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 Vereb, Head of Investor Relations at Bread Financial. The floor is yours.
Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Bread Financial, and Perry Beberman, 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 risks 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 hosted on our Investor Relations website at breadfinancial.com.
With that, I would like to turn the call over to Ralph Andretta.
Thank you, Brian, and thank you to everyone for joining the call this morning. I will start on slide 3 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-brand 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 Bread Cashback 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 the 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 the growing concerns about a potential recession, coupled with the expected normalization of delinquencies in 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 4, 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 U.S. 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.
During the quarter, we signed a multi-year renewal with our longtime valued brand partner, Torrid, a direct-to-consumer apparel and intimates brand in North America that serves over 3 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 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 5 highlights our technology modernization 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 to 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 going 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 Beberman, to review the financials.
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, d riven solely by Loyalty Ventures share price at June 30. 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 points 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 $0.25 were impacted by our 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 at 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 $0.53 impact. These items, combined with the reserve build, reduced diluted EPS by $3.10 in total for the quarter.
Looking at the second quarter financials in more detail on slide 7. Total interest income was up 17% from 2Q 2021, 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 rewards, was -$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 continuing 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 built 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 pretax 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 8. 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's 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 9. 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 provides 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 remain 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 Bread Pay 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%-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. 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 with over 60% of our portfolio above a 660 VantageScore. 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 the changes 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.
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.
Hi. Thank you. 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. 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 a, I mean, a rapid rise in unemployment. What does that mean?
Yeah. Let me comment on that. Let's start with you know, the reserve roll. You're right. We feel very confident in the portfolio that we've constructed. What we're observing is a strong consumer and, you know, we're encouraged by their payment behavior and, yeah, and their spend patterns.
Yeah, as we said, you know, being conservative and prudent in our outlook. What that means is when we look at our reserving models, it's not just what the, you know, 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 and to the portfolio over time.
When you have a period where you have this persistent high inflation, not knowing how long it's going to persist, and then we use Moody's economic outlooks, and when you think about what their scenarios look like, they actually all, whether it's mild, moderate, or severe, have pretty sharp rises in unemployment in a pretty rapid period. Every recession is different. When we think about that, you know, the last one was driven by housing and a lot of unemployment. Right now we're in a, we'll call it, a job-full period.
When you contemplate what this means to a model when you pull those in, it just, you know, when you went from a period where you're going to go from a 25% probability of a recession to 50%, it just put 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. That's as simple as that, to be honest with you.
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.
Thank you. Just a, 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%-25%. How confident are you today, Ralph and Perry, as you look at your business, that those targets are reasonable? You know, 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?
Yeah, I mean, that's interesting. We still continue to target that, you know, mid- to high-20% range at appropriate capital levels. The one variable in that is that, honestly, it's 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 CECL 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 as much CECL growth tax and the economy is, you know, I'll say, you know, the loss rates and everything are what you expect through the cycle, we are definitely building this company for profitable, responsible growth over time.
Thank you. If I could just sneak one last one in. The AAA, can you give any commentary on the size of the AAA portfolio and, you know, kind of some of the pluses and minuses on portfolio and, you know, runoff or additions?
Yeah. Hey, Bob. Yeah, a couple of things. First, let me say we are thrilled to have announced this portfolio in partnership with AAA. More than 56 million members in the U.S., an iconic brand, a brand that is trusted, and we're excited to help AAA grow this portfolio with a couple new exciting value props. You know, we don't comment on the size of the portfolio, but I will say, you know, we have growth of $2+ billion in the back end of the year, and this is a significant part of that.
Thank you. Appreciate it.
Thank you. Our next question comes from Sanjay Sakhrani with KBW. Sanjay, your line is now open.
Yeah, thanks. Good morning. Maybe to follow up on Bob's first question. I guess, Perry, if we look forward now, obviously we got another negative GDP print, so technically, I guess we are in a period of recession. How should we think about that reserve rate moving from here? Like, do you feel like you've incorporated sort of a mild recession now? What would be the next step for the reserve rate if it has to go higher?
