Q2 2024 Bread Financial Holdings Inc Earnings Call - Q&A

Good morning, and welcome to Bread Financial's second quarter 2024 earnings conference call.

Tawanda: My name is Tawanda, and I will be coordinating your call today. At this time, all parties have been placed on a listen-only mode.

Tawanda: My name is Tawanda, and I will be coordinating your call today.

Operator: At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions. To register a question, please press star 11 on your telephone keypad.

Tawanda: My name is Tawanda, and I will be coordinating your call today.

Operator: Following today's presentation, the floor will be open for your questions; to register a question, please press star 1-1 on your telephone keypad. It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial Holdings. Sir, the floor is yours.

At this time, all parties have been placed on a listen-only mode.

Tawanda: Following today's presentation, the floor will be open for your questions. To register a question, please press star 1 1 on your telephone keypad.

Brian Vereb: It is now my pleasure to introduce Mr. Bryant Vereb, head of investor relations at Bread Financial.

Speaker Change: It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. Sir, the floor is yours.

Brian Vereb: Sir, the floor is yours.

Ralph Andretta: Thank you.

Brian Vereb: Thank you. Copies of the slides we will be reviewing and the earnings released can be found in the investor relations section of our website at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer, and Perry Beberman, Executive Vice President and Chief Financial Officer. 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 Andretta: Copies of the slides, we will be reviewing, and the earnings release can be found on the investor relations section of our website at BreadFinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer, and Perry Beberman, Executive Vice President and Chief Financial Officer.

Brian Vereb: 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 at breadfinancial.com.

Speaker Change: On the call today, we have Ralph Andretta, President and Chief Executive Officer, and Perry Beberman, Executive Vice President and Chief Financial Officer.

Ralph Andretta: 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 question may contain forward-looking statements. 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. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our investor relations website.

Speaker Change: 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 question may contain forward-looking statements.

Brian Vereb: These statements are based on management's current expectations and assumptions and are subject to the risk and uncertainties described in the company's earnings release and other filings with the SEC. Also, on today's call, our speakers will reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of those measures to GAAP is included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta.

Speaker Change: These statements are based on management's current expectations and assumptions and are subject to the risk and uncertainties described in the company's earnings release and other filings with the SEC.

Speaker Change: Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website.

Ralph Andretta: With that, I would like to turn the call over to Ralph Andretta.

Ralph Andretta: Thank you, Brian, and good morning to everyone joining the call, starting with the highlights from the second quarter on slide two. I am pleased to report another quarter of salary results as we continue to navigate a challenging consumer and regulatory environment. Our strong results include net income of $133 million and earnings for diluted share of $2.66, or adjusted diluted EPS of $2.67 after adjusting for the anti-dilutive impact of our cap-call transactions, which are related to the 2023 issuance of convertible notes, which Perry will discuss more fully.

Ralph J. Andretta: Thank you, Brian, and good morning to everyone joining the call. I'll start with the highlights from the second quarter on slide two. I am pleased to report another quarter of solid results as we continue to navigate a challenging consumer and regulatory environment. Our strong results include net income of $133 million and earnings per diluted share of $2.66, or adjusted diluted EPS of $2.67 after adjusting for the anti-dilutive impact of our capped call transaction, which is related to the 2023 issuance of convertible notes, which Perry will discuss more fully.

Speaker Change: With that, I would like to turn the call over to Ralph Andretta.

Ralph J. Andretta: Thank you, Brian , and good morning to everyone joining the call. Starting with the highlights from the second quarter on slide two, I am pleased to report another quarter of solid results as we continue to navigate a challenging consumer and regulatory environment.

Speaker Change: Our strong results include net income of $133 million and earnings per diluted share of $2.66.

Speaker Change: or adjusted diluted EPS of $2.67 after adjusting for the anti-dilutive impact of our capped call transactions.

Speaker Change: which are related to the 2023 issuance of convertible notes, which Perry will discuss more fully.

Ralph Andretta: Notably, our balance sheet continues to improve as we increase our tangible book value by 25% year-over-year to nearly $49 per share, and proves our common equity tier-one capital ratio by 170 basis points year-over-year to 13.8%, and reduced our double leverage ratio to 110%, achieving our target of less than 115%. Additionally, direct-to-consumer deposits increase 20% year-over-year to $7.2 billion, representing 14 consecutive quarters of growth.

Ralph J. Andretta: Notably, our balance sheet continued to improve as we increased our tangible book value by 25% year-over-year to nearly $49 per share, improved our common equity Tier 1 capital ratio by 170 basis points year-over-year to 13.8%, and reduced our double leverage ratio to 110%, achieving our target of less than 115%. Additionally, direct-to-consumer deposits increased 20% year-over-year to $7.2 billion, representing 14 consecutive quarters of We highlighted the company's transformation and our energized culture, the strong returns and capital generation that our business model can deliver, and how our responsible capital allocation will build sustainable, long-term value for our shareholders. We also announced our newest partnership with Saks Fifth Avenue.

Speaker Change: Notably, our balance sheet continued to improve as we increased our tangible book value by 25% year-over-year to nearly $49 per share.

Perry S. Beberman: improved our common equity Tier 1 capital ratio by 170 basis points year-over-year to 13.8%, and reduced our double leverage ratio to 110%, achieving our target of less than 115%.

Perry S. Beberman: Additionally, direct-to-consumer deposits increased 20% year-over-year to $7.2 billion, representing 14 consecutive quarters of growth.

Ralph Andretta: During our Investor Day in June, we highlighted the company's transformation and our energized culture. The strong returns and capital generation that our business model can deliver, and how our responsible capital allocation will both sustainable, long-term value for our shareholders.

Perry S. Beberman: During our Investor Day in June ,

Perry S. Beberman: We highlighted the company's transformation and our energized culture, the strong returns and capital generation that our business model can deliver, and how our responsible capital allocation will build sustainable, long-term value for our shareholders.

Ralph Andretta: We also announced our newest partnership with SEX Fifth Avenue.

Ralph Andretta: Review. In a third quarter of this year, we expected completed conversion of the existing SACS portfolio and launched a new and enhanced program. In the second quarter, we made further progress implementing more of our mitigation strategies and response to the CFTV's rule on credit card late fees. Our ongoing discussions with brand partners have been productive, and we now have various pricing changes in market, including increased APRs and statement fees. We are closely monitoring the ongoing litigation related to the rule and will continue to implement our mitigation strategies, given the uncertainty surrounding the timing and outcome.

Ralph J. Andretta: In the third quarter of this year, we expect to complete the conversion of the existing SACS portfolio and launch the new and enhanced program. In the second quarter, we made further progress implementing more of our mitigation strategies in response to the CFPB's rule on credit card latency. Our ongoing discussions with brand partners have been productive, and we now have various pricing changes in the market, including increased APRs and statements. We are closely monitoring the ongoing litigation related to the rule and will continue to implement our mitigation strategies, given the uncertainty surrounding the timing and outcome.

Perry S. Beberman: We also announced our newest partnership with Saks Fifth Avenue.

Perry S. Beberman: In the third quarter of this year, we expect to complete the conversion of the existing SACS portfolio and launch the new and enhanced program.

Perry S. Beberman: In the second quarter, we made further progress implementing more of our mitigation strategies in response to the CFWU's rule on credit card late fees.

Perry S. Beberman: Our ongoing discussions with brand partners have been productive, and we now have various pricing changes in market, including increased APRs and statement fees.

Perry S. Beberman: We are closely monitoring the ongoing litigation related to the rule and will continue to implement our mitigation strategies, given the uncertainty surrounding the timing and outcome. Regardless of the litigation outcome, we are confident in our ability to generate strong results.

Ralph Andretta: Regardless of the litigation outcome, we are confident in our ability to generate strong results and achieve our long-term strategic objectives and financial targets.

Ralph J. Andretta: Regardless of the litigation outcome, we are confident in our ability to generate strong results and achieve our long-term strategic objectives and financial targets. From a macroeconomic perspective, consumer spending continues to moderate, reflecting persistent inflation and higher interest rates. As a result, second quarter trends reflected lower transaction sizes accompanied by more frequent shopping trips, as well as reduced discretionary and big-ticket spending.

Ralph Andretta: From a macroeconomic perspective, consumer spending continues to moderate, reflecting persistent inflation and higher interest rates. As a result, second quarter trends reflected lower transaction sizes accompanied by more frequent shopping trips, as well as reduced discretionary and big ticket spending. Credit sales also impacted by our proactive credit tightening, as we remain disciplined given economic pressures affecting payment capacity. Our credit actions have proven effective, as the link with these have trended lower, and the net loss rate is expected to have peak in the second quarter.

Perry S. Beberman: and achieve our long-term strategic objectives and financial targets.

Speaker Change: From a macroeconomic perspective, consumer spending continues to moderate, reflecting persistent inflation and higher interest rates.

Speaker Change: As a result, second-quarter trends reflected lower transaction sizes, accompanied by more frequent shopping trips, as well as reduced discretionary and big-ticket spending.

Ralph J. Andretta: Credit sales were also impacted by our proactive credit tightening as we remain disciplined given economic pressures affecting payment capacity. Our credit actions have proven effective as delinquencies have trended lower, and the net loss rate is expected to have peaked in the second quarter. Our second quarter results reflect our position of strength with increased capital flexibility and financial resilience. We are better equipped to address uncertainty than ever before, positioning us well to generate long-term value for our shareholders.

Speaker Change: Credit sales were also impacted by our proactive credit tightening as we remain disciplined given economic pressures affecting payment capacity.

Speaker Change: Our credit actions have proven effective as delinquencies have trended lower and the net loss rate is expected to have peaked in the second quarter. Our second quarter results reflect our position of strength with increased capital flexibility and financial resilience.

Ralph Andretta: Our second quarter results reflect our position of strength, with increased capital flexibility and financial resilience. We are better equipped to address uncertainty than ever before, positioning us well to generate long-term value for our shareholders.

Speaker Change: We are better equipped to address uncertainty than ever before, positioning us well to generate long-term value for our shareholders.

Ralph Andretta: Turning to slide three, our disciplined capital allocation strategy focuses on funding responsible, profitable growth, improving our capital metrics, reducing parent debt, and driving long-term shareholder value. Indicative of the success of this strategy is the 410-based support improvement in our common equity tier 1 capital ratio of the last three years, as shown in the chart on the left. As I mentioned previously, we have also made progress on our debt reduction, as shown in the second chart. Over the last three years, we have reduced parent level debt by 53%, and this quarter we achieved our long-term double leverage ratio target of less than 115%.

Ralph J. Andretta: Turning to slide three, our disciplined capital allocation strategy focuses on funding responsible, profitable growth, improving our capital metrics, reducing parent debt, and driving long-term shareholder value. Indicative of the success of this strategy is the 410 basis point improvement in our common equity tier one capital ratio over the last three years, as shown in the chart on the. As I mentioned previously, we have also made progress on our debt reduction, as shown in the second chart. Over the last three years, we have reduced parent-level debt by 53 percent.

Speaker Change: Turning to slide three, our disciplined capital allocation strategy focuses on funding responsible, profitable growth.

Speaker Change: Improving our capital metrics.

Speaker Change: Reducing parent debt and driving long-term shareholder value. Indicative of the success of this strategy is the 410 basis point improvement in our common equity Tier 1 capital ratio over the last three years as shown in the chart on the left.

Speaker Change: As I mentioned previously, we have also made progress on our debt reduction, as shown in the second chart.

Ralph J. Andretta: And this quarter, we achieved our long-term double-leverage ratio target of less than 115 percent. This is an impressive achievement given where we were just four years ago when I joined the company. Finally, our tangible book value of $49 per share has grown at a 22% compound annual rate since the second quarter of 2021.

Speaker Change: Over the last three years, we have reduced parent-level debt by 53%, and this quarter, we achieved our long-term double leverage ratio target of less than 115%.

Ralph Andretta: This is an impressive achievement given where we worked just four years ago when I joined the company. Finally, our tangible book value of $49 per share has grown at a 22% compound annual rate since the second quarter of 2021. Supported by our strong cash flow, we expect to continue to grow our tangible book value over time.

Speaker Change: This is an impressive achievement given where we were just four years ago when I joined the company.

Speaker Change: Finally, our tangible book value of $49 per share has grown at a 22% compound annual rate since the second quarter of 2021. Supported by our strong cash flow, we expect to continue to grow our tangible book value over time.

Ralph J. Andretta: Supported by our strong cash flow, we expect to continue to grow our tangible book value over time. Turning to slide four, our key focus remains on growing revenue. Managing the macroeconomic and regulatory environment, Accelerating Digital and Technology Offerings, and Driving Operational Efficiency As we've highlighted during our Investor Day in June, our decisions are focused on creating sustainable value over the long term. By effectively managing our credit risk while scaling and diversifying our product offerings, we can grow responsibly.

Ralph Andretta: Turning to slide four, our key focus remains on growing responsibly, managing the macroeconomic and regulatory environment, accelerating digital and technology offerings, and driving operational. As we've highlighted during our investor day in June, our decisions are focused on creating sustainable value over the long term by effectively managing our credit risk. While scaling and diversifying our product offerings, we can grow responsibly. We are confident in our strategy and have an experienced leadership team that has successfully navigated through regulatory changes in the past, such as Cardiff. Accelerating our digital and technology capabilities remains a top priority. We are committed to fueling innovation, leveraging data in AI and scaling our platform to enhance satisfaction and enhance partners and associates.

Speaker Change: Turning to slide four, our key focus remains on growing responsibly, managing the macroeconomic and regulatory environment, accelerating digital and technology offerings, and driving operational excellence.

Speaker Change: As we highlighted during our Investor Day in June , our decisions are focused on creating sustainable value over the long term by effectively managing our credit risk while scaling and diversifying our product offerings, we can grow responsibly.

Ralph J. Andretta: Managing the macroeconomic and regulatory environment effectively is fundamental to our success. Although litigation is ongoing and the timing and outcome are unknown, we will continue to take actions to mitigate the potential financial impact of the CFPB late fee rule. We are confident in our strategy and have an experienced leadership team that has successfully navigated through regulatory changes in the past, such as CART. Accelerating our digital and technology capabilities remains a top priority.

