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spk02: Good morning, and welcome to Bread Financial's second quarter earnings conference call. My name is Amber, and I will be coordinating your call today. At this time, all parties have been placed in a listen-only mode. Following today's presentation, the floor will be open for your questions. To register a question, please press star followed by one. It is now my pleasure to introduce Mr. Brian Vera, Head of Investor Relations at Bread Financial. The floor is yours.
spk10: 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. 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 and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risk and uncertainties described in the company's earnings release and other filings with the SEC. Bread Financial has no obligation to update the information presented on the call. Also on today's call, our speakers will reference certain non-GAAP financial metrics, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings material posted on our investor relations website at BredFinancial.com. With that, I would like to turn the call over to Ralph Andretta.
spk07: Thank you, Brian, and thank you to everyone for joining the call this morning. I will start on slide three by highlighting a few key updates from the quarter. We continue to make progress towards our long-term financial goals driven by our focus on sustainable, profitable growth. In the second quarter, consumer activity remained strong, with credit sales up 10% from the second quarter of 2021, with particular strength from our beauty and jewelry verticals and our co-brand and proprietary cards. This growth was a result of increased shopping trips, not just transaction size, which indicates that consumers continue to shop and engage. We are seeing an increase in customer spend in both discretionary and non-discretionary categories across both our co-grant and proprietary cards. We are pleased with the continued acceleration of our loan growth with end of period loans up 13% on a year-over-year basis. We are building on the momentum from our new brand launch with remarkable growth in our consumer deposit balances through our bread savings offerings. with retail deposit balances up 75% year over year. Additionally, we are seeing early success with our American Express bred cash back card offering within the Millennial and Gen X consumer base. Launched in April, we are experiencing strong top of wallet behavior with the majority of cardholders spend in everyday categories, and we are acquiring customers in their channel of choice with an emphasis on mobile new accounts. Our business development wins to date, including our AAA multi-card program, reflect a successful execution of our growth strategy. We are excited about our recent new business additions and renewals, and given our strong pipeline, we anticipate continued growth into the future. We continue to improve our strategic positioning, bolstered by our technology modernization and business transformation efforts. Perry will highlight our actions to enhance our financial resilience and recession readiness, which are critical as a potential economic recession looms. Our seasoned leadership team has extensive experience successfully navigating the full economic cycle, including economic downturns and continuously monitors economic data and the financial health of our customers. The consumer overall remains in a good financial position. While consumer sentiment has weakened, retail sales continue to rise, the unemployment rate is very low, and wage growth has been trending upward, especially in the lower income segments. However, we recognize that growing concerns about a potential recession coupled with the expected normalization, delinquencies, and payments creates uncertainty. And we have reflected that in our conservative CECL reserves. Payment and delinquency rates are normalizing, coming off historical lows of 2021, and we remain confident in our full year guidance. Moving to slide four, I will highlight some of our business development success. This morning, we announced a new long-term relationship with AAA, one of North America's largest and most trusted membership organizations serving more than 56 million US members. We also reached a definitive contract to acquire AAA's existing credit card portfolio, expected in the fourth quarter. As one of the largest full-service leisure travel organizations in North America, providing a wide range of travel services and discounts, as well as a variety of insurance products, the addition of AAA further diversifies our portfolio. Through two unique co-brand offerings, With enhanced cardholder value propositions, we are excited to help AAA drive top of wallet usage, loyalty, and growth. Also during the quarter, we signed a multi-year renewal with our long-time valued brand partner, Tourette, a direct-to-consumer apparel and intimates brand in North America that serves over three million customers through its e-commerce platform and their over 600 stores nationwide. We will use our expertise in specialty retail, coupled with digital modernization to further drive spend, acquisition, and loyalty in this fast-growing industry. Additionally, we expanded our Caesars Card Rewards program, introducing an improved value proposition designed to enhance loyalty and improve cardholder experience. Caesars Rewards remains the largest loyalty program in the industry. Turning to Bread Pay, we signed over 50 new small and medium-sized partners in the second quarter, and we continue to grow our platform with a focus on profitable and disciplined lending. Also, our partnership with Sezzle launched in the second quarter, providing us with access to Sezzle's extensive merchant network for installment lending. As I mentioned previously, we are encouraged by the continued strength of our business development activity and pipeline success. We believe we are well-positioned to continue to add additional quality partners while further diversifying our portfolio. Slide five highlights our technology monetization progress. Our digital monetization efforts have helped us drive convenience and choice for the consumer. Our full product suite coupled with our data and analytics expertise provide personalized experiences offering the right product for the consumer in their channel of choice. At the end of the quarter, we migrated to the cloud and transitioned our core processing system, including tens of millions of data records to Fiserv, further simplifying our business model and increasing our flexibility and capabilities. While any systems migration of this magnitude comes with some degree of anticipated conversion challenges, our teams are working to ensure the fair resolution for all cardholders and brand partners that may have been impacted during this time. By completing this major milestone to modernize our technology, Bread Financial is better positioned to drive enhanced capabilities, long-term operational efficiencies, scalability, and faster speed to market coming forward. Overall, we are pleased with how our business transformation efforts have materialized. We have achieved many targeted milestones, including expanding our product offerings, advancing our digital capabilities, enhancing our talent, strengthening our balance sheet, and adding and renewing iconic and diversified brand partners to support our continued growth. We remain focused on providing financial resilience and sustainable, profitable earnings growth for years to come. I will now turn it over to our CFO, Perry Bieberman, to review the financials.
