Q3 2022 Bread Financial Holdings Inc Earnings Call
Good morning, and welcome to bread find out and shows third quarter earnings Conference call. My name is Jay and I'll be coordinating your crude today at this time all parties have been placed on a listen only mode. Following today's presentation. The floor will be open for your questions did you Register a question. Please press star.
Philip I want it is now my pleasure to introduce Mr. Brian Vera head of Investor Relations at <unk> financial the floor is yours.
Thank you copies of the slides, we'll be reviewing in the earnings release can be found on the Investor Relations section of our website on the call today, we have Ralph and dry dock, President and Chief Executive Officer of <unk> financial and Perry Lieberman 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 based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.
Also on today's call our speakers will reference certain non-GAAP financial measures, which we believe 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.
Thank you, Brian and thank you to everyone for joining the call. This morning.
I'll start on slide three by highlighting a few key updates from the quarter.
We continue to make strong progress towards our 2022 financial goals.
We are pleased with the continued acceleration of our loan growth with end of period loans up 16% on a year over year basis, leading to revenue growth of 15% for the quarter credit sales growth remained positive for the quarter. Despite pressure on discretionary spending in July when fuel prices temporarily spiked and consumer confidence.
<unk> declined notably year over year sales growth rates improved in both August and September from the July low as consumer confidence and in store traffic gradually recovered and we're seeing that trend continue in October .
Also in anticipation of the transition of our credit card processing services, we shifted promotions and incentives with our brand partners and direct to consumer offerings from the third quarter to the fourth quarter, which impacted sales growth.
Outlook for credit sales growth in the fourth quarter looks strong driven by new partner additions and holiday spending we're already seeing brand partners ramp up their promotions and incentives in preparation for the holiday season.
Pre tax pre provision earnings growth improved at double digit rate from the prior year periods for the sixth consecutive quarter highlighting the quality growth. We are focused we are focused on consistently delivering over the long term.
We improved our funding mix and make significant progress again in the third quarter for retail deposit growth of over 70% year over year, and 24% sequentially retail deposit balances exceeded $5 billion benefiting both our funding diversification and cost of funds relative to other funding sources.
Earlier this month, we successfully converted a AAA portfolio of over 1 million active accounts and approximately $1 5 billion in loan balances. We are confident that the new and improved card holder value proposition on our AAA products will drive further engagement with AAA as more than 56 million.
U S members driving increased sales and accounts by leveraging our full product suite, we remain well positioned to continue to add quality partners that further strengthen our diverse portfolio.
We also continue to invest in our technology modernization and business transformation efforts.
While we experienced some temporary disruptions during our transition these upgrade support our long term plan enhance our strategic differentiation and are essential to further driving operating efficiencies and innovation.
From a macroeconomic perspective, while labor markets remain resilient lower and middle income household field household feel the pressure of persistently high inflation and increased cost of overall consumer debt. According to an internal study.
Over 90% of Americans have changed their spending habits due to inflation, we have taken targeted actions to protect inflation vulnerable segment when prudent.
We consistently and proactively adjust our underwriting and credit management to account for changes and it changes in inflation and other factors present to consumers. We will continue to closely monitor consumer health indicators, including how consumers are navigating an increasingly challenging economic environment.
Our seasoned leadership team has extensive credit card lending experience and has successfully navigated the full range of economic cycles, we remain focused on a reasonable risk management and proactive recession readiness planning, we are confident in our outlook and financial resilience.
Moving to slide four I will highlight some of our business development success.
This morning, we announced a new long term credit card relationship with world market, especially key retailer of home furniture decor apparel and international food products with over 240 million locations across the U S and a vast online assortment at world market Dot Com, we will leverage our deep edge.
Experts of serving specialty retailers, coupled with our sophisticated data and analytics capabilities to offer world market customers and there are $6 5 million reward members are new payment products with valuable rewards and an enhanced shopping experience.
Also during the quarter, we signed a multi year renewal with a valued partner.
Buckle operates over 440 retail stores in 42 states as well as its Buffalo Dot Com E Commerce site and has grown to become one of America's favorite denim destinations with a strong millennial customer base. This partnership will focus on providing buckle guests with lending solutions.
And a customer loyalty program tailored to evolving guest wants and needs.
Turning to bread pay we are pleased to have signed water ROA among dozens of other new small and medium sized partners in the third quarter, we have grown our total bread paying merchant base by over 50% this year, while developing incremental platform capabilities and enhancements, including ensuring our products are <unk>.
<unk> compliant.
