Bread Financial Holdings, Inc. (NYSE:BFH) Q2 2022 Results Conference Call July 28, 2022 8:30 AM ET
Company Participants
Brian Vereb – Head, IR
Ralph Andretta – CEO, President & Director
Perry Beberman – EVP & CFO
Conference Call Participants
Robert Napoli – William Blair
Sanjay Sakhrani – KBW
Bill Carcache – Wolfe Research
Jeff Adelson – Morgan Stanley
Mihir Bhatia – Bank of America
Reggie Smith – JPMorgan
John Pancari – Evercore
Dominick Gabriele – Oppenheimer & Co
Operator
Good morning, and welcome to Bread Financial’s Second Quarter Earnings Conference Call. My name is Amber, and I will be coordinating your call today. At this time, all participants placed in a listen-only mode. [Operator Instructions]
It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial.
Brian Vereb
Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website.
On the call today, we have Ralph Andretta, President and Chief Executive Officer of Bread Financial; and Perry Beberman, Executive Vice President and Chief Financial Officer of Bread Financial.
Before we begin, I would like to remind you that some of the comments made on today’s call and some of the responses to your questions may contain forward-looking statements. These statements are subject to the risks and uncertainties described in the company’s earnings release and other filings with the SEC. Bread Financial has no obligation to update the information presented on the call.
Also on today’s call, our speakers will reference certain non-GAAP financial metrics, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website at breadfinancial.com.
With that, I would like to turn the call over to Ralph Andretta.
Ralph Andretta
Thank you, Brian, and thank you to everyone for joining the call this morning.
I will start on Slide 3 by highlighting a few key updates from the quarter. We continue to make progress towards our long-term financial goals driven by our focus on sustainable, profitable growth. In the second quarter, consumer activity remained strong with credit sales up 10% from the second quarter of 2021 with particular strength from our beauty and jewelry verticals and our co-brand and proprietary cards. This growth was a result of increased shopping trips, not just transaction size, which indicates that consumers continue to shop and engage.
We are seeing an increase in customer spend in both discretionary and nondiscretionary categories across both our co-brand and proprietary cards. We are pleased with the continued acceleration of our loan growth with end-of-period loans up 13% on a year-over-year basis. We are building on the momentum from our new brand launch with remarkable growth in our consumer deposit balances through our Bread savings offerings with retail deposit balances up 75% year-over-year.
Additionally, we are seeing early success with our American Express Bread Cashback Card offering within the millennial and Gen-X consumer base. Launched in April, we are experiencing strong top-of-wallet behavior, with the majority of cardholders spend in everyday categories, and we are acquiring customers in their channel of choice with an emphasis on mobile new accounts.
Our business development wins to date, including our AAA multicard program, reflect the successful execution of our growth strategy.
We are excited about our recent new business additions and renewals and given our strong pipeline, we anticipate continued growth into the future.
We continue to improve our strategic positioning bolstered by our technology modernization and business transformation efforts. Perry will highlight our actions to enhance our financial resilience and recession readiness, which are critical as a potential economic recession 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. The consumer overall remains in a good financial position. While consumer sentiment has weakened retail sales continue to rise, the unemployment rate is very low and wage growth has been trending upward, especially in the lower income segments.
However, we recognize the growing concerns about a potential recession coupled with the expected normalization delinquencies and payments creates uncertainty, and we have reflected that in our conservative CECL reserves.
Payment and delinquency rates are normalizing coming off historical lows of 2021, and we remain confident in our full year guidance.
Moving to Slide 4. I will highlight some of our business development success. This morning, we announced a new long-term relationship with AAA, one of North America’s largest and most trusted membership organizations serving more than 56 million U.S. members. We also reached a definitive contract to acquire AAA’s existing credit card portfolio expected in the fourth quarter. As one of the largest full-service leisure travel organizations in North America, providing a wide range of travel services and discounts as well as a variety of insurance products, the addition of AAA further diversifies our portfolio. Through 2 unique co-brand offerings — with enhanced cardholder value propositions, we are excited to help AAA drive top-of-wallet usage, loyalty and growth.