spk06: Thanks, Ralph. Slide 6 provides our second quarter highlights. Bread financial credit sales were up 10% year-over-year to $8.1 billion as consumer spending remained strong. Average loans were up 11%, with end-of-period loans up 13%, driven by continued double-digit credit sales and moderating payment rates. Revenue for the quarter was $893 million, inclusive of a $21 million write-down in the carrying value of the company's investment in Loyalty Ventures Inc., driven solely by Loyalty Ventures' share price at June 30th. Revenue increased 17% versus the second quarter of 2021, while total non-interest expenses increased 12%. Credit metrics remain below historical averages with delinquency and net loss rates of 4.4% and 5.6% respectively for the quarter. The net loss rate included a 30 basis point or $13 million increase from the effects of the purchase of previously written off accounts that were sold to a third party debt collection agency and remain subject to ongoing legal dispute with the debt collection agency as disclosed in our May credit statistics. Our net income of $12 million and diluted EPS of 25 cents were impacted by a reserve build in the quarter. The $166 million CECL reserve build resulting from both loan growth in the quarter of nearly $1 billion and a higher reserve rate had a $2.57 impact on diluted EPS. The combined loyalty ventures write down of $21 million and the purchase of written off accounts of $13 million had an additional 53 cent impact. These items combined with the reserve bill reduced diluted EPS by $3.10 in total for the quarter. Looking at the second quarter financials in more detail on slide seven, total interest income was up 17% from 2Q21 resulting from 11% higher average loan balances coupled with improved loan yields. Total interest expense declined 5% due to 20 basis points lower cost of funds which you can see on the following slide. Non-interest income, which primarily includes merchant discount fees and interchange revenue, net of the impact from our retailer share arrangements and customer awards was negative $85 million, inclusive of the $21 million write-down in the carrying value of our equity method investment in Loyalty Ventures. As we have said, excluding the Loyalty Ventures impact, This line item is most closely correlated with credit sales for the quarter, which increased 10% from the prior year period. Total non-interest expenses increased 12% from the second quarter of 2021 due to increased employee compensation and benefits costs, marketing, and the previously announced investment in our technology modernization efforts. Additional details on expense drivers can be found in the appendix of the slide deck. Overall income from continuum operations was down $251 million for the quarter versus the second quarter of 2021. This was largely a direct result of our $166 million reserve billed in the second quarter of 2022, driven by higher end of period loan balances and a higher reserve rate sequentially compared to a $208 million relief in the second quarter of 2021. Taking out the provision and tax volatility, We are pleased that our pre-tax, pre-provision earnings, or PPNR, improved 24% year-over-year, marking the fifth consecutive quarter that we have seen year-over-year double-digit growth in PPNR. As we have said, our focus continues to be on making the right decisions to produce quality earnings. Turning to slide eight. The left side of the slide highlights our earning asset yields and balances. Second quarter loan yield increased 110 basis points year-over-year and declined sequentially with normal seasonality. Net interest margin improved approximately 130 basis points year-over-year. On the liability side of the slide, we saw funding costs slightly increase sequentially in the second quarter in line with our expectations, given the Fed recent interest rate increases. As you can see from the stack bars on the bottom right, our direct-to-consumer deposits continue to grow, now representing 22% of our total interest-bearing liabilities, up 13% in the year-ago quarter. We expect our retail deposit base will continue to increase, becoming an even more meaningful portion of our funding over time. Moving to slide nine. I'll start in the upper left. Our delinquency rate increased approximately 30 basis points sequentially, generally in line with historical quarter over quarter trends, and was up approximately 110 basis points versus a historical low in the second quarter of 2021. On the upper right, you can see that we had a loss rate of 5.6% for the quarter, including the 30 basis point increase from the effects of the purchase of previously written off accounts that were sold to a third party debt collection agency. While not significant to our full year guidance, our system conversion will create minor timing impacts in our monthly credit metric trends. Turning to the bottom left of the page, our reserve rate increased from the first quarter of 2022 to 11.2%. We maintained a conservative posture with regard to our reserve rate. Since 90 days ago, according to economists, the probability of a recession has increased from approximately 25% to closer to 50%. Our economic scenario weightings in our credit reserve model reflects the increased probability of a recession, leading to our prudent decision to increase our reserve rate. We believe the inclusion of the severe economic scenario overlays provide sufficient future loss absorption capacity, given the harsh economic conditions included in these scenarios, including a rapid rise in unemployment. Overall, We remain pleased with the improvement in the underlying credit quality of our portfolio from pre-pandemic levels. You can see this improvement in the chart on the bottom right-hand side of the page, highlighting that our revolving credit risk distribution has improved over time and remained consistent to the first quarter. Outside of a period of significant economic uncertainty, in other words, during a period of forecasted economic growth, low inflation, and low interest