Q2 2022 Bread Financial Holdings Inc Earnings Call
All parties have been placed in a listen only mode. Following today's presentation before will be opened for your questions to Register a question. Please press star followed by one it is now my pleasure to introduce Mr. Bryan <unk> head.
<unk> Investor relations at broad financial the floor is yours.
Copies of the slides, we will be reviewing.
In the earnings release can be found on the Investor Relations section of our website.
On the call today, we have Ralph <unk>.
Didn't.
Chief Executive officer of bread financial and Perry Beeferman 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 todays 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 materials posted on our Investor Relations website at bread financial Dot com.
With that I would like to turn the call over to Ralph in dry dock.
Good morning, and welcome to <unk> financial 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 before will be opened for your questions to register a question. Please press.
Thank you, Brian and thank you to everyone for joining the call. This morning.
I will start on slide three by highlighting a few key updates from the quarter.
We continue to make progress towards our long term financial goals driven by our focus on sustainable profitable growth.
In the second quarter consumer activity remains strong with credit sales up 10% from the second quarter of 2021, with particular strength from our beauty and jewelry verticals and co brand and proprietary cards.
Star followed by one it is now my pleasure to introduce Mr. Brian There I'm head of Investor Relations at broad financial the floor is yours.
Thank you [laughter] copies of the slides.
This growth was the result of increased shopping trips not just transaction size, which indicates that consumers continue to shop and engage with.
In the earnings release can be found on the Investor Relations section of our website.
On the call today, we have Ralph <unk> President.
Chief Executive Officer, Brad financial and Perry determine executive Vice President and Chief Financial Officer, Brent 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.
We are seeing an increase in customer spend in both discretionary and non discretionary categories across both of 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.
These statements are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC, Brian financial has no obligation to update the information presented on the call also on todays call. Our speakers will reference certain non-GAAP financial metrics, which we believe will provide useful information for investors.
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 cardholder spend in everyday categories and we are acquiring.
Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website at bread financial Dot com with that I would like to turn the call over to Ralph in dry dock.
<unk> customers in their channel of choice with an emphasis on mobile new accounts.
Thank you, Brian and thank you to everyone for joining the call. This morning.
I will start on slide three by highlighting a few key updates from the quarter.
Our business development wins to date, including our AAA multi card program reflect the successful execution of our growth strategy.
We continue to make progress towards our long term financial goals driven by our focus on sustainable profitable growth.
We are excited about our recent new business additions and renewals and given our strong pipeline, we anticipate continued growth into the future.
In the second quarter consumer activity remains 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.
We continue to improve our strategic positioning bolstered by our technology modernization and business transformation efforts.
This growth was the result of increased shopping trips not just transaction size, which indicates that consumers continue to shop and engage.
<unk> will highlight our actions to enhance our financial resilience and recession readiness, which are critical as potential economic recession wounds.
We are seeing an increase in customer spend in both discretionary and non discretionary categories across both of our co brand and proprietary cards.
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.
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.
While consumer consumer sentiment has weakened routine 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.
With remarkable growth in our consumer deposit balances through our branch savings offerings with retail deposit balances up 75% year over year.
Additionally, we are seeing early success with our American Express, Greg 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 cardholder spend in everyday categories and we are acquired.
<unk> and payments creates uncertainty.
And we have reflected that in our conservative seasonal reserves.
Payment and delinquency rates are normalizing coming off historical lows of 2021, and we remain confident in our full year guidance.
<unk> customers in their channel of choice with an emphasis on mobile new accounts.
Moving to slide four I will highlight some of our business development success.
Our business development wins to date, including our Triple a 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.
This morning.
We announced a new long term relationship with a 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 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.
We also reach a definitive contract to acquire a triple as 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.
Our critical as potential economic recession wounds.
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.
Through two unique co brand offerings with.
With enhanced card holder value propositions, we are excited to help AAA drive top of wallet usage loyalty and growth.
The consumer overall remains in a good financial position, while consumer consumer sentiment has weakened routine retail sales continue to rise the unemployment rate is very low and wage growth has been trending upward, especially in the lower income segments.
Also during the quarter, we signed a multiyear renewal with a long time valued brand partner tore it a direct to consumer apparel and intimates brand in North America that serves over 3 million customers through its e-commerce platform and our over 600 stores nationwide.