Finally, our strategic relationship with central has experienced faster than expected new merchant additions with over 125 merchants enrolled and now able to access bread pays long term lending solutions since launching in the first quarter.
We look forward to building on our business developed momentum in the coming quarters.
Moving to the bottom half of the page, we remain committed committed to continuously enhancing our customer experience through technology through.
So our relationships with more kidder and versatile credit we are making it easier for consumers and merchants to access our broad suite of consumer payment products.
The program, we've developed with more Kedah brings access to our bread pay installment lending and split pay products in store, ensuring consumers can access their preferred payment option in the channel of their choice. The virtual card solution. We have developed with more Kedah enables customers to seamlessly apply for provision and a digital wallet and purchase.
In store.
We took an innovative approach to the virtual card and working with Mark header in two of the largest digital wallet providers developed a smoother and faster process that does not require a mobile app download to complete the SaaS.
Markets <unk> this.
<unk> virtual card process is accessible in store to a QR code scan and by eliminating the app download step it does not disrupt the merchant checkout flow, which improves customer conversion rates.
Wed pay puts brand partners first with a simple white label ready web to wallet based solution. This offering is a prime example.
Of how our technology investments to improve the customer experience and enhanced payment products that our brand partners provide.
Brad will continue to expand its presence into a home improvement elective medical and furniture verticals by integrating and diverse how credits simple flexible and diversified sales finance lending platform.
First the tile has relationships with hundreds of merchants and this integrated solution extends sprague's bread pays distribution and increase the speed to market, while providing merchants with a turnkey solution.
With the addition of these two relationships bread pay delivers split pay or paying for and point of sale installment loan products, both online and in store.
We continue to transform our company through a successful execution of our strategy, we have positioned bread paid bread financial to drive sustainable profitable growth through continuous improvement innovation operating efficiencies and the appropriate risk management balance I'll now turn it over to our CFO <unk> <unk>.
To review the financials.
Thanks, Ralph Slide five provides our third quarter financial highlights bread financial credit sales were up 4% year over year to $7 7 billion and average loans were up 14% with end of period loans up 16% driven by growth from our existing partners as well as our new <unk>.
Alex and brand partner additions.
Revenue for the quarter was $979 million revenue increased 15% versus the third quarter of 2021, while total non interest expenses increased 13%.
Income from continuing operations was 134 million and diluted EPS was $2 69 in the quarter.
Looking at the third quarter financials in more detail on slide six total interest income was up 23% from the third quarter of 2021, resulting from 14% higher average loan balances coupled with improved loan yields non interest income, which primarily includes merchant discount fees and interchange.
Revenue net of the impact from our retailers share agreements and customer awards was negative $106 million.
This included an $11 million write down in the carrying value of our equity method investment in loyalty ventures, the carrying value of our investment in loyalty ventures was $6 million as of September 32022.
Total noninterest expenses increased 13% from the third quarter of 2021 due to increased employee compensation and benefits costs and increased information processing and communication expenses as a result of the transition of our credit card processing services. The third quarter expenses were lower than anticipated as such.
Some of the expenses were shifted to the fourth quarter and we received payment network expense credits that were projected in the fourth quarter additional.
Additional details on expense drivers can be found in the appendix of the slide deck.
Overall income from continuing operations was down 72 million, sorry, $2 million for the quarter versus the third quarter of 2021 as improvement in pretax pre provision earnings were <unk> was offset by a higher provision for credit losses in the quarter, taking up the provision and tax impact.
The left side of this slide highlights, our earning asset yields and balances third quarter loan yields increased 160 basis points year over year. It improved 220 basis points sequentially driven by the increases in prime rate.
As well as increased delinquencies, resulting in higher late fee contribution to yield in the quarter note. The third quarter is typically the high point for loan yields each year and we expect our loan yields have dropped in the fourth quarter. Following normal seasonal trends in net interest margin improved approximately 100 basis points year over year as the <unk>.
<unk>, an earning asset yield outpaced the increase in cost of funds.
On the liability side, we saw funding costs increased in the third quarter in line with our expectations given the fed interest rate increases to date as you can see from the stacked bars on the bottom right. Our direct to consumer deposits continued to grow and now represent 27% of our total interest bearing liabilities.
We expect that our retail deposit balances will continue to increase providing a stable funding base as it becomes an even more meaningful portion of our funding over time.
Moving to slide eight and starting in the upper left with the delinquency rate.
Third quarters are normal seasonal high point for delinquency with a rate of five 7%, which remains 20 basis points below our pre pandemic third quarter of 2019 performance.