rates, our portfolio as it is composed today would produce a reserve rate below pre-pandemic levels, given our enhanced credit risk management and product and brand partner diversification. That said, until we pass this period of significant economic uncertainty, we expect our reserve rate to remain elevated. Slide 10 provides our financial outlook for full year 2022. Our outlook assumes a continued moderation in consumer payments throughout 2022. We expect the ongoing Fed interest rate increases will result in a nominal benefit to total net interest income. Our full year average loans are expected to grow in the low double digit range relative to 2021, driven by strong sales activity. We expect end of year 2022 loan growth to be stronger than our average loan growth, given the success of our new business activities throughout the year. This outlook includes expected end of year balances of greater than $2 billion from our 2022 new signings, including the addition of AAA portfolio acquisition expected to close in the fourth quarter of this year. We expect revenue growth to be consistent with average loan growth in 2022 and anticipated full year net interest margin around 19%. We continue to target full year positive operating leverage in 2022. We expect increasing expenses throughout the remainder of the year, which will bring our full-year operating leverage down to a more modest level. As we've previously discussed, our outlook includes incremental strategic investments of over $125 million in technology modernization, digital advancement, marketing, and product innovation to fuel growth opportunities and future operating efficiencies. A large portion of the $125 million investment will be evident in employee expense as we continue to hire digital engineers and data scientists to further advance our continued business transformation. We also plan for higher marketing expenses in the second half of 2022 as a result of increased spending associated with higher sales and brand partner joint marketing campaigns, as well as expanding on our new brand products and direct-to-consumer offerings. Information processing costs are increasing as a result of our ongoing technology modernization, including near-term costs related to the conversion of our core processing system to Fiserv and continued investment into the BreadPay platform. As Ralph mentioned earlier in the year, the Fiserv conversion will result in both expense and revenue synergies in 2023 and beyond. We expect total expenses will increase sequentially each quarter throughout 2022 as our business grows and we continue to invest and add talent. We are making ongoing investments now to stay ahead of customer expectations. Regarding our net loss rate outlook, we continue to anticipate the full year 2022 loss rate will be in the low to mid 5% range. I would also reiterate our confidence in the long-term outlook of a through-the-cycle average net loss rate below our historical average of 6%. We expect our full year normalized effective tax rate to be in the range of 25 to 26% with quarter over quarter variability due to timing of various discrete items. Moving to slide 11. Through our business transformation efforts, we have improved our balance sheet, loss absorption capacity, and funding mix. Second, we've enhanced our credit risk management and underlying credit distribution. And third, we've ensured we have a proactive and refined recession readiness playbook in place. These changes strengthen our financial resilience, better positioning Bread Financial to deliver sustainable, profitable growth with an expectation to outperform historic loss levels throughout an economic cycle. Through our prudent decision making, we have strengthened our balance sheet and capital ratios, including an improvement in our TCE to TA ratio of nearly 400 basis points in just two years. Our higher capital position combined with our increased credit reserves positions Bread Financial to weather more difficult economic conditions if need be. We have been deliberately reducing our debt levels and proactively increasing our mix of consumer deposits to strengthen our position and will continue to do so. Enhancing our credit risk management and underlying credit distribution is a key element of our business transformation. We have diversified across products and partners leading to a credit mix shift towards higher quality customers who have 60% of our portfolio above a 660 Vantage score. We manage our portfolio proactively. We have a recession readiness playbook in place and have implemented elements swiftly as early as the onset of COVID with a focus on managing open to buy and helping customers manage their credit lines and balances in a healthy manner. While we continue to see a very strong overall consumer in terms of spending and payments, we do place extra emphasis on customers who are more sensitive to these high and persistent inflationary pressures to ensure they can manage their credit while maintaining purchasing power. We've also benefited from our implementation of enhanced risk stratification and technology enhancements to build additional resilience in our portfolio. When you combine our improved risk profile with a more diverse portfolio and brand partner base, We believe that we are better positioned than we have ever been for a potential recession. We will remain proactive in our approach as we continuously update our risk management models and underwriting criteria in this rapidly changing macroeconomic environment. We continue to make sure the change is necessary to strengthen the financial resilience of our company while maintaining the tools necessary to successfully manage through an economic cycle. Operator, we are now ready to open the lines for questions.
spk02: Ladies and gentlemen, if you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. When preparing to ask your question, please ensure that your phone is unmuted locally. Our first question comes from Robert Napoli with William Blair. Robert, your line is now open.
