker Change: And people that have access to credit today may not have access to credit tomorrow.

Perry Ralph: Most of that's a good question and one I think the industry is grappling with.

Speaker Change: I think unfortunately, that's that's going to be part of the outcome.

Speaker Change: Got it thank you.

Perry Ralph: This is you basically.

Perry Ralph: Basically hit the Mark on one of the issues that I think that the unintended consequence of the CFPB action that is going to cost.

Speaker Change: Our next question comes from Jeff Adelson with Morgan Stanley.

Speaker Change: Please go ahead.

Perry Bieber: Much higher rates for a much broader set.

Jeff Adelson: Yes, hi, Thanks for taking my question I guess I just wanted to dig in a little bit more again.

The population.

Perry Bieber: Everybody is going to pay for those that are late and how high the rates will go will be pretty much market dependent.

The <unk> impact that you're outlining here with no partner considerations.

Jeff Adelson: Could you just clarify what that means is that more than normal formulaic RSA that offsets or is that already considered.

Perry Bieber: If not comfortable pushing rates up into the mid to high 30%, but that's where.

Perry Bieber: Things are we getting pushed out.

Perry Bieber: Yes, I think unfortunately.

Or is it more just what you are contracts allow you to do any of that.

Perry Bieber: The consequence of this action wherever it lands is credit is going to be more expensive for everyone.

Some adverse versus change to the regulatory environment.

Perry Bieber: And people that have access to credit today.

Jeff Adelson: Yes no.

Jeff Adelson: Okay. Thanks for the question.

Perry Bieber: Not have access to credit tomorrow.

Jeff Adelson: RSA that's already contractually there is already contemplated in there and that that estimate, but because the rule is not final there hasnt been final negotiations with those partners.

Perry Bieber: I think unfortunately, that's that's going to be part of the outcome.

Perry Bieber: Got it thank you.

Perry Bieber: Our next question comes from Jeff Adelson with Morgan Stanley.

Jeff Adelson: No.

Jeff Adelson: Would be disingenuous for me to give you an estimate with assumptions of what each of those partners might be willing to do with a hypothetical situations. So that's why we framed the.

Perry Bieber: Please go ahead.

Perry Bieber: Yes, hi, Thanks for taking my question I guess I just wanted to dig in a little bit more again.

Perry Bieber: The <unk> impact that you're outlining here with no partner considerations.

Jeff Adelson: The estimate as we did.

Perry Bieber: Could you just clarify what that means is that <unk>.

Jeff Adelson: Okay got it.

Jeff Adelson: And then.

Perry Bieber: More than normal formulaic RSA that offsets or is that already considered.

Jeff Adelson: Just the revenue guide just to make sure it's crystal clear here I know.

Jeff Adelson: You are saying no assume gain on sale, but does the revenue base for 'twenty three considered in the growth rate include or exclude Bj's. I think you mean to include Bj's in the base correct.

Perry Bieber: Or is it more just what you are contracts allow you to do any event.

Perry Ralph: Some adverse versus change to the regulatory environment.

Perry Ralph: Yes no.

Jeff Adelson: Yes in the base forecast that included Bj's in the 2023 numbers with.

Perry Ralph: Thanks for the question.

Perry Ralph: RSA that's already contractually there is already contemplated in there and that that estimate, but because the rule is not final there hasnt been final negotiations with those partners.

Jeff Adelson: With the base guidance and then in my comments I had mentioned that it would.

Would have reduced it would have lessen that debt reduction if it was excluded from the prior year.

Perry Ralph: So.

Perry Ralph: It would be disingenuous for me to give you an estimate with assumptions.

Perry Ralph: What each of those partners might be willing to do with a hypothetical situations. So that's why we framed.

Jeff Adelson: Okay, Great got it thanks for taking my question.

Jeff Adelson: Thank you.

Jeff Adelson: The next question comes from Brad Smith with J P. Morgan. Please go ahead.

The estimate as we did.

Perry Bieber: Okay got it.

Brad Smith: Good morning, Thanks for taking the question.

Perry Ralph: And then.