We experienced temporary impacts from the credit card processing services transition that influenced both our delinquency and loss rate in the quarter. In addition, both rates were impacted by continued payment rate normalization.
We expect the delinquency rate to move meaningfully lower in the fourth quarter given that we are seeing improvements in early stage delinquency buckets.
In the upper right. The net loss rate of five was 5% for the quarter as previously disclosed our losses would have been higher had we not completed customer friendly accommodations in July around our credit card processing services transition historic seasonality along with normalization would have suggested a mid five.
Moving to the bottom left the reserve rate increased 20 basis points from the second quarter to 11, 4% consistent with our previous comments and the continued economic uncertainty while the conversion of the AAA portfolio and seasonal growth will be key factors moving into the holiday season, our intention is to maintain a.
<unk> weighting of economic scenarios in our credit reserve model and recognition of the increase in macroeconomic concerns and the potential impact on our credit performance metrics.
Current economic trends continue it is quite possible that our reserve rate will remain closer to the third quarter rate of 11, 4% at year end.
On that note a fundamental element of our business model is managing risk tolerance and being properly compensated for the risk we take along with the impact on credit performance metrics. The normalization of payment rates has also positively impacted our net interest margin, which has improved nearly 100 basis points year over year.
As well as loan growth, which is up 16%, we remain confident as a management team and our ability to manage our credit risk and drive sustainable profitable growth through the full economic cycle.
Yes.
Slide nine provides our financial outlook for the full year of 2022, our full year average loans are expected to grow in the low double digit range relative to 2021 with the addition of approximately $1 5 billion.
The AAA portfolio in the fourth quarter, we expect year end loans to be between 'twenty, one and 'twenty 2 billion before dropping in the first quarter of 2023, as we exit the bj's portfolio and seasonal balances run off as a result, this will have a significant impact on the dollar balance of our allowance for credit losses with.
A large build in the fourth quarter and then a likely release in dollar terms in the first quarter of 2023, all else being equal.
We expect revenue growth to be consistent with average loan growth in 2022 with upside from improved full year net interest margin of around 19%. The fourth quarter net interest margin expected to be down over 100 basis points consistent with both pre pandemic seasonality and the reversing of build interest and fees related to <unk>.
<unk> elevated fourth quarter credit losses.
We continue to remain on track for full year positive operating leverage in 2022, we expect expenses to increase sequentially in the fourth quarter. As we've previously discussed our 2022 spend includes incremental strategic investments of over $125 million in technology moderate.
<unk> digital advancement marketing and product innovation to fuel growth opportunities and future operating efficiencies. We also anticipate higher marketing expenses in the fourth quarter associated with higher sales and brand partner joint marketing campaigns as well as an expanding our new brand products and direct to consumer.
<unk> offerings.
Regarding our net loss rate outlook, we anticipate the full year 2022 loss rate to be at the high end of our low to mid 5% range.
Fourth quarter losses are expected to be above that range aligned with higher mid to late stage delinquency rates. We are seeing this quarter and the normal seasonal trend of a higher loss rate in the fourth quarter note that the normal historical seasonality would result in the October net loss rates being up nearly 100 basis points from September .
In addition to the impact from continued normalization trends.
Over the next two quarters, we expect elevated losses due to the impact from the transition of our credit card processing system and continued payment rate normalization. We see this elevation is temporary and remain confident in our through the cycle average net loss rate remaining below our historic average of 6% as I mentioned, we're seeing good improvement in early.
Stage delinquency performance, which should lead to a meaningful reduction in the delinquency rate in the fourth quarter and bodes well for our performance post the transition impacts.
Finally, 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.
Slide 10 highlights our strengthened financial resilience and ongoing financial transformation the improvement in our balance sheet, including higher parent and bank capital levels, a significantly higher reserve for credit losses.
And improved funding mix.
As well as enhanced underlying credit mixed distribution PPE at our margin and diversification of brand partner products provide mark evidence of our continued financial transformation.
These enhancements offer increased confidence in our ability to sustain more challenging economic outcomes and outperform our historic results. We will continue to manage our portfolio proactively we have a recession readiness playbook in place for both new and existing accounts with a focus on managing open to buy authorizations and helping consumers manage their.
We continue to further strengthen the financial resilience of our company and are confident in our ability to deliver sustainable profitable growth with an expectation to outperform historical loss levels through a full 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 one of the thing to ask your question. Please ensure your phone is on mute lately.
First question today comes from Sanjay <unk> from <unk>. Your line is now open.
