Bread Financial Holdings, Inc. (BFH) Earnings Call Transcript & Summary

Okay. So I think we're going to start. Welcome, everyone, to the 22nd Annual Barclays Global Financial Services Conference. My name is Terry Ma. I'm the consumer finance analyst at Barclays. And we're very pleased to have Bread Financial with us, a leading private label credit card issuer. From Bread, we have Perry Beberman, who's CFO. So welcome.

Well, thank you for having me.

So let's just jump right into it. Maybe just give us a mark-to-market on the third quarter. Any updates on P&L trends we should expect in the third quarter?

I think when you look at what's happening with our trends, let's start with sales, sales are remaining a little softer given what's happening in the macro environment. I think everyone is seeing what we're seeing with retailers talking about their own trends, big ticket purchases are down, more of those, I'll call it, discretionary large tickets down. So that's going to impact us a little bit. But we look specifically at the third quarter income statement for us, consistent with what we said. We expect expenses to go up a little bit in the third quarter result of Saks coming online as well as an increase in marketing in the third quarter. And then sequentially from there into the fourth quarter with continued to be an increase in expenses further with increased marketing and seasonal increase in our HR employee costs related largely to benefits. As we look at our tax rate, the tax rate should be around 30% for the third quarter, a little higher than the full year, but it hasn't changed our full year guidance, except for the convertible. So the convertible that we repurchased, and we repurchased 75% of our $316 million of the convertible outstanding. And with that will be -- it will cost us about $380 million to repurchase that 75%, that will result in a $100 million onetime charge into the P&L in the third quarter. So that will then -- talk about the tax rate, that will obviously put the tax rate into a different number than the 30% it would have been without that.

Got it. That's a helpful update. And you touched on this a little bit, but maybe just expand on it a little more, the trends in big ticket and discretionary spend you saw in the third quarter?

Yes. So we were seeing some softness in some of the big ticket. And you could think about that as jewelry purchases, home furnishings, that had been occurring in the second quarter as well. So it's been a consistent theme throughout the year, and it's continuing on into the third quarter.

Okay. Helpful. And then based on the trends you're seeing, what can you say about the health of the consumer? Like we had a worse-than-expected unemployment trend in July. Have you seen any signs of that kind of manifest itself in the borrower behavior?

Yes. So when I think about the consumer, things are largely playing out as we would have expected, say, 18 months ago with, I'd say, inflation coming down slightly, but I would say that inflation is coming down a little slower this year than what had been projected, had you been thinking about this 18 months ago. But what we said is when inflation comes down, it was going to get offset with some increase in unemployment. So yes, there was a print in July that got people that worked up. But I think that print in July or August was more around the inflow of people looking for jobs, not about job loss. And now you're into the print that we just had, unemployment came down slightly. So unemployment, while it's up from its lows, it's still in a pretty good place. And I think that -- I don't know, no one wants to give a Fed credit, they're doing a decent job navigating this. Obviously, with an expectation, there'll be some interest rate cuts that may help the consumer and may start to again allow companies to invest a bit more, but we'll see. But right now, we're all talking about a soft landing as I saw [ the economist ] the other day talked about a soft landing, still means the planes coming down, right? It means the economy is getting a little weaker, but hopefully, it doesn't have a hard landing. I mean, it's going to be bumpy. And I do expect there's going to be some sectors that are going to feel a little bit more with unemployment. But when you manifest that or turn that into what it means to consumers, consumers are being responsible credit Obviously, there's some increased borrowing credit card debt is at some of its highest levels. But again, that's how credit card companies make money, is borrowing with the right return on risk, and we do a really good job with that. Consumers, even with a slight uptick in unemployment, delinquencies remain stable for us as a result of credit actions we've taken. I'll give you a little context on what I expect for loss rates. Loss rates we've indicated would be around 8% or slightly below for the third quarter, still hold to that view. Fourth quarter then increase to about 8.3%. Again, that's still our current view. One thing I would comment on, though, is when we look at what's happening with, I'll say, the inflation not coming down as much as we thought and the consumers not benefit as much. I think we're going to see around delinquency and loss rates are going to follow more seasonal patterns, meaning even going into the first quarter of next year, we're going to see some upward pressure on that rate just because the improvement in the macro environment really hasn't come through as much as I think people would have hoped. And until that happens, and that's what I would expect.

Got it. So that's on the near term. On the long term, you reiterated your long-term charge-off guide of 6%. Fiscal year '24 is expected to be above 8%. So maybe just talk about the drivers of getting down there in the time line.

