Bread Financial Holdings Inc

NYSE:BFH

Good morning and welcome to Bread Financial's First Quarter 2025 Earnings Conference Call. My name is Lydia, and I'll be coordinating your call today. [Operator Instructions]

It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. The floor is yours.

Thank you. 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.

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. 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.

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

Thank you, Brian, and good morning to everyone joining the call. Today, Bread Financial reported strong first quarter 2025 earnings results, including net income of $138 million and earnings per diluted share of $2.78. Our results reflected our resilient business model, strategic credit tightening actions and ability to deliver despite a challenging macroeconomic environment.

We advanced our efforts to optimize our capital structure and strengthen our balance sheet with successful execution of a $400 million subordinated note offering during the first quarter. As a result of our disciplined approach to capital allocation, we also completed our $150 million Board-authorized share repurchase program, repurchasing 3.2 million shares over March and April. These actions and the ongoing strong capital and cash flow generation of our business create additional capital flexibility and opportunities for Bread Financial to deliver further value to our shareholders.

Additionally, our direct-to-consumer deposits continue to grow steadily, increasing to $7.9 billion at the end of the quarter, up 13% year-over-year. It is notable that we are approaching the $8 billion mark when just 5 years ago, our deposit program was just over $1 billion in balances. Credit sales grew 1% year-over-year in the first quarter driven by higher general-purpose spending and overall transaction volume with lower gas prices helping to bolster consumers' discretionary purchasing power.

Midway through April, we are seeing solid growth year-over-year due to the timing of Easter spend pushed by March into April, coupled with likely accelerated purchases as consumers anticipate future price increases on things like electronics, home furnishings and auto parts. The risk of economic weakness continues to grow as evidenced by the uncertainty reflected in sharply lower consumer and small business confidence and sentiment. We are closely monitoring consumer reaction to tariffs, trade policy and broader concerns, including advancing near-term purchases ahead of potential price increases, which could reduce future spend giving expected higher inflation.

Policy shifts around regulation, including the U.S. District Courts recently vacating the CFPB late fee rule may benefit our industry longer term and the economy as a whole. However, in the near term, risks associated with tariffs, trade policies and inflation may adversely impact consumer strength. We will continue to monitor economic and consumer financial health closely and remain disciplined with our credit risk management approach.

We are seeing positive results from our credit management strategy as the ongoing prudent underwriting, disciplined credit line management and product diversification actions improve credit performance trends. These trends help offset consumer credit pressures attributed to challenging macroeconomic conditions.

We are pleased with our new partner signings in the quarter, including today's card program announcement with Crypto.com, further diversifying our portfolio of industry verticals. We continue to compete and win new programs that expand our reach and offer growth opportunities. Our current pipeline remains robust with a mix of portfolio conversions and de novo opportunities across co-brand, private label, installment lending and diversified industries.

We recently expanded our relationship with AAA to market deposits and personal loans to AAA members across North America. This is a great opportunity to offer a full suite of products across a loyal and expansive member base. Further, we continue to successfully renew programs with our existing brand partners, including extending our long-term agreement with Academy Sports, where we offer both our card and Bread Pay products. Our strong renewal rate is a testament to our team's focus and dedication to delivering value for our brand partners and their customers.

As always, we remain resolute and focused on responsible growth, disciplined capital allocation and continued execution of our operational excellence efforts. These focus areas enable us to maintain flexibility to adapt to changing fiscal and monetary policy and the evolving regulatory landscape.

In summary, we are well positioned to generate capital and cash flow to deliver strong returns and create sustainable long-term value for our shareholders.

Now I will pass it over to Perry to review the financials in more detail.

Thanks, Ralph. Let's begin with Slide 3, which provides our first quarter financial highlights. During the first quarter, credit sales of $6.1 billion increased 1% year-over-year driven by higher general-purpose spending. Average loans of $18.2 billion decreased 2% primarily due to the macroeconomic environment throughout 2024 driving the lower consumer spending, higher gross losses and tighter underwriting standards.

Revenue was $970 million in the quarter, down 2% year-over-year primarily due to lower net interest income. Total noninterest expenses decreased $5 million or 1% driven by our enterprise-wide focus on operational excellence. Income from continuing operations increased $7 million primarily due to a lower provision for credit losses and lower total noninterest expenses, partially offset by a decline in finance charges and late fees.