Perry Ralph: Just the revenue guide just to make sure it's crystal clear here I know.

Brad Smith: Yes.

Brad Smith: <unk>.

Perry Ralph: You are saying no assume gain on sale.

Okay.

Brad Smith: And one thing maybe a bad medicine, but I looked at your employee headcount when I compare it to I guess synchrony and even relative to credit sales.

Perry Ralph: But does the revenue base for 'twenty three considered in the growth rate include or exclude P. J as I think you mean to include Bj's in the base correct.

Perry Ralph: Yes in the base forecast that included Bj's in the 2023 numbers with.

Brad Smith: Yes.

Brad Smith: It attracts a lot higher.

Brad Smith: My question to you is there anything fundamental about the business.

Perry Ralph: With the base guidance and then in my comments I had mentioned that it would would.

Brad Smith: Wires.

Brad Smith: More head count maybe.

Perry Ralph: It would have reduced it would have lessen that debt reduction if it was excluded from the prior year.

James: Great. Thank you it's James.

Brad Smith: Sure.

Brad Smith: And if.

Brad Smith: If you kind of re imagine business from scratch.

Perry Ralph: Okay, Great got it thanks for taking my question.

Brad Smith: Using modern technology.

Thank you.

Brad Smith: Automation would you need fewer people I know thats, a delicate subject with employee, but anything you can share around that.

Perry Ralph: The next question comes from Brad Smith with Jpmorgan. Please go ahead.

Brad Smith: Good morning, Thanks for taking the question.

Brad Smith: It would be helpful. Thanks.

Brad Smith: Yeah. Thanks for the question I think when you think about.

Brad Smith: Yes.

Brad Smith: <unk>.

Brad Smith: Okay.

Brad Smith: The drivers of what you read.

Brad Smith: And one thing maybe a bad medicine, but I looked at your employee head count when I compare it to I guess synchrony and even if relative to credit sales.

Mihir Bhatia: <unk> people for rate to think about the risk organization and technology. There are some fundamental things you have to have in place to serve our business and obviously scale helps when you are talking about businesses that are five to 10 X our size.

Brad Smith: Movables.

Brad Smith: It attracts a lot higher.

Brad Smith: My question to you is there anything fundamental about the business that requires.

Brad Smith: They get that leverage of scale. The second thing is.

Mihir Bhatia: You also have to look at the number of accounts that we serve and we serve one 7 million households in America. So.

Brad Smith: More head count maybe.

Brad Smith: Great. Thank you.

Brad Smith: Sure.

Mihir Bhatia: We have.

Brad Smith: And if.

Brad Smith: Lot more accounts for the size of assets, we have compared to.

Brad Smith: If you kind of re imagine this business from scratch.

Mihir Bhatia: Some larger issuers.

Brad Smith: Using modern technology.

Mihir Bhatia: The other thing I would say is what youre not picking up in.

Brad Smith: Automation would you need fewer people I know that delicate subject with employee, but anything you can share around that.

Mihir Bhatia: Those numbers is the amount of offshore meeting with third parties vendors, where they maybe they use third party servicing versus.

Brad Smith: It would be helpful. Thanks.

Brad Smith: Yeah. Thanks for the question I think when you think about.

Mihir Bhatia: Your own servicing so there's a lot of things that go into those numbers.

Mihir Bhatia: To try to come up with a reasonable.

Brad Smith: The drivers of what you would require people for rate to think about the risk organization and technology. There are some fundamental things you have to have in place to serve our business and obviously scale helps when you are talking about businesses that are five to 10 X our size.

Mihir Bhatia: As a comparative but your point is a good one that and Thats why we talk about operational excellence over time, and I think you've seen us over.

Mihir Bhatia: Decades.

Mihir Bhatia: Technology is our friend and the more proficient we can make there.

Mihir Bhatia: The customer reps, who serve our customers give them better tools to do so or give.

Brad Smith: They get that leverage of scale. The second thing is you.

Brad Smith: You also have to look at the number of accounts that we serve and we serve one in seven households in America. So we.