spk03: Thank you, and good morning, Ralph and Perry. Just on the credit outlook on your reserve building, you sound awful confident on your portfolio mix and credit outlook through cycles, but what do you build? It sounds like you're an outlier versus peers. on your forecast of unemployment. What have you built in? You said, I mean, a rapid rise in unemployment. What does that mean?
spk06: Yeah, so let me comment on that. So let's start with the, you know, the reserve role. You're right. We feel very confident in the portfolio that we've constructed. And what we're observing is a strong consumer. And, you know, we're encouraged by their payment behavior and their spend patterns. But, yes, what we said, you know, being conservative and prudent in, an outlook. And what that means is when we look at our reserving models, it's not just what the credit criteria or the credit performance of the existing portfolio is in the moment, but you're trying to understand what severe scenarios could imply to the portfolio over time. So when you have a period where you have this persistent high inflation, not knowing how long it's going to persist, and then you take the, we use Moody's economic outlooks, And when you think about what their scenarios look like, they actually, all of this, mild, moderate, severe, have pretty sharp rises in unemployment in a pretty rapid period. Now, every recession is different. So when we think about that, the last one was driven by housing and a lot of unemployment. Right now, we're in what we'll call a job-full period. But when you contemplate what this means to a model, when you pull those in, it just... So when you went from a period where you're going to go from a 25% probability of recession to 50%, it just puts us in a position to think, let's be prudent and not chase this, and let's get ahead of it and stay with what the outlooks were suggesting. And that's as simple as that, to be honest with you. And like I said in the prepared remarks, when we run the current portfolio through the model, and if we applied the same economic outlooks that we had pre-pandemic, you produce a CECL reserve rate well below what we had at that other time.
spk03: Thank you. And just, I guess, a follow-up. I mean, your targets are for return on equity, I guess, three cycles, or on average over time of 20% to 25%. How confident are you today, Ralph and Perry, as you look at your business growth? that those targets are reasonable. Assuming we don't have, I mean, recessions are very different. Strong consumer, you're likely not going to have a deep recession, but who knows?
spk06: Yeah, I mean, so we still continue to target that mid to high 20% range at appropriate capital levels. The one variable in that is that, honestly, the pace at which we grow. If you're in a period of high growth, and you need to put up that big, we'll call it Cecil growth tax, that's going to suppress those returns in that period. As you get into a period where you have moderating growth and you're not putting up this much Cecil growth tax and the economy is, I'll say, the loss rates and everything are what you expect through the cycle, we're definitely building this company for profitable, responsible growth over time.
spk03: Thank you. If I could just sneak one last one in. The AAA, can you give any commentary on the size of the, the AAA portfolio and kind of some of the pluses and minuses on portfolio and runoff or additions? Hey, Bob.
spk07: Yeah, a couple of things. So first, let me say we are thrilled to have announced this portfolio and partnership with AAA, more than 56 million members in the US, an iconic brand, a brand that is trusted And we're excited to help AAA grow this portfolio with a couple of new exciting value props. You know, we don't comment on the size of the portfolio, but I will say, you know, we have, you know, growth of two plus billion dollars in the back end of the year, and this is a significant part of that.
spk03: Thank you. Appreciate it.
spk02: Thank you. Our next question comes from Sanjay Sakharani with KBW. Sanjay, your line is now open.
spk09: Yeah, thanks. Good morning. Maybe to follow up on Bob's first question, I guess, Terry, if we look forward now, obviously we've got another negative GDP print, so technically I guess we are in a period of recession. So how should we think about that reserve rate?
spk06: um moving from here like do you feel like you've incorporated sort of a mild recession now and what would be the next step for the reserve rate if it has to go higher yes thanks andre um you know as we think about the reserve rate like we talked about there's a number of factors that go into it um you know including the modeling methods that each company uses but it's the portfolio and then the the overlays that we put in there for an anticipated economic stress. I'd like to think at this point we've captured what we had anticipated. You mentioned this print to look like. And again, I'm not suggesting that GDP is the only measure of what a recession feels like to our consumers. But right now, it's just trying to make sure we are not chasing this. I feel like we're in a pretty good spot right now for what we'd expect. I will tell you, yeah, things got significantly worse. Could it increase again? Sure. But for what we know and what we think is on the horizon, we think we're in a good place and we should remain elevated around this level until this period passes.
spk09: Okay. I want to guess my follow-up question is on the portfolio yield. You know, when we looked at the progression year over year, it did decline sequentially and rates went higher. Could you just... I know you guys gave the NIM guidance, but... How should we think about that yield progressing going forward? Are you able to pass on some of the rate increases? Maybe you can also talk about deposit data and how you see funding costs unfold, not only for the rest of this year, but as you move into next year to some extent. Thanks.