Looking at the financials in more detail on Slide 4. Total net interest income for the quarter decreased 4% year-over-year primarily due to lower finance charges and late fees resulting from a lower average prime rate, lower delinquencies and our gradual shift in risk and product mix, leading to a lower proportion of private label accounts. Noninterest income was up $25 million, which was primarily the result of our more recent paper statement pricing changes.

Total noninterest expenses decreased $5 million or 1%. The decline was primarily driven by a $15 million decrease in other expenses, which includes prior year debt extinguishment costs as well as a $4 million decrease in card and processing expenses due primarily to reduced volume related to card and statement costs. These were partially offset by a $7 million increase in information processing and communication expenses, which was driven by elevated software license renewal costs, and a $7 million increase in marketing investment associated with expanded performance-based marketing and personalization capabilities as well as incremental spend with new brand partner programs. We expect quarterly marketing expenses to build sequentially throughout 2025, in line with normal trends. Pretax pre-provision earnings, or PPNR, decreased $16 million or 3% primarily due to lower net interest income.

Turning to Slide 5. Both loan yield of 26.5% and net interest margin of 18.1% were higher sequentially, following the seasonal trend of decreasing transactor balances from fourth quarter holiday spending. Net interest margin, which decreased 60 basis points year-over-year, continued to be impacted by a lower average prime rate, lower billed late fees from lower delinquencies and a shift in mix toward co-brand products, partially offset by our implementation of pricing changes.

On the funding side, we are seeing funding cost decrease as savings accounts and new term CD rates decline with lower Fed and U.S. treasury rates. Note that pricing of our retail CD portfolio, which comprises over half of our direct-to-consumer deposit, will lag the rate changes in both our savings portfolio and the overall loan portfolio.

Looking at the bottom-right chart, you can see that our funding mix continues to improve, fueled by growth in direct-to-consumer deposits, which increased to $7.9 billion at quarter end. Direct-to-consumer deposits accounted for 43% of our average total funding, up from 36% a year ago. Conversely, wholesale deposits decreased from 37% to 29% year-over-year.

Slide 6 highlights the progress we have made strengthening our balance sheet. During the first quarter, we completed a $400 million subordinated notes offering, which increased our Tier 2 capital. This transaction improved our total risk-based capital ratio by more than 200 basis points. Our prudent capital allocation actions over the past 5 years, focusing on paying down debt and building capital, allowed us to accelerate the execution of this transaction, which proved timely given the strong debt market and investor demand in early March. This successful transaction was a key step in optimizing our capital stack as we discussed at our investor event in June of last year.

Additionally, in March and April, we opportunistically completed our $150 million Board-authorized share repurchase program with 3.2 million total shares repurchased at an average price of approximately 5% below our current tangible book value per share. We remain confident in the intrinsic value of our company and the financial resilience of our business model. We have a proven track record of accreting capital and generating strong cash flow through challenging economic environments. We are well positioned from a capital, liquidity and reserve perspective, providing stability and flexibility to successfully navigate an ever-changing economic environment while delivering value to our shareholders.

From a liquidity perspective, total liquid assets and undrawn credit facilities were $7.4 billion in the first quarter of 2025, up from $7.1 billion a year ago, representing 33% of total assets. At quarter end, deposits made up 72% of our total funding with the majority resulting from direct-to-consumer deposits.

Moving to the capital ratio walks on the upper right of the slide. In addition to the more than 200 basis points positive impact on our total risk-based capital from our subordinated debt issuance during the past 12 months, our capital ratios were impacted by the repurchase of $146 million of common shares as well as the repurchase of the majority of our convertible notes, including the repurchase of $7 million in principal value in the first quarter of 2025, leaving only $3 million outstanding.

Notably, the last CECL phasing adjustment occurred in the first quarter of 2025, resulting in an approximate 70 basis point reduction to our ratios. Together, the impact from the last CECL phasing adjustment and the convertible note repurchases was more than 170 basis points. Looking ahead, the CECL phasing is complete and the $3 million in outstanding convertible notes should not have a material future impact on our ratios. As a result, we are well positioned to allocate more of our capital and sustainable cash flow generation towards supporting responsible, profitable growth and generating value and returns for our shareholders.

At the bottom of the slide, you can see our capital metrics at the end of the quarter with CET1 and Tier 1 ratios at 12.0% and total risk-based capital at 15.5%, all nearing the target ranges we provided during our Investor Day. We monitor these metrics both on a spot basis and an average rolling 4-quarter forward-looking basis, which includes the current quarter and the next 3 quarters' projections.

