This conference call transcript was computer generated and almost certianly contains errors. This transcript is provided for information purposes only.EarningsCall, LLC makes no representation about the accuracy of the aforementioned transcript, and you are cautioned not to place undue reliance on the information provided by the transcript.
spk07: Good morning, and welcome to Bred Financial's second quarter 2024 earnings conference call. My name is Tawanda, and I will be coordinating your call today. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions. To register a question, please press star 11 on your telephone keypad. It is now my pleasure to introduce Mr. Brian Farub, head of investor relations at Bread Financial. Sir, the floor is yours.
spk11: 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 Beiberman, 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 question may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risk and uncertainties described in the company's earnings release and other filings with the SEC. Also on today's call, our speakers will reference certain non-GAAP financial measures which we believe provide useful information for investors. Reconciliation of those measures to GAAP 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. Starting with the highlights from the second quarter on slide two, I am pleased to report another quarter of solid results as we continue to navigate a challenging consumer and regulatory environment. Our strong results include net income of $133 million and earnings per diluted share of $2.66, or adjusted diluted EPS of $2.67, after adjusting for the anti-dilutive impact of our capped call transactions, which are related to the 2023 issuance of convertible notes which Perry will discuss more fully. Notably, our balance sheet continued to improve as we increased our tangible book value by 25% year over year to nearly $49 per share, improved our common equity tier one capital ratio by 170 basis points year over year to 13.8%, and reduced our double leverage ratio to 110% achieving our target of less than 115%. Additionally, direct-to-consumer deposits increased 20% year over year to $7.2 billion, representing 14 consecutive quarters of growth. During our investor day in June, we highlighted the company's transformation and our energized culture, the strong returns and capital generation that our business model can deliver, and how our responsible capital allocation will build sustainable long-term value for our shareholders. We also announced our newest partnership with SACS Fifth Avenue. In the third quarter of this year, we expect to complete the conversion of the existing SACS portfolio and launch the new and enhanced program. In the second quarter, we made further progress implementing more of our mitigation strategies in response to the CFPB's rule on credit card late fees. Our ongoing discussions with brand partners have been productive, and we now have various pricing changes in market, including increased APRs and statement fees. We are closely monitoring the ongoing litigation related to the rule and will continue to implement our mitigation strategies given the uncertainty surrounding the timing and outcome. Regardless of the litigation outcome, We are confident in our ability to generate strong results and achieve our long-term strategic objectives and financial targets. From a macroeconomic perspective, consumer spending continues to moderate, reflecting persistent inflation and higher interest rates. As a result, second quarter trends reflected lower transaction sizes accompanied by more frequent shopping trips, as well as reduced discretionary and big ticket spending. Credit sales were also impacted by our proactive credit tightening as we remain disciplined given economic pressures affecting payment capacity. Our credit actions have proven effective as delinquencies have trended lower and the net loss rate is expected to have peaked in the second quarter. Our second quarter results reflect our position of strength with increased capital flexibility and financial resilience. We are better equipped to address uncertainty than ever before. positioning us well to generate long-term value for our shareholders. Turning to slide three, our disciplined capital allocation strategy focuses on funding responsible, profitable growth, improving our capital metrics, reducing parent debt, and driving long-term shareholder value. Indicative of the success of this strategy is the 410 basis point improvement in our common equity tier one capital ratio over the last three years as shown in the chart on the left. As I mentioned previously, we have also made progress on our debt reduction as shown in the second chart. Over the last three years, we have reduced parent level debt by 53% and this quarter we achieved our long-term double leverage ratio target of less than 115%. This is an impressive achievement given where we were just four years ago when I joined the company. Finally, our tangible book value of $49 per share has grown at a 22% compound annual rate since the second quarter of 2021. Supported by our strong cash flow, we expect to continue to grow our tangible book value over time. Turning to slide four, our key focus remains on growing responsibly. managing the macroeconomic and regulatory environment, accelerating digital and technology offerings, and driving operational excellence. As we highlighted during our investor day in June, our decisions are focused on creating sustainable value over the long term by effectively managing our credit risk while scaling and diversifying our product offerings, we can grow responsibly. Managing the macroeconomic and regulatory environment effectively is fundamental to our success. Although litigation is ongoing and timing and outcome unknown, we will continue to take actions to mitigate the potential financial impact of the CFPB late fee rule. We are confident in our strategy and have an experienced leadership team that has successfully navigated through regulatory changes in the past, such as Cardax. Accelerating our digital and technology capabilities remains a top priority. We are committed to fueling innovation, leveraging data and AI, and scaling our platform to enhance satisfaction for our customers, partners, and associates. Finally, our heightened focus on operational excellence to drive improved customer experience, enterprise-wide efficiency, reduced risk, and value creation is embedded in our decision making. Our goal is to consistently generate operational and expense efficiencies that enable reinvestment in our