Terry, that is the question we're all trying to sort through is, what does that time line look like? I've indicated before, I expect there to be a prolonged period of elevated delinquency and inflation and I mean, and charge-offs. So while I'd love to say we'll exit 2025 at 6%, I just don't see a path to that. I think what's going to happen is it took a long time for this problem to build, meaning this -- where cumulative inflation is compounded itself on the price of things that consumers pay for. Wage growth hasn't kept up. And so when you think about what needs to occur for the consumer to have relief, it's going to take time for wage growth to outpace inflation for them to get a handle on their finances, and they have accumulated more debt. So it will take, I think, a prolonged number of quarters into -- I'm not saying years, but it's going to take more than 12 months. I wish I had the crystal ball to know how -- at the speed at which that can happen. I just think it's going to be one of these slow things, not like the great financial crisis, where you had this huge influx of, I'll say, strategic defaulting by consumers who all went bankrupt and closed their debt with the mortgages they had. This is not that issue, right? This is not a problem that's a mortgage-driven issue, nor do I expect there would be a high degree of unemployment. So it's just going to mean a slow, steady burn to, say, of improvement in time.

Got it. If you were to look at your vintage performance, any color you can kind of provide on how the more recent vintages, like 2023, performing relative to 2021 and 2022 when even pre-pandemic?

We do look at the vintage curves all the time and the recent vintages of performing more in line with what we expected due to the credit actions. All -- but I'd say all the prior vintages are all same thing, is they've felt the effect of inflation, and it's just going to take time for all of them to cure. So no one particular vintage that's causing an issue in our portfolio. So we've taken actions ever since the pandemic, never really opened up the buy box and have continued to tighten sense. It just seems like, of course, you can't get ahead of it, because the consumer, once they go delinquent, they can't seem to get out of delinquency. And the one thing we can't control -- while we can't control our own credit actions, we can't control credit actions of other underwriters, and our consumers may be looking for credit elsewhere, despite our best effort to tighten down credit that they have with us.

Got it. That makes sense. And maybe just turning to the reserve rate in the last quarter at 12.2% and you're expecting to exit the year lower versus 2023. But yet the reserve rate is still going to be noticeably higher than CECL day one at 9.3%. So how should we think about the medium-term target? And do charge-offs need to hit 6% before you drift back down into that range for [ reserve ratio ]?

I'll answer the last part last. They don't have to 6% for our reserve rate to come meaningfully down. Near term, I expect the reserve rate in the third quarter to be very stable to what it was in the second quarter. It hasn't been a lot that has changed. You're going to see some, as I mentioned earlier, seasonal movement with our loss rates. So loss has been lower in the third quarter, going back up in the fourth quarter. So again, the reserve rate being stable to the second quarter still should allow seasonal movement down in the fourth quarter, which would put us slightly below where we were at the end of last year. I would say early in the year, it might have been a little bit more below than the word slightly, might have been modestly below. Now it's slightly low because things haven't improved as much as we thought. But when you look towards next year, I would expect as -- we continue to have a better outlook on the economy, we can then unwind some of those -- the credit risk overlays that we put in where we weight more of the adverse and severely adverse scenarios, which is why when people ask the questions, what if unemployment goes to 5%? Well, we've got much of that care for in our reserve rate if that were to happen because we do have a weighting of some severely adverse scenarios in that, or in that setting, it's really, I'll say, adverse.

Got it. Is there -- as a follow-up to that, is there a level of the unemployment rate that your reserve ratio currently contemplates?

The reserve rate contemplates a weighting of the Moody's baseline, which has the reserve rate of around 4.1% to 4.2% as a baseline rate, and then we weight the scenarios, which are an adverse called S3, S4, adverse and severe adverse that have reserved -- that have unemployment rates jumping up to 7% to 8% in a pretty quick fashion. So those are weighted into the overall reserve. But the baseline model is using the Moody's baseline unemployment considerations, which is only basically where it is today.

Got it. Maybe turning to loan growth. You're targeting low to mid-single-digit growth in the medium term and mid- to high single-digit growth longer term. Maybe just talk about what products or verticals that's driving that outlook?