Finally, our total loss absorption capacity comprised a total tangible common equity plus credit reserves ended the quarter at 25.3% of total loans, an increase of 40 basis points from a year ago, demonstrating a strong margin of safety should more adverse economic conditions arise.

Moving to credit on Slide 7. Our delinquency rate for the first quarter was 5.9%, down 30 basis points from last year and flat sequentially. Our net loss rate was 8.2%, also down 30 basis points from last year and up 20 basis points sequentially, better than normal seasonal trends and better than our original expectations for the quarter.

We are starting to observe favorable trends in our late-stage roll rates and continue to benefit from our multiyear credit-tightening actions. While encouraged by our first quarter improvement in credit results, declining consumer sentiment and ongoing concerns around tariffs and trade policy have lowered baseline macroeconomic outlooks. The emerging macro concerns largely offset the improved credit results, resulting in a reserve rate of 12.2%, a slight improvement year-over-year and in line with the third quarter of 2024. As we have for the past few years, we continue to maintain prudent weightings of the economic scenarios in our credit reserve modeling given the wide range of potential macroeconomic outcomes.

Reflective of our ongoing efforts to manage credit risk exposure as well as a more diversified product mix, our percentage of cardholders with a 6.60-plus prime score improved by 100 basis points over last year to 57%, well above prepandemic levels. We will continue to proactively adjust as necessary to protect our balance sheet, help our consumers navigate the current uncertainty and ensure we are appropriately compensated for the risks we take.

Turning to Slide 8. Our 2025 outlook is reflective of the changing and widening range of economic scenarios. Currently, we expect more modest baseline economic growth driven by slower than previously forecasted retail sales growth, still elevated inflation with a generally healthy labor market.

With greater anticipated economic volatility, we are prepared for a wide range of outcomes. This updated guidance is based on what we know currently about consumer health, policy and overall macroeconomic conditions and is subject to market and policy conditions going forward.

Based largely on the updated macroeconomic expectations, we now expect 2025 average loans to be flat to slightly down. This is based on expected impacts on consumer spending, combined with our strategic credit-tightening actions and elevated gross losses and influenced further by our visibility into our pipeline and existing programs.

Our outlook for total revenue, excluding gains on portfolio sales, is anticipated to be flat to slightly up after adjusting for our updated loan guidance as a result of implemented pricing changes, partially offset by interest rate reductions by the Federal Reserve, lower billed late fees and a continued shift in risk and product mix. We would expect industry pricing changes to remain in place as appropriate as the industry monitors ever-changing macroeconomic and regulatory conditions.

From an interest rate perspective, our outlook assumes multiple reductions in the federal funds rate in the second half of 2025, which will further pressure total net interest margin as we remain slightly asset-sensitive.

As a result of efficiencies gained from operational excellence initiatives, along with disciplined expense management and prudent investments, we expect to generate nominal full year positive operating leverage in 2025, excluding portfolio sales and the pretax impact from our repurchase convertible notes.

We continue to anticipate a year-over-year net loss rate in the 8.0% to 8.2% range for 2025. We expect the net loss rate in the second quarter to remain elevated before declining seasonally in the third quarter. As a reminder, the customer-friendly hurricane actions we took in October and November of 2024 will result in a modest shift of losses from the fourth quarter of 2024 to the second quarter of 2025, negatively impacting the second quarter losses by approximately $13 million.

Given the macroeconomic uncertainty that still exists in -- for 2025, we remain vigilant around credit policy and are closely monitoring potential impacts from higher tariff-driven inflation. With a still generally healthy labor market, we remain confident in maintaining our original loss guidance. Finally, our full year normalized effective tax rate is expected to be in the range of 25% to 26% with quarter-over-quarter variability due to the timing of certain discrete items.

In closing, regardless of the macroeconomic environment, we are confident in our ability to deliver solid results and generate capital by leveraging our resilient business model.

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

[Operator Instructions] And our first question coming from the line of Sanjay Sakhrani with KBW.

Obviously, credit trends continue to perform well, as Perry you mentioned, but the macro backdrop is choppy. Could you just talk about what exactly you're seeing underneath, if you peel the onion a little bit in terms of payment behavior, just credit trends, how the state of the consumer is for you real time? And then maybe, Perry, just talk about how you've incorporated that into your baseline for the reserve.

Yes. Thanks, Sanjay. Yes, a lot is going on right now with the economy. Broadly, I think we're very encouraged with what we're seeing with our consumers and their payment patterns, and you see that in our credit quality results continuing to improve more broadly than with the economy. That's the piece where -- I think the keyword of the month is uncertainty. And so when we look at it, broadly with the economy, I think there's been a lot of sentiment or soft data that's had some dramatic declines over the past couple of months. And that's going to influence some of the consumer behavior that we're seeing.