However, we recognize the growing concerns about a potential recession, coupled with the expected normalization delinquencies and payments creates uncertainty.
We will use our expertise in specialty retail coupled with digital modernization to further drive spend acquisition and loyalty in this fast growing industry.
And we have reflected that in our conservative seasonal reserves.
Payment and delinquency rates are normalizing coming off historical lows of 2021, and we remain confident in our full year guidance.
Additionally, we expanded our <unk> card rewards program, introducing an improved value proposition designed to enhance loyalty and improved cardholder experience Caesars rewards remains the largest loyalty program in the industry.
Moving to slide four.
Unlike some of our business development success.
Turning to bread pay we signed over 50, new small and medium sized partners in the second quarter and.
This morning.
We announced a new long term relationships long term relationships with triple H, one of North America's largest and most trusted membership organizations, serving more than 56 million US Members. We also reached a definitive contract to acquire triple as existing credit card portfolio expect.
And we continue to grow our platform with a focus on profitable and disciplined lending.
So our partnership with several launched in the second quarter, providing us with access to sales of 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.
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.
We believe we are well positioned to continue to add additional quality partners.
While further diversifying our portfolio.
So with two unique co brand offerings.
Slide five highlights our technology monetization progress.
With enhanced card holder value propositions, we are excited to help AAA drive top of wallet usage loyalty and growth.
Our digital modernization efforts have helped us drive convenience and choice for the consumer.
Also during the quarter, we signed a multiyear renewal with a long time valued brand partner tour at our direct to consumer apparel and intimates brand in North America that serves over 3 million customers through its e-commerce platform and our over 600 stores nationwide.
Our full product suite, coupled with our data and analytics expertise provide personalized experience experiences offering the right product for the consumer and 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 <unk> further simplifying our business model and increasing our flexibility and capabilities.
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.
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, great 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 at <unk>.
<unk>, 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 <unk> to review the financials.
Thanks, Ralph Slide six provides our second quarter highlights bread financial credit sales were up 10% year over year to $8 1 billion as consumer spending remains strong.
Average loans were up 11% with end of period loans up 13% driven by continued double digit credit sales and moderate moderating payment rates.
Revenue for the quarter was $893 million inclusive of a $21 million write down in the carrying value of the company's investment in loyalty Ventures, Inc. Driven.
Driven solely by loyalty venture share price at June 30 <unk>.
Revenue increased 17% versus the second quarter of 2021, while total noninterest expenses increased 12%.
Credit metrics remain below historical averages with delinquency and net loss rates of four 4% and five 6% respectively for the quarter.
The net loss rate included a 30 basis point or $13 million increase from the effects of the purchase of previously written off accounts that were sold to a third party debt collection agency and remain subject ongoing legal dispute with the debt collection agency as disclosed in our main credit statistics.
Our net income of $12 million and diluted EPS of <unk> 25.
We're impacted by a reserve build in the quarter.
The $166 million diesel 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.
Combined loyalty ventures write down of $21 million and the purchase of written off accounts of $13 million.
We had an additional 53 impact these items combined with the reserve build diluted EPS reduced diluted EPS by $3 10 in total for the quarter.
Looking at the second quarter financials in more detail on slide seven.
Total interest income was up 17% from <unk> 21, 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.
Noninterest income, which primarily includes merchant discount.
And interchange revenue net of the impact from our retailers share arrangements and customer awards was negative $85 million inclusive of the $21 million write down in the carrying value of our equity method investment in loyalty ventures.
As we have said excluding the loyalty ventures impact. This line item is most closely correlated with credit sales for the quarter, which increased 10% from the prior year period.
Total noninterest expenses increased 12% from the second quarter of 2021 due to increased employee compensation and benefits cost 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 build in the second quarter of 2022, driven by higher end of period loan balances in a higher reserve rate sequentially compared to a $208 million relief in the second quarter of 2021.
Looking at the provision and tax volatility we are pleased that our pretax pre provision earnings our PPR improved 24% year over year, marking the fifth consecutive quarter that we have seen year over year double digit growth in <unk> as we have said our focus continues to be on making the right decision.
