Bread Financial Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
October 26, 2023

There are 12 speakers on the call.

Operator

Good morning, and welcome to the Brett Financial Third Quarter Earnings Conference Call. My name is Bruno, and I'll be coordinating your call today. At this time, all parties have been placed on a listen only mode. Following today's presentation, the floor will open for your questions. It is now my pleasure to introduce Mr.

Operator

Brian Ferab, Head of Investor Relations at Bright Financial. The floor is

Speaker 1

yours. Thank you, Bruno. Copies of the slides we will be reviewing in the earnings release can be found on the Investor Relations section of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Bread Financial and Perry Biberman, Executive Vice President and Chief Financial Officer of Bread Financial. Before we begin, I would like to remind you that Some of the comments made on today's call, some of the responses to your questions may contain forward looking statements.

Speaker 1

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 will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website atbreadfinancial.com. With that, I would like to turn the call over to Ralph Andretta.

Speaker 2

Thank you, Brian, and good morning to everyone joining the call. Starting with slide 3, Brett Financial's business model, which features an industry leading risk Adjusted yield, conservative reserves, strong capital positioning is built to consistently perform well through the full cycle. Our 3rd quarter results, which include net income of $171,000,000 and a 25% return on equity, Demonstrate our continued financial resilience despite losses above our through the cycle average in this current more challenging macroeconomic environment. Funded by strong cash flows for operations, we completed our authorized $35,000,000 share repurchase in the quarter, Which represented 935,000 shares. Additionally, we continue to deliver on our commitment to build long term shareholder value As tangible book value per share exceeded $42 nearly triple the level compared To the Q1 of 2020 when I joined the company.

Speaker 2

During the quarter, we launched Ross Dress for Less, the largest off price apparel Also at the beginning of October, we successfully closed on Dell Technologies Consumer Credit portfolio purchased of approximately $400,000,000 and simultaneously launched the Dell program, which includes a broad suite of payment solutions and expands our position in the consumer electronics market. Through our industry expertise, technology and data and analytic capabilities, we are well positioned to drive value for both our new and existing partners. The economic environment remains challenging, and consumers contend with numerous headwinds, including The compounding effect of persistent inflation relative to wage growth, high interest rates, the resumption of student loan payments and gas volatility. Broadly speaking, these factors are weighing on consumers and in part led to the reduction in our credit sales in the 3rd quarter, particularly within our retail and home industry verticals. For moderate to low income Americans who have depleted much of their excess pandemic era savings, We noted a reduction in travel and entertainment spending as these consumers focus more on non discretionary purchases.

Speaker 2

By contrast, Higher income consumers have continued to spend on health, beauty and experiences. Prime and super prime cardholders remain resilient and are spending approximately the same amount as they did last year. However, as evidenced by many retailers' updated financial outlooks, Economic pressures are expected to continue to manifest in terms of softer sales in the 4th quarter. Given the ongoing macroeconomic stresses faced by many consumers, we have continued to responsibly tighten our underwriting and credit line management. We proactively manage our exposure by tightening approval rates, pausing line increases and implementing line decreases where prudent.

Speaker 2

While these adjustments limit sales and loan growth, we see these as the right actions to support improved credit performance over time. We remain focused on responsible growth and we'll continue to manage underwriting to meet our risk return thresholds. From a regulatory perspective, we are developing mitigation strategies in anticipation of the CFPB's final rule on credit card late fees, Which would have significant impact on our business if unmitigated. We actively engage with our brand partners regarding possible outcomes and strategies, Having effectively managed through significant regulatory changes and varied credit cycles in the past, our seasoned leadership team is focused on addressing Turning to Slide 4. Our key focus areas for 2023 remain unchanged.

Speaker 2

They are growing responsibly, Strengthening our balance sheet, optimizing data and technology and strategically investing in our business. As I mentioned on the last slide, our management team is committed to driving responsible growth that will deliver long term shareholder value. On the data and technology front, we are leveraging innovative capabilities gained from our platform conversion, system enhancements and In addition, machine learning remains one of the many tools we have utilized for many years to bring stronger credit risk models to continually enhance our underwriting, line management and collections. We continue to invest in a range of technology innovations From data and customer analytics to self-service and digital capabilities, we strive to deliver exceptional value and experiences for our cardholders. Our goal is to continuously generate expense efficiencies that enable reinvestment in our business, Support responsible growth and achieve our targeted returns.

Speaker 2

Moving to Slide 5. We have significantly enhanced our financial resilience, strengthening our balance sheet and funding mix while effectively managing credit risk. Over the past few years, we have diversified our product mix through partner co brand growth, the introduction of 2 proprietary cards And the launch and expansion of Bread Pay. Cobrin spend now comprises approximately 50% of our credit sales enabling us to capture incremental sales as consumer spending patterns shift in response to evolving economic conditions. Additionally, our broader product suite increased our total addressable market opportunity and diversifies our spend.