But the hard data which we look at is still pointing to a solid economy. So our consumers that we serve, I think, are benefiting from that with unemployment remaining low. Wage growth is above 3%, and that's ahead of what's happening with inflation. March inflation continue to show some improvement, which is the one thing we've talked about for the consumers we serve that matters, where core inflation is below 3% for the first time since early 2021. So with wage growth and slowing inflation, these are positive signs. So that's been good.

You are seeing some movement in credit sales, where people are buying ahead a little bit. But the challenge that we're seeing now and you're seeing reflected in the broader markets and in some earnings is it's much like the pandemic, where a lot of the economic progress that we've been seeing could stall and possibly be artificially depressed some policy. And so with the pandemic was a shutdown. Now it's primarily tariffs and what the downstream impacts could be on our inflation and potentially lower business investment due to all this uncertainty.

So the government has been clear on what their intentions are: to rightsize the government, address global trade issues, threat national security and all that. But what this means is the normal leading indicators, such as change in unemployment or U.S. retail sales, wage growth, are not as predictive the way we would like them to be. So the leading indicators may lag. And so that's where this is creating a lot of -- I think I'm going to use the word confusion, but certainly uncertainty. And the longer the uncertainty goes on and the tariffs linger and there's greater risk of the slowdown, that's what we're all trying to watch for. Is there going to be some stagflation or even a recession?

Again, we're encouraged by, again, the past couple of days, a little change in posture from the administration. But in the meantime, consumers are still going to have to probably buy ahead on some select imports. So we'll probably see some maybe improved retail sales in the near term. But in the back end, that could be problematic. So really for us, the speed of implementation and outcome of the tariff policies and along with their efforts to deal with the tax cuts from 2017 and their goals on deregulation, all this is going to matter a lot to what happens with the overall health of the economy.

So when we think about our guidance, we've incorporated the things that we know in terms of traditional data, and then we track some alternative data to see if we get a firm handle on the health of our consumers, their sentiment in purchasing and what will happen with their payments. So until greater clarity exists, we're going to continue to take a conservative posture, stay disciplined with credit risk management strategies. And that's very consistent with our responsible growth commitment. And you see that reflected if you ask about our reserve. That's predominantly how we address the reserve.

If we saw some improvement in the, I'll say, the top line inputs with credit quality improvement, so when you think about the portfolio, it's the best view we have with -- the line of sight we have into the current portfolio and the economic landscape. We do maintain a, I will say, a prudent risk overlay. We do proactively look ahead at future potential weakness by maintaining an outsized weighting of adverse and severely adverse scenarios, which is what the CECL economic risk overlay has helped us to achieve. So I think if delinquency continues to improve and economic trends improve, which was a path, I think, we were on, we would expect a slow gradual improvement in the reserve rate. But at this point, the reserve rate will likely remain more stable if weakness continues to creep into the baseline economic outlook. And that's what offset that improvement in credit quality this quarter.

Got it. And I guess, is there an explicit unemployment rate assumption that you can average out to? And then I have a follow-up for just Ralph is -- obviously, it seems like we're getting positive results on the late fee regulation not coming through, but there were mitigation efforts that you guys were planning to put through. Could you just talk about the conversations that you're having with retailers? And what's factored into the guide this year? And how we should think about the sequencing going forward?

So I'll take the first question and, Ralph, take the second. So the scenarios do run some pretty high unemployment synergies. Again, recall from past conversations, a lot of the models do not really incorporate, I'll say, inflation and high interest well into them. But the weighting probably averaged out to around 7% for unemployment weighting. So it is -- I think we are well positioned for anything that could come. Ralph?

Obviously, we're pleased with the outcome of the late fee litigation. That made sense to us. It was logical and feel pretty good about that. The partners are too because we've worked with them, and they've been very cooperative and collaborative in terms of changes we've had to make. At this point, we're not intending to roll back those changes and talk to the partners about that. They're okay with where we are, particularly the rev share partners are particularly happy about that. And we'll continue to monitor it. And most importantly, we look at the competitive landscape and we want to remain competitive in the landscape, and that's very important to us, too.

And how is that in the numbers, maybe Perry, like as we think about the guide?

Yes. That is included in the guide at this point.

Next question coming from the line of Moshe Orenbuch with TD Cowen.