Hi, Good morning question for Perry and one for Ralph but maybe start with Terry.
Could you just talk about that.
NIM going forward in the different.
Factors that impacted obviously yields have done really well, but I'm. Just curious do you hit a point in passing through some of the rate increases and then maybe just talk about deposit betas too.
Sure. Thanks for the question, yes, with NIM and the trajectory there are a lot of moving parts right.
A number of things come into the equation, including product mix.
The percent of your portfolio, that's revolver transact or obviously, even more transaction.
<unk> in your portfolio you are going to have more negative NIM. We don't have a lot of that portfolio. We don't target those super high end spenders, we're looking for good revolve rate and for US that's variable rate price. So as rates go up and funding the APR scope on that front too. So during a period like this you can see in our.
NIM, we're getting really good performance in that dynamic we expect to continue to occur now you do have.
There is a fire loss of some reversal of build interest and fees, but when you think about the full year guidance, we've given over 19% overall NIM, we feel good about that we think about cost of funds.
And we can as fed funds go up we're finding moving with the market on that front and leading the market because as we've talked about.
Our assets are mostly variable price, so and those direct to consumer deposits as they move forward is still a a better alternative in terms of funding costs. So.
We feel very good about having a strong steady NIM of that 19% that we guided towards.
Okay, Great and then Ralph obviously, its very dynamic market out there.
Lot of pain has been felt by the Fintech space. Since we last spoke last quarter I'm. Just curious how you think it's impacting Brad I mean, do you see opportunity out there.
Yeah, Hey, Sanjay good morning, I do.
One of the things one of the benefits of.
Red financial in Us owning.
Our bread and that platform is that we know what the challenges are of a regulated institution. So.
We took a step back and make sure that our platform for a regulatory compliant we know how to underwrite we know how to collect.
Hundreds of years of experience with the team in terms of managing through different cycles, a lot of the Fintech don't have that and again I would emphasize that those products are paying for.
Is just one of many products we offer.
Our consumer base and our brand partner base. So.
Whenever the whatever the market is leaning towards we can lean into so I feel good about that.
Our pricing is.
Competitive because we price our relationships that's another advantage for us as well so I feel good about where we are from a regulatory perspective, a statutory perspective, how we underwrite the risk we're taking there to reward we're getting back and how that.
And the stability of that system, and it's a product and a basket of offerings, we have for our consumers.
Great. Thank you.
Our next question today comes from Rob that Pete Napoli from William Blair. Please go ahead.
Alright, Thank you and good morning.
Ralph Perry.
On the your confidence in the credit loss rate as we look into 2023.
Given the rise in delinquencies, you've got a number of new portfolios.
Good marketing you've lost some portfolios.
What gives you the confidence in that.
Of that 6% charge off rate and it seems like with some volatile macro environment. It wouldn't be hard to be well above that have you tightened credit to Eric.
Just any commentary there on why Youre, so confident in credit.
Yes. Thanks for the question so as I think about our portfolio and I'll start with speaking to credit risk mix, which we've improved that from pre pandemic levels, where we're 600 basis points better than our 660 plus rate than what we were back then so that credit mix will continue to be a favor.
Well I'll say tailwind for us as we move into the next cycle and with that as well as Ralph talked about and I've talked about where we have a very active recession readiness playbook as dynamic as living breathing I mean, we've got people focused on it everyday all day as you would imagine and leadership's focus on only weekly routine so.
Youre not going in and making wholesale changes at any point, but being very surgical and deliberate and it's dynamic in fact and taken into all the data we have about our customers and so that's a key point and then when we think about what we're seeing now a part of what we're going to see some elevated losses in the fourth.
Quarter and first quarter of next year is a lot to do with the.
The card processing platform transition that we went through and so we do.
Good about what we're seeing and so as we as I said the early stage delinquency right. Now is looking really good. So that's evidence that some of what we're doing.
What we saw in terms of our mid to late stage delinquency was part of the actions. We took as we did customer accommodations as we work through our.
The conversion of our platform now with that we're also making very targeted changes ensure we understand the population that has impacted with this high inflationary environment and the key is that we're being proactive for US overall. This is a business that we're good at we understand that we are underwriting for profit so as we do this.
We're making sure that we're getting the right return and you can see that calculate our risk adjusted margins even through cycles, we will do will be fine.
And thank you and then just as it relates to 2023 what are your thoughts on.
On loan growth.
2023, and what is the right I think I've asked this question before the right return on equity for this business.
On average over time, if you will.