spk06: Yeah, good question. So one of the things that, you know, let's talk about what happened sequentially. The second quarter traditionally has seasonality in it with our NIM yield. What happens typically is we have lower late fee yield that goes into our net interest margin because of tax payments that come through in the second quarter. That drives down that aspect. What happened in addition for this quarter is, remember, there were a couple of Fed increases that occurred. There was a 50 base point Fed increase in May. and then we pass some of that on to higher deposits and another 75 in June. But when we pass along higher deposit rates and we grow those deposits, that goes through at a much faster rate in period. It could happen within a week. Whereas when the prime rate goes up, it's passed on to consumers on the asset side for variable price loans, it's actually the last published date of the Wall Street Journal of the month, and then they start billing the following month. So you think about the 75 basis points from June, none of that got passed through in terms of consumer billings where that will come through in July. So you get a little of that lag effect. But again, overall, as you think about them, as we've talked about this, is we're more asset sensitive. So as interest rates go up, we are slightly accretive in that process. Okay.
spk05: Perfect.
spk04: Thank you.
spk02: Thank you. Our next question comes from Bill Cachet with Wolf Research. Bill, your line is now open. Thank you.
spk00: Thank you. Good morning. So, Ralph and Perry, hi there. So I wanted to follow up on some of the earlier questions and kind of drill a little bit more into the trajectory of the reserve rate from here. So when we think about the reasonable and supportable period under CECL, as long as the recession and rising initial claims is still in front of us and there's a lot of uncertainty and we don't know exactly how that's going to look, but you've got the overlays in there that sort of contemplate some degradation, is it reasonable to expect that the trajectory of the reserve rate as long as that's in front of us, is essentially flat to up. But once we get past peak initial claims, then that's kind of when we could start to look for the reserve rate to start coming down again. Is that kind of, oddly speaking, a reasonable way to be thinking about it?
spk06: Yeah, I think that's a fair way to think about it in general terms. Again, every recession is different in what creates strain on a consumer. But if you think about unemployment as a big driver traditionally of what creates a higher credit loss environment, I think it's a fair way to look at it. If you go through this peak period and then you come on the downside, unemployment claims, that trajectory as you talk about, yes, reserves get released again because you have a more favorable economic outlook. So you're trying to get to that point where you peak and then you see a more favorable period ahead of you. That then implies you can bring down your reserve rate for the overlay aspect, where we're being conservative.
spk00: I mean, it certainly suggests you guys are, I guess, looking around corners, if you will. And it's refreshing to see that in a quarter where a lot of your peers ended up letting the reserve rate continue to drift lower. If I could follow up on, you guys are confident in outperforming your 6% through the cycle average longer term. But I guess since it's an average, would it be reasonable to expect that there would be some period if we did have a downturn where that MCO rate would exceed that 6% level?
spk06: That's exactly right. You're going to have periods of time when we're in the good times, we should expect to be below 6%. And you have a short period of recession, you can be above 6%. And that should be expected. That's exactly what through the cycle means.
spk00: Understood. And last one for Ralph, if I may. Ralph, in following up on some of your earlier opening remarks, I wanted to ask if you could take us maybe a little bit more inside the performance of your different cohorts and give us a sense of the spending and just overall trends that you're seeing across those groups and how they're being impacted by inflation.
spk07: Yeah. So if you think about our book and our product diversification, we have PLCC, a private label, and we have You know, we have direct-to-consumer products with the bread cashback card and our co-brand partners. And what we're seeing is, you know, good spend with private label, albeit they have lower lines, but we're seeing consistent spend there, and we feel good about that. But we're seeing really outstanding spend with our proprietary card and our co-brand cards where, you know, we're seeing both spend on the... on discretionary and non-discretionary, up and down the vantage lines. So we're seeing consistent, continued spend. And again, not just a large ticket price, but multiple transactions, which tells us that consumers engage with our products and they're becoming top of wallet.
spk00: That's very helpful. Thank you for taking my questions. Thanks, Phil.
spk02: Thank you. Our next question comes from Jeff Adelson with Morgan Stanley. Jeff, your line is now open.
spk08: Hi. Good morning, guys. I was just wondering, Perry, if we could follow up on the NIM commentary a bit. You're talking about the nominal benefit and being, you know, asset sensitive here, but also talking about this 19% or around 19% NIM for the year. Wondering if you could maybe help us understand what kind of band around the 19% you're talking about here, because I think as we think about that to get to 19%, it implies you have to have some sequential decreases here going out. And maybe as a part of that question, is there a reason to assume that until the Fed starts slowing down Fed hikes that you're maybe going to lag that with your funding costs going up ahead of the asset yields like you referred to earlier?
spk06: Yeah, I think you're going to have a little bit of seasonality in there. And to your point, you get a little bit of a lag. So as the Fed increases, like this one that just happened yesterday, you're going to have a little bit of lag in a month until then we get caught up. So that's why we're saying around 19%. I mean, not thinking much under, not thinking much over. It's just going to float around that number.