Speaker Change: Managing the macroeconomic and regulatory environment effectively is fundamental to our success.

Speaker Change: Although litigation is ongoing and timing and outcome unknown, we will continue to take actions to mitigate the potential financial impact of the CFPB late fee rule.

Speaker Change: We are confident in our strategy and have an experienced leadership team that has successfully navigated through regulatory changes in the past, such as CARDAC.

Ralph J. Andretta: We are committed to fueling innovation, leveraging data and AI, and scaling our platform to enhance satisfaction for our customers, partners, and associates. Finally, our heightened focus on operational excellence to drive improved customer experience, enterprise-wide efficiency, reduced risk, and value creation is embedded in our decision-making. Our goal is to consistently generate operational and expense efficiencies that enable reinvestment in our business, support responsible growth, and achieve our targeted return. Our experienced leadership team remains focused on generating strong returns through prudent capital and risk management, reflecting our unwavering commitment to drive sustainable, profitable growth and build long-term value for our shareholders in challenging economic and regulatory environments. Now, I will turn it over to Perry to review the quarter's financials and discuss our outcome. Thanks, Ralph. And good morning, everyone.

Speaker Change: Accelerating our digital and technology capabilities remains a top priority.

Speaker Change: We are committed to fueling innovation.

Speaker Change: Leveraging Data and AI

Speaker Change: and scaling our platform to enhance satisfaction for our customers, partners, and associates.

Ralph Andretta: Finally, our heightened focus on operational excellence to drive improved customer experience, enterprise-wide efficiency, reduced risk, and value creation is embedded in our decision making. Our goal is to consistently generate operational and expensive efficiencies that enable reinvestment in our business, support responsible growth, and achieve our targeted returns.

Speaker Change: Finally, our heightened focus on operational excellence to drive improved customer experience, enterprise-wide efficiency, reduce risk, and value creation is embedded in our decision making.

Speaker Change: Our goal is to consistently generate operational and expense efficiencies that enable reinvestment in our business, support responsible growth, and achieve our targeted returns.

Ralph Andretta: Our experienced leadership team remains focused on generating strong returns through prudent capital and risk management, reflecting our unwavering commitment to drive sustainable, profitable growth, and build long-term value for our shareholders through challenging economic and regulatory environments.

Speaker Change: Our experienced leadership team remains focused on generating strong returns through prudent capital and risk management.

Speaker Change: reflecting our unwavering commitment to drive sustainable profitable growth and build long-term value for our shareholders through challenging economic and regulatory environments. Now I will turn it over to Perry to review the quarter's financials and to discuss our outlook.

Ralph Andretta: Now, I will turn it over to Perry to review the quarter's financials and to discuss our outlook.

Perry Beberman: Thanks, Ralph, and good morning everyone. Before I dive into the second quarter financial highlights, I'd like to discuss the financial benefits of the CAPCALL transactions we entered into when we issued our convertible notes in 2023. The CAPCALL transactions are set up to reduce the potential diluted impact of the convertible notes up to a stock price of $61.48.

Perry S. Beberman: Before I dive into the second quarter financial highlights, I'd like to discuss the financial benefits of the CAP call transactions we entered into when we issued our convertible notes in 2023. The CAP call transactions are set up to reduce the potential dilutive impact of the convertible notes up to a stock price of $61.48. Our GAAP diluted share count does not incorporate the anti-dilutive impact of these CAP call transactions, which you can see incorporated in our adjusted non-GAAP figures on slide five.

Perry S. Beberman: Thanks, Ralph, and good morning, everyone.

Perry S. Beberman: Before I dive into the second quarter financial highlights, I'd like to discuss the financial benefits of the CAP call transactions we entered into when we issued our convertible notes in 2023.

Perry S. Beberman: The CAP call transactions are set up to reduce the potential dilutive impact of the convertible notes up to a stock price of $61.48.

Perry Beberman: Our GAP diluted share count does not incorporate the anti-diluted impact of these CAPCALL transactions, which you can see incorporated in our adjusted non-GAP figures on slide five. More specifically, the share amount used in calculating adjusted net income per diluted share and adjusted income from continued operations per diluted share have been adjusted for the anti-dilutive impact of our CAPCALL transactions. Reflecting this, our adjusted net income per diluted share was $2.67, and our adjusted income from continued operations per diluted share was $2.66 in the second quarter.

Perry S. Beberman: Our GAAP diluted share count does not incorporate the anti-dilutive impact of these CAP call transactions.

Perry S. Beberman: which you can see incorporated in our adjusted non-GAAP figures on slide 5.

Perry S. Beberman: More specifically, the share amounts used in calculating adjusted net income per diluted share and adjusted income from continued operations per diluted share have been adjusted for the anti-dilutive impact of our capped call transactions. As a result, our adjusted net income per diluted share was $2.67, and our adjusted income from continuing operations per diluted share was $2.66 in the second quarter.

Perry S. Beberman: More specifically, the share amounts used in calculating adjusted net income per diluted share and adjusted income from continued operations per diluted share have been adjusted for the anti-dilutive impact of our capped call transactions.

Perry S. Beberman: Reflecting this, our adjusted net income per diluted share was $2.67, and our adjusted income from continuing operations per diluted share was $2.66 in the second quarter.

Perry Beberman: Moving to slide six, which provides our second quarter financial highlights. During the second quarter, credit sales of $6.6 billion decreased 7% year-over-year, reflecting moderating consumer spend and our strategic credit tightening, partially offset by new partner growth. Average loans of 17.9 billion increased 1% year-over-year, given by growth in co-gram programs highlighting our continued focus on product diversification. Revenue was 0.9 billion dollars in the quarter, down 1% year-over-year due to reduced merchant discount fees resulting from lower big ticket credit sales. Income from continuing operations increased $69 million due to a higher reserve release and lower non-interest expense compared to the same period last year.

Perry S. Beberman: Moving to slide six, which provides our second quarter financial highlight. During the second quarter, credit sales of $6.6 billion decreased 7% year-over-year, reflecting moderating consumer spend and our strategic credit tightening, partially offset by new partner growth. Average loans of $17.9 billion increased 1% year-over-year, driven by growth in co-grant programs highlighting our continued focus on product diversification and revenue. What? $0.9 billion in the quarter, down 1% year-over-year due to reduced merchant discount fees resulting from lower big-ticket credit sales.

Perry S. Beberman: Moving to slide six, which provides our second quarter financial highlights.

Perry S. Beberman: During the second quarter, credit sales of $6.6 billion decreased 7% year-over-year, reflecting moderating consumer spend and our strategic credit tightening, partially offset by new partner growth.

Perry S. Beberman: Average loans of $17.9 billion increased 1% year-over-year, driven by growth in co-grant programs, highlighting our continued focus on product diversification.

Perry S. Beberman: Revenue was $0.9 billion in the quarter, down 1% year-over-year due to reduced merchant discount fees resulting from lower big-ticket credit sales.

Perry S. Beberman: Income from continuing operations increased $69 million due to a higher reserve release and lower non-interest expense compared to the same period last year. Looking at the financials in more detail on slide 7, total net interest income for the quarter remained essentially flat year over year, while non-interest income was down $8 million, resulting from the previously mentioned lower merchant discount fees on big-ticket purchases. Total non-interest expense decreased 12% year-over-year, primarily driven by a decrease in card and processing costs, including fraud, and a reduction in depreciation and amortization costs and marketing expense.

Perry S. Beberman: Income from continuing operations increased $69 million due to a higher reserve release and lower non-interest expense compared to the same period last year.

Perry Beberman: Looking at the financials in more detail on flight 7, total net interest income for the quarter remained essentially flat year-over-year, while non-interest income is down $8 million, resulting from the previously mentioned lower merchant discount fees on big ticket purchases. Total net interest expense decreased 12% year-over-year, primarily driven by a decrease in card-and-processing costs, including fraud, and a reduction in depreciation and amortization costs and marketing expenses. Additional details on expense drivers can be found in the appendix of the slide deck posted on our website. Free tax, free provision earnings or PPR increased $48 million, or 11%.

Perry S. Beberman: Looking at the financials in more detail on slide 7, total net interest income for the quarter remained essentially flat year-over-year, while non-interest income is down $8 million, resulting from the previously mentioned lower merchant discount fees on big-ticket purchases.

Perry S. Beberman: Total non-interest expense decreased 12% year over year, primarily driven by a decrease in card and processing costs, including fraud, and a reduction in depreciation and amortization costs and marketing expenses.

Perry S. Beberman: Additional details on expense drivers can be found in the appendix of the slide deck posted on our website. Pre-tax Pre-Provision Earnings, or PPNR, increased $48 million, or 11%. Turning to slide 8, loan yield increased 30 basis points year over year, benefiting from the upward trend in the prime rate, which caused our variable price loans to move higher in tandem, along with some small amount of CFPB mitigation-related APR increase impact. However, both loan yield of 26.4% and net interest margin of 18.0% were lower sequentially following typical seasonal trends.

Perry S. Beberman: Additional details on expense drivers can be found in the appendix of the slide deck posted on our website.

Perry S. Beberman: Pre-tax, pre-provision earnings, or PPNR, increased $48 million, or 11%.

Perry Beberman: Turning to slide 8, loan yield increased 30 basis points year-over-year, benefiting from the upward trend in the prime rate, which caused our variable price loans to move higher in tandem, along with some small amount of CFPB mitigation-related APR increase impacts.

Perry S. Beberman: Turning to slide 8.

Perry S. Beberman: The loan yield increased 30 basis points year over year, benefiting from the upward trend in the prime rate, which caused our variable price loans to move higher in tandem, along with some small amount of CFPB mitigation-related APR increase impacts.

Perry Beberman: Both loan yield of 26.4% and net interest margin of 18.0% were lower sequentially, following typical seasonal trends. We expect a seasonal improvement in the net interest margin in the third quarter of 2024.

Perry S. Beberman: Both loan yield of 26.4% and net interest margin of 18.0% were lower sequentially following typical seasonal trends. We expect a seasonal improvement in the net interest margin in the third quarter of 2024.

Perry S. Beberman: We expect a seasonal improvement in the net interest margin in the third quarter of 2024. On the funding side, we are seeing total funding costs moderate as deposit costs stabilize. Additionally, as you can see on the bottom right chart, our funding mix continues to improve, fueled by growth in direct-to-consumer deposits, which increased to $7.2 billion at quarter end, while wholesale deposits declined. Direct-to-consumer deposits accounted for 40% of our average total funding, up from 33% a year ago.

Perry Beberman: On the funding side, we are seeing total funding costs moderate if deposit costs are stabilizing. Additionally, as you can see on the bottom right chart, our funding mix continues to improve, fueled by growth in direct-to-consumer deposits, which increase the $7.2 billion at quarter end while wholesale deposits decline. Direct-to-consumer deposits accounted for 40% of our average total funding, up from 33% a year ago. While we anticipate that direct-to-consumer deposits will continue to grow steadily, we will maintain the flexibility of our diversified funding sources, including secured and wholesale funding, to opportunistically and efficiently fund and manage our long-term growth objectives.

Perry S. Beberman: On the funding side,

Perry S. Beberman: We are seeing total funding costs moderate as deposit costs are stabilizing.

Perry S. Beberman: Additionally, as you can see on the bottom right chart, our funding mix continues to improve, fueled by growth in direct-to-consumer deposits, which increased to $7.2 billion at quarter end, while wholesale deposits declined.

Perry S. Beberman: Direct-to-consumer deposits accounted for 40% of our average total funding, up from 33% a year ago.

Perry S. Beberman: While we anticipate that direct-to-consumer deposits will continue to grow steadily, we will maintain the flexibility of our diversified funding sources, including secured and wholesale funding, to opportunistically and efficiently fund and manage our long-term growth objectives. Moving to credit, on slide nine.

Perry S. Beberman: While we anticipate that direct-to-consumer deposits will continue to grow steadily, we will maintain the flexibility of our diversified funding sources, including secured and wholesale funding, to opportunistically and efficiently fund and manage our long-term growth objectives.

Perry Beberman: Moving to credit on slide 9, our delinquency rate for the second quarter was 6.0%, modically down 20 basis points from the first quarter as a result of our credit tightening actions. From this point forward, we expect future quarters to largely follow historical seasonal trends until we see broader macroeconomic improvements.

Perry S. Beberman: Our delinquency rate for the second quarter was 6.0 percent, modestly down 20 basis points from the first quarter as a result of our credit tightening action. From this point forward, we expect future quarters to largely follow historical seasonal trends until we see broader macroeconomic improvement. The net loss rate was 8.6% for the quarter compared to 8.0% in the second quarter of 2023 and 8.5% in the first quarter of 2024. The second quarter net loss rate was elevated compared to last year due to more challenging macroeconomic conditions, pressure on consumer payment rates, as well as ongoing credit tightening and our slower responsible loan growth impacting the denominator.

Perry S. Beberman: Moving to credit on slide 9.

Perry S. Beberman: Our delinquency rate for the second quarter was 6.0 percent, modestly down 20 basis points from the first quarter as a result of our credit tightening actions.

Perry S. Beberman: From this point forward, we expect future quarters to largely follow historical seasonal trends until we see broader macroeconomic improvements.

Perry Beberman: The net loss rate was 8.6% for the quarter compared to 8.0% in the second quarter of 2023 and 8.5% in the first quarter of 2024. The second quarter net loss rate was elevated compared to last year due to more challenging macroeconomic conditions, pressure and consumer payment rates, as well as ongoing credit tightening and our slower responsible long growth impacting the. As anticipated, the second quarter net loss rate is expected to represent the peak for 2024. We anticipate a reduction in the net loss rate in the third quarter to 8% or slightly below, before increasing seasonally in the fourth quarter to the low 8% level.

Perry S. Beberman: The net loss rate was 8.6% for the quarter compared to 8.0% in the second quarter of 2023 and 8.5% in the first quarter of 2024.

Perry S. Beberman: The second quarter net loss rate was elevated compared to last year due to more challenging macroeconomic conditions, pressuring consumer payment rates, as well as ongoing credit tightening and our slower responsible loan growth impacting the denominator.