Also during the quarter, we signed a multiyear renewal with a longtime valued brand partner, Torrid, a direct-to-consumer apparel and intimates brand in North America that serves over 3 million customers through its e-commerce platform and their over 600 stores nationwide. We will use our expertise in specialty retail, coupled with digital modernization to further drive spend, acquisition and loyalty in this fast-growing industry.
Additionally, we expanded our Caesars Card Rewards program, introducing an improved value proposition designed to enhance loyalty and improve cardholder experience. Caesars Rewards remains the largest loyalty program in the industry.
Turning to Bread Pay. We signed over 50 new small- and medium-sized partners in the second quarter and we continue to grow our platform with a focus on profitable and disciplined lending. Also, our partnership with Fiserv 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. We believe we are well positioned to continue to add additional quality partners while further diversifying our portfolio.
Slide 5 highlights our technology modernization progress. Our digital modernization efforts have helped us drive convenience and choice for the consumer. Our full product suite, coupled with our data and analytics expertise, provide personalized experiences offering the right product to the consumer in their channel of choice. At the end of the quarter, we migrated to the cloud and transitioned our core processing system including tens of millions of data records to Fiserv, further simplifying our business model and increasing our flexibility and capabilities.
While any systems migration of this magnitude comes with some degree of anticipated conversion challenges, our teams are working to ensure the fair resolution for all cardholders and brand partners that may have been impacted during this time.
By completing this major milestone to modernize our technology, Bread Financial is better positioned to drive enhanced capabilities, long-term operational efficiencies, scalability and faster speed to market going forward.
Overall, we are pleased with how our business transformation efforts have materialized. We have achieved many targeted milestones, including expanding our product offerings, advancing our digital capabilities, enhancing our talent, strengthening our balance sheet and adding and renewing iconic and diversified brand partners to support our continued growth. We remain focused on providing financial resilience and sustainable, profitable earnings growth for years to come.
I will now turn it over to our CFO, Perry Beberman, to review the financials.
Perry Beberman
Thanks, Ralph. Slide 6 provides our second quarter highlights. Bread Financial Credit sales were up 10% year-over-year to $8.1 billion as consumer spending remained strong. Average loans were up 11% with end-of-period loans up 13% driven by continued double-digit credit sales and moderating payment rates. Revenue for the quarter was $893 million, inclusive of a $21 million write-down in the carrying value of the company’s investment in Loyalty Ventures, Inc. driven solely by Loyalty Ventures share price at June 30.
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 4.4% and 5.6%, respectively, for the quarter.
The net loss rate included a 30 basis point or $13 million increase from the effects of the purchase of previously written off accounts that were sold to a third-party debt collection agency and remain subject to ongoing legal dispute with the debt collection agency as disclosed in our May credit statistics.
Our net income of $12 million and diluted EPS of $0.25 were impacted by our reserve build in the quarter. The $166 million CECL reserve build resulting from both loan growth in the quarter of nearly $1 billion and a higher reserve rate at a $2.57 impact on diluted EPS. The combined Loyalty Ventures write-down of $21 million and the purchase of written-off accounts of $13 million had an additional $0.53 impact. These items, combined with the reserve build, reduced diluted EPS by $3.10 in total for the quarter.
Looking at the second quarter financials in more detail on Slide 7. Total interest income was up 17% from 2Q ’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 fees, and interchange revenue, net of the impact from our retailer share arrangements and customer awards was negative $85 million, inclusive of the $21 million write-down in the carrying value of our equity method investment in Loyalty Ventures. As we have said, excluding the Loyalty Ventures impact, this line item is most closely correlated with credit sales for the quarter, which increased 10% from the prior year period.
Total noninterest expenses increased 12% from the second quarter of 2021 due to increased employee compensation and benefits costs, marketing and the previously announced investment in our Technology Modernization efforts. Additional details on expense drivers can be found in the appendix of the slide deck.
Overall income from continuing operations was down $251 million for the quarter versus the second quarter of 2021. This was largely a direct result of our $166 million reserve build in the second quarter of 2022, driven by higher end-of-period loan balances and a higher reserve rate sequentially compared to a $208 million relief in the second quarter of 2021.