spk08: Okay. And so would it be reasonable, as we maybe get past that, that you'd see a much more material benefit as maybe in 2023 your asset yields catch up beyond that?
spk06: Again, yeah, I think the way to think about it, we're slightly accretive. So I want to go material. And as well, what's going to influence is, as you heard us talk about, winning a large win today, all I'll say wins that we have or the portfolio composition that we have in the future have different net interest margins, right? So if you put on some lower credit risk type portfolios, they're going to bring in a lower NIM. We continue to build out private label, which has higher NIM. So really it's about what is the composition of the portfolio as we move through 2023. Got it.
spk08: And then just on the credit sales trend this quarter, it came in a little bit. below what I thought it would be this quarter. I'm just wondering, is there anything going on maybe with the exit of BJ's there? Maybe you can give us some color into how the Buy Now, Pay Later initiative is going and maybe what your same store sales are looking like.
spk07: Yeah, it's Ralph. I'm really pleased with the 10% increase in credit sales. A double-digit increase in credit sales is a You know, I take that every day and twice on Sunday, quite frankly. You know, BJ's is not in effect. It's still in our portfolio, and it's, you know, it's one of our cards, but it's not doing any differently than any of our other co-brand products. You know, we've talked about buy now, pay later, and where, you know, particularly in paying for, we're going to be very, you know, very prudent about how we approach that and how we assign partners to that because of the you know, the competitive economics in that chapter. But 10% sales for me seems really good, and, you know, it's across all channels and across all products. So I think that's an indicator that our customers are engaged with us and are using our products that we're putting in the marketplace.
spk08: And then if I could just put one last thing on loyalty. Is there any update on that? You know, the stock price there has continued to come down.
spk06: um have your plans there changed or what are you thinking around potential monetization there yeah no the clearly the stock price has come down and we reflected that in our um write down and what i tell you is at the time we did the write down their share price was around three dollars and fifty cents we had it on the books for about eight thousand thirteen cents so that delta is what caused the write down we have about 17 million or so remaining on the books So it's immaterial to our business overall. We're not planning to be a strategic investor in the business. It's just not what we do as a company. So our intent is to monetize it, but upon monetization, as you can tell, it will not have a meaningful impact to us.
spk08: Thank you, guys.
spk02: Thank you. Our next question comes from Mahir Bhatia with Bank of America. Mihir, your line is now open.
spk05: Good morning, and thank you for taking my question. I did want to start with the reserve. Just to be absolutely clear, are you seeing anything in your data that's making you take the reserve ratio higher, or is this primarily driven by the outlook? Like, I just want to make sure we're very clear that in your two Q data, did you see anything, you know, below the line? Like obviously we see the MCO rate, like, and we understand there's some normalization, but was there something unusual, something you didn't expect that impacted your results ratio?
spk06: No, here, thanks for the question. And, you know, to be clear, and I try to, I try to be clear, but it's, uh, There's a lot going on in the CECL Reserve. The modeling is, as you know, we expected normalization to occur. And again, we're performing well against normalization. And that's going to pull through. We've been all waiting for this to see moderating payment rates. And that's a good thing in a credit card business because we get more revolved behavior. And we're priced for risk. And so we feel good about that. So really it is, I'll start with, again, When we ran the portfolio through our model, it produced a lower CECL reserve rate than pre-pandemic. So that would tell me the underlying portfolio is strong. What's causing the rate to go up is the sensitivity model to the economic outlooks. And we leaned into that because, again, trying to get ahead of it and look around the corner of what could come. Nothing is going to come. It's just, again, trying to be cautious with our portfolio. Simple as that, really.
spk05: No, that's helpful. And then I just wanted to go to your, you know, obviously a nice win with AAA coming on board. I wanted to make sure I understand, you know, how are you still feeling about the 2023? I think you've talked about $20 billion of average loans in 2023. Are you still feeling good about that? Do you now have the portfolios necessary to achieve that outlook, or does that still incorporate some more portfolio wins? Just trying to understand how we should be thinking about that one.
spk07: Yeah, again, the addition of AAA certainly was something that we were excited about, and we did contemplate as we think about our 2023 $20 billion target. So we still felt confident about that. It's going to come from a combination of growing existing portfolios, new products, and then what you see here is, you know, you know, acquisitions. So across all three, we are still confident and we're confident in that number for 2023. Yeah.
spk06: And I'll just add on to what Ralph said. You know, think about this management team that set this goal almost three years ago and it's going to get to that number and we'll be around the hoop on that number. Meaning, look, if the economy softens a little bit, we're not going to chase loans just to hit that number. We'll give you that as a, The clear statement. We come in a little bit under because we had to do some risk pullback. I think everyone should applaud us for that. If we come in a little over because the winds keep coming and we like the returns, that's what's going to happen. But, you know, we're around the hoop on that number.