Mihir Bhatia: The customers the ability to self serve through mobile or chat things that they have become accustomed to using and they no longer need to speak to somebody all of those things over time help those ratios and these are things that we've talked about and Ralph talked about it the investments that we've been making in mobile and Youll continue to see those advancements.

Brad Smith: Have a lot more accounts for the size of assets, we have compared to.

Brad Smith: Some larger issuers.

Brad Smith: The other thing I would say is what youre not picking up in.

Brad Smith: Those numbers is the amount of offshore meeting with third parties vendors, where they maybe they use third party servicing versus.

Mihir Bhatia: For us over the next couple of years, which also helped to improve our efficiency.

Perry Ralph: Your own servicing so there's a lot of things that go into those numbers.

Mihir Bhatia: If I could sneak one more and just a point of clarification.

Perry Ralph: To try to come up with a reasonable.

Mihir Bhatia: I would imagine the seasonality.

Perry Ralph: As a comparative but your point is a good one that and Thats why we talk about operational excellence over time, and I think you've seen us over.

Ralph: Kind of a maintenance periods.

Mihir Bhatia: Yes.

Mihir Bhatia: Yes.

Mihir Bhatia: Typically a heavier.

Mihir Bhatia: <unk>.

Mihir Bhatia: Quarter than maybe others I'm just trying to.

Perry Ralph: Decades.

Perry Ralph: Technology is our friend and the more proficient we can make there.

Mihir Bhatia: I think that to think about like what that 25 like how much of that is kind of seasonal and library.

Perry Ralph: The customer reps, who serve our customers give them better tools to do so or give.

Mihir Bhatia: Yes.

Mihir Bhatia: So you're referring to the 25% impact from the CFPB rule.

Perry Ralph: The customers the ability to self serve through mobile or chat things that they have become accustomed to using and they no longer need to speak to somebody all of those things over time help those ratios and these are things that we've talked about and Ralph talked about it are the investments that we've been making in mobile and Youll continue to see those advancements.

Mihir Bhatia: Okay.

Yes.

Mihir Bhatia: Yes.

Mihir Bhatia: That's why we picked the apples to apples comparison.

Mihir Bhatia: The same.

Yes, so I guess, what I'm asking is that in.

In general.

Mihir Bhatia: You tend to have higher late fees in the fourth quarter relative to the other three quarters.

Perry Ralph: For us over the next couple of years, which also helped to improve our efficiency.

Mihir Bhatia: Yeah.

Perry Ralph: If I could sneak one more in just a point of clarification.

Mihir Bhatia: No. There is no there is no material movement I mean, it's more about tracking delinquency.

Perry Ralph: I would imagine the seasonality.

Perry Ralph: Some kind of a maintenance periods.

Mihir Bhatia: Right.

Perry Ralph: Yes.

Mihir Bhatia: So it's really when you think about movement in AP delinquent accounts pay late fees.

Perry Ralph: Yes.

Perry Ralph: Typically a heavier.

Perry Ralph: <unk>.

Perry Ralph: Quarter than maybe others I'm just trying to.

Mihir Bhatia: And so as we look at delinquency movements youre going to see movement in that and right now you've been seeing some.

Perry Ralph: I think that and think about like what that 25 like how much of that is kind of seasonal in like weird.

Mihir Bhatia: Some fluctuate sometimes you have some more sloppy payors.

Move.

Perry Ralph: Yes.

Perry Ralph: So you are you referring to the 25% impact from the CFPB rule.

Mihir Bhatia: It's an interesting dynamic you have people who missed by a few days.

Mihir Bhatia: So you call. It I'll say, a sloppy pay versus those that are actually going 30, 60 day delinquent. So its variation right now is more macro driven than I'd say month to month seasonality.

Referencing yes.

Perry Ralph: Yes.

Perry Ralph: Yes, that's why we picked the apples to apples comparison.

Perry Ralph: The same.

Perry Ralph: Yes, so I guess, what I'm asking is that in.

Mihir Bhatia: Okay. Thank you.

Perry Ralph: In general.