Taking out the provision and tax volatility, we are pleased that our pretax pre-provision earnings or PPNR improved 24% year-over-year, marking the fifth consecutive quarter that we have seen year-over-year double-digit growth in PPNR. As we have said, our focus continues to be on making the right decisions to produce quality earnings.
Turning to Slide 8. The left side of the slide highlights our earning asset yields and balances. Second quarter loan yield increased 110 basis points year-over-year and declined sequentially with normal seasonality. Net interest margin improved approximately 130 basis points year-over-year.
On the liability side of the slide, we saw funding costs slightly increased sequentially in the second quarter, in line with our expectations given the Fed recent interest rate increases. As you can see from the stacked bars on the bottom right, our direct-to-consumer deposits continue to grow, now representing 22% of our total interest-bearing liabilities up 13% in the year ago quarter. We expect our retail deposit base will continue to increase, becoming an even more meaningful portion of our funding over time.
Moving to Slide 9. I’ll start on the upper left. Our delinquency rate increased approximately 30 basis points sequentially, generally in line with historical quarter-over-quarter trends and was up approximately 110 basis points versus historical low in the second quarter of 2021.
On the upper right, you can see that we had a loss rate of 5.6% for the quarter, including the 30 basis point increase from the effects of the purchase of previously written-off accounts that were sold to a third-party debt collection agency. While not significant to our full year guidance, our system conversion will create minor timing impacts in our monthly credit metric trends.
Turning to the bottom left of the page, our reserve rate increased from the first quarter of 2022 to 11.2%. We maintained a conservative posture with regard to our reserve rate. Since 90 days ago, according to economists, the probability of a recession has increased from approximately 25% to closer to 50%. Our economic scenario weightings in our credit reserve model reflects the increased probability of recession, leading to our prudent decision to increase our reserve rate.
We believe the inclusion of the severe economic scenario overlays provide sufficient future loss absorption capacity given the harsh economic conditions included in these scenarios, including a rapid rise in unemployment.
Overall, we remain pleased with the improvement in the underlying credit quality of our portfolio from pre-pandemic levels. You can see this improvement in the chart on the bottom right-hand side of the page, highlighting that our revolving credit risk distribution has improved over time and remain consistent to the first quarter, outside of a period of significant economic uncertainty. In other words, during a period of forecasted economic growth, low inflation and low interest rates.
Our portfolio as it is composed today, would produce a reserve rate below pre-pandemic levels given our enhanced credit risk management and product and brand partner diversification. That said, until we pass this period of significant economic uncertainty, we expect our reserve rate to remain elevated.
Slide 10 provides our financial outlook for full year 2022. Our outlook assumes a continued moderation in consumer payments throughout 2022. We expect the ongoing Fed interest rate increase 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 2020 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 increase in expenses throughout the remainder of the year, which will bring our full year operating leverage down to a more modest level.
As we’ve previously discussed, our outlook includes incremental strategic investments of over $125 million in Technology Modernization, Digital Advancement, Marketing and Product Innovation to fuel growth opportunities and future operating efficiencies. A large portion of the $125 million investment will be evident in employee expense as we continue to hire digital engineers and data scientists to further advance our continued business transformation.
We also plan for higher marketing expenses in the second half of 2022 as a result of increased spending associated with higher sales and brand partner joint marketing campaigns as well as expanding on our new brand products and direct-to-consumer offerings.
Information processing costs are increasing as a result of our ongoing Technology Modernization, including near-term costs related to the conversion of our core processing system to Fiserv and continued investment into the Bread Pay platform. As Ralph mentioned earlier in the year, the Fiserv conversion will result in both expense and revenue synergies in 2023 and beyond. We expect total expenses will increase sequentially each quarter throughout 2022 as our business grows and we continue to invest and add talent. We are making ongoing investments now to stay ahead of customer expectations.
Regarding our net loss rate outlook, we continue to anticipate the full year 2022 loss rate will be in the low to mid-5% range. I would also reiterate our confidence in the long-term outlook of a through-the-cycle average net loss rate below our historical average of 6%. We expect our full year normalized effective tax rate to be in the range of 25% to 26%, with quarter-over-quarter variability due to timing of various discrete items.