Perry, you talked about better late-stage roll rates and its impact -- positive impact on credit. Could you talk a little bit about maybe if you have thoughts as to what the underlying causes of that? Is that just wage growth exceeding inflation for a longer period of time? Is there something else going on? Is it vintage performance? I guess, just we're all trying to think about this in the context of how to think about other changes that might happen, positive and negative. And so any thoughts there would be most appreciated.

Yes. I think it's a combination of things. One, it's consumers, as you said, wage growth outpacing inflation. So I think they're getting a handle on the new norm. And those that couldn't deal with it early on have charged off, and now you -- we're still -- we still have elevated charge-offs. But that roll rate improvement, I think, is reflective of the better vintages that have been coming on. And that's -- we're also -- we still have elevated roll rates. But again, we're seeing some slow gradual improvement in that, and that's encouraging. That's what we've been looking for. I do think it's just simply a matter of wage growth and the better credit risk mix of new vintages that we have.

Got it. And maybe to expand on the question on mitigants and partner discussions, it seems like, to me, that the partner business is probably a little bit insulated from direct competition because in most of those accounts, they're not competing with every other account that's out there. But talk a little bit about how your partners think about the interplay between pricing and growth here and value and growth and when you think about what you would likely do to kind of help increase profitability both for you and them as you kind of look out for the balance of this year and into next year.

Yes. I was going to build upon what Ralph said earlier. It's -- and I think you said it well. There's the intersection of pricing, profitability, value proposition to the consumer, compensation to the partner, that's important to them as well, and how you find that intersection. And what we found to date with the the pricing change that we're in market so far is that we have not seen an immaterial impact to retail sales. So what it's done is it's allowed for some incremental profit share to the partner. And obviously, for us, helping to maintain, I'll say, a risk-adjusted margin that's important in a period like we're in right now, we're still running a couple of hundred points higher than where we want to be on a loss standpoint. So that's important for us to be able to continue to underwrite as deeply as we do, which is important to unlocking sales for them. So it's a combination of things.

So then as the credit environment improves and if the margin gets outside in any one place or another, you continue to work with the partners to how we can invest more so into the value prop, if that's the right place to go because we're always trying to keep the value appropriate for customers, and it works with the partner.

Our next question coming from the line of Jeff Adelson with Morgan Stanley.

So we've heard a lot so far through this earnings season about how the consumer is resilient. There's been some, I think, mixed messaging on whether there's a pull-forward dynamic happening here. But maybe just sort of thinking about the prior commentary in prior quarters about consumers trading down, are you still seeing any of that? Is it possible to strip that out? Or are there any other signs of consumer health you're seeing that you can point to trying to extrapolate out from what might be a pull-forward dynamic? Just anything under the hood there or what you're seeing by income or FICO cohort?

I think when we look at it, it's -- I mean Ralph commented earlier, right, that there's -- we're seeing some of the improved spend partway through April, right? So you've got this -- Easter happened in April, which was in March last year, so you have that dynamic. But we are seeing with -- and we're seeing it more broadly across the industry is we're watching what the retail is seeing as well that there's -- the consumers are buying more electronics, home furnishing, auto parts are some categories that are getting pulled forward because those are ones which are expected to have some price increase.

I mean, if you've heard some CEOs today of a big company, they were saying that they're going to start some increased prices in the second half of the year, which is their fiscal year. So I think it's -- there are going to be price increases. And I think that's what consumers are going to need to navigate. Our consumers that we serve have done a really good job of navigating this the past few years. I mean they've been adjusting. I think we're perhaps more of the impact could be is on the higher-end consumers, and I say higher end meaning prime-plus to super-prime, where they start to pull back on T&E and -- or trying to figure out you're still going to buy that big TV or they're going to make some other choices if inflation comes through at some of the rates they could. I mean that's the real wildcard here, and that goes back to my comment earlier on uncertainty.

I think this is going to impact consumers up and down the Vantage scores or the risk scores. When you think about consumers who have been most impacted by, we'll call it, market volatility, it's not the lower-end consumer, it's not the near-prime consumer, because they don't have big investments -- they're not big investment portfolios. They don't have necessarily as much homeownership. So when you see what's happening in those markets, it's less impactful to them. But those consumers who are speaking about are most impacted by what's happening with the markets are ones that travel a lot, have big purchases, and you may start to see a pull-down in some of those luxury retailers.

Got it. And just to sort of circle back on the strategic credit tightening, can you help us understand what incremental actions you took this quarter, if any? I know you talked about the multiyear tightening there. Just wondering if you took further steps and that might be why you're taking down the loan growth a little bit for the guidance this year.