spk07: Yeah, I think, you know, most important, more important than hitting that exact target is ensuring, you know, that we're taking the appropriate risk and we're getting rewarded for the risk we're taking. So, again, we're not coming off that number. and we feel it could be a combination of acquisition, product growth, and deeper penetration of our existing partners.
spk05: Thank you. Just one last question for me. It's just on the CFDB and the late fees. There's obviously been more chat on that. I understand you don't disclose just the exact breakup of the late fee within you, but what I was hoping is maybe just talk about it philosophically, maybe just how are you all approaching this situation with the CFPB's review? Are you all engaging with them? And how do you all just think about late fees internally and what can you do to manage that? Should they come out with some kind of lower cap or something like that?
spk07: Thank you. Yeah, so I'll talk about it philosophically. You know, I've been in this business 30 years and one thing you can count on is change. And one thing you can count on is when change happens, good companies adapt to that change and move forward. You know, as... What we do with our regulators is we lean in and we comply with the rules that are before us, and that's what we're doing now. We're complying with the existing rules. We have nothing to share outside of what has been reported publicly, and we continue to work closely with the regulators to ensure our views are made known. What I will say is that the continued diversification of our portfolio ensures that we're not overly reliant on any one given product or capability or fee. So as we continue to diversify our portfolio, the reliance is just not there. And in terms of our ability to maneuver, we have unique contracts with many of our brand partners that include many different arrangements, all based on different drivers. We don't disclose the specifics, but certainly there is movement for regulatory issues and change in law. Thank you.
spk02: Thank you. Our next question comes from Reggie Smith with JP Morgan. Reggie, your line is now open.
spk12: Hey, good morning, guys. Thanks for taking the question. I got a few. I wanted to, I guess, get a refresher on, I guess, the accounting around the AAA portfolio and whether you guys will have to take an upfront reserve for that or how the accounting kind of works for that acquisition.
spk06: Yeah. I'll start with that question. The answer is yes. The way it works is And I presume you're trying to model out the fourth quarter. So, yeah, when that portfolio comes online, we will have to set up a CECL reserve in that period for those loans, just like any other loan growth. So in the fourth quarter, which is traditionally a seasonally high loan growth period for us anyways, we'd have to post up a CECL reserve for those. Similarly, with a portfolio acquisition through our accountant, we'll be establishing that reserve through the P&L as well.
spk12: Understood. And I guess looking at your reserve, and I know, you know, folks have asked a thousand questions on it. I believe, and correct me if I'm wrong, with CECL, it's no longer like a 12 month reserve, but it's kind of a life of the account reserve. And I guess my question is, you know, looking at your reserve rate, is there a way, a rule of thumb to kind of extrapolate like what is implied in and credit losses over the next 12 months or so. Just broadly speaking, is there a way to think about that?
spk06: No, there really isn't. To your point, it is the way CECL works. It's your expected losses over the life of the loan, and those loans be established at the end of each period. All I can share with you is like we said, the reserve rate outside of an economic outside of economic uncertainty, would be lower than the pre-pandemic. So, you know, it's the economic scenarios that are putting that reserve rate as high as it is. And so I'm not suggesting that I have 100% confidence that that's actually going to happen. This is saying this is the sensitivity when you apply heavier risk weighting on the severe risk. So it's just protecting the company in the event something happens like that. We're trying to make sure we have a good loss absorption buffer. Look, we're all hoping this doesn't happen and all this reserve gets released back into retained earnings and you'll continue to have, you know, improved capital position. But this is where we are for now.
spk12: That makes sense. And if I could sneak one more in, you know, and proprietary cards, obviously. Curious, and I know that, you know, the mall-based retail is, I think, a quarter of your business now. Are you seeing weakness there? I'm just trying to square that with, you know, kind of what some of the other retailers are saying, if that has actually shown in your portfolio, and maybe if you could talk about sequential trends there. I'm just curious. Thank you.
spk07: So if you're asking if we're seeing weakness in our PLTC business and the retail, we're not. you know, that still remains strong. And, you know, as is our co-brand and our proprietary products. So we've not seen any weakness. And, in fact, you know, one-third of our loans are co-brand and apparel now is probably at 25%, and we've diversified that across a number of verticals and products. But co-brand sales were about 50%. of our sales.
spk12: Just to be clear, you're saying that apparel, and obviously it's not a small piece of your portfolio, but your apparel book is holding up pretty well. Is that what you're saying?
spk07: Yeah, it's holding up both in sales and in credit pretty well, yes.
spk12: Okay, thank you. Thank you.
spk02: Our next question comes from John Pangari with Evercore. John, your line is now open.
spk01: Good morning, guys. Just on the credit front, regarding the increase in the delinquencies that you saw this quarter, maybe can you give us a little bit of color on where you saw the increase in some of the drivers? Perhaps maybe are you seeing pressure in certain FICO bands, certain products? And do you continue to expect an increase there on the billing from Seaside? Thanks.