Perry S. Beberman: As anticipated, the second quarter net loss rate is expected to represent the peak for 2024. We anticipate a reduction in the net loss rate in the third quarter to 8% or slightly below before increasing seasonally in the fourth quarter to the low 8% level. Our outlook assumes a slow, gradual improvement in the macroeconomic environment as it will take time for the lingering effects of a prolonged period of elevated inflation to dissipate. As expected, the reserve rate of 12.2% remained within the range we have seen over the past six quarters.

Perry S. Beberman: As anticipated, the second quarter net loss rate is expected to represent the peak for 2024.

Perry S. Beberman: We anticipate a reduction in the net loss rate in the third quarter to 8% or slightly below before increasing seasonally in the fourth quarter to the low 8% level.

Perry Beberman: Our outlook assumes a slow, gradual improvement in the macroeconomic environment, as it will take time for the lingering effects of a prolonged period of elevator to make inflation to dissipate. As expected, the reserve rate of 12.2% remained within the range we have seen over the past six quarters.

Perry S. Beberman: Our outlook assumes a slow, gradual improvement in the macroeconomic environment, as it will take time for the lingering effects of a prolonged period of elevated inflation to dissipate.

Perry S. Beberman: As expected, the reserve rate of 12.2% remained within the range we have seen over the past six quarters.

Perry Beberman: In this challenging macroeconomic environment, our conservative economic scenario weightings remained unchanged in our credit reserve modeling, and we believe our low loss reserve provides an appropriate margin of protection consistent with what I said last quarter. Based on our economic outlook, we expect the reserve rate to be lower at year-end 2024 versus year-end 2023, reflecting an overall improvement in delinquencies, as well as improved credit quality in the portfolio.

Perry S. Beberman: In this challenging macroeconomic environment, our conservative economic scenario weightings remained unchanged in our credit reserve modeling, and we believe our loan loss reserve provides an appropriate margin of protection. Consistent with what I said last quarter, and based on our economic outlook, we expect the reserve rate to be lower at year-end 2024 versus year-end 2023, reflecting an overall improvement in delinquencies, as well as improved credit quality in the portfolio. Further, our total loss absorption capacity, comprised of the total company tangible common equity plus credit reserve rate, ended the quarter at 26 percent of total loans, an increase of 100 basis points from last quarter and 270 basis points from a year ago, demonstrating a strong margin of protection should more adverse economic conditions arise.

Perry S. Beberman: In this challenging macroeconomic environment, our conservative economic scenario weightings remained unchanged in our credit reserve modeling, and we believe our loan loss reserve provides an appropriate margin of protection.

Perry S. Beberman: Consistent with what I said last quarter and based on our economic outlook.

Perry S. Beberman: We expect the reserve rate to be lower at year-end 2024 versus year-end 2023, reflecting an overall improvement in delinquencies, as well as improved credit quality in the portfolio.

Perry Beberman: Further, our total loss of absorption capacity comprised of the total company tangible common equity plus credit reserve rate into the quarter at 26% of total loans, an increase of 100 basis points from last quarter and two 70 basis points from a year ago, demonstrating a strong margin of protection should more adverse economic conditions arise. Looking at our credit risk distribution mix, the percentage of card holders with a 660 plus credit score improved 200 basis points sequentially and remained above pre-pandemic levels despite continued inflationary pressures. This improvement is primarily a result of our prudent credit tightening actions as well as a more diversified product mix.

Perry S. Beberman: Further.

Perry S. Beberman: Our total loss absorption capacity, comprised of the total company tangible common equity plus

Perry S. Beberman: Credit Reserve Rate ended the quarter at 26% of total loans, an increase of 100 basis points from last quarter and 270 basis points from a year ago, demonstrating a strong margin of protection should more adverse economic conditions arise.

Perry S. Beberman: Looking at our credit risk distribution mix, the percentage of cardholders with a 660 plus credit score improved 200 basis points sequentially and remained above pre-pandemic levels despite continued inflationary pressures. This improvement is primarily a result of our prudent credit tightening actions as well as our more diversified product mix. We continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take. Moving to slide 10, which provides our 2024 financial outlook.

Perry S. Beberman: Looking at our credit risk distribution mix, the percentage of cardholders with a 660-plus credit score improved 200 basis points sequentially and remained above pre-pandemic levels despite continued inflationary pressures.

Perry S. Beberman: This improvement is primarily a result of our prudent credit tightening actions as well as our more diversified product mix. We continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take.

Perry Beberman: We continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take.

Perry Beberman: Moving to slide 10, which provides our 2024 financial outlook. While there is uncertainty surrounding the timing and outcome of the ongoing CFPB late fee rule litigation, our outlook now assumes no impact from the CFPB late fee rule this year. Considering that a stay is in effect, the number of motions hearings and other procedural matters, including appeals, expected to take place in the litigation over the coming months, as well as a presumed implementation period following the final legal rule, and our base case is that the rule does not become effective in 2024.

Perry S. Beberman: While there is uncertainty surrounding the timing and outcome of the ongoing CFPB late fee rule litigation, our outlook now assumes no impact from the CFPB late fee rule this year. Considering that a stay is in effect, the number of motions, hearings, and other procedural matters, including appeals, expected to take place in the litigation over the coming months, as well as a presumed implementation period following the final legal ruling, our base case is that the rule does not become effective in 2024.

Perry S. Beberman: Moving to slide 10, which provides our 2024 financial outlook.

Perry S. Beberman: While there is uncertainty surrounding the timing and outcome of the ongoing CFPB late-fee rule litigation, our outlook now assumes no impact from the CFPB late-fee rule this year.

Perry S. Beberman: Considering that a stay is in effect, the number of motions, hearings, and other procedural matters, including appeals,

Perry S. Beberman: Expected to take place in the litigation over the coming months, as well as a presumed implementation period following the final legal ruling, our base case is that the rule does not become effective in 2024.

Perry Beberman: Our full year contemplates a slower credit sales growth rate as a result of moderation in consumer spending and credit tightening, both of which pressure loan and revenue growth and the net loss rate in the near term. In addition, our 2024 outlook assumes two interest rate decreases by the Federal Reserve in the second half of the year, which are expected to slightly pressure total net interest income. Based on our current economic outlook, proactive credit tightening actions, higher gross credit losses, and visibility into our new business pipeline, we expect 2024 average loans to be down low single digits on a percentage basis relative to 2023.

Perry S. Beberman: Our full year contemplates a slower credit sales growth rate as a result of moderation in consumer spending and credit tightening, both of which pressure loan and revenue growth and the net loss rate in the near term. In addition, our 2024 outlook assumes two interest rate decreases by the Federal Reserve in the second half of the year, which are expected to slightly pressure total net interest income. Based on our current economic outlook, proactive credit tightening actions, higher gross credit losses, and visibility into our new business pipeline, we expect 2024 average loans to be down low single digits on a percentage basis relative to 2023.

Perry S. Beberman: Our full year contemplates a slower credit sales growth rate as a result of moderation in consumer spending and credit tightening.

Perry S. Beberman: both of which pressure loan and revenue growth and the net loss rate in the near term. In addition, our 2024 outlook assumes two interest rate decreases by the Federal Reserve in the second half of the year, which are expected to slightly pressure total net interest income.

Perry S. Beberman: Based on our current economic outlook, proactive credit tightening actions, higher gross credit losses, and visibility into our new business pipeline, we expect 2024 average loans to be down low single digits on a percentage basis relative to 2023.

Perry Beberman: Global revenue growth for 2024, excluding gain on portfolio sales, is anticipated to be down low to mid-single digits, with a full-year net interest margin lower than 2023, reflecting higher reversals of interest in fees due to expected higher gross credit losses, declining interest rates, and a continued shift in product mixed to co-brand and proprietary products. This guidance includes the impact of early CFPB mitigation pricing changes, which are not material to the full-year 2024 guidance. As a result of efficiency's gain from ongoing investments in technology modernization and digital advancement, along with disciplined expense management and reduced fraud, we expect expenses to be down mid-single digits relative to 2023.

Perry S. Beberman: Total revenue growth for 2024, excluding gains on portfolio sales, is anticipated to be down low to mid-single digits with a full-year net interest margin lower than 2023, reflecting higher reversals of interest and fees due to expected higher gross credit losses, declining interest rates, and a continued shift in product mix to co-brand and proprietary products. This guidance includes the impact of early CFPB mitigation pricing changes, which are not material to the full-year 2024 guidance.

Perry S. Beberman: Total revenue growth for 2024, excluding gain on portfolio sales, is anticipated to be

Perry S. Beberman: Down low to mid-single digits with a full-year net interest margin lower than 2023, reflecting higher reversals of interest and fees due to expected higher gross credit losses, declining interest rates, and a continued shift in product mix to co-brand and proprietary products.

Perry S. Beberman: This guidance includes the impact of early CFPB mitigation pricing changes which are not material to the full year 2024 guidance.

Perry S. Beberman: As a result of efficiencies gained from ongoing investments in technology modernization and digital advancement, along with disciplined expense management and reduced fraud, we expect expenses to be down mid-single digits relative to 2023. Expenses are projected to increase in the second half of 2024 versus the first half, driven primarily by the addition of Saks Fifth Avenue to the portfolio and increased sequential marketing expenses of around $10 million in the third quarter. We would expect fourth-quarter expenses to be higher than the third quarter based on seasonally higher employee compensation and benefits costs and further increased marketing expenses.

Perry S. Beberman: As a result of efficiencies gained from ongoing investments in technology modernization and digital advancement, along with disciplined expense management and reduced fraud, we expect expenses to be down mid-single digits relative to 2023.

Perry Beberman: Expenses are projected to increase in the second half of 2024 versus the first half, driven primarily by the addition of SAC-SIT Avenue portfolio and increased sequential marketing expenses around $10 million in the third quarter. We would expect fourth quarter expenses to be higher than the third quarter based on seasonally higher employee compensation and benefits costs and further increased marketing expenses. As I mentioned earlier, the second quarter net loss rate is expected to be the peak for the year, and we continue to expect a full-year net loss rate in the low 8% range for 2024. With the first half loss rate at 8.6%, and a projected improved second half loss rate of approximately 8%, that will currently imply a full-year net loss rate of around 8.3%.

Perry S. Beberman: Expenses are projected to increase in the second half of 2024 versus the first half driven primarily by the addition of SAC's Fifth Avenue portfolio and increased sequential marketing expenses of around $10 million in the third quarter.

Perry S. Beberman: We would expect fourth quarter expenses to be higher than the third quarter based on seasonally higher employee compensation and benefits costs and further increased marketing expenses.

Perry S. Beberman: As I mentioned earlier, the second quarter net loss rate is expected to be the peak for the year, and we continue to expect a full year net loss rate in the low 8% range for 2024. With the first half loss rate at 8.6% and a projected improved second half loss rate of approximately 8%, that would currently imply a full year net loss rate of around 8.3%. Again, our outlook assumes a gradual, modest improvement in economic conditions throughout the year, aligned with most economies. Finally, our full-year normalized effective tax rate is expected to be in the range of 25 to 26 percent.

Perry S. Beberman: As I mentioned earlier, the second quarter net loss rate is expected to be the peak for the year, and we continue to expect a full-year net loss rate in the low 8 percent range for 2024.

Perry S. Beberman: with the first half loss rate at 8.6% and a projected improved second half loss rate of approximately 8%

Perry Beberman: Again, our outlook assumes a gradual, modest improvement in the economic conditions throughout the year, aligned with most economists. Finally, our full-year normalized effective tax rate is expected to be in the range of 25% to 26%.

Perry S. Beberman: That would currently imply a full-year net loss rate of around 8.3 percent. Again, our outlook assumes a gradual, modest improvement in economic conditions throughout the year, aligned with most economists.

Perry S. Beberman: Finally, our full-year normalized effective tax rate is expected to be in the range of 25 to 26 percent. Quarter-over-quarter variability will continue due to timing of certain discrete items.

Perry Beberman: Quarter over quarter variability will continue due to the timing of certain discrete items. We are confident in our ability to successfully manage risk-return trade-offs through this challenge of the macroeconomic and regulatory environment while continuing to make strategic investments that drive long-term value for our stakeholders.

Perry S. Beberman: Quarter over quarter variability will continue due to the timing of certain discrete items. However, we are confident in our ability to successfully manage risk-return tradeoffs through this challenging macroeconomic and regulatory environment while continuing to make strategic investments that drive long-term value for our stakeholders. Before opening the call to your questions, I want to take a moment to reiterate the financial targets that we shared during our Investor Day in June. You can see these targets on slide 11.

Perry S. Beberman: We are confident in our ability to successfully manage risk-return trade-offs through this challenging macroeconomic and regulatory environment while continuing to make strategic investments that drive long-term value for our stakeholders.

Perry Beberman: Before opening the call for your questions, I want to take a moment to reiterate the financial targets that we shared during our investor day in June. You can see these targets on Slide 11. Note, this slide assumed an October 1 CFPB rule change effective date. From a debt perspective, as Ralph mentioned earlier, we have already successfully reduced our double leverage ratio to less than 115%. For capital, our goal is to build total risk-based capital to around 16% with an initial CET-1 build to approximately 14%. Over the longer term, we plan to optimize our capital mix through additional Tier 1 and Tier 2 capital, which will allow us to lower our corresponding CET-1 ratio.

Perry S. Beberman: Before opening the call for your questions, I want to take a moment to reiterate the financial targets that we shared during our Investor Day in June . You can see these targets on slide 11. Note, this slide assumed an October 1 CFPB late fee rule change effective date.

Perry S. Beberman: Note, this slide assumes an October 1st CFPB late fee rule change effective date. From a debt perspective, as Ralph mentioned earlier, we've already successfully reduced our double leverage ratio to less than 115%. For capital, our goal is to build total risk-based capital to around 16% with an initial CET 1 build of approximately 14%. Over the longer term, we plan to optimize our capital mix through additional Tier 1 and Tier 2 capital, which will allow us to lower our corresponding CET1 ratio.

Perry S. Beberman: From a debt perspective, as Ralph mentioned earlier, we've already successfully reduced our double leverage ratio to less than 115 percent.

Ralph J. Andretta: For capital, our goal is to build total risk-based capital to around 16%, with an initial CET1 build to approximately 14%.