To produce quality earnings.
Turning to slide eight.
The left side of the slide highlights, our earning asset yields and balances.
Second quarter loan yield increased 110 basis points year over year and declined sequentially with normal seasonality net interest margin improved approximately 130 basis points year over year.
On the liability side of the slide we saw funding costs slightly increased sequentially in the second quarter in line with our expectations given the fed recent interest rate increases.
As you can see from the stack bars on the bottom line, our direct to consumer deposits continued 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 overtime.
<unk>.
Moving to slide nine.
I'll start on the upper left.
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 five 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 a 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 reflect 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.
<unk> a rapid rise in unemployment.
Overall, we remain pleased with the improvement in the underlying credit quality of our portfolio from prepaying Demick 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 on 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 diverse.
Vacation that set 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.
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 include incremental strategic investments of over $125 million in technology modernization digital advancement marketing and <unk>.
<unk> innovation to fuel growth opportunities and future operating efficiencies.
A large portion of the $125 million investment will be evident in employee expenses 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 product 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 Pfizer and continued investment into the bread paid 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 in our talent, we are making ongoing investments now to stay ahead of customer expectations.
Regarding our net loss rate outlook, we continue to anticipate the full year 2022 loss rate will be in the low to mid 5% range I would also reiterate our confidence in the long term outlook of a through the cycle average net loss rate below our historical average of 6%.
We expect our full year normalized effective tax rate to be in the range of 25% to 26% with quarter over quarter variability due to timing of various discrete items.
Moving to slide 11.
Through our business transformation efforts, we have improved our balance sheet loss absorption capacity and funding mix.
We've enhanced our credit and credit risk management and underlying credit distribution and third we've ensured we have a proactive and refine our recession readiness playbook in place.
These changes strengthen our financial resilience better positioning bread financials 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 physicians bread financial to whether 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 we'll 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 will have 60% of our portfolio above a 660 vantage score.
We manage our portfolio proactively we have our 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 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.
When you combine our improve.
Improved risk profile with a more diverse portfolio and brand partner base. We believe that we are better positioned than we've 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're 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 team.
Preparing to ask a question. Please ensure that your phone is on.
Locally.
Yes.
Yes.
Our first question comes from Robert Napoli with.
William Blair Robert.
Your line is now open.
Got it thank you and good morning.
Ralph.
Just on the credit outlook.
I mean, you sound confident on your portfolio.
Mix.
Outlook.
Cycles, but what are you bill it sounds like you are an outlier versus peers on your forecast of unemployment what have you built in.
You said it I mean, a rapid rise in unemployment what does that mean.
Yes, So let me comment that so let's start with the the reserve only right. We feel very confident in the portfolio that we've constructed and what we're observing is a strong consumer and we're encouraged by their payment behavior and.
And their spend patterns, but yes, what we said, we're being conservative and prudent in our in <unk>.
Outlook and what that means is when we look at our reserve model. It's not just what the let's say the the credit criteria or the credit performance of the existing portfolio is in the moment, but youre trying to understand what's severe scenarios could imply.
<unk> to the portfolio over time, so when you have a period, where you have this persistent high inflation is not known how long it's going to persist and then you take the we use Moody's economic outlook and when you think about what their scenarios look like they actually all of this mild moderate severe have pretty sharp rises in unemployment and a pretty rapid period now every recession is different.
So when we think about that.
Last one was driven by housing.
A lot of unemployment right now.
We will call the job full.
But when you contemplate what this means to our model when you pull those in.
So when you went from a period, where you're going to go from a 25% probability of a recession to 25% to 50%. It just but it's in a position to think lets be prudent and not chase this and let's get ahead of it and stay safe.
Stay with what the outlooks, we're suggesting and thats as simple as that to be honest with you I think I said in the in the prepared remarks, when we run the current portfolio through the model and if we applied the same economic outlooks that we have pre pandemic you produce a seasonal reserve rate well below what we had.
Other time.
Thank you and just I guess, a follow up I mean your targets.
<unk> return on equity I guess, three cycles or on average over time of 20% to 25%.
Confident are you today.
Ralph and Terry as you look at your.
Your business.
That you can get those targets are reasonable.
Assuming we don't have I mean recessions are very different.