business, support responsible growth, and achieve our targeted returns. Our experienced leadership team remains focused on generating strong returns through prudent capital and risk management, reflecting our unwavering commitment to drive sustainable, profitable growth and build long-term value for our shareholders through challenging economic and regulatory environments. Now, I will turn it over to Perry to review the quarter's financials and to discuss our outlook. Thanks, Ralph, and good morning, everyone. Before I dive into the second quarter financial highlights, I'd like to discuss the financial benefits of the CAT call transactions we entered into when we issued our convertible notes in 2023. The cap call transactions are set up to reduce the potential dilutive impact of the convertible notes up to a stock price of $61.48. Our GAAP diluted share count does not incorporate the anti-dilutive impact of these cap call transactions, which you can see incorporated in our adjusted non-GAAP figures on slide five. More specifically, the share amounts used in calculated calculating adjusted net income per diluted share and adjusted income from continuing operations per diluted share have been adjusted for the anti-dilutive impact of our capped call transactions. Reflecting this, our adjusted net income per diluted share was $2.67, and our adjusted income from continuing operations per diluted share was $2.66 in the second quarter. Moving to slide six, which provides our second quarter financial highlights. During the second quarter, credit sales of $6.6 billion decreased 7% year-over-year, reflecting moderating consumer spend and our strategic credit tightening partially offset by new partner growth. Average loans of $17.9 billion increased 1% year-over-year, driven by growth in co-brand programs highlighting our continued focus on product diversification. Revenue was point nine billion dollars in the quarter, down one percent year over year due to reduced merchant discount fees resulting from lower big ticket credit sales. Income from continuing operations increased sixty nine million dollars due to a higher reserve release and lower non-interest expense compared to the same period last year. Looking at the financials in more detail on slide seven, Total net interest income for the quarter remained essentially flat year over year, while non-interest income is down $8 million, resulting from the previously mentioned lower merchant discount fees on big ticket purchases. Total non-interest expense decreased 12% year over year, primarily driven by a decrease in card and processing costs, including fraud, and a reduction in depreciation and amortization costs and marketing expenses. Additional details on expense drivers can be found in the appendix of the slide deck posted on our website. Pre-tax, pre-provision earnings, or PPNR, increased $48 million, or 11%. Turning to slide eight, loan yield increased 30 basis points year over year, benefiting from the upward trend in the prime rate, which caused our variable price loans to move higher in tandem, along with some small amount of CFPB mitigation-related APR increase impacts. Both loan yield of 26.4% and net interest margin of 18.0% were lower sequentially following typical seasonal trends. We expect a seasonal improvement in the net interest margin in the third quarter of 2024. On the funding side, we are seeing total funding costs moderate as deposit costs are stabilizing. Additionally, as you can see on the bottom right chart, our funding mix continues to improve, fueled by growth in direct-to-consumer deposits, which increased to $7.2 billion at quarter end, while wholesale deposits declined. Direct-to-consumer deposits accounted for 40% of our average total funding, up from 33% a year ago. While we anticipate that direct-to-consumer deposits will continue to grow steadily, we will maintain the flexibility of our diversified funding sources including secured and wholesale funding to opportunistically and efficiently fund and manage our long-term growth objectives. Moving to credit on slide nine. Our delinquency rate for the second quarter was 6.0%, modestly down 20 basis points from the first quarter as a result of our credit tightening actions. From this point forward, we expect future quarters to largely follow historical seasonal trends until we see broader macroeconomic improvements. The net loss rate was 8.6% for the quarter compared to 8.0% in the second quarter of 2023 and 8.5% in the first quarter of 2024. The second quarter net loss rate was elevated compared to last year due to more challenging macroeconomic conditions pressure in consumer payment rates, as well as ongoing credit tightening and our slower responsible loan growth impacting the denominator. As anticipated, the second quarter net loss rate is expected to represent the peak for 2024. We anticipate a reduction in the net loss rate in the third quarter to 8% or slightly below before increasing seasonally in the fourth quarter to the low 8% level. Our outlook assumes a slow, gradual improvement in the macroeconomic environment as it will take time for the lingering effects of a prolonged period of elevated inflation to dissipate. As expected, the reserve rate of 12.2% remained within the range we have seen over the past six quarters. In this challenging macroeconomic environment, our conservative economic scenario weightings remained unchanged in our credit reserve modeling, and we believe our loan loss reserve provides an appropriate margin of protection. Consistent with what I said last quarter, and based on our economic outlook, we expect the reserve rate to be lower at year end 2024 versus year end 2023, reflecting an overall improvement in delinquencies, as well as improved credit quality in the portfolio. Our total loss absorption capacity comprised of the total company tangible common equity plus credit reserve rate ended the quarter at 26% of total loans, an increase of 100 basis points from last quarter and 270 basis points from a year ago, demonstrating a strong margin of protection should more adverse economic conditions arise. Looking at our credit risk distribution mix, The percentage of cardholders with a 660-plus credit score improved 200 basis points sequentially and remained above pre-pandemic levels despite continued inflationary pressures. This improvement is primarily a result of our prudent credit tightening actions as well as our more diversified product mix. We continue to proactively manage our credit risk to protect our balance sheet and ensure we are appropriately compensated for the risk we take. Moving