Perry Ralph: You tend to have higher maintenance in the fourth quarter relative to the other three quarters.

Mihir Bhatia: The next question comes from Bill <unk> with Wolfe Research. Please go ahead.

Perry Ralph: Yeah.

Perry Ralph: No Theres no theres no material movement, I mean, it's more about tracking delinquency.

Mihir Bhatia: Thank you.

Bill <unk>: Thanks, Ralph comparing for all of the proactive disclosures.

Ralph: Maybe first question I had was whether providing so much details suggest in any way that you view of eventual implementation is likely it just seems like.

Perry Ralph: Right.

Perry Ralph: So it's really when you think about movement in late the delinquent accounts pay late fees.

Perry Ralph: And so as we look at delinquency movements youre going to see movement in that and right now you've been seeing some.

Ralph: There is still this scenario, where the rule gets immediately litigated in the industry gets a win in the fifth circuit, which would likely pushed the legal process beyond the 24 election and give trumps. The point he has an opportunity to overturn overturn the rule if we assume.

Perry Ralph: Some fluctuate sometimes you have some more sloppy payors.

Perry Ralph: It's an interesting dynamic you have people who missed by a few days.

Perry Ralph: I'll say, a sloppy pay versus those that are actually going 30, 60 day delinquent. So its variation right now it's more macro driven than I'd say month to month seasonality.

Trump win and a biding versus Trump 'twenty for a rematch.

Ralph Comparing: Just hoping you could speak to that dynamic.

Ralph Comparing: Your your view of what this says about likelihood of implementation.

Ralph Comparing: Yes so.

Perry Ralph: Okay. Thank you.

Ralph Comparing: It's hard for us to predict predict political climate, though I'd like to your outcome.

Ralph Comparing: But for us.

Perry Ralph: The next question comes from Bill <unk> with Wolfe Research. Please go ahead now.

Mihir Bhatia: We view this as you know.

Mihir Bhatia: High potential and because it's a high potential we wanted to understand what the impact is to our business and how we get on top of it to mitigate so if it doesn't happen and it gets pushed off that's terrific but.

Perry Ralph: Thank you.

Perry Ralph: Thanks, Ralph comparing for all of the proactive disclosures.

Perry Ralph: Maybe first question I had was whether providing so much detail suggests in any way that you view of eventual implementation is likely it just seems like.

Mihir Bhatia: Hope is not a strategy so for us it's it's.

Mihir Bhatia: Out there.

Reginald Lawrence Smith: There is still this scenario, where the rule gets immediately litigated in the industry gets a win in the fifth circuit, which would likely pushed the legal process beyond the 24 election, then give trumps appointees and opportunity to overturn overturn the rule if we assume.

Mihir Bhatia: It's highly likely and we are going to mitigate it with this seasoned team.

Mihir Bhatia: And despite all of that and bill. Thanks for question and I also like your thesis and Im hoping youre right.

Mihir Bhatia: But.

Mihir Bhatia: You know from us being together in the past, we get a lot of questions on the potential impact and in the spirit of transparency and knowing that we are giving guidance for the year and that because he has a catalyst event. It gave us the opportunity to provide some more context to help invest.

Reginald Lawrence Smith: Trump win and a biding versus Trump 'twenty for a rematch.

Perry Ralph: Just hoping you could speak to that dynamic.

Perry Ralph: Your your view of what this says about likelihood of implementation.

Perry Ralph: Yes so.

Perry Ralph: It's hard for us to predict predict political climate, though I'd like to your outcome.

Brad Smith: Investors understand what that potential impact would be even though with highly likelihood almost certain litigation and delays. It felt it was appropriate to provide that transparency.

Perry Ralph: But for us.

We view this as you know.

Perry Ralph: High potential and because it's a high potential we wanted to understand what the impact is to our business and how we would get on top of it to mitigate so if it doesn't happen and it gets pushed off that's terrific but.

Brad Smith: Understood. That's very helpful. Thanks, and if I could follow up on the expense guidance.

Brad Smith: Okay.

Brad Smith: <unk>.