And then where you are likely not going to have a deep recession, but who knows.
Yes.
So we have we still continue to target that.
Mid to high 20% range at appropriate capital levels.
The one variable in that is that honestly the pace at which we grow if you're in a period of high growth and you need to put up that we'll call it seasonal growth Tac.
That's going to suppress those returns in that period as you get into a period, where you have moderating growth and youre not putting up as much seasonal growth in the economy as I'll say.
Loss rate and everything or what you expect through the cycle. We are definitely building this company for profitable responsible growth overtime.
Thank you if I could just sneak one last one in the chip away can you give any commentary on the size of the AAA portfolio and kind.
Kind of some of the pluses and minuses on portfolio.
Runoff or additions.
Hey, Bob.
Yeah, a couple of things. So first let me say we are thrilled to.
To have announced this.
Portfolio in partnership with AAA 50, more than 56 million members in the U S and iconic brands.
And that is trusted and we're excited to help triple eight grow this portfolio with a couple of new exciting value props.
We don't comment on the size of the portfolio, but I will say we have.
Growth of two plus billion dollars in.
And in the back end of the year and this is a significant part of that.
Thank you I appreciate it.
Okay.
Thank you our next question comes from.
Okay.
Sanjay <unk> with <unk>.
W. Sanjay your line is now open.
Yes. Thanks, good morning, maybe to follow up on Bob's first question I guess, Terry if we look forward now obviously, we've got another negative GDP print. So technically I guess, we are in a period of recession. So.
How should we think about that reserve rate.
Moving from here do you feel like you've incorporated some of the miles of the session now.
What would be the next step of the Missouri.
Ohio.
Yeah. Thanks Sanjay.
As we think about the reserve rate like we've talked about this a number of factors that go into it.
Including the modeling methods that each company uses but it's the portfolio and then the overlays that we put in there for Intest anticipated economic stress I'd like to thank at this point.
Captured what we had anticipated you mentioned this print to look like.
And again, I'm, not suggesting that gd.
GDP is the only measure of what a recession feels like to our consumers, but right now it's just trying to make sure we are not chasing that and I feel like we're in a.
Pretty good spot right now for what we would expect I would tell you things got significantly worse could it increase again sure.
What we know when we think is on the horizon. We think we're in a good place and we should remain elevated at around this level until this period passes.
Okay.
And then I guess my.
Follow up question on the portfolio yield.
And when you look to add the progression year over year. It did decline sequentially and rates went higher.
I know you guys reiterated our England.
And then Martin NIM guidance, but how should we think about that yields progressing going forward are you able to pass on some of the rate increase and maybe if you can also talk about deposit data and how do you see.
Not only for the rest of this year, but as you move into next year.
Thanks.
Yes. Good question. So one of the things that you can talk about what.
What happened sequentially. The second quarter is traditionally a seasonal kind of seasonality in it.
With our NIM yield and what.
What happens typically if we have lower late deal late.
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 and then what happened. In addition for this quarter is remember there were a couple of fed increases that occurred to a 50 basis point fed increase in May and then we pass some of that onto higher deposit and another 75.
In June we will win.
When we pass along higher deposit rates, but we do.
We grow those deposits that goes through much faster.
Faster rate in peer to can happen within a week, whereas when the prime rate goes up.
<unk> onto consumers on the asset side for available variable price loans, it's actually the last published data the Wall Street Journal.
Of the month and then they start billing the following months. So you think about the 75 basis points from June none of that that pass through in terms of consumer billings, where that will come through in July so you've got a little of that lag effect, but again overall as you think about NIM as we've talked about this is we are more asset sensitive so.
As interest rates go up we are slightly accretive in that process.
Okay perfect. Thank you.
Okay.
Thank you.
Our next question comes from.
Cachet with Wolfe research.
Bill Your line is now open thank you.
Thank you good morning.
All right Ralph.
Hey, there.
I wanted to follow up on some of the earlier questions.
And kind of drill a little bit more into the trajectory of the reserve rate from here.
So when we think about the reasonable and supportable period under Cecil.
Along as the recession and rising initial claims is still in front of us and there is a lot of uncertainty and we don't know exactly how that's going to look like.