Yes, but we have we put out our targets two years ago and.
I think we are.
Holding fast to those targets those were.
We are expecting average receivables in 2023 to be around $20 billion.
Mid mid twenties, ROE and net loss rate through the cycle of 6% now having said all of that.
Macroeconomic as kind of macroeconomic environment is going to have an impact on that and we're not going to grow loans for the sake of growing low into and to grow them responsibly with the right return, but at this point.
That's kind of bar.
Our target for 2023.
Yeah, if I could.
What I'd say is exactly were outside of the economy.
You asked a question about <unk>.
The way to look at I think if you look at the under lying business. If you strip out the build.
Reserve build in there you can see the underlying performance of the.
The business.
Great. Thank you appreciate it.
Question today comes from Mihir Bhatia from Bank of America. Please go ahead.
Good morning, and thank you for taking my question.
I do want to go back to credit losses.
I guess, you mentioned credit losses, increasing in <unk> I think our calculations suggest your guidance implies something like 6.2.
So it's something that you also have the impact in <unk> from the gut some actions you took.
I appreciate your guidance for 6% is on a full year and through the cycle basis, but based on what you are seeing not only in the early stage delinquencies and your data do you expect to stay above the 6% level for a while or do you think exiting <unk> you're back below the 6% level.
Yes, I mean look.
I think when you think about where we are in the economic cycle.
I think we're going to be around the 6% level up and down and you talked about through the cycle you do expect some quarters to be above it others will be below.
Every economic cycle is different and we will see where we go but we are.
Taken actions proactively making sure that we are.
Carrying for the customers, who we think may experience some more strained in that period, but I think as you think about the overall through the cycle guidance of 6% I'm not expecting it to be materially above that but it can be up and down around that as we March through next year based on what we know now.
We're hoping for us a more of a soft landing as we move through next year, but again every recession looks a little different.
Okay.
Then just on the low new this quarter could you parse out just given how much it increase just quarter over quarter can you just bought side how much was interest rate driven versus just the payment normalization benefit that was maybe thank you.
Yes, so when I think about the.
With the NIM expansion, it's what I said earlier <unk> got a couple of things going on you do have some NIM expansion because the rate on our assets, we're moving up faster than the rate on our cost once you have that aspect and as you look at our delinquency rate rises that also means you have more late fees that are.
Contributing into yields do you have a combination of those two items happening in the period.
And I should also mention it seasonally is higher in the fourth quarter seasonally lower.
Okay. Thank you.
Our next question comes from Bell correct, Jay from Wolfe Research. Please go ahead.
Thank you good morning.
Can you give a little bit more detail behind why NCO rates in DQ rates were impacted by the transition of your credit card processing services.
And maybe.
Long.
Similar lines, if you could also discuss what level of unemployment.
You you you would say is implicit in your outlook.
Okay. So I'll take the first half and I'll ask Perry to kind of chime in on the unemployment rate. So when you make a magnitude of change that we've made in our technology from going from a aging legacy system to our state of the art.
System.
Going to the cloud there are bound to be issues and and.
And concerns as you go along the way.
Our focus was to make sure that consumers and our brand partners will not harm so because of that we've done a couple of things we kept a payment window open longer or to help our consumers make payments we.
Delay the aging of accounts to ensure that that consumers were unharmed. They couldnt make a payment because of technology disruption and we then extended.
Sure.
Our promotional plans that were expiring around the time of the conversion that give consumers more time again to make to make those payments. So combination of all those kind of well.
Impacted the <unk>.
Rates during the time of conversion that will all work itself out over the next.
Kind of couple of quarters, So it's a timing issue.
Still feel confident in that 6% rate, which we're confident in our guidance in 2022, but our focus was to ensure that the consumer may have been disrupted for a period of time, but was not harmed and we did everything we could to ensure that the consumers have the ability to make payments and that extended the payment window and some.
Some aging of accounts, that's how it impacted us.
Yes, and then to follow up on your question around the seasonal reserve rate.
What I'd tell you about the reserve rate as we've maintained a conservative economic scenario weighting in there.
And so when we do our modeling at the end of <unk>, we take those as considerations in place and what's happened in the last 90 days with the macroeconomic variables that we have input into the model both from the baseline and then the risk weightings that you put into other scenarios as a risk overlay.
<unk> continue to.
I will say deteriorate a little bit from 90 days ago. So there's an increase in probability of a recession and then even in the baseline views. There are some variables in there looking like there'll be a little bit higher unemployment as you mentioned that just one variable and.