Perry Ralph: Hope is not a strategy so for us it's.

Brad Smith: Is the hypothetical sort of I guess like sort of nominal positive operating leverage.

Perry Ralph: Out there.

Perry Ralph: It's highly likely and we are going to mitigate it with this seasoned team.

Brad Smith: Yes.

Brad Smith: Roughly 3% decrease in year over year, Opex growth sort of the right Zip code.

Perry Ralph: And despair Elliot and bill Thanks for the question and I also like your thesis and Im hoping youre right.

Brad Smith: Given your revenue guidance.

Perry Ralph: But.

Brad Smith: It would.

Perry Ralph: You know from us being together in the past, we get a lot of questions on the potential impact and in the spirit of transparency and knowing that we are giving guidance for the year and that's because the catalyst event. It gave us the opportunity to provide some more context to help invest.

Brad Smith: Kris look it would decrease slightly more than revenue decreases.

Brad Smith: We think about the math.

Brad Smith: Understood.

Brad Smith: Great. Thank you for taking my questions.

Brad Smith: Thanks Bill.

Perry Ralph: Investors understand what that potential impact would be even though with highly likelihood almost certain litigation and delays. It felt it was appropriate to provide that transparency.

Brad Smith: Our next question comes from the line of Dominic Gabriel with Oppenheimer. Please go ahead.

Brad Smith: Great.

Dominic Gabriel: Excuse me. Thank you so much for taking my questions.

Perry Ralph: Understood. That's very helpful. Thanks, and if I could follow up on the expense guidance.

Dominic Gabriel: If you think about the long term.

Dominic Gabriel: Loan growth.

Dominic Gabriel: Expectation that you've had.

Perry Ralph: Okay.

Perry Ralph: <unk>.

Is the hypothetical sort of I guess like sort of nominal positive operating leverage.

Dominic Gabriel: Roughly 10% ish or so.

And the fact that you'd be paring back from.

Yes.

Dominic Gabriel: Some of the lower FICO bands most likely given this.

Perry Ralph: Roughly 3% decrease in year over year, Opex growth sort of the right Zip code.

Rule, if it comes into effect.

Given your revenue guidance.

Dominic Gabriel: Does that affect your long term.

Perry Ralph: It would.

Dominic Gabriel: Loan growth rate.

Kris.

Dominic Gabriel: And given if it slows it.

Kris: It would decrease slightly more than revenue decreases.

Dominic Gabriel: To maybe mid single digits or whatever it may be.

Kris: Should we think about the math.

Dominic Gabriel: How do you think about that dynamic with your long term net charge off expectation and I just have a follow up thanks.

Kris: Understood.

Kris: Great. Thank you for taking my questions.

Kris: Thanks Bill.

Dominic Gabriel: Yes, a couple of things so.

Kris: Our next question comes from the line of Dominic Gabriel with Oppenheimer. Please go ahead.

Dominic Gabriel: <unk>.

Dominic Gabriel: We will provide.

Dominic Gabriel: More information.

Kris: Great.

Nation on Investor day, as we as we move forward, but if you think about what we've been doing we've really been diversifying our portfolio. So when that when if you think about potentially this rule going into effect and we may not be able to underwrite.

Dominick Gabriele: Excuse me. Thank you so much for taking my questions.

Dominick Gabriele: If you think about the long term.

Dominick Gabriele: Loan growth.

Dominick Gabriele: Expectation that you've had.

Dominic Gabriel: At the levels, we've been underwriting we have co brands, we have direct to consumer and our products proprietary products.

Dominick Gabriele: Roughly 10% ish or so.

Dominick Gabriele: And the fact that you'd be paring back from.

Dominic Gabriel: Our products that will continue to grow over over the long long haul and invest in and lean into those hard so at this point.

Dominick Gabriele: Some of the lower FICO bands most likely given this.

Dominick Gabriele: Rule, if it comes into effect.

Perry Ralph: How does that affect your long term loan growth rate.

Dominic Gabriel: To me.

Perry Smith: I would not want to change anything until we get to Investor day, where we can be more transparent in terms of how we're thinking about the future.