Ralph J. Andretta: Over the longer term, we plan to optimize our capital mix through additional Tier 1 and Tier 2 capital, which will allow us to lower our corresponding CET1 ratio.

Perry Beberman: Overall, we will continue to grow tangible book value with the goal of generating a low-to-mid 20% ROTCE in the medium term and mid-20% ROTCE in the long term. While there are many scenarios currently in play regarding our timing to achieve our target given the uncertainty around the economy and potential regulatory changes, we are well positioned to deliver responsible growth, strong returns, and capital distribution opportunities over time.

Operator: Overall, we will continue to grow tangible book value with the goal of generating a low to mid-20% ROTCE in the medium term and mid-20% ROTCE in the long term. While there are many scenarios currently in play regarding our timing to achieve our targets, given the uncertainty around the economy and potential regulatory changes, we are well positioned to deliver responsible growth, strong returns, and capital distribution opportunities over time. Operator, we are now ready to open up the lines for questions.

Perry S. Beberman: Overall, we will continue to grow tangible book value with the goal of generating a low-to-mid 20% ROTCE in the medium-term and mid-20% ROTCE in the long-term.

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

Operator: Thank you.

Operator: Ladies and gentlemen, if you would like to ask the question, please press star 11 on your telephone keypad. You would then hear an automated message advising your hand is raised. Then wait to hear your name announced. To withdraw your question, please press star 11 again. When preparing to ask your question, please ensure your phone is unmuted locally.

Operator: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 11 on your telephone keypad. You will then hear an automated message advising your hand is raised. I can't wait to hear your name announced.

Operator: To withdraw your question, please first start 1-1 again. When preparing to ask your question, please ensure your phone is unmuted. Please stand by while we compile the Q&A room. Our first question comes from the line of Mihir Bhatia. Bank of America, your line is open. Good morning.

Operator: Please stand by while we compile the Q&A roster.

Mihir Bhatia: Our first question comes from the line of Mihir Bhatia with Bank of America.

Mihir Bhatia: Your line is open.

Mihir Bhatia: Good morning. Thank you for taking my question. I wanted to start maybe talking about just the purchase while you and friends. You obviously have a pretty diverse customer base, and you've talked previously about low-income consumers being impacted by inflation. I guess a couple of questions on that. One is, are you seeing those impacts starting to moderate as we've had some wage growth here, and then also relatedly, is the pressures on the consumer spreading up the income scale, or are you still seeing the pressures concentrated in that segment? Maybe just talk about that a little bit just from where you're seeing the pressures on what kinds of products, what kinds of retailers or categories maybe.

Mihir Bhatia: Thank you. I wanted to start maybe by talking about just the purchase volume trend. You obviously have a pretty diverse customer base, and you've talked previously about low-income consumers being impacted by... So I guess I have a couple of questions on that.

Ralph J. Andretta: One question is, are you seeing those impacts starting to moderate as we've had some wage growth here? And then also relatedly, are the pressures on the consumer spreading up the income scale? Or are you still seeing... the pressures concentrated in that segment?

Ralph J. Andretta: Maybe just talk about that a little bit, just from where you're seeing the pressures on what kinds of products, what kinds of retailers, or categories. Yeah, thanks for the question. I, you know, we're still seeing consumers, no matter where they are in the advantage chain, self moderate and, and self budget. You know, we see the biggest impact in, you know, discretionary and big ticket is where we see the biggest impact in terms of spend moderation.

Speaker Change: Where youre seeing the pressures on what kinds of products what kinds of retailers all categories, maybe thank you.

Ralph Andretta: Thank you.

Ralph Andretta: Thanks for the question. We're still seeing consumers no matter where they are, and the advantage change, self-moderate and self-budget. We see the biggest impact in discretionary and big ticket is where we see the biggest impact in terms of spend moderation.

Speaker Change: Yeah. Thanks for the question, Yeah, we're still seeing consumers no matter, where they are in an advantaged change self moderate and and self budget. We've seen the biggest impact in discretionary and big ticket is where we've seen the biggest impact in terms of spend moderation.

Ralph J. Andretta: But, you know, I think as we move forward, as we said, we think we've peaked in the second quarter. I don't think it's going to be an immediate rush to the point of sale.

Ralph Andretta: I think as we move forward, as we said, we think we've peaked in the second quarter. I don't think it's going to be an immediate rush to the point of sale. I think it's going to be a gradual improvement over time. People are still suffering from high inflation and the high interest rate. While we're anticipating a little bit of improvement, I think it's going to be very moderate as we move forward, but big ticket and discretionary spend with the biggest impact.

Speaker Change: But yes.

Speaker Change: As we move forward as we said you know we think we've peaked in the second quarter I don't think it's going to be an immediate.

Speaker Change: <unk> to the to the point of sale I think it's going to be a gradual improvement over time.

Ralph J. Andretta: I think it's going to be a gradual improvement over time. People are still suffering from high inflation and high interest rates. So, you know, while we are, you know, we're anticipating a little bit of improvement, I think it's going to be very moderate as we move forward. But, you know, big ticket and discretionary spend was the biggest impact, at anything from the on the income side, like is it just mostly still in the lower and then, if I could switch gears on credit. And what I was curious about was, what is your view as you enter into 2025? Should that... All right, thank you. Hey, good morning, guys.

Speaker Change: People are still suffering from high inflation in the high interest rate. So while we are.

Speaker Change: We're anticipating a little bit of improvement I think it's going to be very moderate as we move forward, but big ticket.

Speaker Change: Discretionary spend with the biggest impact it.

Ralph Andretta: Anything on the income side? Is it just mostly still in the lower income, consume only? What I think I share with you is that view on the economy overall. I think we've been saying this, and we're all saying that the consumer has been pretty resilient. They are definitely feeling the effects of that cumulative prolonged period of inflation, and now the higher interest rates, they're impacting them. The inflation is still about 2%, while it's coming down; that's positive. High interest rates on things like their mortgages, auto, credit cards, personal loans, that be roads, they're spending power.

Ralph Andretta: You've been through a higher monthly interest cost. You've got that affordability gap that's still out there for lower middle-income Americans. I think that's where you're going. The top third of the consumers are just fine. They're higher income, higher scoring. They're not showing any signs of stress, and we're seeing that in our portfolio.

Ralph Andretta: Those high scores are not being affected, but that doesn't tell us where to go to the two thirds, and you are starting to see some of that stress creep up a little bit in the risk scores because these folks are trying to make ends meet, and these other things are putting pressure on them. That's it. There are positive signs that we're seeing, and I think we're all seeing it with what we expect to materialize in the second half of the year, and that was led by what we just saw with this quarter where, as you mentioned, wage growth outpaced inflation.

Ralph Andretta: That is good, and that's particularly going to help the two thirds of the consumers who are trying to rebuild their discretionary income, and I think that's going to be a positive. Inflation is coming down, so hopefully again wage growth stays up. Inflation comes down to that's more positive. Now you will have a little bit of offset with some modest increase on employment that everybody is expecting to finish the year with a little 4%, but that's all in our outlook and forecast. So we're monitoring the consumers really carefully. We have a really strong credit team that is taking credit actions appropriately, but I think we're all waiting to see how this economy unfolds in the back half of the year.

Speaker Change: <unk> been offset with some modest increase in unemployment that everybody is expecting to finish the year, a little over 4%, but that's all in our outlook and forecast, but so we're monitoring the consumers really carefully we have a really strong credit team that is taking credit actions appropriately and.

Speaker Change: I think we're all waiting to see how this economy unfolds in the back half of the year.

Mihir Bhatia: And then, if I could switch gears on credit, just obviously two queue came in better than your initial guide. You gave some pretty good commentary on three queue and four queue and what your expectations are.

Speaker Change: Got it and then if I could switch gears on credit just.

Speaker Change: Obviously <unk> came in better than your initial guide.

Speaker Change: You gave some pretty good commentary on <unk> and <unk> and what your expectations are.

Ralph Andretta: And what I was curious to was what is your view as you entered a 2025? Should that, do you expect losses to continue to moderate? I mean, you mentioned some about them being kind of a seasonal till you see the economy improve. So like my question is really do you need the economy to improve to get your losses down towards your target, or have the credit actions you've taken drive that loss rate lower closer to your long-term targets? Because you mean you still are eight percent, right? So if you just get seasonality from here, like are we just going to stay above the long-term targets till you get an economic improvement?

Speaker Change: And what I was curious though is what is your view as you enter into 2025 should that.

Speaker Change: Do you expect losses continue to moderate I mean, you mentioned.

Speaker Change: About there being kind of a seasonal till you see the economy improves. So my question is really do you need the economy to improve to get to your losses down towards your target all have the credit actions, you've taken drive that loss rate lower closer to your long term targets because you're still at 8% right. So if you just get seasonality from here like how would you just.

Speaker Change: Stay above the long term targets until you get to economic improvement.

Ralph Andretta: So I think you have a couple of things, a number of things that go into that.

Speaker Change: So I think you have a couple of things a number of things.

Ralph Andretta: I'm not going to give guidance on 2025 at this point, but I can give you my thoughts on how this trend is going to play out over time, right? Are credit actions? Well, the peak benefits that will happen in the second half of this year. So the full benefit of our credit actions hasn't yet materialized all the way through. So that will be a run rate benefit into 2025. Then we're expecting a what I'll say is a slow, gradual improvement in customer behavior. It's going to take a prolonged number of quarters for the consumer behavior to improve, given that they're trying to deal with three years of this persistent high inflation, higher interest rates, right?

Speaker Change: That go into that I'm, not going to give guidance on 2025 at this point, but I can give you my thoughts on <unk>.

Speaker Change: This trend is going to play out over time right our credit actions.

Speaker Change: The peak benefit will happen in the second half of this year. So the full benefit of our credit actions haven't yet materialized all the way through.

Speaker Change: So that will be a run rate benefit into call. It 2025, then were expecting a what I'll say is a slow gradual improvement in customer behavior.

Ralph Andretta: And that is going to take time to unwind. I mean, there is no fast fix. We're not expecting a big stimulus to come in and all of a sudden, you know, consumer payments just improve dramatically. So I expect there to be a slow, gradual improvement through next year, but to get back to that 6% number that fast seems, yeah, that would be a tough, tough, tough ask of the consumer. But I do think there's going to be continued gradual improvement.

Mihir Bhatia: Thank you for taking my questions.

Operator: Thank you.

Jeff Adelson: Please stand by for our next question. Our next question comes from the line of Jeff Adelson with Morgan Stanley.

Jeff Adelson: Your line is open. Hey, good morning, guys. Thank you for taking my questions.

Perry S. Beberman: Thank you for taking my questions. And just one point of clarification on the revenue guide, I know you removed the late fee rule implementation from the fourth quarter versus your last quarter guide, but I think last quarter you also discussed a scenario where the late fee rule didn't go into effect. You were looking for, I think, down, mid-single; now you're looking for down low to mid-single digits. Can you just talk about where some of the improvement came from there?

Jeff Adelson: I just want to point a clarification on the revenue guide. I know you removed the late fee rule implementation from the fourth quarter versus your last quarter guide. But I think last quarter, you also had discussed the scenario where the late fee rule didn't go into effect. You were looking for, I think, down, mid single. Now you're looking for down low to mid single digits. Can you just talk about where some of the improvement came from there? Is that just, you know, continued efforts on the late fee offsets and NCIDs you put out there, or also may have changed in the outlook?

Perry S. Beberman: Is that just continued efforts on the late fee offsets and NCITs you've put out there, or what else may have changed in the outcome? Yeah, it's a modest change in the outlook, to your point. I think part of it is we're only expecting two rate reductions, Fed rate reductions. Just remember we're a little asset sensitive, so we will see a little bit of NIM compression when you have that. We also probably feel a little bit more confident about the second half of the year loss rate and what that means in terms of reversal of interest and fees.

Perry Beberman: Thanks. Yeah, it's a modest change in the outlook, to your point. I think part of it is we're only expecting two rate reductions, Fed rate reductions. As you remember, we're a little asset-sensitive. So we will see a little bit of an in compression when you have that. We also, I think, a little bit more confident about the second half of the year loss rate and what that means in terms of reversal of interest in fees. And then we also have, you know, the line of sight into the CFPB mitigation actions, while not material. It's just, you know, we're just trying to get everything down a little tighter to what we expect to say.

Perry S. Beberman: And then we also have the line of sight into the CFPB mitigation actions, while not material, it's just we're just trying to get everything dialed in a little tighter to what we expect to see. Please stand by for our next question. Our next question comes from the line of Sanjay Sakhrani with KBW. Your line is open. A bunch of great questions in there.

Jeff Adelson: And just to follow up on Crata, I know at the investor today you were talking about some nice stability and you know not only your early stage but your mid and late stage link with you. Could you just give us an update on what you're seeing there this quarter? And if I could maybe just pick a little bit on the monthly data. It did look like your second derivative on total link with you did increase a little bit this past month. Is there anything to that? Or do you probably still expect that trend of slowing will kind of continue to come through?

Speaker Change: And just a follow up on credit I know at the Investor Day, you were talking about some nice stability and you know not only your early stage, but your mid and late stage delinquencies could you just give us an update on what youre seeing there this quarter and.

Speaker Change: If I could maybe just nitpick, a little bit on the monthly data.

Speaker Change: It did look like your your second derivative on total delinquencies did increase a little bit this past month.

Speaker Change: Is there anything to that or or do you broadly you still expect that trend of slowing well will kind of continue to come through.

Perry Beberman: Yeah, I think what I would characterize things as stable and improving that again we're in an improvement economy. Credit actions are taking place; you've got some seasonal things happening within the length one C. So again, our early stages is stable and we're starting to see some improvement in, you know, very slow improvement in those mid to late stages. But you know the role rates remain high in those later stages because you know nothing's changed for I'll say the consumer who does go to length one. They have a hard time getting out of the length one C once they're in, and that's you know when you think thematically around why you need wage growth and things to improve for them. You know that that's what we hear from the customer, which is a strain them is just that you know that high inflation and wages are keeping up.

Speaker Change: Yes, I think what I would characterize things this is stable and improving.

Speaker Change: Yeah again, we're in an improving economy credit actions are taking place.