Yeah. Thanks, Sanjay. You know, as we think about the reserve rate, like we talked about, there's a number of factors that go into it, you know, including the modeling methods that each company uses. It's the portfolio and then the overlays that we put in there for anticipated economic stress. I'd like to think at this point, we've captured what we had anticipated, you know, you mentioned this print to look like.
Again, I'm not suggesting that, you know, the GDP is the only measure of what a recession feels like to our consumers. 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, yes, things got significantly worse. Could it increase again? Sure. For what we know, and 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.
Okay. I 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-- I know you guys reiterated or gave the margin 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 we move into next year to some extent. Thanks.
Yeah, good question. One of the things that, you know, let's talk about the what happened sequentially. The second quarter is 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, and because of tax payments that come through in the second quarter. That drives down that aspect.
Then what happened in addition for this quarter is, remember, there were a couple Fed increases that occurred. There was 50 basis point Fed increase in May, and then we passed some of that on to higher deposits and another 75 basis point in June. When we pass along higher deposit rates than we do, you know, 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, when it's passed on to consumers on the asset side for available 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.
Again, overall, as you think about NIM, as we've talked about this, we're more asset sensitive, so as interest rates go up, we are slightly accretive in that process.
Okay. Perfect. Thank you.
Thank you. Our next question comes from Bill Carcache with Wolfe Research. Bill, your line is now open.
Thank you. Good morning. Ralph and Perry, hi there. I wanted to follow up on some of the earlier questions, and, you know, kind of drill a little bit more into the trajectory of the reserve rate from here. 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 gonna 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? 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, broadly speaking, a reasonable way to be thinking about it?
Yeah. I think that's, you know, a fair way to think about it in general terms. Again, every recession's different and what creates, you know, strain on a consumer. When you think about unemployment as a big driver traditionally of what creates a higher credit loss environment, I think that's a fair way to look at it, right?
If you go through this peak period, and then when 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. 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, you know, where we're being conservative.
Right. I mean, it certainly suggests you guys are, you know, 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 know, you guys are confident in outperforming your 6% through the cycle average longer term. 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 NCO rate would exceed that 6% level?
Yeah. Exactly right. You know, you're gonna have periods of time when, you know, when we're in the good times, we should expect to be below 6%, and you have a, you know, short period of, you know, recession, you can be above 6%, and that should be expected. That's exactly what through the cycle means.
Understood. 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.
Yeah. If you think about our book, you know, and our product diversification, we have PLCC or private label, and we have direct-to-consumer products with the Bread Cashback card and our program partners. 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.
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 discretionary and nondiscretionary up and down the Vantage levels. We're seeing, you know, consistent continued spend. Again, not just a large ticket price, but, you know, multiple transactions which are, you know, it tells us that consumers engage with our products and, you know, they're becoming top of wallet.
That's very helpful. Thank you for taking my questions.
Thanks, Bill.
Thank you. Our next question comes from Jeff Adelson with Morgan Stanley. Jeff, your line is now open.
Hi. Good morning, guys. 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, you know, what kind of band around the 19% you're talking about here, because I think, you know, as we think about that, to get to 19%, it implies you have to have some, you know, sequential decreases here going out.
Maybe, as a part of that question, is it reasonable to assume that until the Fed, you know, starts slowing down Fed hikes, that you're maybe gonna lag that with your funding costs going up ahead of the asset yields like you referred to earlier?
Yeah. I think you're gonna have a little bit of seasonality in there. To your point, you get a little bit of a lag. As the Fed increases, like this one that just happened yesterday, you're gonna have a little bit of lag in a month until then we get caught up. That's why we're saying, you know, around 19%. I mean, that's. I'm not thinking much under, not thinking much over. It's just gonna have. It's gonna float around that number.
Would it be reasonable, like, as we maybe get past that you'd see a much more material benefit, you know, as maybe in 2023 your asset yields catch up beyond that?