You've got the overlays in there that sort of contemplate some some degradation.
It reasonable to expect that the trajectory of the reserve rate as long as that's in front of US is essentially flat to up but once we get past peak initial claims than that 10 of them. When we could start to look for the reserve rate to start coming down again is that kind of broadly speaking in a reasonable way to be thinking about it.
Yes, I think Thats, a fair way to think about it in general terms.
Again every recession is different and what creates.
Training on a consumer but when you think about unemployment.
Big driver traditionally of Wolf Creek.
Higher credit loss environment, I think it's a fair.
The way to look at that versus if you go through this peak period and then when you come on the downside and unemployment claims that trajectory as you talk about yes reserves get released again, because you have a more favorable economic outlook, so you're trying to get to that point.
Peak and then you see a more favorable period ahead of you that that implies you can bring down your reserve rate for the for the overlay aspect.
We're being conservative.
I mean, it certainly suggests you guys are I guess looking around corners, if you will.
It's refreshing to see that in a quarter, where a lot of your peers ended up letting the reserve rate continued to drift lower.
Could follow up on you guys are confident and outperforming your 6% through the cycle average.
Longer term.
But I guess since it's an average would it be reasonable to expect that there would be some period.
If we did have a downturn, where where that NCO rate would exceed that 6% level.
Exactly right.
Going to a period of time when we're in the good times, we should expect to be below 6% and you have a short period.
Recession, you can be above 6% and that should be expected that's exactly what through the cycle.
Understood last one for Ralph if I may just 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 different cohorts and give us a sense of the spending and just overall trends that you're seeing across those groups and how they are being impacted by inflation.
Yes, so if you think about it.
About our book.
Our product diversification, we have plc, a private label on the App.
Direct to consumer products with Greg Cashback card in our programming partners and what we're seeing is good spend with with private label, albeit they have lower alliance, where we're seeing consistent spend there and we feel good about that.
But we're seeing really.
Outstanding spend with our <unk>.
Proprietary card and our co brand cards, where we're seeing both spend on the.
Discretionary and non discretionary up and down the vantage points.
So we are seeing consistent.
Can you expand and again not just a large ticket price click.
Multiple transactions, which are.
It tells us that consumers engage with our products and they are becoming top of wallet.
That's very helpful. Thank you for taking my questions.
Thanks.
Thank you.
Our next question comes from.
Jeff Adelson wins.
Morgan Stanley .
Jeff Your line is now open.
Hi, good morning, guys.
I was just wondering if you could follow up on the.
The NIM commentary a bit.
You are talking about the nominal benefit in being asset sensitive here, but.
But also talking about this 19% or around 19% NIM for the year I'm wondering if you could maybe help us understand what kind of band around the 19% Youre talking about here because I think as we think about that to get to 19%. It implies you have to ask him some sequential decreases here going out.
And maybe as a part of that question.
Is it reasonable to assume that until the fed.
Start slowing down fed hikes that you're maybe going to lag that with your funding costs going up ahead of the asset yields like you referred to earlier.
Yes, I think youre going to have a little bit of seasonality in there.
And to your point there is this you get.
A little bit of a lag so as the fed increases like this one that just happened yesterday youre going to have a little bit of lag.
Until then we get caught up so that's why we are saying.
Around 19%.
Yes.
Not thinking much under not thinking much over so it's going to it's going to float around that number.
Okay, and so would it be reasonable as we need to get past that you'd see a much more material benefit.
In 2023, your asset yields catch up beyond that again, I think the way to think about it we're slightly accretive so I want to go material and as well what's going to influence us.
As you've heard us talk about winning a large wind today, all I'll say wins that we have the portfolio composition that we have in the future have different net interest margins right. So he put on some lower credit risk type.
Portfolios theyre going to bring in a lower NIM, we continue to build out private label, which is higher and so really it's about what is the composition of the portfolio as we move through 2023.
Got it and then and then just on the credit sales trading this quarter.
A little bit below what I thought it would be this quarter. Just wondering is there anything going on maybe.
With the exit of Bj's, there, maybe you can give us some color into how.
B.
Don I'll pay later initiative is going and maybe what your same store sales are looking like.
Sure.
It's Ralph.
Im really pleased with a 10% increase in credit sales a double digit increase in credit sales.