spk06: Yeah, thanks for the question. You know, when we look at it, this is where we've talked about this, that we were expecting normalization to come through this entire year. And now we're seeing it again. When you think about our portfolio and the way this business is composed, we were going to see more impacts of the stimulus wind down sooner than others. And we also think about peers in the industry where we may look a little different. We don't have a portfolio concentrated in travel, so they had this big contraction of spend during COVID, and now you see the bounce back in that category. So we don't have that tailwind state to our balance the same way those do. So we're more with the general consumer on those things. So I think the pull-through is exactly what we're expecting to see, and some of it is seasonal on top of that.
spk01: Okay. All right, thanks for that. And then related to that, your loss rate, I know you answered Bill earlier in indicating that it could certainly exceed the 6%, being that the 6% is an average. Can you help us maybe frame out how you're thinking about 2023 as you're looking at the economic outlook, what that could mean in terms of your charge-off rate that you're expecting in your modeling?
spk06: So right now we're not giving guidance for 2023. We'll get to that probably around January. The way to think about this right now is we gave you guidance for the rest of this year. So you can imagine that we're going to be within the guidance of what we said. It might be on the upper end of that, the low to mid fives. And where you exit will give you a sense of what could be. Now again, what happens if you hit a period of economic strain into next year, that's what you're caring for with CECL so that it could be higher. We're not saying it is going to be. As it is right now, the portfolio should be pretty strong and perform really well for the coming period. If you're trying to correlate our position on the CECL reserve to what's actually fundamentally happening in the portfolio and the business we're building, They're almost two different things in a way, right? And that's what, you know, CECL's caring for potential losses, not necessarily what our projection is. And again, right now we're performing below pre-pandemic levels with regard to delinquency and losses.
spk01: Okay, thanks. And then one last one just on the credit front. I know the The accounts that were sold to a third party that contributed to the charge, all of a sudden they said it's in legal dispute. Are there any other similar transactions that you would have such exposure? And then does this impact your ability to offload future exposure?
spk06: We can't comment on the ongoing litigation as it relates to that particular item. um but what i can say it has no impact on our ability to you know you know sell charged off debt to um you know third-party debt collectors and that's part of our recovery strategy some that we do in-house for recoveries and some that we sell the paper to third parties okay great thanks take my questions thank you our final question comes from
spk02: Dominic Gabriel with Oppenheimer and Company. Dominic, your line is now open.
spk11: Hey, great. I just want to reiterate as well, it's refreshing to see some of the, what might be a more realistic scenario playing through in your numbers with the reserve. So thank you. You know, if you just think about AT&T talking about some of the delayed phone bill billings, and Visa the other day talking about people not filling up their gas tanks all the way, you know, and your reserve changes. Maybe you could talk to us about how your underwriting for new accounts has changed, given perhaps your more cautious view and, you know, how that could affect the loan growth. You talked about, you know, it could slow it from the 20 billion number, but Any detail you can provide on that, I just have a follow-up. Thanks so much.
spk06: Sure. And I thank you for appreciating our conservative position. You know, again, we read the same things about what, you know, AT&T said. Now, when I think about Americans, almost every American has a cell phone. We don't underwrite every American. And, you know, so whether if you're a subprime consumer or You have a cell phone. So that's a piece of it. So what they may be seeing and the strain in, I'll say, the deep subprime where we don't play is an aspect, I think, what's pulling through their general billings. For us, we have more full spectrum underwriting from super prime, prime, and near prime. So we're watching that and we obviously adapt our underwriting based on the credit quality of the consumer when they come through. We monitor everything at the time of underwriting with the bureau data. We can see how much leverage they have, stress, strain, are they employed, not employed. So there's a lot that goes into the sophisticated underwriting tools and not just for underwriting new business but also the sophistication for managing credit lines with the existing portfolio. That's equally important for line increases and line decrease strategies or account closures, whatever has to happen to make sure we manage around the loss rates that we're comfortable to ensure we're getting the risk reward from those accounts.
spk11: Really great. Thank you so much. And then I just wanted to follow up on the late fees question and perhaps frame it a different way. You know, is there any reason that your late fees as a percentage of card average balances would be materially different than the private label card industry net charge-offs if we were to adjust for your FICO score distribution?
spk06: You know, I think it would be a little bit different, right? Because as Ralph talked about earlier, over a third of our portfolio is co-branded in balances. And the mix continues to shift over time. We're bringing in more proprietary card. So I wouldn't give us the 100% correlation to historical experience on the private label.
spk11: Okay, perfect. Thanks so much.
spk02: Thank you. I'll now pass the conference back over to Ralph Andretti for any closing remarks.
spk07: Sure. I just want to thank you all for joining and your continued interest in Bread Financial. I appreciate the questions. We feel good about the quarter. We feel good about the adjustments we made, and we're looking forward to the future. Everyone have a good day.
spk02: That concludes today's Bread Financial second quarter 2022 earnings conference call. Thank you for your participation. You may now disconnect.
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