But it's all of the scenarios combined that's as you start to move through this what the persistent high inflation is going to do increase in consumer debt. So we think it's appropriate to maintain a conservative posture for this period of time until we get through whatever the peak is and get to the other side.
Ralph period, that's Super helpful. Thank you if I may as a follow up.
Can you give us an update on your current thinking around the CFPB late fee issue.
Rather than engaging in a legal dispute over the safe harbor provision around late fees. Some concerns have surfaced more recently that the CFPB may eliminate the safe Harbor altogether.
Just curious if you guys are engaged in any discussions with your retail partners about potential changes to the economics of the private label business model. If so how would you characterize their responses anything that you can give around that would be super helpful. Thank you.
Yes.
Since you brought up with supportive regulation that provides.
Appropriate consumer protections and we will continue to have a good relationship with our regulators.
Our.
As as it evolves, we'll we.
We will continue we'll continue to do that.
<unk>.
But I think it's appropriate that.
We continue to lean in and lean into the regulators.
As we move forward rulemaking is probable but I can't predict what they will do.
But we think it will be more likely with safe harbor would be reduced rather than eliminated.
Understood. That's super helpful. Thank you for the color.
Welcome.
Our next question comes from Jeff Adelson from Morgan Stanley . Your line is now open.
Hey, good morning, Thanks for taking my questions.
Just wondering if you could.
Give us a little color on the removal of the recent Master Trust ABS securitization funding and just your thinking around funding from here whether.
You may be coming back to the market on that.
Yes. So thanks for the question so our last outstanding asset backed security that you note and matured in September .
So that was the only public ABS deal that we had about $685 million of securitized balances, we have over $5 billion and a lot of that syndicated through condo facilities with bank lenders, which has about 4 billion outstanding and so I think what youre talking about is.
Thats.
Opportunistic at the right time.
Our goal is to get direct to consumer deposits to over 50% of our funding so that will be a critical funding element of our future growth.
Understood and then just going back to the comment around the 100 bps of seasonality in October on the net loss rate down it.
It seems like quick math is that September also solid roughly 100 basis point benefit. So we should probably be thinking about layering in that removal as well if I understand it correctly.
What we're sharing with you is that we expect October two to jump up in the fourth quarter. When you do the math when we say that we're going to be in the high mid 5% range for the full year.
The fourth quarter in total I'm not going to do the math for you on the call but.
I would say what is the loss rate for the quarter was 5%, so it's going to elevate as well.
So the customer friendly accommodation that we did start to work its way through.
That will be seen in the next two quarters and then after that should come back down.
Okay. Thank you.
Our next question comes from David <unk> from JMP Securities. Your line is now open.
Great. Thanks, good morning.
Ralph.
I wanted to follow up on one of the comments you made in your prepared remarks, you made reference to sort of targeted actions to protect inflation sensitive segments and.
It actually raised kind of the broader question in my mind.
Given all the kind of.
New business activity in the portfolio, it's been a while since we've gotten.
Sort of a portfolio mix and breakdown and I'm wondering, particularly with AAA coming on board.
Bj's wholesale rolling off.
As we think about.
2023, or the end of the year.
Is there an update on the rough mix.
<unk>.
Traditional apparel and non apparel, maybe just to kind of bring us current since it's been awhile.
<unk>.
Yes.
I think.
If you if you think about where we were and where we are now as.
We have balanced our portfolio.
Less than 25% of sales now with specialty retailers.
And.
So that's kind of how.
How the portfolio has shifted.
We have great partner diversification.
Specialty apparel and department stores made up 50% of our 2016 sales now like I said less than 25.
And greater than.
Our loan portfolio is.
As variable price. So we feel we feel good about the additions that we've added to the portfolio and how we've diversified our portfolio between co brand.
The core plc.
<unk>.
Direct to consumer.
Maybe as a follow up.
Yes.
I'm asking because.
Earlier this week at money 2020.
Few years since I've been there and I was just struck by how many booths there were for companies related to point of sale financing.
The NPL or even lenders, but just the whole ecosystem around Pos financing.
And.
As you kind of broadly.
Survey competition.
Is there anything new on the Horizon you are seeing.
New entrants.
Okay.
Are you, saying that you know I would say well a lot of boots Las Vegas.
<unk>.
Fair enough.
Right.
I guess to me.
Interesting the way we think about this market is.
There can be innovation around tech.
<unk> technology and point of sale and those types of things, which I think are great and we will take advantage of those because that's important because that's how our consumers want to transact, but at the end of the day, you've got to responsibly underwrite. These people you've got a service.