I take that everyday and twice on Sunday quite frankly.
Bj's is not effective selling a portfolio.
It's one of our cards, but it's not doing any differently than any other any other other.
The co brand products.
We've talked about buy now pay later.
And where we are.
Particularly in paying for we're going to be very.
Very prudent about how we approach that and how we signed partners to that because of the.
The competitive economics in that in that chapter, so, but 10% sales for me seems really good.
Its across all channels and across all products. So I think thats a.
Indicator that our customers are engaged with us and are using our products that we're putting in the marketplace.
And then if I could just one last one in on loyalty is there any update on that.
Stock price there has continued to come down.
Heavier plans, there changed or what are you thinking around potential monetization there.
Yes.
Clearly the stock price has come down and we reflected that in our.
Right down and what I'd tell you at the time, we did the write down their share price was around $3 50, we had it on the books for about eight <unk> 8000, <unk>. 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 overall, we're not planning to be a strategic investor in the business. It's just not what we do as a company. So our intent is to monetize it but upon monetization as you can tell it will not have any meaningful impact to us.
Okay. Thank you guys.
Thank you.
Our next question comes from.
Mihir Bhatia with bank of America.
Matthew Your line is now open.
Good morning, and thank you for taking my questions.
I did want to start with the reserve I just just to be absolutely clear are you seeing anything in your data that's making you take the reserve ratio higher.
<unk>.
Primarily driven by the outlook I just wanted to make sure we're very clear that in your <unk> data did you see anything.
Below the line like obviously, we see the NPL rate.
And we understand that some normalization, but was there something unusual something you didnt expect that impacted your reserve ratio.
No. Thanks for the question and to be clear.
I tried to I tried to be clear, but it's.
There's a lot going on in the seasonal reserve the modeling as you as you know we expected normalization to occur and again, we are performing well against the normalization.
And thats going to pull through like we've had we've been waiting for this to see moderating payment rate and Thats a good thing.
Card business, because we get more revolve behavior, and where price for risk and so we feel good about that really it is.
I'll start with <unk>.
Again, when I ran this when we ran the portfolio through our model it produced a lower seasonal.
Our reserve rate than pre pandemic, so that would tell me the underlying portfolio is strong.
Causing the rate to go up as 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 nothing is going to come. It's just again trying to be cautious.
With our portfolio and simple is that really.
Okay.
That's helpful. And then just wanted to go.
Obviously, a nice win with AAA coming onboard.
I wanted to make sure I understand how you're still feeling about 2023, I think you've talked about $20 billion of average loans in 2020, you're still feeling good about that and do you now have the portfolio of the necessary to achieve that outlook, but that still incorporate some loan portfolio wins.
Just trying to understand how.
You should be thinking about that one.
Yes again. The addition of AAA certainly was something that we're excited about it.
We did contemplate as we think about our 2023 $20 billion.
$20 billion target so.
We still feel confident about that it's going to come from a combination of growing existing portfolios new products and then what you see here is.
Acquisitions, so across all three we are still confident and we're confident in that number for 2023 and I'll just add Ralph said.
Think about this management team that set this goal almost three years ago.
<unk>.
To get to that number and it will be around the coupon that number meaning look if the economy softens a little bit we're not going to chase loan just to hit that number. We will give you that is a clear statement. We found it a little bit under because we had to do some risk pullback I think there were some flaws for that if we come in little over because the wins keep coming in.
The returns that's what's going to happen, but we're around the coupon that number yes I think.
The most important.
The more important and hitting that exact target is insuring.
We're taking the appropriate risk and were getting rewarded for the risk. We're taking so again, we're not coming off that number.
And we feel it can be a combination of acquisition product growth and deeper penetration of our existing partners.
Thank you just one last question for me is just on the CFPB.
<unk> has obviously been much out on that I understand you don't disclose.
The exact breakup of the lately within Neal.
But I was hoping to maybe just talk about it philosophically maybe.
How are you approaching this situation with the CFPB.
Review engaging with them and how do you just think about late fees internally and what can you do to manage that you should think about with some kind of lower capital or something like that.
Thank you yeah, so I'll talk about philosophically.
I've been in this business 30 years and looking at Carillon is change.