Speaker 2

We have generated significant growth in our direct to consumer deposits, which reached $6,100,000,000 in the 3rd quarter. This additional source of funding has strengthened our balance sheet and enhanced our financial flexibility. We have also strengthened our balance sheet by reducing debt and building capital while maintaining conservative loan loss reserve of 12.3% For the last three quarters, our loan loss reserve rate is 300 basis points higher than our CECL day 1 rate in 2020. Our quarter end total absorption capacity, which we define as our allowance for credit losses plus Tier 1 capital Divided by the total end of period loans was 24%, providing a strong margin of protection Should more adverse economic conditions arise. We remain confident in our disciplined credit risk management and our ability to drive sustainable value Through the full economic cycle, we are committed to delivering responsible, profitable growth, which may entail responsibly slowing growth during more uncertain economic periods.

Speaker 2

Turning to Slide 6. Our disciplined capital allocation strategy, which focuses on profitable growth, Improving capital metrics and reducing debt has driven substantial growth and tangible book value over the past several years. Looking at the first chart, you can see that since the Q1 of 2020, we have more than tripled our TCE to TA ratio. Moving to the 2nd chart, we are proud of the progress we have made with respect to debt reduction. In just over 3 years, we have reduced parent level debt 55 percent paying down more than $1,700,000,000 We aim to further enhance Our total company capital metrics from where we are today, we will balance achieving these targets with continued investment in our business And growth aligned with our capital priorities.

Speaker 2

Before I turn it over to Perry, I will again highlight the Improvement in our tangible book value per share shown on the last graph, which has grown at 37% compounded annual rate since the Q1 of 2020. Supported by our strong cash flow generation, We expect to continue to grow our tangible book value. We believe this growth combined with our meaningful improved financial resilience and a strengthened balance sheet Should yield a company valuation that is multiple of tangible book value. Our significant accomplishments over the past 3 years Demonstrate our focus and the success of managing our business responsibly to build long term value for our stakeholders. We remain confident in our strategic direction and our commitment to drive long term value creation.

Speaker 2

Now I'll turn it over to Perry to discuss the financials for the quarter.

Speaker 3

Thanks, Ralph. Slide 7 provides our Q3 financial results. BRIC Financial's credit sales were down 13% year over year to $6,700,000,000 reflecting the sale of the BJ's Wholesale Club portfolio in late February 2023, strategic credit tightening and moderating consumer spending, partially offset by new partner growth. As Ralph highlighted, we have been proactive in tightening our credit underwriting and credit line assignments for both new and existing customers Given the economic uncertainties and pressures affecting a portion of our customer base, average loans were flat year over year driven by the addition of new partners And a lower consumer payment rate offset by the sale of BJ's portfolio in February and softening credit sales. Revenue for the quarter was $1,000,000,000 up 5%, while total non interest expenses increased 3% year over year.

Speaker 3

Income from continuing operations was $173,000,000 up 29% and diluted EPS from continuing operations was 3.4 Looking at financials in more detail on slide 8. Total net interest income was flat year over year. Total non interest income benefited from 3 factors: higher cardholder and brand partner engagement initiatives in the prior year post our conversion Higher merchant discount fees and interchange revenue earned in the current year and lower payments under our retailer share agreements due to lower credit sales and higher losses. Total non interest expenses increased 3% from the Q3 of 2022, yet declined $28,000,000 or 5% sequentially. The year over year increase was primarily an increase in card and processing costs, including fraud and higher employee compensation and benefit costs.

Speaker 3

This was partially offset by a reduction in marketing expenses and depreciation and amortization costs. The sequential decline in expenses largely reflected lower fraud expenses, lower depreciation and amortization costs and our continued focus on driving efficiency Through our prior and ongoing investment in technology, additional details on expense drivers can be found in the appendix of the slide deck. Income from continuing operations was up $39,000,000 for the quarter versus the Q3 of 2022, while pretax Pre provision earnings or PP and R grew for the 10th consecutive quarter increasing by 7% year over year. Turning to slide 9. Loan yields continue to increase, up 140 basis points year over year.

Speaker 3

Loan yields benefit from an upward trend in the prime rate causing our variable priced loans to move higher in tandem. Net interest margin was seasonally elevated in the 3rd quarter at 20.6%. Looking at the sequential change from the 2nd quarter, Both loan yield and net interest margin benefited from a decrease in the reversal of interest and fees related to reduced sequential credit losses. Also funding costs continue to rise and remain in line with our expectations. We would expect Net interest margin to move lower sequentially in the 4th quarter following typical seasonality and Due to an increase in the reversal of interest and fees related to expected a sequential increase in gross losses.

Speaker 3

As you can see on the bottom right graph, we continue to improve our funding mix through our actions to grow our direct to consumer deposits, Which increased to $6,100,000,000 in the 3rd quarter. 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 efficiently fund our long term growth objectives. Moving to credit on slide 10. Our delinquency rate for the 3rd quarter was 6.3%, Up from Q2 as expected, driven by continued macroeconomic pressures. The net loss rate was 6.9% The Q3 net loss rate was elevated compared to last year's level due to more challenging macroeconomic conditions pressuring the consumers' payment rate as Well as actions taken to the transition of our credit card processing services in June of 2022 that benefited the loss rate in that quarter.