Again, yeah, I think the way to think about it, we're slightly accretive. I wouldn't go material. As well, what's gonna influence is, you know, as you heard us talk about winning a large, you know, 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? If you put on some lower credit risk type portfolios, they're gonna bring in a lower NIM. We continue to build out private label, which has higher NIM. Really, it's about what is the composition of the portfolio as we move through 2023.
Got it. 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, you know, the buy now pay later initiative is going and maybe what your same store sales are looking like.
Yeah. Ralph, I'm really pleased with the 10% increase in credit sales. Any double-digit increase in credit sales is a you know, I take that every day and twice on Sunday, quite frankly. BJ's is not affected. 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 we particularly in pay in four, we're gonna be very prudent about how we approach that and how we sign partners to that because of the competitive economics in that chapter.
10% sales for me seems really good and, you know, it's across all channels and across all products. I think that's a, you know, that's an indicator that our customers are engaged with us and are using our products that we're putting in the marketplace.
If I could just put one last in then. On loyalty, is there any update on that? You know, the stock price there has continued to come down. Have your plans there changed, or what are you thinking around potential monetization there?
Yeah. No, clearly the stock price has come down, and we reflected that in our write-down. What I'd tell you is, at the time we did the write-down, their share price was around $3.50. We had it on the books for about $80.13. 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. You know, upon monetization, as you can tell, it will not have a meaningful impact to us.
Okay. Thank you, guys.
Thank you. Our next question comes from Mihir Bhatia with Bank of America. Mihir, your line is now open.
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 2Q data, did you see anything, you know, below the line? Like, obviously we see the NCO rate, but did you, like, and we understand there's some normalization, but was there something unusual, something you didn't expect that impacted your reserve ratio?
No, Mihir. Thanks for the question. You know, to be clear, and I try to be clear, but it's-
Yeah.
... you know, there's a lot going on in the CECL reserve. You know, the modeling is as, you know, we expected normalization to occur. Again, we're performing well against the normalization, and that's gonna pull through. Like, we've all been waiting for this to see moderating payment rates, and that's a good thing in a credit card business 'cause we get more revolve behavior, and we're priced for risk and so we feel good about that. 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 outlook, and we leaned into that because, again, trying to get ahead of it and look around the corner of what could come. Not saying it's going to come. It's just, again, trying to be cautious with our portfolio. Simple as that, really.
Okay. No, no, that's helpful. I just wanted to go to your, you know, obviously a nice win with AAA coming on board. 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-
Yeah. We-
... strategic you feel about that one?
Yeah. Again, the addition of AAA certainly was something that we're, you know, we're excited about and we did contemplate as we think about our 2023 $20 billion target. We still feel confident about that. It's gonna come from a combination of growing existing portfolios, new products, and then what you see here is, you know, acquisitions. Across all three, we are still confident, and we're confident in that number for 2023.
Yeah. 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 gonna get to that number. You know, we'll be around the hoop on that number. Meaning, look, if the economy softens a little bit, we're not gonna chase loans just to hit that number. You know, we'll give you that as a clear statement.
We come in a little bit under because we had to do some risk pullbacks. 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 gonna happen. You know, we're around the hoop on that number.
Yeah. I think, you know, 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. Again, we're not coming off that number, and it can be a combination of acquisition, product growth, and deeper penetration on our existing partners.
Understood. Thank you. Just one last question from me. It's just on the CFPB and the late fees. There's obviously been more chatter on that. I understand you don't disclose, you know, just the exact breakdown of the late fee within NCO.
But what I was hoping is maybe just talk about it philosophically maybe. How are you all approaching this situation with the CFPB, you know, review? Are y'all engaging with them? How do y'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? Thank you.
Yeah. 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. 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 you know been reported publicly. We continue to work closely with the regulators to ensure you know 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. As we continue to diversify our portfolio, the reliance is just not there. 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.
Understood. Thank you.
Thank you. Our next question comes from Reggie Smith with JP Morgan. Reggie, your line is now open.
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.
Yeah. Start with that question. The answer is yes. The way it works is. I presume you're trying to model out the fourth quarter. 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. In the fourth quarter, which is traditionally 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 account, we'll be establishing that reserve through the P&L as well.