Anything you can count on is when change happens good companies adapt to that change and move forward.
It is.
What we do with our regulators as 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's been reported publicly.
We will continue to work closely with our regulators to ensure.
Our views are made known but I will say is that the continued diversification of our portfolio ensures that we are not overly reliant on any one given product or a capability or a fee. So as we continue to diversify our portfolio.
The reliance is.
It's just not there.
And.
And in terms of.
Our ability to maneuver we have unique contracts with many of our brand partners that include many different arrangements all based on different drivers.
Don't disclose the specifics, but certainly there is.
Moving to our regulatory issues and change and change.
Change in law.
Thank you.
Thank you.
Yes.
Our next question comes from.
Smith with JP Morgan.
Your line is now open.
Hey, good morning, guys. Thanks for taking the question.
I guess I've 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.
And upfront reserve for that or how would the accounting.
Kind of works for that for that that acquisition.
Yes, so I'll start with that question.
The answer is yes.
The way it works is.
I presume youre trying to model out the fourth quarter, so when that portfolio comes online.
We will have to set up a seasonal reserve.
In that period for those loans, just like any other loan growth. So in the fourth quarter, which is traditionally seasonally high loan growth period for us anyways, we'd have to post up a seasonal reserve for those similarly with a portfolio acquisition through our account and we will be establishing that reserve through the P&L as well.
Understood.
And I guess looking at your reserve I know folks of that.
Questions on it.
I believe and correct me if I'm wrong, we'll see so it's no longer like a 12 month was there, but it's kind of a light of the.
The account was there and I guess my question is looking at your reserve rate.
Is there a way a rule of thumb to kind of extrapolate like what is it.
Right.
Credit losses over.
Over the next 12 months or so.
Broadly speaking the way to think about that.
No there really isn't.
To your point it is the way <unk> works at your expected losses over the life of the loan and as long as we established at the end of each period.
All I can share with you is like we said the the reserve rate.
Outside of an economic.
Outside of the economic uncertainty would be lower than the pre pandemic. So it's the economic scenarios that are.
Putting that reserve rate as high as it is and so.
Im not suggesting that I have 100% confidence that that's actually going to happen. This is saying this is the sensitivity when you apply the heavier risk weighting on the severe scenario. So it's just protecting the company in the event something happens like that we're trying to make sure. We have got a good loss absorption buffer look we're all hoping.
This doesn't happen in all of this reserve gets released back into retained earnings and you'll continue to have improved capital position.
Where we are for now.
That makes sense and Novartis sneak one more in.
Obviously, you highlighted the strength in the co brand portfolio.
Sure.
And proprietary clouds obviously.
And I know that the mall based retailers.
A quarter of your business now.
Are you seeing.
Just trying to I'm trying to square that with kind of what some of the retailers are saying if that has actually shown in your portfolio and maybe if you could talk about sequential trends there.
Just curious thank you.
So if you're asking if we're seeing weakness.
Our <unk> business and our retail we're not.
That still remains strong.
And.
As is our program.
Our proprietary products, so we've not seen any weakness in <unk>.
<unk>.
One third of our loans are co brand and apparel now is probably at 25% that we've diversified that across a number of verticals.
And and and products.
The co brand sales are about 50% of our of our of our sales.
So just to be clear, you're saying that apparel.
And obviously as that small piece of your portfolio, but your apparel book is holding up pretty well.
Is that what you're saying, yes, it's holding up both in sales and in credit pretty well.
Okay. Thank you.
Yes.
Thank you.
Our next question comes from.
John <unk> with Evercore.
John Your line is now open.
Good morning, guys.
On the just on the credit front regarding the increase in the delinquencies that you saw this quarter, maybe could you give us some color on where you saw the.
The increase in some of the drivers perhaps maybe are you seeing pressure in certain FICO band certain products and do you continue to expect to increase there on the delinquency side. Thanks.
Yes.
Yes, thanks for the question.
When we look at it this is where we've talked about this that we were expecting normalization that come through this entire year.
And now we're seeing it.
Again, when you think about our portfolio and the way. We're viewing. This business is composed we were going to see more impact of the stimulus wind down sooner than others.