Speaker 3

The net loss rate declined sequentially from the Q2 as the final impact from the transition of our credit card processing services was reflected in our July credit metrics. The reserve rate remained flat sequentially at 12.3%. We intend to maintain a conservative weighting of economic scenarios in our credit reserve model in anticipation of the ongoing macroeconomic challenges And the consequential impact on our future credit losses. As macroeconomic headwinds persisted during the quarter, Our credit risk score distribution deteriorated slightly compared to the 2nd quarter, driven by downward score migration from existing customers, Despite new account risk scores, our distribution being well above the portfolio blend. Even so, Our percentage of cardholders with a 6.60 plus credit score remained above pre pandemic levels given our prudent credit tightening actions and our more diversified product mix.

Speaker 3

As Ralph touched on, we continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take. We closely monitor our projected returns with the goal of generating risk adjusted margins above our peers. Finally, Slide 11 provides our financial outlook for the full year of 2023. Our financial outlook is updated to reflect slowing sales growth as a result of both our strategic And targeted credit tightening as well as an expected continued moderation in consumer spending. For the full year, average loans are expected to grow In the low to mid single digit range relative to 2022 based on the latest economic outlook, we anticipate year end period loans to be around 19 point $3,000,000,000 inclusive of the recently acquired Dell portfolio of approximately $400,000,000 We expect revenue Growth to be slightly above our average loan growth in 2023 excluding the gain on sale from BJ's with a full year net interest margin similar Full year total non interest expenses Are expected to be up 8% to 9% compared to 2022 with 4th quarter total expenses slightly higher In the Q3 driven by increased seasonal marketing and employee benefits costs, we updated our net loss rate outlook As we now anticipate, the full year 2023 rate will be in the mid-seven percent range, including impacts from the transition of our credit card processing services in June 2022.

Speaker 3

While our tighter underwriting and services in June 2022. While our tighter underwriting and credit line management should benefit future loss performance, these actions Raise the loss rate in the near term by lowering our projected loan balance, which forms the denominator in the net loss rate equation. We now expect the 4th quarter net loss rate to be approximately 8% driven by normal seasonal trends, continued consumer payment pressure And the denominator effect from lower loan growth. In addition, we expect 4th quarter delinquency rate To be relatively consistent with the Q3, sticking with credit, with the addition of the Dell portfolio in early October And the 4th quarter anticipated seasonal increase in transactor balances, it is likely the reserve dollars will increase, But the reserve rate could decline slightly at year end. The increase in transactor balances will also temporarily reduce our capital metrics In the Q4 as is typical each year end, our full year normalized effective tax rate is expected to remain in the range of 25% to 26% with quarter over quarter variability due to timing of certain discrete items.

Speaker 3

One final item before wrapping up. As you can see in the financial tables provided in the appendix, we are now reporting total company Regulatory capital ratios and our double leverage ratios. As Ralph highlighted,

Speaker 4

you can see the disciplined

Speaker 3

Our management decisions and successful execution of our plans over the past 3 years. Briefly looking ahead to 2024, We will stay true to pursuing responsible profitable growth. We expect consumer macroeconomic pressures to continue to drive softer consumer spending, Which coupled with our continued tighter credit underwriting and line management actions will likely lead to loan growth remaining below our longer term targets next year. Also, we currently project that our net loss rate will peak in 2024 subject to economic conditions. We will provide specific guidance for 2024 during our Q4 earnings call in January and more details around our intended mitigation strategies after a final CFPB BB rule is released.

Speaker 3

In closing, we are effectively managing risk return trade offs through an ongoing challenging macroeconomic environment, while continuing to strategically invest and drive long term value for our stakeholders. Operator, we are now ready to open up the lines for questions.

Operator

Thank you. And please also remember to unmute your microphone if it's your turn to speak. We do have our first question. It comes from Sanjay Sakhrani from KBW. Sanjay, your line is now open.

Operator

Please go ahead.

Speaker 5

Thank you. Good morning. Ralph, appreciate that these CFPB rules are fluid from a timing perspective, but But it seems like we're going to get something by the end of the year and it's probably going to be close to that $8 I'm just curious if you've started to think about like and implement any mitigation efforts So we're tested to see what you might be able to do and how comfortable are you with mitigation?

Speaker 2

Yes. Sanjay, thanks for the question. We're awaiting like everybody else for the final ruling from the CFPB. Yes,

Speaker 4

we'd like it

Speaker 2

to come sooner than later so we can just get focused on it even more. But we're testing different APRs in the marketplace and a variety of Other type of fees to close gaps. We're working with our partners diligently. They understand what the issue is and the impact It could have on their business as it could have in our business and we continue to collaborate with them on mitigations. In terms of how long it will take, what the mitigations will be, closing the gaps, we'll know more when the final ruling comes out.

Speaker 2

But Rest assured, we're focused on it. We're testing different strategies and working very collaboratively and diligently with our partners.