Speaker Change: Some seasonal things happening within delinquency. So again, our early stages is stable and we're starting to see some improvement in very slow improvement in those mid to late stages, but the roll rates remain high in those later stages because nothing has changed for you I will tell you the consumer who does go to.

Speaker Change: <unk> they have a hard time getting out of delinquency once they are in and that's when you think dramatically around why you need wage growth and things to improve for them.

Speaker Change: That's what we hear from the customer which stream them as just at.

Speaker Change: That high inflation and wages aren't keeping up.

Jeff Adelson: Thank you for taking my questions. Thank you.

Speaker Change: Thank you for taking my questions.

Speaker Change: Thank you.

Sanjay Sakhrani: Please stand by for our next question. Our next question comes from a line of Sanjay the creamy, with KBW. The line is open.

Speaker Change: Please standby for our next question.

Sanjay Harkishin Sakhrani: Our next question comes from the line of Sanjay <unk> with <unk>. Your line is open.

Sanjay Sakhrani: Thank you. Perry, could you maybe just talk about what you might be looking at in your data to give you an indication of whether or not the consumers sort of flat. Doing worse, you know. I mean, do you look at like monthly minimum payments, cash draw downs? I'm just curious because I think there's a lot of confusion, as we've heard from some of the questions before. You know, we're hearing the consumer slowing down; they're sending, but you guys are saying, and this is the industry.

Speaker Change: Thank you.

Speaker Change: Could you.

Speaker Change: Maybe just talk about.

Speaker Change: What you might be looking at in your data to give you an indication of whether or not the consumers sort of flat.

Speaker Change: Doing worse I mean, do you look at it like monthly minimum payments cash draw Downs I'm, just curious because I think theres a lot of <unk>.

Speaker Change: And as we've heard from some of the questions before we're hearing the consumer slowing down their spending but you guys are saying and this is the industry.

Perry Beberman: So the consumers generally find so I mean maybe you just give us a little bit more on sort of what informed you the consumers doing well and then secondly just if it's right start coming down how quickly does that feed into the health of your consumer does it help them improve their health and their health. Under great questions in there, you know, and that's where the benefits of having as many consumers as we do that we can monitor through stratification segmentation. And we do look at what's happening with our consumer, and we talked about this before. When you hear, I'll say, the big banks talk, they're they have a much fuller view of the high net worth customers. They have the view of customers are not credit eligible that, you know, we don't underwrite. So, you know, you're things from the big networks, and they're giving perspectives on spend overall.

Speaker Change: Tumors generally fine. So maybe you can just give us a little bit more on sort of what informed view that the consumer is doing well and then secondly, just.

Speaker Change: If rates are coming down how quickly does that feed into the health of your consumer does it help them improve their health.

Speaker Change: Their health.

Speaker Change: Great questions in there.

Sanjay Harkishin Sakhrani: You know, and that's the benefits of having as many consumers as we do that we can monitor through stratification segmentation. We do look at what's happening with our customers. And we talked about this before. When you hear the big banks talk, they have a much fuller view of those high-net-worth customers. They have a view of customers who are not credit eligible that, you know, we don't underwrite.

Speaker Change: And that's where the benefits of having as many consumers as we do that we can monitor through stratification segmentation.

Speaker Change: We do look at what's happening with our consumer.

Speaker Change: About this before when you here I'll say the banner bank stock there they have a much fuller view of those high net worth customers. They have the view of customers were not credit eligible.

Speaker Change: We don't underwrite.

Ralph J. Andretta: So, you know, and you'll hear things from the big networks, and they're giving perspectives on spend overall. What we monitor are things like their payment trends, how many people are making no payment, how many people are making minimum payments, and multiples of minimum payments. So we are starting to see fewer customers at zero pay and more making minimum pay. But, you know, that's something we monitor very carefully. So you do look at on-us payment behaviors and off-us payment behaviors.

Speaker Change: No.

Speaker Change: You'll hear things from the big networks, and Theyre, giving perspectives on spend overall, what we monitor are things like their payment trends. How many people are making no payment. How many people are making men PE multiples of min pay. So we are starting to see fewer customers at zero pay and more making min pay but.

Perry Beberman: What we monitor are things like their payment trends, how many people are making no payment, how many people making mint pay, multiples of mint pay. So we are starting to see fewer customers at zero pay and more making mint pay. But you know that's something we monitor very carefully. So you do look at on us payment behaviors, off us payment behaviors. You know, so I think it's that, so when we say the customer is, I say improving, it's from the result of the credit actions and a little bit of this wage broke that's in place, so.

Speaker Change: That's something we monitor very carefully so you do look at on us payment behaviors off us payment behaviors.

Ralph J. Andretta: You know, so I think it's—when we say the customer is, I'll say, improving, it's as a result of the credit actions and a little bit of this wage growth that's in place. But I don't want to give an indication that, wow, things are improving dramatically. It's stable with modest improvement, and that's what we expect to see in the back part of the year. I mean, for us to guide that we're still going to have 8 percent losses in the back half of the year, that's still, you know, a pretty strained environment for the consumer.

Speaker Change: So I think it's that.

Speaker Change: So when we say the customer is I'll say, improving it's from the result of the credit actions and a little bit of this wage growth that's in place so.

Perry Beberman: I don't want to give an indication that wow, with these things, are improving dramatically; it's stable with modest improvement, and that's what we expect to see in the back part of the year. I mean, for us to guide that we're still going to have 8% losses in the back half of the year. That's still a, you know, a pretty strained environment for the consumer, while improving. It's, you know, going to take a slow, gradual improvement for, you know, to return to our, I'll say, through the cycle target.

Speaker Change: I don't want to give an indication that while things are improving dramatically it's stable.

Speaker Change: With modest improvement and Thats, what we expect to see in the back part of the year I mean for US to guide that we're starting to have 8% losses in the back half of the year, that's still a pretty strained environment for the consumer while improving its.

Ralph J. Andretta: While improving, it's, you know, it's going to take a slow, gradual improvement for, you know, for its return to our, I'll say, through-the-cycle target, your ability to sort of overcome some of the, Maybe if, you know, coming back to the kind of macro issue of the low-end consumer. So, great question.

Speaker Change: You can take a slow gradual improvement for.

Speaker Change: <unk> returned to our I'll say through the cycle targets.

Sanjay Sakhrani: Okay, Grace, I'm going to give you a base case for the case change to the implementation next year. Could you just maybe give us a little bit more detail on how those machinations work, and then how does that affect your ability? I mean, I don't know the terms of it much, but you guys always felt like you can offset them. You can still grow book's value, but I'm just curious on the margins.

Speaker Change: Okay, Great and then.

Speaker Change: Your base case for late he has changed.

Speaker Change: Amortization next year could you just maybe give us a little bit more detail on sort of.

Speaker Change: Those machinations work and then how does that affect.

Speaker Change: <unk> I don't know the terms of that much of an emphasis has always felt like you can offset.

Speaker Change: You can still grow book value, but I'm just curious on the margin what kind of impact does it have the fundamentals on a go forward basis.

Perry Beberman: What kind of impact does it have to the fundamentals on the go forward basis is your ability to sort of overcome some of the impact?

Speaker Change: Our ability to sort of overcome some of the impact.

Perry Beberman: Yeah, so look, the reason why we took it out of our guidance for this year and when we see where things are going right now, you know, the parties involved with the litigation, they're still litigating over where this litigation should be hurt, right? And that now is set for, I think it's August 27th, and that could possibly result in another appeal of the judge's ruling. And this is before the courts actually consider the merit of the lawsuit filed by the industry.

Speaker Change: Yes so.

Speaker Change: Look the reason why we took it out of our guidance for this year and.

Speaker Change: When we see where things are going right now.

Speaker Change: The parties involved with the litigation Theyre still litigating over where this.

Speaker Change: Litigation should be hurt right and that now is set for I think its August 27.

Speaker Change: And that could possibly result in another appeal of the judge's ruling and this is before the courts actually consider the merits of the lawsuit filed by the industry. So that's why we don't think the impact will happen in 2024.

Perry Beberman: So that's why we don't think the impact will happen in 2024. We're not taking that assumption of what that could mean to 2025, but the teams continue to work very closely with all of our brand partners. We've been very thoughtful about the timing of when we roll out changes to consumers for some of the change that we have put in market. We took a half step towards the back part of 2023, some pricing that was already in our guidance. Some of the things that we just put in market around paper statement C and some again further pricing APR increases.

Speaker Change: We're not taking that assumption and what that could mean to 2025, but the teams continue to work very closely with all of our brand partners. We've been very thoughtful about the timing of when we rollout changes the consumer for some of the changes that we have put in the market. We took a I'll say a half step towards the back part of 2002.

Speaker Change: Through some pricing that was already in our guidance.

Speaker Change: Some of the things that we just put in market around paper statement fee and some again further pricing APR increases as you know APR increases take time 18 months to up to three years to fully.

Perry Beberman: As you know, APR increases take time, like 18 months up to three years, to fully get the benefit of that to work through the PNL. And we're also monitoring closely any change in customer behavior, right, because you don't want to have the unintended consequence where it's more than offset the good of what you're trying to get from it. So that's being carefully done, watch. And you know, so the rollout will continue throughout this year. We're assuming the change will go into effect at some point next year. We don't really have our guide on that at this point.

Speaker Change: You get the benefit of that to work through the P&L.

Speaker Change: And we're also monitoring very closely any change in customer behavior right. Because you don't want to have the unintended consequence were more than offset the good of what youre trying to get from it so that's being carefully watched and so.

Speaker Change: So the rollout will continue throughout this year, we're assuming the change.

Speaker Change: Change will go into effect at some point next year, we don't really have a guide on that at this point, but we have the teams working as if it will happen in short order right. After the litigation gets through again, not knowing the outcome of the upcoming elections, and we don't want to speculate on that.

Perry Beberman: So we have the teams working as if it will happen in, you know, short order right after the litigation gets through. Again, not knowing any outcome of the up from the elections that we don't want to speculate on that.

Sanjay Sakhrani: Thank you.

Speaker Change: Thank you.

Speaker Change: Thank you.

Operator: Please stand by for our next question.

Speaker Change: Please standby for our next question.

Moshe Orenbuch: Our next question comes from the line of Moshe or in birch with TD Cohen.

Speaker Change: Our next question comes from the line of Moshe Orenbuch with TD Cowen Your line is open.

Moshe Orenbuch: The line is open. Great. Thanks. And most of my questions have been asked and answered.

Moshe Ari Orenbuch: Great. Thanks.

Speaker Change: Most of my questions have been asked and answered but.

Moshe Orenbuch: But maybe if you know, coming back to the kind of macro issue of the low-end consumer. And, you know, the timing of, you know, kind of rebounding of growth, is there a way to kind of segregate out portions, you know, of your, you know, of your portfolio or if your partners, you know, to think about like what could be, you know, kind of earlier and later in that, you know, how do you, how do you sort of think about that? And, you know, kind of, because we've, we've noticed, you know, kind of low-end furniture type, you know, we're starting to see a little bit of a rebound.

Speaker Change: Maybe.

Speaker Change: Coming back to the kind of macro issue with the low end consumer.

Speaker Change: And.

Speaker Change: The timing.

Speaker Change: Kind of rebounding of growth is there a way to kind of segregate out portions of your.

Speaker Change: Sure.

Speaker Change: Of your portfolio or to your partners.

Speaker Change: Think about like what could be kind of earlier and the leader in that.

Speaker Change: How do you sort of think about that and.

Speaker Change: Because we've noticed.

Speaker Change: Some of the.

Speaker Change: Kind of low end furniture tight we're starting to see a little bit.

Ralph Andretta: So is there a way to kind of talk about, you know, what portions of your portfolio, you know, even where there's been, you know, that pressure, you know, and, you know, when we could start seeing some of the rebound on what pieces.

Speaker Change: Rebound is.

Speaker Change: Is there a way to kind of talk about.

Speaker Change: What portions of your portfolio.

Speaker Change: Even where there has been.

Speaker Change: That pressure.

Speaker Change: And when we could start seeing some of the rebound and on what.

Speaker Change: What pieces.

Ralph Andretta: So, I'd answer that couple was one. We'll answer with regard to, we're going to have a number of tailwinds behind us from a growth standpoint. One thing about general macro improvement, like you said, these consumers start to get wage growth going, inflation comes down, they can free up more discretionary income. That will help the lower and consumer, and wage growth has been more prominent in the lower income brackets than the high income bracket. So, that will be an aid to these consumers.

Speaker Change: So I would answer that a couple of was one will answer with regard to.

Speaker Change: Rebounding growth.

Speaker Change: We're going to have a number of tailwind behind us from a growth standpoint, one thinking about general macro improvement like you said these consumers start to get.

Speaker Change: Wage growth going inflation comes down it can free up more discretionary income that will help to lower end consumer and wage growth has been more prominent in the lower income brackets and the high income bracket. So that will be an aid to these consumers. The second thing that will impact our I'll say loan growth is when we.

Ralph Andretta: The second thing that will, in fact, our loan growth is when we march back down towards, you know, a 6% loss rate versus being, you know, over 8. And you think about the interest and fees issue with that too, that's almost a 3% tailwind as we march back towards that. And then, as the consumers improving, we then unwind some of those credit tightening strides that were in place around lining creases, higher approval rates, and all that will as well be a tailwind to grow. And that's not the; you mentioned what Ralph talked about, the terrific business development team that we have out there that, you know, continue to win opportunistic deals for us.

Speaker Change: Marks back down towards a 6% loss rate versus being over eight and you think about the interest and fees associated with that too that's almost a 3% tailwind as we march back towards that and then as the consumers improving we then unwind some of those credit tightening strives that were in place.

Speaker Change: Around line increases higher approval rates and all of that will as well be a tailwind to growth and thats not the you mentioned that with Ralph talked about the terrific business development team that we have out there that we're continuing to win opportunistic deal for us.

Speaker Change: Got it.

Ralph Andretta: Thanks. Maybe just, you know, kind of think, you know, on that, you know, on that note, you know, as you kind of look out at the, you know, the landscape, do you see opportunities for additional portfolios, either, you know, conversions or, you know, kind of start-up opportunities. And, you know, now that, you know, perhaps the leafy issue is at least on hold for a while, okay, you know, how are the potential partner, you know, what's that channel?