And we also think about peers in the industry, where we may look a little different we don't have a portfolio concentrated in travel. So they had this big contraction has been during COVID-19 to bounce back in that category. So we don't have that we don't have that tailwind to our balance in the same way.
So we are more with the general consumer on those things. So I think the pull through is exactly what we're expecting to see and some of it is seasonal on top of that.
Okay, alright, thanks for that and then related to that.
Your loss rate.
I know you answered bill earlier, indicating that it could.
Certainly exceed the 6% being at 6% and average can you help us maybe frame out how you're thinking about 2023 years, 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.
So right now, we're not giving guidance for 2023.
We'll get to that.
And the around January .
The way to think about this right. Now is we are we gave you guidance for the rest of this year. So you can imagine that it will say hey, we're going to be.
Within the guidance, what we said I'll be it might be on the upper end of that.
Low to mid fives, and where you exit we will give you a sense of what could be again what happens.
You hit a period of economic strain into next year. That's what you are carrying for receive so that it could be higher we're not saying it is going to be.
As right as it is right now the portfolio should be.
Be pretty strong and performed really well for the coming period. This is about.
So if youre trying to correlate.
Our position on the seasonal reserve to what's actually fundamentally happening the portfolio on the business. We're building there are almost two different things in a way right and thats, what diesel caring for potential losses, not necessarily what our projection is and again right now we are performing below pre pandemic levels.
With regard to delinquency and losses.
Okay. Thanks, and then one last one just on the credit front I know the.
The accounts that were sold to a third party that contributed to the charge offs.
It's legal dispute are there any other.
Similar transactions that you would have such exposure and then does this impact your ability to offload future exposure.
Yes, we can't comment on the ongoing.
<unk> litigation as it relates to that particular item.
But what I can say it has no impact on our ability to.
Sell charged off debt to.
Third party debt collectors and Thats part of our recovery strategy something that we do in house for recoveries and some that we sell the paper to third parties.
Okay, great. Thanks for taking my questions.
Thank you.
Our final question comes from.
Dominic Gabriel with Oppenheimer <unk> Company Dominic Your line is now open.
Hey, great I just want to.
Reiterate as well as its refreshing and seen some of the.
Well it might be a more realistic scenario playing through in your numbers with the reserves. So thank you.
If you just think about AT&T talking about some of the delayed phone Bill billings and these are the other day talking about people not filling up their gas tanks all the way.
And your reserve changes, maybe you could talk to us about how you're underwriting for new accounts has changed given perhaps you're more cautious view.
And.
How that could affect our loan growth you've talked about it could slow it from the $20 billion number but any detail you can provide on that and I just have a follow up thanks. So much.
Sure.
Okay.
Thank you for appreciating our conservative position.
Again, we read the same things about what AT&T said now when I think about Americans almost every American has a cell phone.
We don't underwrite every American and so whether if youre a subprime customers subprime consumer do you have a cell phone.
So that's a piece of what they may be seeing in the strain in I'll say, the deep subprime, where we don't play.
Is an aspect I think what's pulling through their general billings for us.
We have a more full spectrum underwriting from Super Prime Prime and near Prime and so we're watching that and we obviously adapt our underwriting.
On the credit quality of the consumer when they come through we monitor everything at the time.
Underwriting with the Bureau data, we can see how much leverage they have stress strain unemployed not employed so theres 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 increase.
In line decreased strategies or account closer whatever has to happen to make sure. We manage around the loss rates that were comfortable to ensure we're getting the risk reward from those accounts.
Okay, great. Thank you so much and then I just wanted to follow up on the late fees.
First gen and perhaps frame it a different way.
Is there any reason that you are 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.
I think it would be a little bit different right because as Ralph talked about earlier.
Over a third of our portfolio is co brands.
Imbalances and mix continues to shift over time, we're bringing more.
Proprietary card.
So I wouldn't give us 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 <unk> for any closing remarks.
Sure.
Just wanted to thank you all for joining and your continued interest in <unk> financial I appreciate the questions.
<unk>.
We're we feel good about the quarter, we feel good about the adjustments we've made and we're looking forward to the future.
Have a good day.
That concludes today's great financials second quarter 2022 earnings conference call. Thank.
Thank you for your participation you may now disconnect.