Speaker 5

Yes. Okay. Great. And I

Speaker 3

would just add what Ralph said there, right? It's some of this it's hard to implement some of the changes that you have Teed up before the final rule comes about. And so that's what we are waiting on. And I would say that I think we all believe and know that this is going to get litigated in court and then the question is how long before we actually have to implement. And one other thing I'd share is and we'll share more when and if the rule becomes final, but we expect the initial impact As a percent of total revenue, will be more impactful to Bread Financial and be higher than peers, given our higher proportion of private label credit

Speaker 5

Yes, absolutely. Perry, maybe it's a question for you on like credit. You Talked a little bit towards the end about the reserve rate and I know it's going to go down sort of in the Q3 because you get the I'm sorry in the 4th quarter because you get Zach or Bill, but I'm just curious as we look out to next year, maybe you could just speak to how you're seeing delinquency migration, obviously, choppy backdrop, Who knows where things go, but seems stable ish at this point. But just how the reserve rate would migrate If there's stability? Thanks.

Speaker 3

Thanks, Sanjay. Yes, so as we think about the reserve rate,

Speaker 4

I think it is dependent on

Speaker 3

what you It's the what happens with the economy next year and as we signaled and I think it's playing out pretty much as we expected. I think we were Foreseeing things that perhaps a lot of the economic forecasts weren't seeing, in terms of what was happening with the consumers we serve, the pressure that Yes. This elevated environment of inflation puts into the consumer base and what that means for future delinquency and losses. We were caring for that when we increased our reserve rate to 12.3%. Like I said previously, we did not expect unemployment to be the driver.

Speaker 3

It was more about the pressure from this compounding effect of inflation. So the degree to which the Fed is able to get, I'll say inflation under control, whether it's the back half of next year, you start to see inflation coming down. A lot of this is you could tell with what the Fed's View on rates are now you're starting to see economists thinking, oh, the Fed's going to maybe increase the rate one more time or so or Keep rates higher longer, that aligns to our view that rates were going to remain higher longer, which implies inflation is going to remain a A little higher, longer before hitting that 2% target rate. So we've said we expect our losses to Peak next year, whether it's mid year or remains a little elevated throughout the year is hard to know. That's really going to be macro dependent.

Speaker 3

But I would Expect that as we think about the reserve rate, the reserve rate should remain pretty steady throughout next year and it's Going to be macro dependent upon when that rate can come down. So we start to have a brighter outlook and that might be if we see a brighter outlook in 2025 that means for Next year the reserve rate comes down. If the outlook does not improve, you expect the reserve rate to hold kind of where it is. Okay.

Speaker 5

That's great. Thank you so much.

Operator

Our next question comes from Robert Napoli from William Blair. Robert, your line is now open. Please go ahead.

Speaker 6

Thank you, and good morning. Maybe just following up, I guess, The biggest question, as you looked at, I'm sure you have all types of models for mitigation and what effects. What do you have a confidence level in being able to generate attractive returns post The adjustments, if assuming that we go to the lowest level on late fees, what is your confidence level being able to drive Reasonably attractive returns, I guess, at Fred under any scenario on late fees.

Speaker 3

Thanks for the question. I mean, that's first of all, we don't know what the final rule is. And so to your point, if we go to the Current $8 fee, you should expect that we said in the past and it's continued to be true that APRs will have to go up across the board For all customers, you'll start to see some fees for credit, whether it means upfront origination fees, promotional fees on promotional Sounds like for big ticket or annual or monthly fees, that will be true. Then you're going to have some restructuring of partner contracts. I mean, so as Ralph talked about earlier, We're very engaged with our partners.

Speaker 3

Look, we're in this together and trying to protect their economics as well as ours, but we've got to underwrite, As you said to protect returns for shareholders and we're running through a bank, so we have a responsibility to make sure From a safety and sound standpoint that we're doing that as well. So you're going to see, some tightening of credit standards, which means we'll see a which will result in Fewer customers being extended credit. So you might we might grow a little less than what we otherwise might have In, I'll say, private label, but then that will free up capital to deploy into other product adjacencies. So there's a lot to sort through. But yes, there's a full expectation that we will be able to run a business delivering strong returns in the future.

Speaker 3

There might be a little bit of a burn in period as you know with The APR changes, but when you look to get to the other side of it, we have full expectation to be able to deliver strong returns.

Speaker 6

Thank you. And then I guess given that your confidence there and given that your stock is so far below book value, Tangible book value right now. What are your thoughts on capital, on capital return and balancing that With the new potential regulatory changes coming up as well, but it seems like a good opportunity for conference level is that high To increase tangible book value by reducing the share count, Eben?

Speaker 2

Yes. I think when

Speaker 3

we think about Our capital structure, I'll first start by saying our priorities remain unchanged, right, supporting responsible profitable growth, Make sure we're investing in our technology and digital capabilities to serve our brand partners and customers. We're still not where we want to be on that front. Ralph talked about earlier, we're paying down our debt. We need to pay down our debt to get below 115% double leverage ratio. We want to continue to build our capital ratios to fortify this balance sheet and then we can think about things like you mentioned around further returns to shareholders.

Speaker 3

But in this environment, with the uncertainty around the macro side of things and as you noted on the regulatory front, It would not be responsible to take a strong action like that. We did do our good hygiene share repurchase. As Ralph noted, we bought back $35,000,000 shares. If it weren't for those uncertain environments that we're in right now, it would certainly be A lot more attractive, but I think that would not be the responsible thing for us to do at this time.

Speaker 6

Thank you. Appreciate it.

Operator

Our next question comes from Mihir Bhatia from Bank of America. Mihir, your line is now open. Please go ahead.