Speaker Change: Thanks.

Speaker Change: Maybe just correcting on that.

Speaker Change: On that note.

Speaker Change: You kind of look out at the <unk>.

Speaker Change: The landscape do you see.

Speaker Change: <unk> for additional portfolios either conversions.

Speaker Change: Conversions or.

Speaker Change: Startup opportunities.

Speaker Change: Now that.

Speaker Change: Perhaps the late fee issue is at least on hold for a while okay.

Speaker Change: How are the potential partner whats that channel.

Ralph Andretta: Yes, Ralph, we do, you know, we, you know, we announced, you know, Saxist Avenue earlier this year, earlier this quarter, really excited about that to get that in, you know, next in the third quarter. And this morning, we just announced HP. So we're excited about that opportunity. It said the noble opportunity for us. And if you look at, you know, HP, we have Del, Sony, and even throw B&H Photo in there. We have a real nice electric, you know, electronics vertical, which we, which we really like. And, you know, the pipeline is always active. You know, our business development team, you know, I'll match up against any; I think it's second to none.

Ralph J. Andretta: Yes, Ralph we do.

Ralph J. Andretta: We announced.

Ralph J. Andretta: Saks Fifth Avenue earlier this year earlier this quarter, we're really excited about that to get that in.

Ralph J. Andretta: Next in the third quarter and this morning, we just announced HP. So we're excited about that opportunity. It's a de novo opportunities for us and if you look at <unk>.

Ralph J. Andretta: HP, we have sale of Sony and even sort of being a photo and there we have a real nice electric electronics vertical, which we which really like in the pipeline is always active.

Ralph J. Andretta: Our business development team all match up against any I think it's second to none and we're always engaged in those those deals that are coming due and also again, what I love about our team, it's up and down the spectrum. So it's the 100 million dollar deals to $1 billion deals we're able to play.

Ralph Andretta: And we're always engaged in those, you know, those deals that are coming through. And also, again, when I love about our team, it's up and down the spectrum. So it's a hundred million dollar deals to the billion dollar deals. We're able to play, you know, very comfortably in that, you know, and with those guidelines. And, you know, they're active and busy. And we certainly see; we win more. We, you know, we win more than all for share as we go forward. Yeah.

Ralph J. Andretta: Comfortably in that.

Ralph J. Andretta: With those guidelines.

Ralph J. Andretta: They are active and busy and we certainly see.

Ralph J. Andretta: We win more.

Speaker Change: More than all for its fair share as we go forward, yes and.

Ralph Andretta: And you asked the question about, you know, with the CFPB happening or not happening. The one thing I think that's common in the marketplace. All of our competitors are, I'll say, pretty rational, right. Sometimes there's something that's strategic that somebody wants to win really badly, and it won't take less or economics. But traditionally, you win based on your capabilities and the partnership, and the CFPB ruling is contemplated in the economics through the discussions, whether the, whether partner somewhere else. They stay where they are. They come to us. It has to be contemplated. And, you know, we are very capital disciplined.

Speaker Change: You've asked a question about with the CFPB happening or not happening. The one thing I think thats common in the marketplace. All of our competitors are I'll say pretty rationale right, sometimes it's something thats strategic that somebody wants to win really badly and that won't take lesser economics, but traditionally you win based on your capabilities.

Ralph J. Andretta: The partnership and the CFPB.

Ralph J. Andretta: Ruling is contemplated in the economics through the discussions whether the weather partner somewhere else if they stay where they are or they come to us. It has to be contemplated and we are very capital disciplined and with the amount of opportunity in front of US. We're also making sure we're selective with who we are signing and that it fits.

Ralph Andretta: And with the amount of opportunity in front of us, we're also making sure we're selective with you. We're signing, and that it fits with our strategic verticals as well as delivering the right capital return for shareholders.

Ralph J. Andretta: With our strategic verticals as well as delivering the right capital return for our shareholders.

Moshe Orenbuch: Great. Thanks very much. Thank you.

Speaker Change: Great. Thanks very much.

Alana Bill Carcache: Please stand back or our next question. Our next question comes from Alana, Bill Carcache with Wolf Research Security, Celana Sopin.

Speaker Change: Thank you.

Speaker Change: Please standby for our next question.

Speaker Change: Our next question comes from the line of <unk> with Wolfe Research Securities. Your line is open.

Alana Bill Carcache: Thanks.

Alana Bill Carcache: Good morning, Ralph and Perry. Following up on your comments about the resiliency of the consumer, there's a view among some that we could see a delayed charge-off effect as customers that are delinquent today and potentially would have charged off by now in a normal cycle have instead been able to avoid charging off because of all the financial support they received during COVID. Is that a risk that you worry about in your portfolio? Great question. I think that dovetails into the question earlier. You're starting to see some of the pressure start to creep up the risk fans.

<unk>: Thanks, Good morning, Ralph Impairing following up on your comments about the resiliency of the consumer there's a view amongst some that we could see a delayed charge offs effect as customers that are delinquent.

Speaker Change: Today potentially would have charged off by now in a normal cycle have instead been able to avoid charging off because of all the financial support they received during COVID-19 is that a risk that you worry about in your portfolio.

Speaker Change: Sure.

Ralph J. Andretta: I think that dovetails into the question earlier. You're starting to see some of the pressure start to creep up the risk bands, and I think that that is something that everybody's watching. Are some of those middle-income Americans starting to feel the pressure that the lower and moderate-income Americans felt last year, right?

Speaker Change: So great question I think that dovetails into the question earlier Youre starting to see.

Speaker Change: Some of the pressure start to creep up the risk bands and I think that that is something that everybody is watching or some of those.

Ralph Andretta: I think that is something that everybody's watching: are some of those middle-income Americans starting to feel the pressure that the lower and moderate-income Americans had felt last year, right? And this has been a thing that we've talked about, I think, for over 18 months, that the stimulus that has built up and the savings that were in place for the lower and moderate-income Americans had been depleted. And those are the people that you see in our portfolio. That's why you're seeing the peak losses come through, because that has already happened. And now we've taken credit actions to make sure we've taken care of the population that we see at risk.

Speaker Change: Middle income Americans, starting to feel the pressure that the lower and moderate income Americans at felt last year right and this has been a theme that we've talked about I think for over 18 months that the stimulus that had built up in the savings that were in place for the lower and moderate income Americans had been depleted and those.

Ralph J. Andretta: And this has been a theme that we've talked about for over 18 months, that the stimulus that had built up and the savings that were in place for lower and moderate-income Americans had been depleted. And those are the people that, when you see our portfolio, that's why you're seeing the peak losses come through, because that has already happened. And now, you know, we've taken steps to make sure we've, you know, taken care of the population that we see at risk.

Speaker Change: Of the people that when you see our portfolio Thats why youre seeing the peak losses come through because that has already happened and now we've taken credit actions to make sure we.

Speaker Change: Taken care of the population that we see at risk, but that's why partly you think theres going to be a a prolong period of time for losses to get all the way back down to the 6% range because the.

Ralph Andretta: But that's why, partly, you think there's going to be a prolonged period of time for losses to get all the way back down to the 6% range because the stress is still there. That's the issue with our economy right now. This prolonged period of high inflation, high interest rates, consumer debt is high. It's impacting folks. So it's a concern, but I don't see it as something where there's going to be this next wave coming through because we're really on top of this. Understood.

Ralph J. Andretta: But I, you know, that's why partly you think there's going to be a prolonged period of time for losses to get all the way back down to the 6% range because, you know, the stress is still there. I mean, that's the issue with our economy right now is this prolonged period of high inflation, high interest rates, consumer debt is high, and it's impacting folks. So it's a concern, but I don't see it as something where there's going to be this next wave coming through because we're really on top of it, you know, where we need to be to start having considerations of other capital opportunities. Very helpful; thank you for taking my questions.

Speaker Change: Distress is still there I mean thats the issue with our economy right. Now is this prolonged period of <unk>.

Speaker Change: High inflation high interest rates consumer debt is high it's impacting folks. So it's a concern, but I don't see it as something where there is going to be a this next wave coming through because we're really on top of this.

Alana Bill Carcache: That's very helpful.

Speaker Change: Understood. That's very helpful and then as a follow up with your CET one now at 13, 8%.

Perry Beberman: And then, as a follow-up with your C21 now at 13.8%, very close to that initial target that you laid out at your investor day, is it reasonable to start modeling buybacks as you crossed that 14% threshold? So what I would say is our first binding constraint is total risk-based capital. And that needs to get above 16%.

Speaker Change: Very close to that initial target that you laid out at your Investor day is it reasonable to start modeling buybacks as you cross that 14% threshold.

Speaker Change: So what I would say is our first binding constraint is total risk based capital and that needs to get above 16%.

Perry Beberman: And then I would share this with you. I think I mentioned this previously, investor day, before I did it. Then we have a last slug of Cecil Faizin that will happen in January 2025, so in the first quarter of 25. And that's 65 basis points. So we've got to care for that, care for the expected growth in the portfolio. And that's when, and then obviously continue to look at our debt stack and other things.

Speaker Change: And then I will share this with you I think I had mentioned this.

Speaker Change: Previously at Investor day, but if identity.

Speaker Change: We have a left.

Speaker Change: Slug of.

Speaker Change: Seasonal phasing that will happen in January 2025, so in the first quarter 'twenty, five and Thats 65 basis points. So we've got to.

Speaker Change: Care for that tier.

Speaker Change: For the expected growth in the portfolio and.

Speaker Change: And Thats when and then obviously continue to.

Speaker Change: Look at our debt stack and other things, but I.

Perry Beberman: But I think that's when you start to think about where we need to be, start having considerations of other capital opportunities.

Speaker Change: I think that's when you start to think about.

Speaker Change: Where we need to be to start having considerations of other capital opportunities.

Alana Bill Carcache: Very helpful.

Alana Bill Carcache: Thank you for taking my questions.

Speaker Change: Very helpful. Thank you for taking my questions.

Operator: Thank you.

Speaker Change: Thank you.

Vincent Caintic: Please stand by for our next question.

Speaker Change: Please standby for our next question.

Vincent Caintic: Our next question comes from the line of Vincent Canesick with BTRG.

Speaker Change: Our next question comes from the line of Vincent <unk> with <unk>. Your line is open.

Vincent Caintic: Your line is up. Hey, good morning. Thanks for taking my question.

Vincent Albert Caintic: Hey, good morning. Thanks for taking my question first question want to focus on NIM and specifically the loan yield.

Perry Beberman: First question, I want to focus on Nim and specifically the Loneal. So, understanding that the Loneal was down quarter or quarter due to seasonality, but I wanted to get a sense of how much you've been able to add price as they see a few big mitigants. So I was wondering if there's a way to maybe separate out the seasonality versus the pricing you've been able to put in. And then separately, there's any other impacts. So, for instance, the tightening credit underwriting, if that's maybe pushing you upmark and therefore having a lower price. Thank you. Yeah, you know, Nim, you know, the 18% is quarter, you being down 70 basis points, link quarter.

Speaker Change: So understanding that the loan yield was down quarter over quarter due to seasonality, but.

Speaker Change: I wanted to get a sense of how much you've been able to add price. So you CFPB mitigate so I was wondering if there's a way to to maybe separate out the seasonality versus two.

Perry S. Beberman: Thank you. CFPB Midicant, so I was wondering if there's a way to separate out the seasonality and pricing you've been able to put in. And then separately, if there's any other impacts. Payton Credit, pushing you up, Mark, in the list of Better Losses for the quarter. Just wondering if, on your expectations for the third quarter and fourth quarter, you will execute on the guidance for the third and fourth quarter lawsuits. So, what I would expect to have happen is, well, pleased that the reserve rate came down this quarter.

Speaker Change #109: The pricing <unk> been able to put in and then separately if theres any other impacts so for instance, the tightened credit.

Speaker Change: Underwriting if thats.

Speaker Change #101: Maybe pushing you up market and therefore, having a lower price. Thank you.

Speaker Change: Yes.

Speaker Change: NIM.

Speaker Change: The 18% this quarter being down 70 basis points linked quarter.

Perry Beberman: You know, that was really pressured from the sequentially higher reversal of interest and fees. And as well as not the link with these improving coupled with a mix in the book as we're, you know, booking fewer private label cards that kind of have some more late fees. We're seeing a little bit lower yield from those. So that's a result of, you know, having a little bit of a better early stage to link with these.

Speaker Change: It was really pressured from the sequentially higher reversal of interest and fees.

Speaker Change: As well as not delinquencies improving coupled with a mix in the book as we were booking fewer private label cards that tend to have some more late fees, we're seeing a little bit lower.

Speaker Change: Yield from those so that's the result of having a little bit better early stage delinquencies and so you should expect.

Perry Beberman: And so you should expect the net interest margin to come back up in the third quarter seasonally, also aided by lower reversal of interest and fees in the third quarter as you have a meaningful reduction in losses. As it relates to your question on how much of the mitigation, you know, mitigation action APRs are built through. Again, it takes a long time for APR changes to burn into that full rate yield. And, you know, we've been really consistent on saying that, you know, I put that chart together, I think over a year ago to illustrate how long that can take.

Speaker Change: Net interest margin to come back up in the <unk>.

Speaker Change: Third quarter.

Speaker Change: Seasonal.

Speaker Change: Also aided by lower reversal of interest and fees in the third quarter as you will have a meaningful reduction in losses.

Speaker Change: As it relates to your question on how much of the mitigation fraud mitigation.

Speaker Change: Mitigation action the APR is a bill through.

Speaker Change: Again, it takes a long time for APR changes to burn into that full rate yield and we've been really consistent on saying that I put that chart together I think over a year ago to illustrate how long that can take in.

Perry Beberman: And so it's not a meaningful impact in this quarter; it'll just continue to slowly, steadily, you know, impact the improving loan yield. But then you also have, like I mentioned earlier, risk mix changes, product mix changes, and you could have, you know, lower interest rate environment at some point.

Speaker Change: So it's not a meaningful impact in this quarter. It will just continue to slowly steadily.