to slide 10, which provides our 2024 financial outlook. While there is uncertainty surrounding the timing and outcome of the ongoing CFPB late fee rule litigation, our outlook now assumes no impact from the CFPB late fee rule this year. Considering that a stay is in effect, the number of motions, hearings, and other procedural matters, including appeals, expected to take place in the litigation over the coming months, as well as a presumed implementation period following the final legal ruling, our base case is that the rule does not become effective in 2024. Our full year contemplates a slower credit sales growth rate as a result of moderation in consumer spending and credit tightening, both of which pressure loan and revenue growth and the net loss rate in the near term. In addition, our 2024 outlook assumes two interest rate decreases by the Federal Reserve in the second half of the year, which are expected to slightly pressure total net interest income. Based on our current economic outlook, proactive credit tightening actions, higher gross credit losses, and visibility into our new business pipeline, we expect 2024 average loans to be down low single digits on a percentage basis relative to 2023. Total revenue growth for 2024, excluding gain on portfolio sales, is anticipated to be down low to mid-single digits with a full-year net interest margin lower than 2023, reflecting higher reversals of interest and fees due to expected higher gross credit losses, declining interest rates, and a continued shift in product mix to co-brand and proprietary products. This guidance includes the impact of early CFPB mitigation pricing changes, which are not material to the full year 2024 guidance. As a result of efficiencies gained from ongoing investments in technology modernization and digital advancement, along with disciplined expense management and reduced fraud, we expect expenses to be down mid-single digits relative to 2023. Expenses are projected to increase in the second half of 2024 versus the first half, driven primarily by the addition of Saks Fifth Avenue portfolio and increased sequential marketing expenses of around $10 million in the third quarter. We would expect fourth quarter expenses to be higher than the third quarter based on seasonally higher employee compensation and benefits costs and further increased marketing expenses. As I mentioned earlier, The second quarter net loss rate is expected to be the peak for the year, and we continue to expect a full year net loss rate in the low 8% range for 2024. With the first half loss rate at 8.6% and a projected improved second half loss rate of approximately 8%, that would currently imply a full year net loss rate of around 8.3%. Again, our outlook assumes a gradual modest improvement in economic conditions throughout the year aligned with most economists. Finally, our full year normalized effective tax rate is expected to be in the range of 25 to 26%. Quarter over quarter variability will continue due to timing of certain discrete items. We are confident in our ability to successfully manage risk return trade-offs through this challenging macroeconomic and regulatory environment. while continuing to make strategic investments that drive long-term value for our stakeholders. Before opening the call for your questions, I want to take a moment to reiterate the financial targets that we shared during our investor day in June. You can see these targets on slide 11. Note, this slide assumed an October 1 CFPB late fee rule change effective date. From a debt perspective, as Ralph mentioned earlier, we've already successfully reduced our double leverage ratio to less than 115%. For capital, our goal is to build total risk-based capital to around 16% with an initial CET1 build to approximately 14%. Over the longer term, we plan to optimize our capital mix through additional Tier 1 and Tier 2 capital which will allow us to lower our corresponding CET1 ratio. Overall, we will continue to grow tangible book value with the goal of generating a low to mid 20% ROTCE in the medium term and mid 20% ROTCE in the long term. While there are many scenarios currently in play regarding our timing to achieve our target, given the uncertainty around the economy and potential regulatory changes, We are well positioned to deliver responsible growth, strong returns, and capital distribution opportunities over time. Operator, we are now ready to open up the lines for questions.
spk07: Thank you. Ladies and gentlemen, if you would like to ask a question, please press star 11 on your telephone keypad. You would then hear an automated message advising your hand is raised. Then wait to hear your name announced. To withdraw your question, please press star 11 again. When preparing to ask your question, please ensure your phone is unmuted locally. Please stand by while we compile the Q&A roster. Our first question comes from the line of Mihir Bhatia with Bank of America. Your line is open.
spk03: Good morning. Thank you for taking my question. I wanted to start maybe by talking about just the purchase volume trends. Look, you obviously have a pretty diverse customer base, and you've talked previously about low-income consumers being impacted by inflation. And so I guess a couple of questions on that. One is, are you seeing those impacts starting to moderate as we've had some wage growth here? And then also relatedly, is the pressures on the consumer spreading up the income scale, or are you still seeing the pressures concentrated in that segment. Maybe just talk about that a little bit, just from where you're seeing the pressures on what kinds of products, what kinds of retailers or categories, maybe. Thank you.
spk11: Yeah, thanks for the question. We're still seeing consumers, no matter where they are in the Vantage change, self-moderate and self-budget. We see the biggest impact in You know, discretionary and big ticket is where we see the biggest impact in terms of spend moderation. But, you know, I think as we move forward, as we said, you know, we think we've peaked in the second quarter. I don't think it's going to be an immediate, you know, rush to the point of sale. I think it's going to be a gradual improvement over time. people are still suffering from high inflation and a high interest rate. So, you know, while we are, you know, we're anticipating a little bit of improvement, I think it's going to be very moderate as we move forward. But, you know, big ticket and discretionary spend were the biggest impact.
spk03: Anything from the income side? Like, is it just mostly still in the low-income consumer only?