Speaker 4

Good morning. Thank you for taking my questions. I wanted to start with the delinquency trends and I think Your comments about 2024 right at the end, delinquencies right now at like 15 year highs, I think they saw in your Ben, thanks. I understand some of the pressures on the consumer, but I was curious, like I think it sounds like you expect this to obviously drive NCOs higher next year. And in hindsight, do you think Brad or the industry got too aggressive with growth coming out of COVID, like what's driving this?

Speaker 4

And Just talk a little bit more about the tightening you're doing to get back to your expected or long term guidance of loss rates. Any more color you can give on that tightening?

Speaker 3

Yes. Let me talk a little you've got a number of things in there and Ralph will talk about the credit strategy tightening. But in terms of did we grow too fast, Camillus, no, I'd say we've remained very disciplined In the growth and compared to others who maybe you heard where they've had these large vintages and these vintages are seasoning, You can look at our lag loss rates and things of that nature. We have not that is not our issue. Really what we're what you're seeing is the economy and the effect it has On moderate and lower income households and where their wage growth is not keeping up with the compounding effect of inflation.

Speaker 3

So it's an unfortunate Element of this type of environment and our customers are doing the best they can to make ends meet. They're rotating spend categories To try to make it happen, they're picking up second jobs. It's a job full environment. So your question though around the hidden delinquency And a 15 year peak and I'm sure if you link that to the great financial crisis when these losses really peaked up much higher, It was a very different environment, right? The great financial crisis was driven by rapid and high unemployment.

Speaker 3

People were upside down in their mortgage meeting. They had negative equity and that drove a lot of consumers to file bankruptcy. And so that was a very different macro environment versus the one we're in right now where consumers are employed. If that's not the issue, it's more so inflation and inflation should come under control. It's just it's not a matter of if, it's just a matter of when.

Speaker 3

So I think you're going to see continued pressure on delinquency for a bit. It's going to result in some higher losses, but I don't think you're going to see the breakthrough

Speaker 2

And it's across the life cycle of a borrower. So we think from acquisition to line management to Collections and account closures, we manage that very carefully. Our view is to make sure that we are not putting anybody In harm's way, and we're managing their debt appropriately. So for example, now that student loans has come back on track, we monitor Those customers that have student loans, where we've included those student loans in their obligation and ability to pay even when they weren't paying them. So as we step through this uncertain time, we continue to focus on this Across the life cycle of individual in terms of their credit underwriting and their Your ability to manage credit.

Speaker 2

So I feel very good about that. We were focused on this pre my arrival in 2019. We were very diligent and thoughtful through the pandemic when everybody was kind of opening their buybacks a little bit. We were very We made sure that we were very diligent in terms of underwriting in line management and we'll continue to do that as we move forward. Now as we said, some of that impacts our growth in the near term.

Speaker 2

But from a loss perspective, long term, We believe it's the right thing to do and we'll continue to manage very thoughtfully through the process.

Speaker 3

Then I'll add one last comment to what Ralph just said. We are seeing the benefits of those credit strategies and that we're seeing a little bit lower early stage delinquency, which Demonstrates that the credit actions are taking hold. The challenge is that once consumers get into delinquency, even though they're employed, They're struggling

Speaker 5

to get back to current.

Speaker 3

And so what that means is that your later stage roll rates are higher than historically they've been And that's what's driving the higher losses. So we're going to continue to do what we can to drive down the early stage and again working with customers as they enter those later stages.

Speaker 4

Thank you for that. Maybe switching gears to just the spending, but related to some of the tightening. Can you just talk about some of the changes you saw intra quarter in consumer spending? Did you see like slowdown month over month over month and maybe give us a glimpse What you've seen month to date, really what we're trying to understand is how much more can spending slow down from here into the Q4 and as we think about the Q1 next year?

Speaker 3

Yes. I think when we think about that there's a slowdown basically that we're seeing Certainly in the moderate and lower income cohorts, but you're starting to see that creep up into even some of the prime Cohorts as inflation has taken hold. And I think the way you can look at it is, when we think about the 4th quarter And what retailers are saying, what our brand partners are saying that they're projecting a softening of sales this holiday season, Which is kind of in line with some of the trends we've been seeing over the summer. So what you should expect is that more retailers will be planned to offer Discounts, incentives, rewards. Now unlike last year and even the year before where there were supply chain issues, People couldn't get the electronics or whatever it was they were looking for.

Speaker 3

Spend got accelerated earlier in the season into really early October even. And now what I think you're going to see is as consumers are more cost conscious and looking for deals, you're going to see the typical Seasonal spend of what you saw a few years ago where it's really concentrated into November, December as they're looking for that deal and with the merchants are going to be Obviously, Quirting was on sale at that time. So it may look more like past cycles from past years.

Speaker 4

Got it. Thank you.

Operator

Our next Question comes from Jeff Adelson from Morgan Stanley. Jeff, your line is now open. Please go ahead.

Speaker 7

Hey guys, thanks for taking my questions and good morning. Just wanted to follow-up on the credit commentary. And as a risk of beating a dead horse here, I just want to make sure we got it right. So I think you're expecting your loss rate to peak out next year. I just want to be sure, should we be thinking about a peak loss rate in the context of I think you mentioned This Q4, looking more like an 8%.