No. I think what I'd say is we've maintained a very constant or consistent posture. We continue to make targeted adjustments, adjusting a segment where we believe could be at risk, where we'll look at acquisition or we'll have line assignment at acquisition or things like that or reactivation strategies. But there's nothing that is that material that happened in the quarter.

What I'd say is representing always, obviously, is that when we now look to what's happening with this degree of uncertainty, I'd say that it's probably going to push off what would have been opportunities to begin some credit unwind actions, right? So we were really on the cusp of seeing good performance of the underlying portfolio. That was the first marker we said had to show itself was better consumer payment patterns of those that we have. And when they demonstrate that and their overall debt management look good and there's strength in delinquency improvement, that -- once you clear that gate, we were kind of on the way there. And we needed to see ongoing macro improvement, which was inflation, interest rates coming down, stability employment.

Unfortunately, that one now just became a lot more uncertain. And if you think the curve could bend the other way on some of these, it just means we have to be prudent and very thoughtful about when it's an appropriate time to unwind some of the credit actions. Does that make sense?

It does.

Our next question coming from the line of John Pancari with Evercore ISI.

Just on the capital front, good to see the CET ratio -- CET1 ratio pretty solid at 12%. You completed the $150 million buyback authorization earlier than we thought. So maybe can you can help us think how you're thinking about the pace of buybacks, particularly in the context of possibly slower balance sheet growth as you're alluding to?

Yes. So thank you for the question. Yes, we are pleased to have executed the $150 million buyback when we did. Any time you can buy back your shares below tangible book value, that's a real positive.

Look, as it relates to our capital priorities, it remains unchanged. Supporting responsible, profitable growth, number one, investing in our technology, digital capabilities, but we still need to build and maintain our strong capital ratios, and then we do return to our capital shareholders. So that hasn't changed.

In terms of what's coming, you're right, it balances -- if balance growth isn't as strong as what we'd expect by the year -- by the end of the year, that will perhaps accrete more capital. We do look forward to what is coming out next year to make sure we have enough capital to support that. But we will discuss with our Board. We have a couple of meetings coming up, one in May, one in June, and we'll figure out as we run more stress scenarios because things are changing, just making sure that we have a no-regret type of decision as it relates to capital usage, particularly buybacks because once the capital goes out the door, we then can't use it to support growth. So we've got to make sure we can care for all things I've previously mentioned. And we do look at our capital ratios. We look at a 4-quarter forward view, as I mentioned. So it's the current quarter plus the next 3. But we'll continue to do the right thing with capital. I hope you can see that we are trying to

do.

Okay. And then on the margin, solid expansion this quarter to about 18.1%. If you could just help us think about how we should think about the margin trajectory from here given the volatile rate environment. I know that might be challenging. But how could we think about it here? I believe you had indicated previously, maybe as recent as January, the expected modest expansion in the margin, but I didn't see that noted in your outlook today. So curious how you think about the margin from here.

Yes. There's going to be a lot of movements. I mean I'll still hold to what we said back in January, that we expect slight expansion in the margin for the full year. So when we think about the moving pieces in net interest margin, we'll go -- still feel cautiously optimistic that we'll be able to deliver that slight improvement. But there's some headwinds in there, right? So the prime rate reductions are a headwind in that we are asset-sensitive. So we had 100 basis points of prime reductions in 2024 that come through in -- all '25. We still expect another 75 basis points of cut in the back half of '25. Now granted, some of those are later in the year, so they might not be as impactful.

As delinquency improves, as we're starting to see our early-stage delinquency improvement, that means we have lower billed late fees. We're continuing to see a shift in our new account product mix with the vintages we're putting on. There's more of a mix of co-brand and some proprietary card that has a little lower yield in it than private label. So that means you get a lower assigned APR and it comes with lower late fees.

Tailwinds are the rollout of the pricing and policy change that we made in 2024 and continue to make in 2025. And then as your gross losses improve, you get less reversal of interest and fees. So that's again, a helper. But then the quarterly impacts are going to just move around and be kind of choppy. So you saw it in the first quarter, the holiday transactors paying down going into 1Q, 2Q, we had the timing of tax refunds and how much of that was going to be used to pay down debt. I think this year, we saw less of the pay down than what we were expecting. It was muted again. The level of gross losses in which quarter matters to net interest margin and then the continued build of the pricing actions that we put in there and then the timing, as I mentioned earlier, of when does the prime rate changes occur and how does that impact us? So yes, forecasting NIM is a little bit of a challenge. And I appreciate the question. But right now, I'd say, overall, we're still pretty confident that we'll see some slight improvement year-over-year despite the headwinds.