spk11: Yeah, so this is Perry. So, you know, what I think I'd share with you is, you know, that view on the economy overall. I think we've been saying this, and I think we're all saying it, the consumer's been pretty resilient. But they are definitely feeling the effects of that cumulative prolonged period of inflation, and now the higher interest rates that are impacting them. With inflation still above 2%, while it's coming down, that's a positive. you know, higher interest rates on things like their mortgages, auto, credit cards, personal loans, that erodes their spending power, right? And, you know, through higher monthly interest costs. So you've got that affordability gap that's still out there for lower and middle-income Americans. So I think that's where you're going, is right at the top third of the consumers are just fine. They're higher income, higher scoring. They're not showing any signs of stress, and we're seeing that in our portfolio. You know, those high... scores are not being affected but that doesn't tell the story for those two-thirds and you are starting to see some of that stress creep up a little bit in the in the risk scores because you know these folks are trying to you know make ends meet and these other things are putting pressure on them now that said there are positive signs that we're seeing and yeah i think we're all seeing it with what we expect to materialize in the second half of the year and that was led by what we just saw with this quarter Whereas you mentioned wage growth outpaced inflation. So that is good. And that's particularly going to help the two-thirds of the consumers who are trying to rebuild their discretionary income. And I think that's going to be a positive. Inflation is coming down. So hopefully, again, wage growth stays up. Inflation comes down. So that's more positive. Now, you will have a little bit of an offset with some modest increase in unemployment that everybody's expecting to finish the year a little over 4%. But that's all in our outlook and forecast. But know so we're monitoring the consumers really carefully we have a really strong credit team that is taking credit actions appropriately and um but you know i think we're all waiting to see how this economy unfolds in the back half of the year and then if i could switch gears on credit just uh obviously uh 2q came in better than your initial guide uh you gave some pretty good commentary on 3q and 4q and what your expectations are and
spk03: What I was curious, though, is what is your view as you enter into 2025? Do you expect losses to continue to moderate? I mean, you mentioned about them being kind of seasonal until you see the economy improve. So my question is really, do you need the economy to improve to get your losses down towards your target or have the credit actions you've taken drive that loss rate lower closer to your long-term targets? Because you're still at 8%, right? So if you just get seasonality from here, are we just going to stay above the long-term targets until you get an economic improvement?
spk11: So I think you have a couple of things, a number of things that go into that. I'm not going to give guidance on 2025 at this point, but I can give you my thoughts on how this trend is going to play out over time, right? Our credit actions are the peak benefit will happen in the second half of this year. So the full benefit of our credit actions haven't yet materialized all the way through. So that will be a run rate benefit into call it 2025. Then we're expecting what I'll say is a slow, gradual improvement in customer behavior. It's going to take a prolonged number of quarters for the consumer behavior to improve given the that they're trying to deal with three years of this persistent high inflation, higher interest rates, right? And that is going to take time to unwind. I mean, there is no fast fix. We're not expecting a big stimulus to come in and all of a sudden, you know, consumer payments just improve dramatically. So I expect there to be a slow, gradual improvement through next year. But to get back to that 6% number that fast seems, you know, that would be a tough, a tough, uh, a tough ask of the consumer, but I do think there's going to be continued gradual improvement.
spk03: Thank you for taking my questions.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is open.
spk04: Hey, good morning, guys. Thank you for taking my questions. I just want a point of clarification on the revenue guide. I know you removed the late fee rule implementation from the fourth quarter versus your last quarter guide. But I think last quarter you also had discussed a scenario where the late fee rule didn't go into effect. You were looking for, I think, down mid-single. Now you're looking for down low to mid-single digits. Can you just talk about where some of the improvement came from there? Is that just continued efforts on the late fee offsets and NCITs you've put out there, or what else may have changed in the outlook? Thanks.
spk11: Yeah, it's a modest change in the outlook, to your point. I think part of it is we're only expecting two rate reductions, Fed rate reductions. So remember, we're a little asset sensitive, so we will see a little bit of NIM compression when you have that. We also probably feel a little bit more confident about the second half of the year loss rate and what that means in terms of reversal of interest and fees. And then we also have, you know, the line of sight into the CFPB mitigation actions while not material. It's just, you know, we're just trying to get everything, you know, dialed in a little tighter to what we expect to see.
spk04: Okay. Just to follow up on credit, I know at the investor day you were talking about some nice stability and not only your early stage, but your mid and late stage delinquencies. Could you just give us an update on what you're seeing there this quarter? And if I could maybe just nitpick a little bit on the monthly data, it did look like your second derivative on total delinquencies did increase a little bit this past month. Is there anything to that or, you know, do you probably still expect that trend of slowing will kind of continue to come through?
spk11: Yeah, I think what I would characterize things is stable and improving. That, again, we're in an improving economy. Credit actions are taking place. You've got some seasonal things happening within delinquency markets. So again, our early stages is stable and we're starting to see some improvement in, you know, very slow improvement in those mid to late stages. But, you know, the roll rates remain high in those later stages because, you know, nothing's changed for, I'll say the consumer who does go delinquent, they have a hard time getting out of delinquency once they're in. And that's, you know, when you think thematically around why you need wage growth and things to improve for them, you know, that's what we hear from the customer, what's straining them. It's just that, you know, that high inflation and wages aren't keeping up.
spk02: Thank you for taking my questions.
spk06: Thank you.
spk07: Please stand by for our next question. Our next question comes from the line of Sanjay Sokrani with KBW. Your line is open.
spk09: Thank you. Perry, could you maybe just talk about what you might be looking at in your data to give you an indication of whether or not the consumer is sort of flat to doing worse? I mean, do you look at like monthly minimum payments, cash drawdowns? I'm just curious because I think there's a lot of confusion as we've heard from some of the questions before. You know, we're hearing the consumer slowing down their spending, but you guys are saying, and this is the industry, that the consumer is generally fine. So maybe you can just give us a little bit more on sort of what informs you that the consumer is doing well. And then secondly, just if rates start coming down, how quickly does that feed into the health of your consumer? Does it help them improve their health? Great questions in there.