Moving to Slide 11. Through our business transformation efforts, we have improved our balance sheet, loss absorption capacity and funding mix. Second, we’ve enhanced our credit risk management and underlying credit distribution. And third, we’ve ensured we have a proactive and refined recession readiness playbook in place. These changes strengthen our financial resilience, better positioning Bread Financial to deliver sustainable, profitable growth with an expectation to outperform historic loss levels throughout an economic cycle.
Through our prudent decision-making, we have strengthened our balance sheet and capital ratios, including an improvement in our TCE to TA ratio nearly 400 basis points in just 2 years. Our higher capital position combined with our increased credit reserves positions 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 will continue to do so.
Enhancing our credit risk management and underlying credit distribution is a key element of our business transformation. We have diversified across products and partners leading to a credit mix shift towards higher quality customers who have 60% of our portfolio above a 660 Vantage score. We manage our portfolio proactively, we have a recession readiness playbook in place and have implemented elements swiftly as early as the onset of COVID with a focus on managing open to buy and helping customers manage their credit lines and balances in a healthy manner.
While we continue to see a very strong overall consumer in terms of spending and payments, we do place extra emphasis on customers who are more sensitive to these high and persistent inflationary pressures to ensure they can manage their credit while maintaining purchasing power. We’ve also benefited from our implementation of enhanced risk stratification and technology enhancements to build additional resilience in our portfolio.
When you combine our improved risk profile with a more diverse portfolio and brand partner base, we believe that we are better positioned than we have ever been for a potential recession. We will remain proactive in our approach as we continuously update our risk management models and underwriting criteria in this rapidly changing macroeconomic environment. We continue to make the changes necessary to strengthen the financial resilience of our company while maintaining the tools necessary to successfully manage through an economic cycle.
Operator, we are now ready to open the lines for questions.
Question-and-Answer Session
Operator
[Operator Instructions] Our first question comes from Robert Napoli with William Blair. Robert?
Robert Napoli
Thank you, and good morning. Ralph and Perry, just on the credit outlook on your reserve build, I mean, you sound awfully confident on your portfolio mix and credit outlook through cycles. But what do you build, it sounds like you’re an outlier versus peers on your forecast of unemployment? What have you built in? You said I mean, a rapid rise in unemployment. What does that mean?
Perry Beberman
Yes. So let me comment on that. So let’s start with the reserve role, you’re right. We feel very confident in the portfolio that we’ve constructed. And what we’re observing is a strong consumer and we’re encouraged by their payment behavior and their spend patterns.
But as what we said, being conservative and prudent in an outlook. And what that means is when we look at our reserve and models, it’s not just what the, say, the credit criteria or the credit performance of the existing portfolio is in the moment, but you’re trying to understand what severe scenarios could imply into the portfolio over time.
So when you have a period where you have this persistent high inflation, not knowing how long it’s going to persist. And then you take the — we use Moody’s economic outlook and when you think about what their scenarios look like, they actually all that is mild, moderate to severe — have pretty sharp rises in unemployment in a pretty rapid period.
Now every recession is different. So when we think about that, the last one was driven by housing and a lot of unemployment. Right now, we’re in a — we’ll call the job full period. But when you contemplate what this means to a model, when you pull those in, it just — so when you went from a period where you’re going to go from a 25% probability of recession to 25% to 50%, it just — but it’s in a position to think let’s be prudent and not chase this and let’s get ahead of it and stay — stay with what the outlooks were suggesting. And that’s as simple as that, to be honest with you.
And like I said in the prepared remarks, when we run the current portfolio, through the model and if we apply the same economic outlooks that we have pre-pandemic, you produce a CECL reserve rate well below what we had at other time.
Robert Napoli
And just, I guess, a follow-up. I mean, your targets are for return on equity, I guess, 3 cycles are on average over time of 20% to 25%. How confident are you today, Ralph and Perry, as you look at your business that you can — that those targets are reasonable? Assuming we don’t have — I mean recessions are very different, strong consumer, you’re likely not going to have a deep recession, but who knows?