Yes. So a couple of things. Near term, as the macro environment improves, we've got a couple of tailwinds happening, right? As right now, our loss rates are, as you mentioned, elevated well above the 6% target. And that's -- you think about losses, it's gross losses. So the 6% is really more like a 8%, 9% when you factor in the reversal of interest and fees, that's gross losses. Today's 8% might be more like a 12% gross loss rate. That's 12% of your loans coming out as a result of losses. As losses improving migrates back down to the 6% target, that's a tailwind to growth. Then you -- in that environment, you have consumers who are healthier, spending more tailwind to growth. At the same time, that means more consumers will be looking for credit, top of the funnel applications improve. And then also, our approval rates will improve, another tailwind to growth. And then as well, the last piece would be, you would stop the -- like right now, with risk detection actions that continue to suppress credit access to customers. We can unwind some of that, including increasing the lines again to consumers, and then increasing initial line assignment. So there's a lot of things without even booking a new partner that should be a tailwind to growth. And then around the mix of product, we'll continue to diversify our products. You can see the progress that we've made over the past few years trying to move away from soft, good private label as a concentration, more broadly getting into more general purpose cards, including proprietary cards, more co-brand cards. You've seen us establish more of that, I'll say, travel and entertainment vertical, with AAA, NFL and as well more recently, let's call it, a technology vertical where you have HP and [ Dallas ] there.

Okay. That's helpful. Maybe just switching gears and turning to [ late ] fees. What's the update on that? And more importantly, the revenue impact. I think the last guide you gave was a decline of 20% that I also assume an October 1 implementation date, which looks highly unlikely, at least to me. So maybe just talk about the update there?

Yes. I'm surprised you're asking the question about late fees. In fact, waited this long into the 26-minute mark. The -- what we know is you guys know, right, is that the parties are still debating over the -- where the litigation will occur. That happened on August 27, there was a hearing with Judge Pittman. He heard the cases from each parties. We're waiting on his ruling. We didn't know if he was going to come out with a rule in the very next morning because often, it seems as though he already has a [indiscernible] decision. This time, it seems he's taking some time. Not sure we're hearing that -- again, I don't hearing, we know he doesn't want the case. He wants to kick the case to DC. But it's pretty clear from the appellate court that they believe, of course, has merits to be in Judge Pittman's court. So whether or not he decides to kick it again or try to, it's anybody's guess from what I understand, the industry is ready to file an appeal as soon as the ruling comes out, if it goes against the industry. Our -- nobody knows how long this is going to play out. Not sure if this is going to wait until after the elections, what happens. But I think everybody who's been around litigation tells us things take a long time. And I think you're starting to see that play out. So your point on, if not being October 1, I think that's a guarantee, there will be no impact October 1. Back at the -- in our second quarter earnings, we gave guidance that we removed the impact of 20% from this year because we do not believe there will be an impact. Right now, we're building out our base case for what that might be for 2025, thinking the impact maybe occur midyear, but we'll give some guidance when we give 2025 financial guidance around what we would assume and when that might impact because the numbers will look -- possibly look a little different because we'll be hopefully accreting and building some revenue in advance through some early mitigation actions. And we'll have a better hand on what exactly that would be and then what the assumptions would be if the late fees were to go into effect in a particular quarter.

Got it. So on the topic of mitigants, any update there as to kind of what you've implemented so far? And what's kind of left in the pipeline to roll out?

Yes. So we're still working with every partner, and as we noted previously, each partner has different motivations to take actions on certain levers sooner or later, depending on, I'll say, the profit share construct. Some are highly incented because they're on a very robust profit share. So if there's a way for them to make more money now by increasing fees or APRs, they were early takers on those actions. Others are concerns about being out of market with APR increases relative to, I'll say, programs that look like theirs, and they wanted to wait. So then there's other programs you're seeing the market go up, okay, the others say, they're comfortable, because what they don't want to do, it does something detrimental to their customers and program that would affect their sales sooner than needs to be done. So some are waiting for okay, we're on board now. They've signed -- papered up the contracts of what it would look like if the late fee rule goes into effect. So not all programs are going to have increased APRs or introducing fees, where some get it and want to do it sooner and they'll share in the revenue. In some cases, we will give that revenue in some part back into the program. That grow the program now. So they're all a little different. You're going to start to see some revenue accretion. I'd say it starts to come through maybe a little bit in the fourth quarter, more in the first, more on the second of next year, and we'll give some guidance around that as we get closer to it.

Got it. It sounds like it's a complicated process. If you had to say like what inning are you in with respect to implementing the actual mitigants or getting all the partners on board.