spk11: And that's where the benefits of having as many consumers as we do that we can monitor through stratification segmentation. We do look at what's happening with our consumer. And we've talked about this before. When you hear, I'll say, the big banks talk, they have a much fuller view of those high net worth customers. They have the view of customers who are not credit eligible that we don't underwrite. So, you know, and you'll hear things from the big networks and they're giving perspectives on spend overall. What we monitor are things like their payment trends, how many people are making no payment, how many people are making min pay, multiples of min pay. So we are starting to see fewer customers at zero pay and more making min pay. But, you know, that's something we monitor very carefully. So you do look at on-us payment behaviors, off-us payment behaviors. So when we say the customer is, I'll say, improving, it's from the result of the credit actions and a little bit of this wage growth that's in place. So I don't want to give an indication that, wow, things are improving dramatically. It's stable. with modest improvement, and that's what we expect to see in the back part of the year. I mean, for us to guide that we're still going to have 8% losses in the back half of the year, that's still, you know, a pretty strained environment for the consumer. While improving, it's, you know, it's going to take a slow, gradual improvement for, you know, to return to our, I'll say, through the cycle targets.
spk09: Okay, great. And then, you know, your base case, for late fees change to, you know, implementation next year. Could you just maybe give us a little bit more detail on sort of, you know, how those machinations work and then how does that affect, you know, like your ability? I mean, I don't think it changes it much. I mean, I think you guys always felt like you can offset it and, you know, you can still grow book value. But I'm just curious, on the margins, what kind of impact does it have to the fundamentals on a go-forward basis and your ability to sort of overcome some of the impacts?
spk11: Yeah, so look, the reason why we took it out of our guidance for this year, and when we see where things are going right now, the parties involved with the litigation, they're still litigating over where this litigation should be heard, right? And that now is set for, I think it's August 27th, and that could possibly result in another appeal of the judge's ruling. And this is before the courts actually consider the merits of the lawsuit filed by the industry. So that's why we don't think the impact will happen in 2024. We're not taking that assumption of what that could mean to 2025. But the teams continue to work very closely with all of our brand partners. We've been very thoughtful. about the timing of when we roll out changes to the consumer for some of the change that we have put in market. You know, we took, I'll say, a half step towards the back part of 2023 with some pricing that was already in our guidance. You know, some of the things that we just put in market around paper statement fee and some, again, further pricing APR increases. As you know, APR increases take time, like 18 months up to three years to fully get the benefit of that to work through the P&L. and we're also monitoring very closely any change in customer behavior, right, because you don't want to have the unintended consequence where it's more than offset the good of what you're trying to get from it. So that's being carefully watched. And, you know, so the rollout will continue throughout this year. We're assuming the change will go into effect at some point next year. We don't really have a guide on that at this point, but we have the teams working as if it, will happen in short order right after the litigation gets through. Again, not knowing any outcome of the upcoming elections, and we don't want to speculate on that.
spk02: Thank you.
spk06: Thank you.
spk07: Please stand by for our next question. Our next question comes from the line of Moshe Orenberch with TD Cohen. Your line is open.
spk05: Great, thanks. most of my questions have been asked and answered, but maybe if it, you know, coming back to the kind of macro issue of the low end consumer, um, and you know, you know, the, the timing of, you know, kind of rebounding of growth, is there a way to kind of segregate out portions, uh, you know, of your, you know, of your portfolio or if your partners, you know, to think about like what could be, you know, kind of earlier and later in that, you know, how do you, how do you sort of think about that? And, uh, you know, kind of, because we've, we've noticed, you know, some of the, you know, kind of low end furniture type, you know, are starting to see a little bit of a rebound. So is there a way to kind of talk about, you know, uh, you know, what portions of your portfolio, you know, even where there's been, um, you know, that pressure, you know, and, you know, when we could start seeing some of the rebound and on what, you know, what pieces?
spk11: So I'd answer that a couple ways. One, I will answer with regard to rebounding growth. You know, we're going to have a number of tailwinds behind us from a growth standpoint. One, Think about general macro improvement. Like you said, these consumers start to get wage growth going. Inflation comes down. They can free up more discretionary income. That will help the lower end consumer. And wage growth has been more prominent in the lower income brackets than the high income brackets. So that will be an aid to these consumers. The second thing that will impact our loan growth is when we march back down towards you know, a 6% loss rate versus being, you know, over eight. And you think about the interest and fees associated with that too. That's almost a 3% tailwind as we march back towards that. And then as the consumer's improving, we then unwind some of those credit tightening strategies that were in place around line increases, higher approval rates, and all that will as well be a tailwind to growth. And that's not to even mention what Ralph talked about, the terrific business development team that we have out there that, you know, continue to win opportunistic deals for us.
spk05: Got it. Thanks. Maybe just, you know, kind of think, you know, on that note, you know, as you kind of look out at the, you know, the landscape, do you see opportunities for additional portfolios, either, you know, conversions or you know, kind of startup opportunities and, you know, now that, you know, perhaps the late fee issue is at least on hold for a while. Okay. You know, how are the potential partner, you know, what's that channel look like?