You've got to make sure that.
If you collect on them.
Dave.
If there is bad debt youre going to be regulated you've got to make sure. Your technology works and it's not just quick and that's what we're all about.
Just a we've got this great new piece of technology.
<unk> got to be appropriate where a bank. So our funding as appropriate all of those things I believe give us a competitive advantage. The technologies out there will lead to help really the borrow it will partner with them, we will develop it ourselves but that core of how you are a financial institution is always going to be a competitive advantage for us.
Got it I appreciate the color.
Our next question comes from Reggie Smith from Jpmorgan. Please go ahead.
Hey, good morning, guys. Thanks for taking the question.
I guess it is.
There's a narrative out there that some of these fin techs.
Have I.
I guess better data than you guys and if there are more nimble in terms of managing their portfolios.
I know you've talked a little bit Ralph about.
I guess managing open lines and things like that I was curious you mentioned your recession playbook, what other tools and capabilities you guys have to kind.
Manage through the cycle.
Yeah my sense of it.
You guys are better positioned and more agile than maybe the market is giving you guys credit for it. So if you could talk a little bit about that.
A follow up.
I appreciate that it's interesting I think its quite the opposite I think the narrative is quite the opposite we are.
We are data rich we have.
Invested millions in data and analytics technology, we've been through multiple cycles, we have that.
Paid alaikum information of how consumers react in and.
During during the past two recessions.
Argue that they do not have that level of.
Of sophistication, we've invested in artificial intelligence machine learning across all of our models.
We use these across risk marketing and servicing we have partner information, we share with our partners on how whats going on by vertical by industry by FICO band.
We take proactive proactive steps with our with our population we.
We focus on the White line assignment, we wanted if we don't want to put anybody in apparel.
We're pretty thorough and all of that is based on data and analytics and the analytics. We have so I think I appreciate your question.
And most importantly, we have a seasoned experienced leadership team that has been through many a cycle. So all that combined I view we are.
Well positioned to manage through.
Whatever cycle is out there and we continue to do that and productivity is the key.
And using a scalpel and not a hammer is also the key making sure that you do things on a very surgical basis that youre not youre focused on where the stresses and youre not kind of whitewash in your portfolio, one way or the other.
Those things go into all our decision, making as we move forward and I would say I'm not sure any fintech has that level of information and history and uses it the way we do.
Got it understood and I would imagine that you guys have.
A larger margin for error given the yields.
Your portfolio and the size of it relative to some of these newer companies.
Question.
There's a slide here in your deck that talks about I think your capital ratio.
Your tangible book value and all that stuff.
My question <unk> seen that I think you've mentioned you're above your regulatory ratios, what's keeping you guys given where the stock is and where your tangible book value is what's keeping you guys from getting more aggressive on the share repurchase front.
Yeah. So that's a good question, we get frequently right. So one of the things that we've talked about is we've been targeting to get to a 9% TCE to ta ratio before we would start to contemplate.
Additional capital actions. So you think about that that's a good initial low end marker of what we're targeting for our capital ratios now first priority, which we've been consistently saying is to make sure we support profitable growth and we will invest in our business.
And then as we move closer to that 9%, we should be in a position to discuss capital allocation with the board and set more formal targets how much we invest back in the business how much debt you pay down or stock buybacks or other things so.
But that's the place where I would get to and we are not in a rush to make a decision as a lot of considerations that go into that including the pure capital levels, our growth plans and what else is out there to be opportunistic in all of those need to be contemplated before.
Before we would make a recommendation on the stock buyback.
Perfect. Thank you.
Our next question comes from John <unk> from Evercore ISI. Please go ahead.
Good morning.
On the on your your expectation for the elevated delinquency and losses tied to the card processing platform transition can you, possibly help us quantify that impact and how we should think about how much that could contribute over the next couple of quarters and then separately you also in the.
Some improvement in your underlying early stage delinquency buckets, where are you seeing an improvement in what's driving that could continue.
Low to mid 5% and so that should compute.
What the math will do for the fourth quarter, so I'm not going to give that specific guidance right here.
We're seeing improvement in the early stage delinquency across the board and when I say that that's from the elevated period that we just went through.
We have some of that we definitely expected so and this is Ralph talked about when we did some customer friendly accommodations. So that's we're seeing that and youll see that shortly.
When we start to release our delinquency in the next couple of months.
Okay. So that improvement was mainly tied to the to the elevated impact of the transition.
And what was that again sorry.