Understood. I guess looking at your reserve, and I know, you know, folks have asked 1,000 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. 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 credit losses over the next 12 months or so? Just broadly speaking, is there a way to think about that?
No, there really isn't. You know, like 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 economic concerns would be lower than the pre-pandemic.
You know, it's the economic scenarios that are putting that reserve rate as high as it is. I'm not suggesting that I have 100% confidence that that's actually gonna happen. This is the sensitivity when you apply a heavier risk weighting on these severe scenarios. 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 a, you know, improved capital position. This is where we are for now.
That makes sense. If I could sneak one more in. You know, obviously you highlighted the strength in your co-brand portfolio and proprietary cards, obviously. Curious, I know that, you know, the mall-based retail is I think up to a quarter of your business now. Are you seeing weakness there? 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. Maybe if you could talk about sequential trends there. Just curious. Thank you.
If you're asking if we're seeing weakness in our PLCC business and the retail, we're not. You know, that still remains strong, and you know, as does our co-brand and our proprietary products. We've not seen any weakness. In fact, you know, 1/3 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. co-brand sales are about 50% of our sales.
Got it. Just to be clear, you're saying that apparel, and obviously it's not, you know, it's a small piece of your portfolio, but your apparel book is holding up pretty well. Is that what you're saying?
Yeah. It's holding up both in sales and in credit pretty well. Yes.
Good stuff. Okay. Thank you.
Thank you. Our next question comes from John Pancari with Evercore. John, your line is now open.
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 if, you know, maybe are you seeing pressure in certain FICO bands, certain products? Do you continue to expect an increase there on the delinquency side? Thanks.
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. 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.
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. We don't have that tailwind, say, to our balance in the same way those do. We're more with the general consumer on those things.
I think the pull-through is exactly what we're expecting to see, and some of it is seasonal on top of that.
Okay. All right. Thanks for that. 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?
Right now we're not giving guidance for 2023. You know, we'll get to that, you know, probably I guess around January. The way to think about this right now is, you know, we gave you guidance for the rest of this year. You can imagine that if we're saying, "Hey, we're going to be within the guidance of what we said," probably it might be on the upper end of that.
You know, the low- to mid-5%s. Where you exit will give you a sense of, you know, 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, that it could be higher. We're not saying it is going to be.
You know, as it is right now, the portfolio should, you know, be pretty strong and perform really well for the coming periods. This is about, you know. 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? That's what, you know, CECL's caring for potential losses, not necessarily what our projection is. Again, right now we are performing below pre-pandemic levels with regard to delinquency and losses.
Okay, thanks. One last one just on the credit front. I know the accounts that were sold to a third party that contributed to the charge-off. Somebody said it's in legal dispute. Are there any other similar transactions that you would have such exposure? Does this impact your ability to offload future exposure?
Yeah. We can't comment on the ongoing litigation as it relates to that particular item. What I can say, it has no impact on our ability to you know sell charged off debt to you know third party debt collectors, and that is 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. Taking my questions.
Thank you. Our final question comes from Dominick Gabriele with Oppenheimer & Co. Dominick, your line is now open.
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.
Sure. 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. You know, whether if you're a subprime consumer, you have a cell phone. You know, that's a piece of it.
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, you know, we have more full spectrum underwriting from, you know, super prime and near prime. I... You know, we're watching that, and we obviously adapt our underwriting, you know, 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. 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 closure. Whatever has to happen to make sure we manage around the loss rate that we're comfortable to ensure we're getting the risk reward from those accounts.
Really great. Thank you so much. You know, 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?
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-brand in balances.
Right.
The mix continues to shift over time. We're bringing in more proprietary card. So I wouldn't give us a 100% correlation to historical experiences with private label.
Okay. Perfect. Thanks so much.
Thank you. I'll now pass the conference back over to Ralph Andretta for any closing remarks.
Sure. I just wanna thank you all for joining and your continued interest in Bread Financial. I appreciate the questions. You know, 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.