spk11: Yes, Ralph, we do. You know, we announced, you know, Saks Fifth Avenue earlier this year, earlier this quarter. Really excited about that to get that in, you know, next, in the third quarter. And this morning we just announced HPF. So we're excited about that opportunity. It's a de novo opportunity for us. And if you look at HP, we have Dell, Sony, and even throw B&H Photo in there, we have a real nice electronics vertical, which we really like. And the pipeline's always active. Our business development team, I'll match up against any. I think it's second to none. And we're always engaged in those deals that are coming due. And also, again, what I love about our team, it's up and down the spectrum. So It's the $100 million deals to the billion-dollar deals. We're able to play, you know, very comfortably in that, you know, with those guidelines. And, you know, they're active and busy. And we certainly see we win more than our first share as we go forward.
spk10: Yeah.
spk11: And, you know, you've asked a question about, you know, with the CFPB happening or not happening. The one thing I think that's common in the marketplace, all of our competitors are, I'll say, pretty rational, right? Sometimes there's something that's strategic that somebody wants to win really badly and they're willing to take lesser economics. But traditionally, you win based on your capabilities and the partnership. And the CFPB ruling is contemplated in the economics through the discussions, whether the partner is somewhere else, they stay where they are, or they come to us it has to be contemplated and you know we are very capital disciplined and with the amount of opportunity in front of us we're also making sure we're selective with who we're signing and that it fits with our strategic verticals as well as delivering the right capital return for our shareholders great thanks very much thank you please stand by for our next question
spk07: Our next question comes from the line of Bill Caccacci with Wolf Research Securities. Your line is open.
spk00: Thanks. Good morning, Ralph and Perry. Following up on your comments about the resiliency of the consumer, there's a view among some that we could see a delayed charge-off effect as customers that are delinquent today and potentially would have charged off by now in a normal cycle have instead been able to avoid charging off because of all the financial support they received during COVID-19. Is that a risk that you worry about in your portfolio?
spk11: So great question. I think that dovetails into the question of earlier, you're starting to see, um, some of the pressure start to creep up the risk bands. And I think that that is something that everybody's watching are some of those, um, middle income Americans starting to feel the pressure that the lower and moderate income Americans had felt last year. Right. And this has been a theme that we've talked about, I think, for over 18 months, that the stimulus that had built up and the savings that were in place for the lower and moderate income Americans had been depleted. And those are the people that, when you see our portfolio, that's why you're seeing the peak losses come through, because that has already happened. And now we've taken credit actions to make sure we've taken care of the population that we see at risk. But, you know, that's why partly you think there's going to be a prolonged period of time for losses to get all the way back down to the 6% range because, you know, the stress is still there. I mean, that's the issue with our economy right now is, you know, this prolonged period of high inflation, high interest rates, consumer debt is high. It's impacting folks. So it's a concern, but I don't see it as something where there's going to be this next wave coming through because we're really on top of this.
spk00: Understood, that's very helpful. And then as a follow up with your C21 now at 13.8%, very close to that initial target that you laid out at your investor day, is it reasonable to start modeling buybacks as you cross that 14% threshold?
spk11: So what I would say is our first binding constraint is total risk-based capital. and that needs to get above 16%. And then I would share this with you, I think I mentioned this previously in Investor Day, but if I didn't, then we have a last slug of, you know, Cecil phase-in that will happen in January 2025, so in the first quarter of 25, and that's 65 basis points. So we've got to care for that, care for the expected growth in the portfolio, And that's when, you know, and then obviously continue to, you know, look at our debt stack and other things. But, you know, I think that's when you start to think about, you know, where we need to be to start having considerations of other capital opportunities.
spk00: Very helpful. Thank you for taking my questions.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of Vincent Caintick with BTIG. Your line is open.
spk10: Hey, good morning. Thanks for taking my question. First question, I wanted to focus on NIM and specifically the loan yield. So understanding that the loan yield was down quarter over quarter due to seasonality, but I wanted to get a sense of how much you've been able to add price, say CFPB Mitigan. So I was wondering if there's a way to maybe separate out the seasonality versus the pricing you've been able to put in. And then separately, if there's any other impacts, so for instance, the tightening credit underwriting, if that's maybe pushing you up market and therefore having a lower price.
spk02: Thank you.
spk11: Yeah, you know, NIM, you know, the 18% this quarter, being down 70 basis points in one quarter, you know, that was really pressured from the sequentially higher reversal of interest and fees. as well as now delinquencies improving, coupled with a mix in the book as we're booking fewer private label cards that tend to have some more late fees. We're seeing a little bit lower yield from those. So that's a result of having a little bit better early stage delinquencies. And so you should expect the net interest margin to come back up in the third quarter. seasonally, also aided by lower reversal of interest and fees in the third quarter as you'll have a meaningful reduction in losses. As it relates to your question on how much of the mitigation action APRs are built through, again, it takes a long time for APR changes to burn into that full rate yield. And, you know, we've been really consistent on saying that, you know, I put that chart together, I think, over a year ago to illustrate how long that can take. And so it's not a meaningful impact in this quarter. It'll just continue to slowly, steadily, you know, impact the improving loan yield. But then you also have, like I mentioned earlier, risk mix changes, product mix changes, and you could have, you know, lower interest rate environment at some point.