Speaker 7

I think maybe we're all expecting a little bit more improvement next year. So I just wanted Square those figures.

Speaker 3

No, I appreciate the direct question. You're right. We are definitely expecting 4th quarter To be around 8% and reiterate that's 100 basis points up linked quarter, some of that's a seasonal increase. And then The other half that I'll say is a combination of the macro conditions affecting the consumer's ability to pay and the denominator effect. So when you think about that, yes, you can extrapolate that into next year because while seasonality will move around, I think that pressure on the consumer's ability to pay will continue to play out throughout next year as well as the denominator effect as We will have smaller vintages from this year carrying into next year and next year's vintage will also be smaller as a result.

Speaker 3

So That will put pressure on the net loss rate and I don't think any of us are thinking that inflation is abating that quickly And the effects of higher interest rates, there's a lagged effect of what that means to the consumers in terms of higher cost of auto loans, home loans, credit card debt And their debt is rising for them, so they've got more debt to pay with higher interest costs and at the same time student debt repayment is occurring. So I think there's going to be this play out to next year, which is definitely going to put it in the higher end of that range.

Speaker 7

Okay, great. And just to circle back on the NIM, I know this was Seasonality, lower reversals, and it's going to trend back down next quarter on seasonality as well. I think we're all pretty surprised by the strength in the NIM though. You've discussed yourself being a little bit more neutral to rates. I know there's a lag effect with the Fed here to the prime rate.

Speaker 7

But thinking forward, is there a case to be made that maybe you've got a structurally higher NIM or a car deal going forward with People may be revolving more or are you still more in the camp of hanging around this low 19% level?

Speaker 3

Yes. I'm definitely more in the camp of hanging around the low 19% level. We'll give more guidance on that as we get into next year. But When you think about what's going to happen in the Q4, you're going to get a seasonal drop. And as losses remain elevated, remember This quarter losses were 100 basis points below last quarter and now next quarter they're going to go back up.

Speaker 3

So you're going to have that The purification or reversal of interest and fees impacting the 4th quarter and if losses remain elevated through next year, That's going to put pressure on there. So, and then as we bring in smaller vintages, that will also affect higher quality vintages Let me have a little bit of less rollover, maybe a little low pricing. So I would not want to speculate that We have a structurally higher net interest margin going forward.

Speaker 7

Great. Thank you, guys.

Operator

Our next question comes from David Sharp from GMP Securities. David, your line is now open. Please go ahead.

Speaker 8

And thanks for taking my questions. Hey, I wanted to Circle back to just some of the planned mitigation efforts and as it relates To sort of timing and ability to kind of roll things out, not looking For you to name names, but I'm wondering, as you reflect on maybe your top 20 Retailer partners and the discussions you've had thus far, is there sort of a unanimity in their Reactions or embracing of certain mitigation efforts or pushback on others. I'm just wondering Is there a wide spectrum of support and resistance to various strategies among your partners? Or do you think that There is a pretty uniform buy in to what you're thinking and that therefore kind of implementation should be pretty smooth.

Speaker 2

So let me start and I'll let Perry finish. Just a couple of things. So our partners And our interests are aligned to remain profitable during any kind of regulatory change. So that's it. They are focused on making sure that we would Do the right things for their cardholders that we can still provide credit, that their baskets at the point of sale Our as robust as it can be given the challenges we would have underwriting a certain population with just an $8 lease So they're aware of it.

Speaker 2

They understand our challenges. We understand their challenges. And we're working through the impacts of the changes we will need to make to keep them profitable and us as well. And that may vary from partner to partner, but the Collaboration and understanding of the challenge is consistent.

Speaker 8

Got it. So, and really what I was getting at is I didn't know if there was Maybe a uniform pushback on origination fees whereas others were more leaning towards promotional and whatnot. But Obviously, it sounds like everybody is rowing in the same boat and

Speaker 2

I think the other thing to remember too is most of Our partnership contracts have a material change in law It provides us to make it allows us to make adjustments. So and that's what we're working through with them.

Speaker 3

Yes. And I'll add to what Ralph just said. If you think about Your top 20 partners, they're all different. Whether they're a big ticket partner where I'll tell you a little less impacted by the late fee, but still impacted away and then so you can pull levers on things like promotional fees Or others that are more private label concentrated and the soft goods who are more impacted, Those require different things. So each partner, because each of them are different in terms of their business model, The size of the average balance, the customers they're attracting, they all require nuance and different approaches and the team is doing a really good job of Partnering with them and as Ralph said, it's a partnership.

Speaker 3

We're trying to protect their economics, protect our economics and really try to figure out how to underwrite As many customers as we can and still provide the right return for our shareholders.

Speaker 2

Yes. I think one of the as you look at What's facing us in terms of the cost to collect, it's really a cost to lend. And the unintended consequence here is We may not be able to lend to the population we lend to today. So that I believe is going to be A casualty of this late fee legislation, and that's unfortunate because people will not be able to borrow as they do today Because the legislation has made it riskier for people to borrow.