Our next question coming from the line of Bill Carcache with Wolfe Research Securities.

Following up on your commentary around the 7% unemployment weighting in your allowance, that's the most conservative assumption that we've heard. And so if we go down that it path, seems likely that the Fed would be cutting pretty aggressively. But if we do start seeing unemployment rise, can you frame your ability to start lowering your reserve rate as losses are rising versus the likelihood that you would actually have to potentially build even more and that 7% weighting could go even higher?

Yes. Bill, I think the keyword of what I said, I think that we feel very confident in the way we've approached the reserve rate to date. I mean we are down 20 basis points versus this time last year, up only 30 basis points sequentially, which is basically seasonal. And we're back in line with the third quarter of last year despite what I would contend as now a more uncertain forward-looking macroeconomic environment.

And I can't speak to what others are seeing or doing or how they took -- consumed, what I'll say, is the more recent macroeconomic outlooks. But a lot of the more recent ones are starting to show some signs of some baseline unemployment increases. So I think your question is spot on is that because of the way we have weighted the S3, S4, those more severe scenarios, as unemployment creeps into the baseline, you can dial back the weightings on those others because what we were caring for is going to manifest itself into more of the baseline. So for now, I'd say you should expect pretty stable reserve rate for 2Q.

That's helpful. And then following up on your NIM commentary, are you putting on new originations at wider spreads currently or have spreads been pretty stable? Curious how the macro environment is affecting your decisions there? And then sort of along the lines of the pricing discussion earlier, even though the ruling has been vacated, maybe if you could just share your thoughts on the risk that we could see a future administration come back another attempt at a cap.

I'll take the first one and have Ralph talk about the potential this coming -- a new late fee regulation. So as we look at what's happening in there with the spread, the -- we price for risk at the time of underwriting. So if you have more co-brand, high, high quality, they're getting a lower price assigned. But yes, with the pricing changes we've made, the spread is a little bit more for, say, the new vintages, but it's caring for the risk environment that we're in right now because they do a good job of projecting different loss rates. They stress those loss rates, make sure the accounts will be profitable under different loss rate scenarios, and similarly, that the pricing that's in the back book, that just takes -- as we talked about before, those take a long time to burn into the balance because of payment hierarchy.

Yes. So as I said, we were pleased with the decision. I mean we've got 3.5 more years of this administration. So it's not imminent, what's going to happen. I think the way that the opinion was written, it makes it very difficult to make that logical going forward. I think opinion was written very well. It was laid out. It was consistent and logical. And I think any administration would have a tough time reinstituting the late fee.

Our next question coming from the line of Terry Ma with Barclays.

Maybe to just follow up on the roll rate comment. Any color you can kind of provide on the magnitude of the improvements you're kind of seeing across your FICO buckets and maybe like how sustainable that is? You obviously maintained your charge-off guide for the year. So maybe just help us reconcile that.

Yes. So we're seeing, again, modest improvements across all the roll rates. It's a slow gradual improvement. And I wouldn't say there's a distinction by risk band with that. I mean we look at it in aggregate, we look at it more micro. But we do look at payment behaviors at a very segmented level. And we're seeing some good signs of gradual improvement. So this isn't going to be a cliff type of improvement. It's just going to be slow and steady. So I think that's the way to think about roll rates at this point.

Got it. Okay. And then you reduced your loan growth guide for the year. Maybe can you just talk about how that kind of impacts the phasing of your mitigants, particularly the APR piece?

So we slightly reduced the loan guide. So I don't -- there's really not much of an impact to the the mitigants. It just means there'll be slower new accounts building in the vintage, but also it's more -- it's a little bit of the new accounts. It's also a little bit of, I'll say, spend softness that we're expecting on the back book as people have to contend with these -- the higher costs for other goods and services.

Our next question coming from the line of Mihir Bhatia with Bank of America.

Just had one quick follow-up here. On the pull-forward effect that you talked about, obviously, we've heard that from other companies. But any way to quantify that, like maybe you have some month-to-date spending stats? Are you seeing like a 1%, 2% increase? Because I think you also mentioned you might see a little bit of a benefit here in 2Q of higher purchase volume before things -- you start having to give back. So just wondering what you're seeing in the data from a quantitative side.