spk10: Okay, that's helpful. Thank you. And then second question, just on the credit reserves. It was nice seeing the credit reserves drop this quarter alongside the execution on better losses for the quarter. I'm just wondering, for your expectations for third quarter and fourth quarter, is... Is your expectations for the full year built into the credit reserves? So we should just expect credit reserves to sort of stay stable at this rate going forward, or as time goes on and you're actually able to, you execute on the guidance for the third and fourth quarter loss rate, we should be expecting that credit reserve to continue to come down.
spk02: Thank you.
spk11: So what I would expect to have happen is, look, pleased that the reserve rate came down this quarter. It was funny because we had, you know, prior questions. Do you ever see a point where you could have peak losses and have a reduction in your reserve rate and it just happens that, yes, we can and we did, right? This quarter we had the peak losses and we have our reserve rate coming down. And that's a reflection of the better credit quality and delinquency that's in the current portfolio. So as the year goes on, if everything holds steady, I expect that we'll have a seasonal drop in the fourth quarter. And that's, again, why we have confidence that the end of this year, we'll have a lower reserve rate than where we exited 2023. But I do expect a pretty stable reserve rate, not expecting, you know, sharp declines in the reserve rate, consistent with what we've said. We expect a slow, steady improvement in the portfolio quality over time. I would expect something similar with the reserve rate over time. And the other part of this is I mentioned it in the prepared remarks. weightings of adverse scenarios remained unchanged at this point. So the change from last quarter to this quarter is solely due to the improving credit quality. In time, as we have more confidence in a more benign economic outlook, those can get unwound, but that will be much further down the road.
spk02: Okay, great. Very helpful. Thanks very much.
spk07: Thank you. Please stand by for our next question. Our next question comes from the line of John Pancari with Evercore ISF. Your line is open.
spk12: Good morning. On the late fee side again, I know you removed it from your outlook. I guess just as it is and from what you're seeing in terms of the expected impacts, has the expected impact to revenue from the late fee, you know, any of those expectations, have they changed at all? as well as the magnitude of the offsets that you expect. Anything behind the scenes, has it changed at all in terms of the expected impact, aside from, I know, your efforts to dial in the pricing changes, et cetera?
spk11: No, I wouldn't say that anything's changed in terms of our approach or the strategies, right? I mean, these, it's unfortunate. I mean, this is what happens when you get you know, regulator making changes, probably not fully understanding the impact of what this would mean to all consumers. You know, we are moving forward with, you know, higher APRs for everyone. You know, we've introduced other fees. There's other policy changes that are in place. You know, we put this, I'll say, the paper statement fee in there. It's not something that, you know, we necessarily thought would, you know, I'd say in a normal course of action would have done, were not for the CFPB making this rule change. But we are You know, rolling that out, I'll say thoughtfully, and watching the change in consumer behavior as it relates to APRs for private label and things like that. We're not seeing any change in behavior. What we are seeing, you know, with the paper statement fee, as you would expect, many are opting to go digitally, which will benefit our expenses over time, which was great because we have a, you know, real nice opportunity to drive people to more of 100% digital engagement. So I'd say everything that is happening right now is happening as expected.
spk12: Okay, thanks. That's helpful. And then separately on the funding side, I know you indicated deposit cost stabilizing. Could you give us a little bit more color there of what you're seeing and you're able to see the, you know, I guess your expectation of the trajectory here on deposit cost? And maybe if you could just comment a little bit on how you expect deposit growth to progress in coming quarters.
spk11: Yeah, so we've got our direct-to-consumer deposits sitting at about 40% of our total funding. We've communicated our goal is to get to 50% of our funding from direct-to-consumer deposits and expect that each quarter here out we'll continue to grow thoughtfully with that. Our pricing... Because of the way we are structured, we don't have brick and mortar and all this, and you don't have checking accounts. We are comfortable being towards the top of the league table. As you see deposit pricing come down some, I think we actually were just in market recently with a small reduction in some of the deposit pricing. So we're monitoring it. We're very actively monitoring to make sure that we're getting the growth in deposits that we expect. And so I expect, you know, it's pretty stable right now, but, you know, if there's sharp declines, you know, in fed funds and the market moves, we'll be prepared to, you know, move appropriately, but making sure that we are where we want to be positioned to keep attracting deposits.
spk02: Okay, great. Thank you.
spk06: Thank you. Please stand by for our next question.
spk07: Our next question comes from the line of Terry Ma with Barclays. Your line is open.
spk01: Hey, thanks. Good morning. I think you indicated you don't expect much incremental revenue from the mitigation actions this year. Can you maybe just talk about how the pricing actions and the incremental fees are progressing and when you would expect more meaningful contribution from those measures?