Speaker Change: Impact improving loan yield, but then you also have like I mentioned earlier risk mix changes product mix changes and you could have lower interest.

Speaker Change: Crist rate environment at some point.

Vincent Caintic: Okay, that's helpful. Thank you.

Speaker Change: Okay. That's helpful. Thank you.

Perry Beberman: And then second question, just on the credit reserve. So it was nice seeing the credit reserves drop this quarter alongside the execution on better credit, the better losses for the quarter. Just wondering if, for your expectations for third quarter and fourth quarter, is your expectations for the full year built into the credit reserve. So we should just expect credit reserves to sort of say stable at this rate going forward or as time goes on and you're actually able to you execute on the guidance for the third and fourth quarter and loss rate. We should be expecting that credit reserve to continue to come down.

Speaker Change #103: Second question just on the credit reserve so it was nice seeing.

Speaker Change #106: The credit reserves dropped this quarter alongside the execution on a better credit.

Speaker Change #110: Better losses for the quarter, just wondering for your expectations for the third quarter and fourth quarter.

Speaker Change: <unk>.

Speaker Change #111: Is your expectations for the full year built into the credit reserves. So we should just expect credit reserves as sort of stable at this rate going forward or as time goes on and you are actually able to execute.

Speaker Change #105: Execute on the guidance for the third and fourth quarter loss rate, we should be expecting that credit reserve to continue to come down. Thank you.

Perry Beberman: Thank you. So what I would expect to have happened is please that the reserve rate came down this quarter was funny because we had, you know, prior questions, the ever see a point where you could have peak losses and have a reduction in your reserve rate and it just happens that yes, we can and we did. Right this quarter we had peak losses and we have a reserve rate coming down. And that's a reflection of the better credit quality and the latency that's in the current portfolio. So, as the year goes on, if everything holds steady, I expect they will have a seasonal drop in the fourth quarter.

Speaker Change #104: So what I would expect to have happen is.

Speaker Change #108: Pleased that the reserve rate came down this quarter. It was funny because we had.

Perry S. Beberman: It was funny because we had, you know, prior questions. Do you ever see a point where you could have peak losses and have a reduction in your reserve rate? And it just happens that, yes, we can, and we did, right?

Speaker Change #100: Prior questions do you ever see a point, where you could have peak losses and have a reduction in your reserve rate and it just happens that yes, we can and we did this quarter, we hit the peak losses, and we have a reserve rate coming down and that's a reflection of the better credit quality and delinquency that's in the current portfolio.

Perry S. Beberman: This quarter we had peak losses, and we have our reserve rate coming down, and that's a reflection of the better credit quality and delinquency that's in the current portfolio. So as the year goes on, if everything holds steady, you know, I expect that we'll have a seasonal drop in the fourth quarter. And that's, again, why we have confidence that at the end of this year, we'll have a lower reserve rate than where we exited 2023.

Speaker Change #100: So as the year goes on if everything holds steady I expect they will have the seasonal drop in the fourth quarter and that's again why we've got confidence at the end of this year, we'll have a lower reserve rate than where we exited 2023, but I do expect a pretty stable reserve rate not.

Perry Beberman: And that's again, why we get confidence that the end of this year will have a lower reserve rate than where we exited 2023. But I do expect a pretty stable reserve rate, not expecting, you know, sharp declines in the reserve rate consistent with what we said. We expect a slow, steady improvement in the portfolio quality over time. I would expect something similar with the reserve rate over time. And the other part of this is, I mentioned it in the prepared remarks. Our weightings of adverse scenarios remained unchanged at this point. So the change from last quarter to this quarter is solely due to the improving credit quality in time, as we have more confidence in a more benign economic outlook. Those can get unwound, but that will be much further down the road.

Perry S. Beberman: But I do expect a pretty stable reserve rate; not expecting, you know, sharp declines in the reserve rate consistent with what we've said. We expect a slow, steady improvement in portfolio quality over time. Yeah, I would expect something similar with the reserve rate over time. And the other part of this is, you see deposit pricing come down some. We, I think we actually were in the market recently with a small reduction in some of the deposit pricing.

Speaker Change #100: Sharp declines in the reserve rate consistent with what we said, we expect a slow steady improvement in the portfolio quality overtime I would expect something similar with the reserve rate over time and the other part of this is.

Speaker Change #100: I mentioned it in the prepared remarks, our weightings of adverse scenarios remained unchanged at this point. So the change from last quarter. This quarter is solely due to the improving credit quality in time as we have more confidence in a more benign economic outlook those can get unwound.

Speaker Change #100: But that will be.

Speaker Change #100: Much further down the road.

Perry Beberman: Thank you. Okay, great. Very helpful. Thanks very much.

Speaker Change #116: Okay, great very helpful. Thanks, so much.

Vincent Caintic: Thank you.

Speaker Change #121: Thank you.

Operator: Please stand by for our next question.

Speaker Change #100: Please standby for our next question.

John Pancari: Our next question comes from the line of John Pancari with Evacule ISF, Yelena Soltis.

John Hecht: Our next question comes from the line of John <unk> with Evercore ISI. Your line is open.

John Pancari: Good morning. On the late, the side again, I know you removed it from your outlook. I guess just as it is, from what you're seeing in terms of the expected impacts, has the expected impact to revenue from the late, you know, any of those expectations that they changed it all. And as well as the magnitude of the offset that you expect, anything behind the scenes, has it changed at all in terms of the expected impact aside from, I know your efforts to dial in the pricing changes, et cetera.

John Hecht: Good morning, all.

Speaker Change #100: The.

John Hecht: Late fee side again, I know you removed from your outlook I guess just as it is from what you're seeing in terms of the expected impact has the expected impact to revenue from the late fee.

Speaker Change #112: Any of those expectations have they changed at all.

John Hecht: And.

Speaker Change #115: As well as the magnitude of the offsets that you expect anything behind the scene has it changed at all in terms of the expected impact aside from I know your efforts to dial in the pricing changes et cetera.

Perry Beberman: Well, I wouldn't say that anything's changed in terms of our approach or the strategies, right? I mean, these; it's unfortunate. I mean, this is what happens when you get, you know, regular making changes, probably not fully understanding the impact of what this would mean to all consumers. You know, we are moving forward with higher APRs for everyone. You know, we've introduced other fees as other policy changes that are in place. You know, we put the, you know, say the paper statement fee, and there's not something that, you know, we necessarily thought, you know, I say the normal course of action would have done.

Speaker Change #114: No I wouldn't say that anything's changed in terms of.

Speaker Change #120: Our approach or the strategies right I mean, these it's unfortunate I mean this is what happens when you get <unk>.

Speaker Change #113: We are making changes probably not fully understanding the impact of what this would mean to all consumers.

Speaker Change #113: We are moving forward with higher APR for everyone.

Speaker Change #113: We've introduced other fees as other policy changes that are in place.

Speaker Change #113: We put the I'll say the paper statement fee and there is not something that we necessarily target.

Speaker Change #113: I'll say in a normal course of action, we would've done were not for the CFPB, making this rule change, but we are rolling that out I'll say thoughtfully and watching the changing consumer behavior as it relates to APR for private label and things like that we're not seeing any change in behavior, what we're seeing with the payer.

Perry Beberman: We're not for the CFPB making this rule change, but we are, you know, rolling that out. I'll say thoughtfully and watching the changing behavior as it relates to APRs or private label and things like that, we're not seeing any change in behavior. What we are seeing, you know, with the paper statement fee, as you would expect, many are docked into go, opt into go digitally, which will benefit our expenses over time, which was great because we have a, you know, real nice opportunity to drive people to 100% digital engagement. So I'd say everything that is happening right now is happening as expected.

Speaker Change #113: For statements easy as you would expect many are adopting <unk>.

Speaker Change #113: Opt into a digitally which will benefit our expenses overtime, which was great. Because we have a real nice opportunities that would drive people to over 100% digital engagement. So I'd say everything that is happening right now is happening as expected.

John Pancari: Okay, thanks. That's helpful.

Speaker Change #122: Okay. Thanks.

Perry Beberman: And then separately on the funding side, I know you indicated deposit cost stabilizing. Yeah, so, you know, we've got our direct customer deposits sitting at about 40% of our total funding. We've communicated our goal is to get to 50% of our funding from direct-to-consumer deposits and expect that, you know, each quarter here out will continue to grow thoughtfully with that. You know, our pricing, because of the way, you know, we are structured, you know, we don't have brick and mortar and all this and you know checking accounts. We are comfortable being towards the top of the league table as you see deposit pricing come down some. You know, we actually were just in market recently with a small reduction in some of the deposit.

Speaker Change #117: Helpful. And then separately on the funding side I know you indicated deposit costs stabilizing could you give us a little bit more color, there, what youre seeing or able to.

Speaker Change #119: See the.

Speaker Change #118: I guess your expectation of the trajectory here on deposit cost and maybe if you could just comment a little bit on how you expect deposit growth to progress in coming quarters.

Speaker Change #129: Yes, so we've got our direct to consumer deposits sitting at about 40% of our total funding. We've communicated our goal is to get to 50% of our funding from direct to consumer deposits and expect that each quarter here out will continue to grow thoughtfully with that.

Speaker Change #118: Yeah.

Speaker Change #137: Our pricing because of the way we are structured.

Speaker Change #125: Brick and mortar and all this and you wont have checking accounts were.

Speaker Change #118: Comfortable being towards the top of the league table.

Speaker Change #117: As.

Speaker Change #117: You see deposit pricing come down some.

Speaker Change #117: We exited just in market Ah recently with a small reduction in some of the deposit pricing. So we're monitoring it we are very actively monitoring make sure that we're getting the growth in deposits that we expect and.

Perry Beberman: So we're monitoring it. We're very actively monitoring; make sure that we're getting the growth and deposits that we expect. And so I expect is, you know, it's pretty stable right now. But, you know, if there's sharp declines, you know, and Fed funds and the market moves, we will be prepared to, you know, move appropriately, but making sure that we are where we want to be positioned to keep attracting deposit.

Perry S. Beberman: So we're monitoring it; we're very actively monitoring to make sure that we're getting the growth in deposits that we expect. And so I expect, you know, it's pretty stable right now. But, you know, if there's sharp declines in Fed funds and the market moves, we'll be prepared to, you know, move appropriately but make sure that we are where we want to be positioned to keep attracting deposits. Please stand by for our next question. Our next question comes from the line of Terry Ma with Barclays. Your line is open. Thanks. Good morning.

Speaker Change #117: I expect a pretty stable right now, but if theres sharp declines.

Speaker Change #117: Fed funds in the market moves, we'll be prepared to move appropriately, but making sure that we are where we want to be positioned to keep attracting deposits.

John Pancari: Okay, Gary, thank you. Thank you.

Speaker Change #127: Okay, great. Thank you.

Lisa: Thank you Lisa.

Terry MA: Please stand by for our next question. Our next question comes from the line of Terry Ma with Barclays.

Speaker Change #124: Ladies sandbox around next question.

Speaker Change #133: Our next question comes from the line of Terry MA with Barclays. Your line is open.

Terry MA: Your line is open. Hey, thanks.

Terry MA: I think you indicated, Can you maybe just talk about how the pricing act... And then on the reserve rate being lower as you exit this year compared to last year? Great, thank you. Please stand by for our next question. When I look at the model, I guess the processing costs were down sequentially. Definitely lower than we had expected. You called out, I guess, some efficiencies there. What's driving that?

Terry MA: Good morning. I think you indicated you don't expect much incremental revenue from the mitigation actions this year. I'm keen maybe to just talk about how the pricing actions and the incremental fees are progressing and when you would expect more meaningful contribution from those measures. Yeah, I think when it wedges in, it's the best way to say it, right? So every month that goes by, more and more of the portfolio spend bond or balance will be subject to the higher APRs. And that just takes time. And I just point you to the chart that put out there as an illustration previously gives you an idea of where are you 12 months after that.

Tammy Michelle Mcconnaughey: Hey, Thanks, Good morning, I think you indicated.

Tammy Michelle Mcconnaughey: You don't expect much incremental revenue from the mitigation actions. This year can you maybe just talk about how the pricing actions and the incremental fees or.

Speaker Change #131: We are progressing and when you would expect more meaningful contribution from.

Speaker Change #130: From those measures.

Speaker Change #134: Yes, I think.

Speaker Change #126: Wedges in is the best way to say it right. So every month that goes by.

Speaker Change #126: More and more of the portfolio spend volume or balance will be subject to the higher APR and that just takes time and I.

Tammy Michelle Mcconnaughey: I'll just point you to the chart that I put out there as an illustration previously gives you an idea of where are you 12 months after that and so you are only partway through the benefit of full 12 months. After the fact that you've increased the APR.

Perry Beberman: And so you're only partway through the benefit of 12 months after the fact that you increase the APRs. Paper statement fees; it's not a large amount in the, you know, say, certainly not this upcoming quarter. As we get into next year, it'll become a more meaningful amount. But even then, the expectations, we're going to have a lot more customers. You know, don't pay for us in digital, other policy change that we have and waiver policies, other things, all those are going to go into effect.

Tammy Michelle Mcconnaughey: Paper statement fees, it's not a large amount in the I'll say certainly not this upcoming quarter as we get into next year. It will become a more meaningful amount, but even then the expectations, we're going to have a lot more customers.

Tammy Michelle Mcconnaughey: Gone paperless and digital other policies policy change that we have and waiver policies. Other things all of those are going to go into effect in some of this.

Perry Beberman: And some of this, you know, I probably was remiss in saying this earlier, if I didn't, is we're not trying to put these actions in place to a creek, a ton of revenue in the near term, you know, while we wait for resolution on the litigation. We're trying to very thoughtfully with our brand partners, time to roll out of these things so that we're not doing anything detrimental to the consumer before something like the late few drop goes in. And if we do have to put some things in place earlier, as we are, there may be a point where, you know, there's some consideration of investing more back into the program, you know, in consideration with that brand partner.

Tammy Michelle Mcconnaughey: Probably was remiss in saying this earlier by then it is we're not trying to put these actions in place too.

Tammy Michelle Mcconnaughey: A ton of revenue in the near term while.