Speaker 8

Right. Quick follow-up. I think you mentioned about 50% of credit sales are co branded now. And Can you just remind us what the mix is in terms of balances at the end of the quarter, private label versus co brand?

Speaker 3

We are about a third of our portfolio average balances are co brand.

Operator

Our next question comes from Bill Kersache from Wolfe Research. Bill, your line is now open. Please go ahead.

Speaker 9

Thanks. Good morning, Ralph and Perry. It's great to see the total company C21 ratio Disclosure, by our math that metric was actually negative when you took over Ralph, which is a real testament to the significant capital that you've all accreted Since taking over from the prior management team, but what's the right level of CET1 to target as you look forward from here? And then if you could layer into your response, How you're thinking about the RWA inflation associated with Basel III Endgame, which many of your peers are working through, but it'd be great to hear Whether that's impacting how you think about capital? Yes.

Speaker 3

Thanks for the question. And thank you for acknowledging the great work that Ralph's Don, under his leadership.

Speaker 2

That's good news I've heard today.

Speaker 3

When you think let's start with the Basel III endgame and the implications. That only impacts the bank's over $100,000,000,000 in assets and we are well below that. So for us, It could be opportunistic as a number of the big players when they look at new opportunities, new deals to sign with partners We'll have a different degree of capital requirements. So that for us is not an impact. As it relates to our ongoing targets, that's something that we continue to develop.

Speaker 3

We're not all the way home yet. Think about the stress models that go into figuring out what the right target is, look at your risk ID factors that go into targets, think about what Yes, traditional disciplined banks do. That is how we're going to approach this. And in the environment we're in right now, we're certainly not Yes, all the way to where we want to go and then we'll communicate more in 2024 probably during our investor event To give longer term targets around where we will be and what our binding constraint is.

Speaker 9

Understood. Thank you. That's helpful. And separately, as you prepare for the potential late fee changes that you've Given some details on, are there any costs associated with that, that you'd call out, whether they'd be one time Or recurring and I guess how dependent are those costs on the rule getting litigated and whatever path that could take? Any thoughts around that would be helpful.

Speaker 3

Yes. I mean that's some of the issue is And some of I think some of the comments have been provided to the CFPB. And we're encouraged that we understand that they've Looking at the comments and hopefully they contemplate the comments as Ralph said the cost to lend, but there are going to be some costs depending on what the rule comes out To implement those costs, if they put in certain things that require percent, the late peak has to be a can be max of a A balance or changing grace versus their system cost to making those changes. But then more so when you think about The investment to pivot into other product adjacencies, if we start to pull back in certain products that maybe are no longer As viable in a post CFPB rule change, there could be some cost to develop capabilities on that front.

Speaker 9

Got it. Thank you for taking my questions.

Operator

Our next question comes from Dominik Gabriel from Oppenheimer. Dominik, your line is now open. Please proceed.

Speaker 10

Hey, good morning everybody. Thanks for taking my questions. Just following up on the last line of questioning, The CET1 total company target, I do appreciate that as well. Is it fair to say that Your target would likely be slightly above the industry average for credit card issuers just given Profile of the credit profile of the company

Speaker 3

as a follow-up. I'll answer that directly. Yes, that is a fair Expectation.

Speaker 10

Okay, perfect. I thought that was an easy one. And Yes. When you think about, Perry, you've had some really good spending comments on this call. I know this is a huge focus for many investors of the trajectory of spend.

Speaker 10

Could you try to isolate for us The spending slowdown specifically at partners only, not bread spending in the 4th quarter, but what the partners That you have that you're talking to what that year over year spend expectation is, for instance, is it 1%, 2%, 3% slowdown versus last year. How were they thinking about the magnitude of that spending slowdown? Thanks so much.

Speaker 3

Yes. I think I don't want to speak to any one particular partner because I think it's going to be varied by partner, by product So it's really mixed by vertical. So I think as we commented, you're seeing some slowdown In some retail categories, some home furnishings year over year, so it's really going to be interesting to watch consumers as They play into this Q4 and how they direct their holiday spend. I wish I gave you more context on that, but It wouldn't be appropriate to comment on one particular partner.

Speaker 10

Okay, perfect. Thanks so much.

Operator

Our next question comes from Reggie Smith from JPMorgan. Reggie, your line is now open. Please go ahead.

Speaker 11

Yes, good morning. Thanks for Taking the question. You got a few here. You I guess you suggested that loss rates would peak in 2024. It sounds like You expect inflation to kind of moderate to the back half of the year.

Speaker 11

What's your, I guess, embedded Unemployment assumption in that view, that loss rates were kind of peaked in 2024. And I guess I need unemployment assumptions for 25% to fully appreciate that, right?

Speaker 3

Well, so I've talked about this numerous times in the past, Right. When we think about loss rates and where they're at this year, unemployment is low. It's really inflation driven. And then as we talk about next year And with the commentary of losses peaking next year, I'm talking about a full year loss rate, but then even within some quarters, I expect the quarterly peak to happen next year. So we're going to end up this quarter, coming quarter at 8%.