So yes, it's hard to quantify with precision what you say is the pull-forward of future spend. Again, what we saw is a couple of things that stood out a little bit of higher purchase of some electronics and some auto parts and a little bit of pullback in T&E. So you see a little of that mix shift going on in the quarter, more so -- and it's hard to decouple some of that as well, what we're seeing in April to date because you do have the timing of Easter that I think is worth like 60 basis points of growth or whatever it is in the -- that will be worth that for the quarter. So I wish I could give you more insight on that.

It's early. We continue to monitor it. And that's why we're cautious about what that means for the full year because it could be a little bit of a head fake, meaning that consumers are pulling through, you don't want to extrapolate that a little bit of higher spend we're seeing now to say that's going to be a full year trend. And I think we're seeing it as we stay -- in terms of staying on top of what others are seeing in the industry. And retailers are also saying the same thing, and you're hearing it anecdotally from consumers and surveys that there's a decent percentage that are pulling forward purchases and a little bit of I'm going to call it panic buy, but it is a little bit of that happening because of what could be 30% to 70% tariff impact on goods and services when you look at the mix of what -- where retailers get their goods from.

Got it. And then just one quick other one -- might not be quick. In terms of the guidance and the outlook, you talked -- we've talked quite a bit about across -- I think across issuers about the hard data being reasonably decent but the soft data and sentiment indicators being weak. Can you just talk about some of the levers you would be pulling if you start seeing the hard data follow the sentiment data?

Yes. So I kind of opened up with a little bit of commentary on the economy, and that is consistent, right? I think we're all seeing the same thing, that the hard data is really pretty strong and was on a good trajectory. At this point, it would mean, one, continuing to maintain what I say is a conservative credit posture that we have today. It would mean that you would see a slower improvement in the -- our credit metrics that we've been seeing some nice improvements that have been, I think, at a faster pace than what you've seen across the general industry.

And again, it would then pull through into perhaps slower spend, but then payment rates would slow. So you have a little bit lower loans from origination slowing. You'd have a little bit slower payment rates would push some balances back up. So there's a whole lot of things happening in there. But I don't -- for what we're seeing, again, our consumers have been dealing with 3 years now of elevated inflation, and I think we've seen it would be a similar scenario. It just means more of this -- basically more of the same for our consumers. But this is what they've had to deal with, where things are up 25% over the past 4 years in terms of inflation. It really would be unfortunate if they had to contend with more of this going forward.

And our next question coming from the line of Vincent Caintic with BTIG.

First question, wanted to talk again about the merchant side but zoom out a bit. So related to the uncertainty of the market, could you discuss how your conversations have been going with your merchants? Are you seeing more merchant engagement? And are there any focal points with your merchant discussions? Like are they discussing approval rates or economic sharing or anything else?

No. The -- we have conversations with our merchants all the time. And they range from approval rates to increasing the value prop to everything under the sun. So nothing unusual there. We're in constant contact with our merchants. I think to me, if you think about the tariffs, it's still very early in the process. It's still very dynamic. The tariffs are going to affect our merchants -- many merchants in different ways. We're working -- they're working through that now. But those are the types of conversations we're having.

Okay. That's helpful. And then relatedly, I thought your Crypto.com, partnership was really fascinating. It seems very innovative. First, like how difficult it is -- is it to do that kind of rewards program with Crypto Has Rewards? And then when you're competing for a program wins like Crypto.com, is the current competitive environment leaning on any particular factor to win business? Like is it price or the willingness to go lend down credit? Just talking about the competitive environment.

It's what we do best, right, win partnerships. And we're excited about Crypto.com. They've got millions of U.S. customers that are engaged in the company. The rewards program is pretty robust. It's going to be managed by them. You can buy their currency or you can buy multiple other currencies. You can buy stock, you can buy merchandise, a really very robust program for Crypto.com.

I think we won this for a variety of reasons. We demonstrated to them that our technology is up to snuff. So we continue to invest in tech monetization. We have seamless integration in multiple platforms, particularly in our mobile app. We've expanded our web and mobile-based customer service. So all that matters. It also matters that -- personally, that we're on top of with the team, and that's how we're engaged. So it will launch sometime this summer. We're really excited about the launch.

[Operator Instructions] I am showing no further questions in the queue at this time. I will now pass the call back to Ralph Andretta for closing comments.

Yes. Thank you all for joining today and for your continued interest in Bread Financial. Looking forward to speaking to you next quarter. And everybody, have a terrific day. Take care.

This concludes today's conference call. Thank you for your participation. You may now disconnect