I think we're probably in the -- probably eighth inning in terms of getting the partners on board. So all partners have been -- have had conversations. All the major partners understand the -- what needs to get done. Nobody likes this. Let's just start with that. We don't like what we have to do here to increase APRs on people who pay on time, introduce new fees. It's not what we want to do, but it's a necessary thing to get the appropriate returns on capital that all shareholders expect. And we've been very vocal about what these actions will look like, and it's playing out exactly as we said it would when this late fee rule get introduced by the CFPB. In terms of mitigation, you said -- you asked 2 questions, right? One is where are you at with the partners and agreeing to what needs to get done? We're very far down that path. In terms of rolling things out, probably more third, fourth inning, just because it's a sequencing and timing and the roll out and then the build of the benefit. Again, we've talked before about APRs take time, take years to get the full value out of that.

Got it. That's helpful. Maybe just touch on the customer response. Out of this stuff, you have kind of implemented, have you noticed any change or early changes in customer behavior, whether it's in response to higher APRs or paper statement fees?

The higher APRs, when you have customers who need credit and that are borrowing tend to accept it, and in some cases, if they're going from a 31% APR to a 34%, 35% APR. It's not as dramatic. And I think what's happening right now as well is not I think, I know, it's across the industry. APRs are going up everywhere. All insurers are increasing APRs. So this is a -- you can't point to any one card and say, well, geez, you're increasing my APR, no one else's, it is, it's happening. Paper statement fees, there's a path to free, meaning just sign up for digital statements. And that's the goal. So we have a very liberal policy initially, right, to waive the fees, help the customer to get a digital statement and what that does for us, it benefits the company through a lower operating costs in the future.

Got it. That's helpful. In terms of the actual kind of incremental revenue you expect to generate from your mitigants. Is there any kind of framework you can give to help investors size the impact of mitigants ultimately? Obviously, you had your -- a close peer put out an actual range. Like is there any framework to kind of help investors get to a certain number?

I'd say a couple of them. One is we're going to give more guidance on that because the real impact in value is going to happen in 2025 based on the sequencing of how we're putting things in place for our partners, and I'm also a little bit cautious of raising a say, "Hey, look at us, look at how much incremental revenue we're raising." I don't think the CFPB will look too kindly on that either. But that is a natural outcome of what we said, right? I mean, I think all the issuers, the whole industry said this. They changed the late fees. They want to save what the save, save the consumer billions of dollars. Okay, they're saving the consumer billions of dollars who went late. Now consumers who are paying on time are going to pay billions of dollars in higher interest and fees. We've said all along, this is going to be net neutral in a period of time. It's just a matter of when, and we'll give more guidance on the impact to our revenues as we give 2025 guidance.

Okay. Fair enough. Switching gears and maybe just talking about partnerships. You recently announced the Saks partnership, partnership with HP with a BNPL option. Maybe just talk about the market for both co-brand and private label partnerships? What you're seeing there with respect to competition?

I think with competition in this industry, and I've shockingly been in this industry for over 35 years, it always ebbs and flows. You have some competitors leaning in more heavily at times. Sometimes you see irrational pricing, some then lean out depending upon what's going on with their particular bank or balance sheet, capital rules. Right now, what happens in the co-brand and private label space is, there's just a timing of when contracts come up for renewal, right? So the pipeline remains pretty steady. And you can project out 3 years. I'll say the industry consultants, we know the brands are going to come up for renewal at different times, and it's just a matter of being ready, being engaged. And we got to look at almost every deal that comes to market. So the pipeline is robust. We have to be selective, we have to be disciplined, and what's different today with these opportunities is when you make a proposal, because of the CFPB pending late fee rule, you have to say, okay, here is the construct, if there is no late fee change, and then here's Plan B, if that late change goes into effect, you're basically papering what actions need to happen. So there's not this debate that maybe happen with some of your existing partners, and so through negotiation, it's basically predetermined.

Got it. To look at your credit sales by categories, about 51% co-brand, 44% private label. I guess what looks more attractive longer term for growth? Is there -- are you trying to tilt it one way or the other?

One, I like more general purpose spend because it gives you more diversification of spend. And so as consumers flex between discretionary, nondiscretionary, that gives more value to us, and I think they tend to tilt to be a little bit lower risk customer. So when we think about what's happening in the private label industry as a whole, you'll hear -- I get questions, private label tends to be shrinking. But what people are kind of missing with that is not exactly, right? The retail partnership or retail cards is not shrinking. If you take private label, think about those as your down-sell products, people who are not eligible for a co-brand, where you don't want to give them a higher line, where they can go use the card anywhere. So often, what's happening to, say, 20 years ago, private label is a store card. They can only use it in the store. Now most retailers want to have a store card where they have their brands as the co-brand and then you down sell to a private label. So you were to stack the private label plus the co-brand together to see what is truly the trajectory of brand partner programs. And I think it's still a very attractive business model for retailers.