Perry Beberman
Yes. I mean, 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 call it, CECL growth tax that’s going to suppress those returns in that period. As you get into a period where you have moderated growth and you’re not putting up as much CECL growth tax and the economy is, I’ll say, the loss rate and everything are what you expect through the cycle. We are definitely building this company for profitable responsible growth over time.
Robert Napoli
If I could just sneak one last one in. The AAA, can you give a commentary on the size of the AAA portfolio and kind of some of the pluses and minuses on portfolio and runoff or additions?
Ralph Andretta
Bob, yes, a couple of things. So first, let me say we are thrilled to have announced this portfolio in partnership with AAA more than 56 million members in the U.S., an iconic brand, a brand that is trusted and we’re excited to help AAA grow this portfolio with a couple of new exciting value props. We don’t comment on the size of the portfolio. But I will say we have growth of $2-plus billion in the back end of the year, and this is a significant part of that.
Operator
Our next question comes from Sanjay Sakhrani with KBW. Sanjay?
Sanjay Sakhrani
Maybe to follow up on Bob’s first question. I guess, Perry, if we look forward now, obviously, we got another negative GDP print. But technically, I guess we are in a period of recession. So how should we think about that reserve rate moving from here? Like do you feel like you’ve incorporated sort of a mild recession now? And what would be the next step for the reserve rate if it have to go higher?
Perry Beberman
Yes. Thanks, Sanjay. As we think about the reserve rate, like we talked about, there’s 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 an anticipated economic stress. I’d like to think at this point, factored what we had anticipated. You mentioned this print to look like. And again, I’m not suggesting that GDP is the only measure of what a recession feels like to our consumers. But right now, it’s just trying to make sure we are not chasing this — I feel like we are in a pretty good spot right now for what we’d expect.
I would tell you, yes, things got significantly worse. Could it increase again, sure. But what we know when we think is on the horizon, we think we’re in a good place and we should remain elevated around this level until this period passes.
Sanjay Sakhrani
Okay. Then I guess my follow-up question is on the portfolio yield. When we look at the progression year-over-year, it did decline sequentially and rates went higher. Could you just — I know you guys reiterated or given the NIM guidance, but — how should we think about that yield progressing going forward? Are you able to pass on some of the rate increases? Maybe you can also talk about the positive data and how you can find in cost unfold not only for the rest of this year, but as we move into next year to come.
Perry Beberman
Yes, good question. So one of the things that let’s talk about the — what happened sequentially — the second quarter is traditionally has seasonality in it with our NIM yield. And what happens in — typically is we have lower late fee yield that goes into our net interest margin and because of tax payments that come through in the second quarter. So 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 as a 50 basis point, Fed increase in May, and then we pass some of that on to higher deposits and another 75 in June. When we pass along higher deposit rates and we grow those deposits, that goes through a much faster rate in period. It happen within a week, whereas when the prime rate goes up, is passed on to consumers on the asset side for variable priced loans, it’s actually the last published date of the Wall Street Journal of the month, and then they start building the following months.
So you think about the 75 basis points from June none of that got passed through in terms of consumer billings where that will come through in July. So you get a little of that lag effect. But again, overall, as you think about 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.
Operator
Our next question comes from Bill Carcache with Wolfe Research. Bill?
Bill Carcache
Ralph and Perry. So I wanted to follow-up on some of the earlier questions and kind of drill a little bit more into the trajectory of the reserve rate from here. So when we think about the reasonable and supportable period under CECL, as long as the recession and rising initial claims is still in front of us, and there’s a lot of uncertainty and we don’t know exactly how that’s going to look. But you’ve got the overlays in there that sort of contemplate some degradation. Is it reasonable to expect that the trajectory of the reserve rate as long as that’s in front of us is essentially flat to up? But once we get past peak initial claims, then that’s kind of when we could start to look for the reserve rate to start coming down again. Is that kind of broadly speaking, a reasonable way to be thinking about it?