spk11: Yeah, I think when it wedges in. It's the best way to say it, right? So every month that goes by, more and more of the portfolio spend volume or balance will be subject to the higher APRs. And that just takes time. And, you know, I just pointed to the chart that I put out there as an illustration previously, gives you an idea of where are you 12 months after that. And so You know, you're only partway through the benefit a full 12 months after the fact that you've increased the APRs. You know, paper statement fees, it's not a large amount in this, you know, I'll say certainly not this upcoming quarter. As we get into next year, it'll become a more meaningful amount. But even then, the expectation is we're going to have a lot more customers, you know, going paperless and digital. Other policy changes that we have and waiver policies, other things, All those are going to go into effect. And some of this, you know, I probably was remiss in saying this earlier if I didn't, is we're not trying to put these actions in place to accrete a ton of revenue in the near term, you know, while we wait for resolution on the litigation. We're trying to do this very thoughtfully with our brand partners, time the rollout of these things so that we're not doing anything detrimental to to the consumer before something like the late fee drop goes in. And if we do have to put some things in place earlier, as we are, there may be a point where there's some consideration of investing more back into the program in consideration with that brand partner.
spk01: Got it. That's helpful. And then on the reserve rate being lower as you exit this year compared to last year, I think another peer had initially messaged that earlier this year, but is now indicating kind of like a flat reserve ratio year over year. So maybe just speak to your confidence in the macro and the performance of your portfolio to take that reserve rate lower at the end of this year.
spk11: Yeah. What I say is that, look, I can't speak to everyone else's models. But industry-wide, we're hearing the same thing, normalization, seasoning of recent vintages, consumer pressure, we're creeping up into different risk scores, seems to be a theme for them. Now, what I remind you of is that we moved our reserve rate up earlier than others based on anticipated impacts to our customers of high inflation. And it proved to be the right action. We've had a stable reserve rate for over six quarters. So based on the expected stable and slightly improving macro conditions, our improved credit quality and resulting delinquency should allow for modest reductions of our reserve rate over time. Again, with fourth quarter having the normal seasonal reduction before the first quarter increases back up a little bit. But that's what we're expecting to see. And we feel very confident in our process. And we use the term conservative. I'd call it just prudent, right? You know, we have a very experienced team of people at this company who've been through different macro environments. And, you know, we knew to get ahead of this thing early and anticipating what inflation can mean to our customers. Now, others didn't increase their reserve rates to the degree we did. And now they're continuing to see pressure. And maybe, you know, they need to get to a different spot than where we are. But we feel very confident with where we are and confident in the guidance that we're giving.
spk02: Great. Thank you. Helpful.
spk06: Thank you.
spk07: Please stand by for our next question. Our next question comes from the line of Reggie Smith with JPM. Your line is open.
spk08: Hey, good morning. Just real quick, can you remind us what proportion of your portfolio has been or you've been able to kind of implement or have the partner agreed to some of these mitigation efforts, and then I have a few follow-ups. Thank you.
spk11: We have not given a proportion of the portfolio, but I would tell you that conversations have happened with 100% of the brand partners. And as we had talked about previously, each brand partner is unique. Some are opting for you know, APRs, some are in promo fees, some need a compensation list, others may introduce other fees for credit, some are changing, you know, service level agreements, certain strategies. So, I mean, there's a lot that goes into these things, and others have to, you know, are discussing partner compensation changes with different revenue share things. So, you know, again, our commercial team is very active with all of the partners, and as I mentioned earlier, That's why you use the word thoughtful rollout of these strategies.
spk08: And I guess with that said, I would imagine that right now, given the uncertainty that I guess any agreement that hasn't been struck is probably on hold until we get more clarity.
spk11: I don't know if I would use the word on hold. I'd say they're all progressing. and in a state of readiness to take appropriate action. I mean, look, time is our friend. Let's just call that what it is, right? Every month that goes by and delays, our company is getting stronger and stronger from a capital standpoint. The macro environment is improving. We're in a better state of readiness for whatever we have to do systemically from a technology side to implement product changes. So we're feeling very good about our ability to get strong returns should a regulatory change be put in place.
spk08: Yeah, that makes sense. And then if I could ask, when I look at the model, I guess the processing costs were down sequentially, definitely lower than we had expected. You called out, I guess, some efficiencies there. What's driving that? Is that the Fiserv deal? And how sustainable is that kind of run rate that we have there?
spk11: Yeah, so as it, you know, with the expenses, we're at a, I'll say probably a low point for the year, right? We've had benefits year over year as our fraud team has done an amazing job, you know, getting fraud strategies in place to tighten things down. The whole industry experienced, you know, some fraud attacks last year. Now, I think most industries got it under control and our team certainly does. We're going to see an increase in expenses in the third quarter because you've got SACs coming online, right? So that's a portfolio purchase for servicing and the costs involved with getting that up and going. As well, you're going to see an increase in marketing, sequential marketing. It's going to be up about $10 million in the third quarter. And then in the fourth quarter, expenses will rise again from there because fourth quarter is always sequentially higher for us as a result of, again, further increases in marketing for the holiday seasons, as well as our employee benefits costs are seasonally higher in that quarter.
spk02: Got it. Perfect. Thank you.
spk07: Thank you. Ladies and gentlemen, I'm showing no further questions in the queue. I would now like to turn the call back over to Ralph Andretto for closing remarks.
spk11: Sure. Well, a couple of thank yous. First, thank you to Perry for fielding all the questions today. I appreciate that very much. And thank you to all of you for your continued interest in bread. We look forward to talking to you again in the next quarter. And everybody have a terrific day. Take care now.
spk07: Ladies and gentlemen, this concludes today's conference call. Thank you for your participation. You may now disconnect.
Disclaimer