Perry Ralph: And given if it slows it to maybe mid single digits or whatever it may be.

Looking over the horizon.

Perry Ralph: How do you think about that dynamic with your long term net charge off expectation and I just have a follow up thanks.

Perry Smith: Perfect. Thanks, so much for that and.

Perry Smith: Perry you kind of add.

Perry Smith: This in.

Perry Ralph: Yes, a couple of things so.

Perry Smith: And another answer, but I was hoping to get some.

Perry Ralph: We will provide.

Perry Smith: An example out there just to gauge the magnitude of some of this late fee impact on the efficiency ratio.

Perry Ralph: More information.

Perry Ralph: Nation on Investor day, as we as we move forward, but if you think about what we've been doing we've really been diversifying our portfolio. So when that when if you think about potentially this rule going into effect and we may not be able to underwrite.

Perry: If I, even take the fourth quarter, alright and I.

Perry: Kind of do what your guidance is telling me to do on the on the revenue and I take out 25% and I keep expenses roughly flat because.

Perry Ralph: At the levels, we've been underwriting we have co brands, we have direct to consumer now products proprietary products.

Perry: Ultimately like you've said you need to invest you need your.

Perry Ralph: Our products that will continue to grow over over the long long haul and invest in and leaning into those hard. So at this point I think to me.

Perry: Your employee base that could push the efficiency ratio, if I'm not doing something wrong into the high sixty's.

Perry Ralph: I would not want to change anything until we get to Investor day, where we could be more transparent in terms of how we're thinking about the future.

Perry: I'm just curious of that.

Perry: Yes.

Perry: Thats, even remotely in the ballpark and then I guess it would step down over time as you get some of this back to a level of recapture that that's feasible, but does that magnitude sound correct. Thanks, so much.

Looking over the horizon.

Perry Ralph: Perfect. Thanks, so much for that and.

Perry Bieber: Perry you kind of add.

Perry Ralph: This in.

Perry: Okay. Thanks for the question I mean look.

Perry Ralph: And another answer, but I was hoping to get some.

Perry: Everyone's going to plug some numbers into the model with this downside scenario, what I share with you is the.

Perry Ralph: An example out there just to gauge the magnitude of some of this late fee impact on the efficiency ratio.

Perry: The math is going to be the math right and whatever that math turns out that in the first quarter of impact has an impact to revenue.

If I, even take the fourth quarter, alright and I.

Kind of do what your guidance is telling me to do on the on the revenue and I take out 25% and I keep expenses roughly flat because.

Mihir Bhatia: And then over time that will.

Mihir Bhatia: Get mitigated.

Mihir Bhatia: So yes, you'll take a hit to all of your your return metrics inclusive of efficiency ratio in the first quarter of implementation that should be the worst of it and then it gets better from there to get back to places, where we're where we're comfortable.

Perry Ralph: Ultimately like you've said you need to invest you need your.

Your employee base that could push the efficiency ratio, if I'm not doing something wrong into the high sixty's.

Perry Ralph: I'm just curious of that.

Perry Smith: Yes that makes perfect sense, just feels like to me that you want to keep your expense base strong because youre looking towards the future.

Perry Ralph: Yes.

Perry Ralph: Thats, even remotely in the ballpark and then I guess it would step down over time as you get some of this back to a level of recapture that that's feasible, but does that magnitude sound correct. Thanks, so much.

Perry Smith: In order to do that you would have to grow expenses or whatever it may be I really appreciate it. Thank you so much.

Perry Smith: Thank you.

Perry Ralph: Okay. Thanks for the question I mean look.

Perry Smith: Our next question comes from Joseph <unk> with Evercore ISI. Please go ahead.

Perry Ralph: Everyone's going to plug some numbers into the model with this downside scenario, what I share with you is.

Perry Smith: Good morning.

Perry Ralph: The math is going to be the math right and whatever that math turns out of that in the first quarter of impact has an impact to revenue.

Perry Smith: Thanks, as well for the detail on the late fee sorry to go back to it again, but just I just want to confirm a couple of things.