Speaker Change #136: While we wait for resolution on the litigation, we're trying to do is very thoughtfully with our brand partners time. The rollout of these of these things so that we're not doing anything detrimental to the consumer.

Speaker Change #136: For something like the late fee dropped goes in and if we do practically some things in place earlier, whereas we are there may be a point, where there is some consideration of investing more in back into the program.

Speaker Change #136: Consideration with that brand partner.

Terry MA: That's helpful.

Speaker Change #132: Got it that's helpful and then on the reserve rate being lower as you exit this year compared to last year.

Perry Beberman: And then on the reserve rate being lower, as you exit this year compared to last year, I think another peer had initially message that earlier this year, but it's now indicating kind of like a flat reserve ratio year, so maybe just speak to your confidence and confidence in the macro and the performance year portfolio to take that reserve rate lower at the end of this year. Yeah, what I say is that, look, I can't speak to everyone else's models, right, but industry-wide, you know, we're hearing something, normalization, season of recent, um, ventages, consumer pressure, you know, we're creeping up into different risk scores, seems to be a thing for them.

Speaker Change #150: I think another peer had initially messages that earlier this year a bit is now indicating kind.

Speaker Change #135: Kind of like a flat reserve ratio year over year. So maybe just speak to your confidence and confidence in the macro and the performance of your portfolio to take that reserve rate lowered this at the end of this year.

Tammy Michelle Mcconnaughey: Yes.

Speaker Change #143: I would say is that look I can't speak to everyone else's models, right, but industry wide.

Speaker Change #138: We are hearing anything normalization and seasoning of recent.

Tammy Michelle Mcconnaughey: Vintages consumer pressure, we're creeping up into different risk score seems to be a theme for them now what I remind you of is that we moved our reserve rate up earlier than others based on anticipated impacts to our customers of high inflation.

Perry Beberman: Now, you know, what I remind you of is that we moved our reserve rate up earlier than others based on anticipated impacts to our customers of high inflation and approved to be the right, you know, action, you know, as we've had a stable reserve rate for over six quarters.

Tammy Michelle Mcconnaughey: And it proved to be the rate action as we have.

Tammy Michelle Mcconnaughey: Had a stable reserve rate for over six quarters.

Perry Beberman: So based on the expected stable and slightly improving macro conditions, our improved credit quality and resultant delinquency should allow for modest reductions of our reserve rate over time. You know, again, with fourth quarter having the normal season reduction before the first quarter, you know, increases back up a little bit. But, you know, that's what we're expecting to see and we feel very confident in our process. We were, and we use the term conservative; I'd call it just prudent, right? You know, we have a very experienced team of people at this company who've been through different macro environments, and, you know, we knew to get ahead of this thing early and anticipating what inflation can mean to our customers.

Tammy Michelle Mcconnaughey: Based on the expected stable or slightly improving macro conditions, our improved credit quality and result in delinquencies should allow for modest reductions of our reserve rate over time.

Tammy Michelle Mcconnaughey: Again with fourth quarter, having a normal seasonal.

Tammy Michelle Mcconnaughey: Reduction before the first quarter increases back up a little bit, but that's what we're expecting to see and we feel very confident in our process. We were and we use the term conservative I apologize prudent right.

Tammy Michelle Mcconnaughey: We have a very experienced team of people at this company, who have been through different macro environments.

Tammy Michelle Mcconnaughey: And we knew to get ahead of this thing early.

Tammy Michelle Mcconnaughey: And anticipating what inflation can mean to our customers now others didn't increase their reserve rates to the degree we did and now they're continuing to see pressure maybe.

Perry Beberman: Now, others didn't increase their reserve rates to the degree we did, and now they're continuing to see pressure. Maybe, you know, they need to get to where a different spot than where we are, but we feel very confident with where we are and confident in the guidance that we're giving.

Tammy Michelle Mcconnaughey: They need to get to where different spot than where we are but we feel very confident with where we are and confident in the guidance that we're giving.

Terry MA: Great.

Terry MA: Thank you.

Speaker Change #146: Great. Thank you helpful.

Operator: Helpful.

Operator: Thank you.

Tammy Michelle Mcconnaughey: Thank you.

Reggie Smith: Please stand by for our next question. Our next question comes from the line of Reggie Smith with JPM.

Speaker Change #139: Please standby for our next question.

Speaker Change #148: Our next question comes from the line of Reggie Smith with J P. M. Your line is open.

Reggie Smith: Your line is open.

Reggie Smith: Hey, good morning. I guess real quick. Can you remind us what proportion of your portfolio has been, or you've been able to kind of implement or had the partner agree to some of your mitigation efforts and then have it through follow-up. Thank you. We have not given a proportion of the portfolio, but I would tell you that conversations have happened with a hundred percent of the brand partners. And, as we had talked about previously, each brand partner is unique. Some are opting for APRs, some are in promo fees, some of the competencies of this, others may introduce other fees for credit, some are changing, some are all agreements, serving strategy.

Reginald Lawrence Smith: Hey, good morning.

Reginald Lawrence Smith: I guess real quick can you remind us.

Reginald Lawrence Smith: What proportion of your portfolio.

Speaker Change #140: Has been <unk> been able to kind of implement or had the partner agreed to.

Speaker Change #154: Some of these mitigation efforts.

Speaker Change #153: Then I have a few follow ups. Thank you.

Speaker Change #149: Yes, we have not given a proportion of the portfolio, but I would tell you that conversations have happened with 100% of the brand partners.

Speaker Change #140: And as we had talked about previously each brand partner.

Speaker Change #144: These unique.

Speaker Change #144: Some are opting for APR or somewhere in promo feed some of the combination of this others may introduce other fees for.

Speaker Change #144: For credit.

Speaker Change #144: Some are changing.

Speaker Change #144: All agreements serving strategy. So I mean, there's a lot that goes into these things and others.

Perry Beberman: So, I mean, there's a lot that goes into these things, and others have to discuss partner compensation changes with different revenue share things. So again, our commercial team is very active with all of the partners. And as I mentioned earlier, that's why you're, you know, use the word thoughtful rollout of these strategies. I guess with that said, I would imagine that right now, given the uncertainty, that I guess any agreement that hasn't been struck is probably on hold until we get more clarity. I don't know if I would use the word "on hold." I said they're all progressing and in a state of readiness to take appropriate action.

Speaker Change #144: Discussing partner compensation changes with different revenue share things so.

Speaker Change #144: Again, our commercial team is very active with all of the partners and as I mentioned earlier, that's why I used the word thoughtful rollout of these strategies.

Speaker Change #145: Alright, and I guess.

Speaker Change #141: With that said I would imagine that right now given your uncertainty that I guess any agreement that hasnt been stripe is probably on hold until we get more clarity.

Speaker Change #163: I don't know if I would use the word on hold I.

Speaker Change #156: I'd say, they're all progressing and in a state of readiness to to take appropriate action.

Perry Beberman: I mean, look, time is our friend. This is called that what it is, right? Every month that goes by and delays, you know, our company's been stronger and stronger from a capital standpoint. The macro environment's improving; you know, we're in a better state of readiness for whatever we have to do systemically from a technology side to implement product changes. So, you know, we're feeling very good about our ability to get strong returns. You know, should a regulatory change be put in place? That makes sense.

Speaker Change #161: Time is our friend, let's just call that what it is right every month that goes by and delays are companies getting stronger and stronger from a capital standpoint, the macro environment is improving we're in a better state of readiness for whatever we have to do systemically from a technology side to implement product changes.

Speaker Change #141: No.

Speaker Change #141: We're feeling very good about our ability to get strong returns.

Speaker Change #141: Good.

Speaker Change #141: A regulatory change you put in place.

Speaker Change #152: Got it that makes sense and then.

Perry Beberman: And then, if I could ask, you know, look at the model. I guess the processing costs were down sequentially definitely low and we expected. You called out, I guess, some efficiencies there. What's driving that? Is that the Pfizer deal and how sustainable is that, you know, kind of roommate that we have there? Yeah. So, as it is staying up with the expenses, we're at a, I say, probably a low point for the year, right? We've had benefits. Our fraud team has done an amazing job, you know, getting fraud strides in place to tighten things down.

Speaker Change #147: If I could add.

Speaker Change #155: When I look at the model I guess the processing costs were down sequentially definitely lower than we had expected and you called out I guess, some some efficiencies there.

Perry S. Beberman: Is that the Fiserv deal and how sustainable is that, you know, the kind of run rate that we have? Yeah, so as it is, you know, with the expenses, we're at, I'd say, probably a low point for the year, right? We've had benefits for years and years. Our fraud team has done an amazing job, you know, getting fraud strategies in place to tighten things down. The whole industry experienced some fraud attacks last year.

Speaker Change #160: Whats driving that.

Speaker Change #159: <unk> deal and how sustainable is that kind of run rate that we have there.

Speaker Change #151: Yes, so as it is with the expenses were at a I'd say, probably a low point for the year we've had benefits.

Speaker Change #157: And our fraud team has done an amazing job.

Speaker Change #157: Getting fraud strategies in place to tightened things down the whole industry experienced.

Perry Beberman: The whole industry experienced, you know, some fraud attacks last year. Now, I think most industries got on control, and our team certainly does. We're going to see an increase in expenses in the third quarter because you've got facts coming online, right? So, that's a portfolio purchase for servicing, and the cost involved with getting that up and going. As well, you're going to see an increase in marketing; sequential marketing, it's going to have about $10 million in the third quarter. And then in the fourth quarter, expenses will rise again from there because fourth quarter is always sequentially higher for us as a result of, again, further increases in marketing for the holiday seasons, as well as our employee benefits costs are seasonally higher in that quarter.

Speaker Change #147: Some.

Speaker Change #147: The fraud attacks last year now.

Perry S. Beberman: Now, I think most industries have it under control, and our team certainly does. We're going to see an increase in expenses in the third quarter because you've got SACs coming online, right? So that's a portfolio purchase for servicing and the costs involved with getting that up and going. As well, you're going to see an increase in marketing; sequential marketing is going to be up about $10 million in the third quarter. And then in the fourth quarter, expenses will rise again from there because the fourth quarter is always sequentially higher for us as a result of, again, further increases in marketing for the holiday seasons, as well as our employee benefits costs being seasonally higher in that quarter.

Speaker Change #147: The industry has got it under control and our team certainly does we're going to see an increase in expenses in the third quarter, because you've got <unk> coming online right. So that's a portfolio purchase for servicing and the cost involved with getting that up and going as well youre going to see an increase in marketing sequential marketing is going up about $10 million in the third.

Speaker Change #147: And then in the fourth quarter expenses will rise again from there because fourth quarter is always sequentially higher for us as a result of again further increases in marketing for the holiday seasons as well as our employee benefit costs are seasonally higher in that quarter.

Reggie Smith: Got it. Perfect. Thank you.

Perry S. Beberman: Got it. Perfect. Well, a couple of thank yous first. Thank you, Perry, for fielding all the questions today. I appreciate that very much. And thank you to all of you for your continued interest in bread. We look forward to talking to you again in the next quarter, and everybody have a terrific day. Take care now.

Speaker Change #164: Got it perfect. Thank you.

Operator: Ladies and gentlemen, I'm showing no further questions in the queue.

Speaker Change #158: Thank you.

Speaker Change #147: Ladies and gentlemen, im showing no further questions in the queue I would now like to turn the call back over to Ralph <unk> for closing remarks.

Ralph Andretta: I would now like to turn the call back over to Ralph Andretta for closing remarks. Sure, well, a couple of thank yous for thank you to Perry for fueling all the questions today. I appreciate that very much, and thank you to all of you for your continued interest in bread.

Ralph: Sure well a couple of thank yous first secular perrier fulfilling all the questions today I appreciate that very much and thank you to all of you for your continued interest in bread. We all look forward to you talking to you again in the <unk>.

Ralph Andretta: We look forward to you to talk to you again in the next quarter, and everybody have a terrific day. Take care now.

Ralph: In the next quarter and everybody have a terrific day take care now.

Operator: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation.

Speaker Change #165: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation you may now disconnect.

Operator: You may now disconnect. Thank you.

Speaker Change #165: [music].

Ralph: Okay.

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Speaker Change #147: Okay.

Perry S. Beberman: [music].

Perry S. Beberman: Yes.

Perry S. Beberman: [music].

Perry S. Beberman: Yes.

Perry S. Beberman: [music].

Perry S. Beberman: Thanks.

Perry S. Beberman: [music].

Perry S. Beberman: Okay.

Perry S. Beberman: Sure.

Perry S. Beberman: Sure.

Perry S. Beberman: Yes.

Perry S. Beberman: Yes.

Perry S. Beberman: [music].

Perry S. Beberman: Okay.

Perry S. Beberman: [music].

Perry S. Beberman: Sure.

Perry S. Beberman: Yes.

Perry S. Beberman: Okay.

Perry S. Beberman: [music].

Perry S. Beberman: [music].

Perry S. Beberman: Yes.

Perry S. Beberman: Okay.

Perry S. Beberman: [music].

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: Sure.

Perry S. Beberman: Yes.

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: [music].

Perry S. Beberman: Yes.

Perry S. Beberman: [music].

Perry S. Beberman: Yes.

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: [music].

Perry S. Beberman: Okay.

Perry S. Beberman: Yes.

Perry S. Beberman: [music].

Perry S. Beberman: Yes.

Perry S. Beberman: Okay.

Perry S. Beberman: Sure.

Perry S. Beberman: Okay.

Perry S. Beberman: Sure.

Perry S. Beberman: Yes.

Perry S. Beberman: [music].

Perry S. Beberman: Sure.

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Speaker Change: Thank you.

Perry S. Beberman: Yes.

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: Sure.

Perry S. Beberman: [music].

Perry S. Beberman: Yes.

Perry S. Beberman: Yes.

Perry S. Beberman: [music].

Perry S. Beberman: Yes.

Perry S. Beberman: Thanks.

Perry S. Beberman: Okay.

Perry S. Beberman: Yes.

Perry S. Beberman: Okay.

Perry S. Beberman: Yes.

Perry S. Beberman: Yes.

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: [music].

Perry S. Beberman: Okay.

Perry S. Beberman: Okay.

Perry S. Beberman: Yes.

Perry S. Beberman: Yes.