Sorry to interrupt, but yes. It was the elevate it seems elevated because of the transition and so the improvement we're seeing is that coupled with some very targeted credit actions that we continue to make.
Got it Okay, Alright, and then by first part of my question was just in terms of the elevated loss and how much elevation.
Is being brought on by this transition in terms of your loss ratio versus the underlying trajectory of the economic conditions.
Well right now.
We're at a 5% loss rate so I think it's the.
Inverse of it which is how much of the lower loss rate do we have in this quarter is due to the transition and so in my prepared remarks, I kind of guided it would've been in the mid fives. So that tells you roughly what the basis points of betterment was in this quarter.
Or that you could then apply to next quarter plus normal seasonality plus some normalization would be the components that would drive the difference in the fourth quarter.
Got it okay. All right. Thanks for clarifying and then lastly, just on the credit sales dynamic I know you said you saw some year over year improvement August September and October you, you're expecting do you think that could continue.
In terms of outlook do you ultimately modeling some moderation from the cooling economic backdrop and.
And fed actions et cetera, and how would you can you maybe talk surround.
Rides up.
What you expect on that front.
Yes, so like anything else with like anything else, we do it's thoughtful and it's data driven than it has historically driven so.
We are in constant communications with our brand partners and what they are seeing at the tail and based on <unk>.
Multiple data points not just the macro economy.
We moderate our sales either up or down based on everything we're hearing and seeing with our brand partners and the microeconomic macroeconomic environment and performance.
Okay. Thanks for taking my questions.
Our final question comes from Alexander <unk> from Jefferies. Please go ahead.
Thank you for taking my question.
John had can't be on the call.
Earnings, but did want to ask a little bit more about the reserve rate and net charge offs were going more into next year, you guys were pretty clear about <unk>, but just how should we think about <unk>.
The following year, obviously, there's a lot of uncertainty, but if there is any guide on that that'd be helpful. Thank you.
Yeah. So.
Again with the reserve I gave some dollar based comments in my prepared remarks right in that.
You have seen.
If the macro economic variables continue to I'll say soften a bit.
That would indicate that the reserve rate could stay elevated.
Until you kind of.
Peak over that and then you get an improving outlooks.
And for US in particular, we've got a couple large portfolio moves that are happening between the fourth quarter and the first quarter. So in the fourth quarter with AAA portfolio coming on for about 1 billion and a half.
You can do the math it pretty much something close to the exact reserve rate that we have today, we would put on a large reserve build in that quarter and then if you do the same type of math in the first quarter with a large.
Bj's portfolio going out you would expect.
The $1 reserve release in that quarter, plus you've got normal seasonal movement in the portfolio. So those are two big things that are going to happen in terms of the big dollars swings and then in terms of what would happen with the rate it.
It will depend on a lot of things, which will be the core delinquency in the portfolio of the macroeconomic variables that we're seeing in projections going forward.
Which is why what I had guided towards if the trend has continued where every time every 90 days when we run the model the new set of macroeconomic variables that we're pulling through have deteriorated a little bit from the last set that would make me think that even with a higher quality portfolio electric fully coming in you could end up.
With a flat.
Reserve rate in the fourth quarter and then in the first quarter when Bj's goes out again going to reset what that reserve rate needs to look like but BJ has a little bit lower loss rate than the total portfolio. So one would naturally think that reserve rate could go up but the dollars would come out. So it's all of those things and there is a lot of things that we monitor from.
Internal performance that macro churn trends look we're still in a strong unemployment environment. The consumer overall is healthy.
One a job theres jobs to be had is a lot of open Jonathan.
So it's going to be interesting right. We think about the economy overall, we've talked about almost a tale of two economies right now the high end consumer that's doing really well and is absorbing the inflation with those out of blinked, there back to traveling and thats going on for them that they may start to feel pressure. If they were thinking theyre going to buy a home mortgage prices one mortgage reason with doubled.
The past six months.
Middle America is feeling it more so with inflation of the necessities and all of this is what we're watching and we're making sure that we're being very deliberate with our credit actions along the way and we're going to be conservative in our reserve rate until we see the other side.
Perfect. Thank you so much.
Youre very welcome.
Yes.
We have no further questions.
I'll now pass it back to Ralph <unk> for closing remarks.
Thank you all for joining our call today and your continued interest in bread financial.
Everyone have a terrific day and thank you very much.
That concludes.
Today's Q3, 'twenty 'twenty Bridge financial earnings Conference call you May now disconnect your line.
Okay.
Uh huh.
Yes.
Okay.
Sure.