Got it. And what are you seeing from new entrants? We've seen some newer entrants, like [ imprint ], pick up some retail relationships. What can you say about those entrants?

Yes. I think the -- we'll see how some of those play out. I think the more sophisticated players with bigger balance sheet, who have the analytics, who can underwrite deeper, who understand how the return model works. When you look at the industry, they have tended to be the ones who have persevered the longest. I've seen a lot of new entrants come in over the past few years, and you're watching a lot of entrants fade away. So this is a hard business. It has, I'd say, with a regulatory environment has a pretty high barrier to entry. So wish these guys look obviously, competition is good, but not overly concerned about what it means to us.

Got it. Switching gears again and going to capital allocation. Bread's made strides and balance sheet management, paying down parent company debt, increasing deposits and improving overall capital ratios. Can you maybe just talk about your near-term and intermediate-term priorities?

Yes. Near term, I think you can tell that we are still very focused on taking care of our parent debt as the recent announcement of reducing 75% of our convertible. We still have $100 million of a stub that we will take out probably by the first quarter of next year. Our capital ratios will be impacted a little bit. We won't make as much ground in increasing them because of the $100 million onetime charge in this quarter. We will have a 65-basis point impact from the final CECL phase-in, in the first quarter of next year. So those are near-term capital priorities to make sure we're tackling all of these things. Then we still need to hit the capital ratios that we laid out in the -- in our Investor Day as well as make sure we have enough capital for potential growth. We talked about a robust pipeline. Again, we generate a lot of capital that should be able to support that with the one thing you're obviously watching for is what's going to happen with macro and then the CFPB late teaching. So if that goes into effect, you might see us hold a little more capital in advance of going into that if we believe that could be an effective question is when does that happen? Is that mid next year? Does it get pushed out to 2026? It's something that will impact our readiness to do anything more meaningfully with our capital.

Got it. That's helpful. CET1 is about 13.8% last quarter. You mentioned the 65 basis points from the last CECL phase in. And then obviously, moving pieces around regulatory. So at what point should investors start thinking about a buyback? How do we think about that?

Yes. Really what I just said in the last response kind of lays it out, right, it's the unknown. I would say that, okay, if the macro improves really well, and the CFPB weren't happening at all, wasn't on the horizon, that's a sooner than later. If you believe the CFPB effect that happened, then that has a meaningful reduction in revenue in the initial quarter. So that's the big wildcard for me. The other thing we'll do at some point, hopefully, we've commented that we'd like to do some subordinated debt. That will improve the capital stack. We'll be opportunistic in what we do with our balance sheet. But we've got a couple of big unknowns out there that are just giving me caution to be too specific around when a more meaningful share repurchase could happen.

Got it. At your Investor Day, you highlighted your ability to underwrite deeper in the non-prime space, which has led to high risk-adjusted returns. Maybe just talk about your -- what you see your competitive advantage is in that area that allows you to do that.

Yes. Some of it is the partners we have are terrific partners, and we make sure that we are able to unlock credit sales for them. And that's done through our ability to have lower lines appropriate APRs for the risk along with the late fees, it produces a revenue yield that allows for that risk-adjusted margin. And I don't know if it's the -- they have different risk appetites like you could think about the big banks certainly have different risk appetites. They don't want to go near a near prime customers where, for us, we're comfortable going there because we get paid for the risk, and we know how to manage it.

Got it. We have about 9 minutes left. I'll just queue up the one audience response question we have. So the question is, over the next year, would you expect your position in Bread to one, increase, two, decrease or three, stay the same?

Is this for me to answer? Mine's going to increase.

So it's actually fairly evenly split, 35% increase, 31% decrease and 35% stay the same. Any comments?

[indiscernible].

Okay. So we have 9 minutes left. I'll just open it up to the audience for questions, if there are any. We have one up in the front, second row.

I think your retail partnerships has been kind of smaller and very diversified. How big a partnership could you go after? I mean, on the one hand, a lot of potential revenue on the tab, if you win a much bigger partnership. On the other hand, that kind of there's always risk with kind of concentration in a small number of bigger partners. So how do you think about that?