Perry Ralph: And then over time that will.

Perry Smith: Let's see if you had provided or not sorry, if I missed it but.

Perry Ralph: Get mitigated.

Perry Ralph: Yes, you'll take a hit to all of your your return metrics inclusive of efficiency ratio in the first quarter of implementation that should be the worst of it and then it gets better from there to get back to places, where we're where we're comfortable.

Perry Smith: Did you know what the gross impact was from the late fee that you estimated.

Perry Smith: Versus the net that you provided and then also I believe this was asked earlier, but I'm not sure you mentioned ultimately what do you view the net impact to be at 25% could that go down to something like 10% of an impact or how do you view that longer term at this point. Thanks.

Perry Ralph: Yes that makes perfect sense, just feels like to me that you want to keep your expense base strong because youre looking towards the future.

Perry Ralph: In order to do that you would have to grow expenses or whatever it may be I really appreciate it. Thank you so much.

Perry Smith: Thank you for the question.

Perry Smith: We provided the number we provided we did not provide a grossed up number if the net settlement of parcel or in place mitigation that we expect to be put in place in advance of the actual implementation. Once the final rule is in place.

Perry Ralph: Thank you.

Perry Ralph: Our next question comes from Joseph <unk> with Evercore ISI. Please go ahead.

Good morning.

Perry Ralph: Thanks, as well for the detail on the late fee sorry to go back to it again, but I just wanted to confirm a couple of things.

And power.

Brad Smith: How far it gets mitigated against the original amount.

Brad Smith: Is anybody's guess, but it will certainly mitigate over time, but as well will be offset in other line items as you think about reducing some underwriting improving loss rates reduced provision.

Perry Ralph: Let's see if you have provided or not sorry, if I missed it but.

Joseph <unk>: Did you know what the gross impact was from the late fee that you estimated.

Joseph <unk>: Versus the net that you provided and then also I believe this was asked earlier, but I'm not sure you mentioned ultimately what do you view the net impact to be that 25% could that go down to something like 10% of an impact or how do you view that longer term at this point. Thanks.

Brian Smith: Lower expenses, I mean, theres going to be a number of things as you March through 36 months. Following the final rule that will ultimately determine where we land.

Brian Smith: And once that rule comes into play once the team completes its work with all the partners will certainly be able to provide more information.

Joseph <unk>: Thank you for the question.

Joseph <unk>: We provided the number we provided we did not provide a grossed up number if the net some I'll call parcel or in place of mitigation that we expect to be put in place in advance of the actual implementation. Once the final rule is in place.

Jeff Adelson: Okay I appreciate that you might provide.

Jeff Adelson: But one other way to I guess around the mitigation there any way to help us size up like what percentage of overall mitigation that you considered as this rule was put out there like what percentage is in that number about half of it you got through all of these other measures.

And power.

Joseph <unk>: How far it gets mitigated against the original amount.

Joseph <unk>: Is anybody's guess, but it will certainly mitigate over time, but as well the offsets in other line items as you think about reducing some underwriting improving loss rates reduced provision.

Jeff Adelson: Other half on its way how can we think about about that.

Perry Smith: Yes, so what I would do is ask you to just take a peek back at the slide that I prepared and shared.

Joseph <unk>: Lower expenses, I mean, theres going to be a number of things as you March through the 36 months. Following the final rule that will ultimately determine where we land.

Ralph Comparing: With you guys at the.

Brian Smith: Last conferences and when you think about one of the largest lever as APR and repricing.

Brian Smith: Due to the way cardiac work it takes time for that to burn in.

Joseph <unk>: And once that rule comes into play once the team completes its work with all the partners will certainly be able to provide more information.

Brian Smith: And it will.

Brian Smith: That's why we said we're going to take some early movement on some things and that will get a jumpstart on it but it will take some time for the existing accounts for those balances to cycle through as well as the new vintages come online at the higher at the higher APR. So that's going to take some time.

Perry Ralph: Okay I appreciate that you might provide.