Speaker 3

Next year, there could be some quarters like that. When you think about it's less about what the unemployment assumption is and more about Inflation, now I expect there to be a rotation of inflation pressure getting replaced by some modest uptick In unemployment, and I think that's the outlook that everybody is looking at. Now when we think about our reserve levels, we have a we weighed in Scenarios which include unemployment peaking over the next 24 months, an adverse number of 7% severely adverse at 8.7%. That's not what's expected, right? It's more that baseline view, which does have, unemployment Getting up into the low 4s next year.

Speaker 3

And I think so that's what's, I'll say, informing our base loss rate View would be that low to mid-four percent unemployment with a starting to have some moderation of inflation, But not expecting inflation to, I'll say, fall off a cliff and come back in line that quick. And I think that's the sentiment that's starting to emerge Is that inflation is going to be hanging around just a little bit longer, but the good news is that means unemployment should stay Yes, in a good place for longer and that's the idea of a soft landing. And I think from all the outlooks that Now getting updated, it's just pushing out that view. So that we expect that to be the case. So it's just a matter of how long this Environment persists.

Speaker 11

Understood. That makes sense. You made a comment In regards to the impact of late fees on you guys, you, I guess, talked about the impact relative to your peers. And I was curious, When you say peers, is that just kind of Synchrony or is that the broader credit card issuer space? And I ask because I think you suggested that your proportion of late fees is not materially different than Synchrony.

Speaker 11

So I was just trying to square those comments.

Speaker 3

We've always said that if somebody is asking about us relative to peers That we have a higher mix of private label and we underwrite deeper. And then I said, which means we have You have more exposure to that. And then if you're asking specifically about Synchrony, we've always said it, whatever it is, it's Synchrony Plus. And I say plus that means more, not in line with them more because of the fact that we have a higher mix of private label card and underwriting put in there.

Speaker 11

Okay. That's fair. And then last question, this is kind of a bigger picture question. Your cycle loss rate guidance, I was curious how you arrived at 6%. Given your rich NIMs, it doesn't appear to be a level that maximizes profit dollars, But maybe I'm wrong, like how are you thinking about that?

Speaker 11

And I guess does it does that create unnecessary constraint On the business, does that make sense?

Speaker 3

That's a really good question and one that we grapple with internally. But I think when you It's hard to think about well, let's talk about the cycle, right? A cycle is typically 10 years, could be 15 years. And through the cycle is to go peak to Peak trough to trough, average it out. And it's been a good marker for us in terms of guiding, in terms of We're going to have some periods when we're above that, some where we're below it.

Speaker 3

And you can see right now, it's not like we're closing off the spigots. We are still delivering very strong margins and I appreciate you commenting on that. But there's also an element of Capital, right? So you need to stress your book. So you start to be more disciplined at the bank level and total company level And making sure that your capital ratios, capital targets are aligned, if we underwrote a lot deeper, Just going through the cycle of 9% as a new target, well that means the capital levels that would be out to help would be Far in excess of that.

Speaker 3

I'm also not sure our regulators would appreciate it. So I think we find that sweet spot of profitability and we want to make sure we're underwriting on the margin, so To be profitable and provide that right return on equity. So that's a real part of the disciplined practice that we have in our credit underwriting shop Every account is a decision around its profitability and making sure it has a proper return on capital. So on the margin, we're underwriting deeper than 6%, right? So people coming in, it could be a 10% loss rate on the margin, but they're giving the right return.

Speaker 3

So it's I don't want to imply that there's a hard cut at 6%. So it's something that is managed very effectively and over time.

Speaker 2

Yes. I think the principles we abide by are, 1, we get paid for the risk that we take 2, that we're lending responsibly and that we're always aware of the safety and soundness of our banks. Those are the principles we abide by and how we arrive at, the risk we're willing to take and the loss rate we're willing to endure with the returns We're expecting.

Speaker 11

Perfect. Thank you.

Operator

We currently have no further questions. So I will now pass it back to Ross Andretta for closing remarks.

Speaker 2

Well, thank you all. I appreciate your time and your continued interest in Brent Financial. Everybody have a terrific day.

Operator

Ladies and gentlemen, this concludes today's call. Thank you for joining. You may now disconnect your lines.

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Key Takeaways

  • This quarter delivered net income of $171 M and a 25% return on equity, funded a $35 M share repurchase and grew tangible book value per share to over $42—nearly triple its level since Q1 2020.
  • Bright Financial expanded its partner ecosystem by launching with Ross Dress for Less and closing the acquisition of Dell’s $400 M consumer credit portfolio, adding a broad suite of payment solutions.
  • Persistent inflation, high interest rates, the resumption of student loan payments and gas price volatility drove a 13% year-over-year drop in credit sales, with moderate-to-low income consumers cutting discretionary spending while prime cardholders held steady.
  • The company proactively tightened underwriting and credit lines, maintained a conservative 12.3% allowance for credit losses (300 bps above 2020 levels) and sustained a 24% absorption capacity to guard against further macroeconomic stress.
  • For full-year 2023, Bright Financial expects low-to-mid single-digit loan growth, revenue growth slightly above loan growth, a net interest margin near 20%, total non-interest expenses up 8–9%, and a net loss rate in the mid-7% range (rising to ~8% in Q4), while continuing to invest in data, technology and responsible profitable growth into 2024.
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