Yes. I think about it pretty much as you just said it, right? And there's a number of big partnerships out there you could always think about, and the ones that could be a Walmart, an Amazon, Apple Card more recently, those are so big. One, they would require a capital infusion to take on something about $10 billion or above, and they often come with really thin returns. So to do something like that, you probably want to be in a position where you can offer other types of products to the broader firm or you just have -- you just accept a much lower return on capital. And from my seat right now, that's not really the position to be in because then 5 years, 7 years when that contract comes up for renewal, you've got the concentration risk that you just said. So either you're going to continue to pay more to keep that partner or are you going to lose the partner and then it creates a pretty disruptive environment. And I think when I look at the opportunity in front of us, I have a good line of sight into the pipeline over the next few years, what's coming to market, where we engaged with conversations, and we want to be very disciplined with that because going back to the conversation we had earlier around hitting our own internal capital ratios and self-generating capital that we could use to pursue new opportunities, you want to fit that within your organic structure. Otherwise, if you go up to something big, it would take a -- some other type of capital work to make that happen.

Just a quick question back to the late fees. Several analyses that have been performed suggest that Bread's share come from late fee, good deal higher than some of the other major issuers. And so aside from the sort of, let's call it, short-term tactical steps that, frankly, all issuers are taking regarding the APRs, other forms of fees, given that aside I just stated, are there any longer-term more strategic things that you're contemplating in terms of your business, like the change to the business model and change to that sort of risk return base that you talked about?

Yes. Excellent question. And exactly right. Given who we underwrite, we do have a larger percent of our revenue that's associated with late fees than all the major peers. And so that means we have to take APRs up a little bit higher. We have to have the willingness to do the -- a little bit higher statement fee and drive down -- eventually drive down operating costs associated with it. We may have introduced promotional fees on big ticket purchases, annual fees for people who are higher risk credit. So those things could happen. And yes, we've contemplated a little bit of possibly lower return, if that's what happens because we're also then going to tighten credit. We may no longer underwrite certain portions of the portfolio who really had strong returns before, which means it does free up capital to pursue other things in the pipeline. So I don't think it structurally changes who we are. And then within that, to get the right returns is also going to be partner compensation adjustments where we can no longer make certain programs work. If they want us to keep underwriting deep, there's going to be concessions on that front. So it will evolve the entire program. But again, that's all been contemplated in the return targets that we laid out during our Investor Day.

Question here.

What's going on with the Walmart partnership? I mean it ended badly with Synchrony and then it ended badly with Capital One. I mean is it still -- I think it's still open as they haven't partnered with anybody yet. Is that right?

I'm not aware of who they are partnering with, but you would think it's going to be someone that's out of the larger size. It's certainly something that we were asked to contemplate. But to your exactly -- that's a tough partnership, right? It doesn't seem to end well for anyone. And it's one that you know is going to have a thin return, they're going to be a very demanding partner, and where it sounds like an attractive partnership for a company like ours, given our underwriting capabilities as our capabilities overall. But it's something strategically, you have to really think long and hard about.

Okay. A few minutes left. One last question over there.

Fees [indiscernible] certain macro, sorry if I missed, if I did, [indiscernible] the question, where are we -- what do you watch thinking about your credit box and so forth, your reserve levels?

Yes. So I'll just reiterate some of what we said earlier. I'm watching the pace at which inflation has come down. It -- well, I'd say, earlier in the year or the end of last year, we expect to come down a little faster. It has remained sticky, while improving, that's very encouraging. I'm watching wage growth against that, obviously watching payroll. Unemployment is pretty good, right, at 4.1%. I'd say that's a pretty good environment overall. If that starts to really step up, that would be concerning. But if it starts to creep up to 4.5% to 5%, I think that can be expected presuming that inflation really comes down, interest rates come down, some relief comes to the average American household. That's what I'm looking for. I think the reserve rate is going to remain elevated until which time you see those indicators come down. Now when you run a reserve model, unemployment is one of those indicators. So if the unemployment starts to get up 5%, the core baseline model will produce a higher output, meaning the rate -- the reserve rate should be higher. However, you may be going to that -- running that model with a better credit quality of the portfolio, so that might offset a little lower. And then the overlays that we put in, which are for higher interest rates, now it would be lower interest rates, that would be a benefit. At the same time, you would also then be able to unwind some of the credit risk overlays that you put in place to assume there could be an environment with that getting that 5%, so you would unwind some of those weightings of the adverse and severely adverse. So the reserve, from what I can see right now, will remain pretty stable, coming down modestly in time as both credit quality improves and our confidence in the macro environment remains stable to improving.

Okay. Great. Any more questions? So we'll wrap it up there. Thank you, Perry.

Appreciate it.

Yes.