Perry Ralph: But one other way to I guess around the mitigation there any way to help us size up like what percentage of overall mitigation that you considered as this rule was put out there like what percentage is in that number about half of it you got through all of these other measures.

Brad Smith: And then once we start working with the partners will understand.

Brad Smith: Who wants to use more promotional rates, who wants us to do some fees.

Perry Ralph: Other half on its way how can we think about about that.

Brad Smith: There's a lot of that goes into it so I really don't want to speculate on percentages of mitigation, but theres a lot more mitigation to come after the rule goes into effect and that work is done with the partners, but again, we are very long term focused on what we're trying to do here and we will we are fully committed to making sure that.

Perry Ralph: Yes, so what I would do is ask you to just take a peek back at the slide that I have.

Perry Ralph: Third and shared with you with you guys at.

Perry Ralph: The last conferences and when you think about one of the largest levers is APR and re pricing.

Brad Smith: We get back to strong returns for the capital that we deploy against this business.

Perry Ralph: Due to the way cardiac work it takes time for that to burn in.

Perry Ralph: And it will.

Perry Ralph: That's why we said we're going to take some early movement on some things and that will get a jumpstart on it but it will take some time for the existing accounts for those balances to cycle through as well as the new vintages come online at the higher at the higher APR. So that's going to take some time.

Okay, great. Thank you.

Brad Smith: Thank you.

Brad Smith: Our final question today comes from John Hecht with Jefferies. Please go ahead.

John Hecht: Good morning, guys and sorry to ask because you've talked a lot about the late fee stuff and I. Appreciate the details there, but I just want a point of clarification, because you talked about this as a revenue hit thus far.

Perry Ralph: And then once we start working with the partners will understand.

Perry Ralph: Who wants to use more promotional rates, who wants us to do some fees.

John Hecht: Your the retail sharing arrangement is kind of expense net of the interchange in a different line in the P&L is there not some immediate offset in that line item that we should think about or are your are your arrangements different where they would exclude.

Perry Ralph: There's a lot of that goes into it so I really don't want to speculate on percentages of mitigation, but theres a lot more mitigation to come after the rule goes into effect and the work is done with the partners, but again, we are very long term focused on what we're trying to do here and we will we are fully committed to making sure that.

John Hecht: This type of revenue.

John Hecht: Yes no.

John Hecht: That's why we used revenue.

John Hecht: Because the retail share agreement impact happens, it's a contra revenue. So it's already in there that's why we didn't use net interest margin.

We get back to strong returns for the capital that we deploy against this business.

Perry Ralph: Okay, great. Thank you.

Perry Ralph: Thank you.

John Hecht: Revenue. So we were doing it net of the retail share agreement.

Perry Ralph: Our final question today comes from John Hecht with Jefferies. Please go ahead.

John Hecht: Okay. That's very helpful. Thanks very much.

John Hecht: You bet. Thank you for your question.

John Hecht: Good morning, guys and sorry to ask because you've talked a lot about the late fee stuff and I. Appreciate the details there, but I just want a point of clarification, because you talked about this as a revenue hit thus far.

John Hecht: Listen I want to thank you all for joining the call and for your interest in bread financial and for all your questions today, everybody have a wonderful day take care now.

John Hecht: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

John Hecht: Your the retail sharing arrangement is kind of expense net of the interchange in a different line in the P&L is there not some immediate offset in that line item that we should think about or are your are your arrangements different where they would exclude.

John Hecht: This type of revenue.

John Hecht: Yes, no that's why we used revenue.

Perry Ralph: Because the retail share agreement impact happens, it's a contra revenue. So it's already in there. That's why we didn't use net interest margin. We use revenue. So we were doing it net of the retail share agreement.

Perry Bieber: Okay. That's very helpful. Thanks very much.

Perry Bieber: You bet. Thank you for your question.

Perry Bieber: Listen I want to thank you all for joining the call and for your interest in <unk> financial and for all your questions today.

Perry Bieber: They have just wonderful day take care now.

Perry Bieber: Thank you everyone for joining us today. This concludes our call and you may now disconnect your lines.

Perry Bieber: [music].