Perry Beberman
Yes. I think that’s a fair way to think about it in general terms. Again, every recession is different and what creates a strain on a consumer. But when you think about unemployment as a big driver traditionally of what creates a higher credit loss environment, I think it’s a fair way to look at it — if you go through this peak period. And then 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 where you peak and then you see a more favorable period ahead of you, that then implies you can bring down your reserve rate for the overlay aspect where we’re being conservative.
Bill Carcache
Right. I mean it certainly suggests you guys are, I guess, looking around corners, if you will, and it’s refreshing to see that in a quarter where a lot of your peers ended up letting the reserve rate continue to drift floor. If I could follow up on — you guys are confident in outperforming your 6% through the cycle average longer term but I guess, since it’s an average, would it be reasonable to expect that there would be some period if we did have a downturn where that NCO rate would exceed that 6% level?
Perry Beberman
Yes, exactly right. You’re going to have periods of time when we’re in the good times, we should expect to be below 6% and you have a short period of recession, you can be above 6%. And that should we expect that’s exactly what through the cycle means.
Bill Carcache
Understood. And last one for Ralph, if I may. Ralph, following up on some of your earlier opening remarks, I wanted to ask you if you could take us maybe a little bit more inside the performance of your different cohorts and give us a sense of the spending and just overall trends that you’re seeing across those groups and how they’re being impacted by inflation.
Ralph Andretta
Yes. So if you think about our book and our product diversification, we have PLCC or private label, and we have to rent-to-consumer products with the Bread Cashback Card and our co-brand partners. And what we’re seeing is good spend with private label, albeit they have lower lines where we’re seeing consistent spend there, and we feel good about that. It’s — and — but we’re seeing really outstanding spend with our proprietary card and our co-brand cards where we’re seeing both spend on the — on discretionary, nondiscretionary, up and down the Vantage loans. So we’re seeing consistent continued spend.
And again, not just a large ticket price, but multiple transactions, which are — tells us that consumers engage with our products and they’re becoming top-of-wallet.
Operator
Our next question comes from Jeff Adelson with Morgan Stanley. Jeff?
Jeff Adelson
I was just wondering, Perry, if we could follow up on the NIM commentary a bit. You’re talking about the nominal benefit in being asset sensitive here but also talking about this 19% or around 19% NIM for the year. Wondering if you could maybe help us understand what kind of band around the 19% you’re talking about here? Because I think as we think about that to get to 19%, it implies you have to have some sequential decreases here going out.
And maybe as a part of that question, is it reasonable to assume that until the Fed start slowing down the 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?
Perry Beberman
Yes. I think you’re going to have a little bit of seasonality in there. And to your point, there’s this get a little bit of a lag. So as the Fed increases like this one that just happened yesterday, you’re going to have a little bit of lag in a month until then we get caught up. So that’s why we’re saying around 19%. I mean not thinking much under, not thinking much over. It’s going to have — it’s going to float around that number.
Jeff Adelson
Okay. And so would it be reasonable like as we maybe get past that, that you’d see a much more material benefit as maybe in 2023 your asset yields catch up beyond that?
Perry Beberman
Again. Yes, I think the way to think about it, we’re slightly accretive. So I want to go material and as well what’s going to influence is, as you heard us talk about winning a large win today, all — I’ll say, wins that we have where the portfolio composition that we have in the future have different net interest margins, right?
So if you put on some lower credit risk type portfolios, they’re going to bring in a lower NIM. We continue to build out private label, that’s higher. So really, it’s about what is the composition of the portfolio as we move through 2023.
Jeff Adelson
Got it. And then just on the credit sales trend this quarter. It came in a little bit below what I thought it would be this quarter. Just wondering, is there anything going on maybe with the exit of BJ’s there. Maybe you can give us some color into how the buy now, pay later initiative is going and maybe what your same-store sales are looking like?
Ralph Andretta
Yes. It’s Ralph. I’m really pleased with the 10% increase in credit sales. A double-digit increase in credit sales is — I take that every day and twice on Sunday, quite frankly. BJs is not effect. It’s still in our portfolio, and it’s one of our cards, but it’s not doing any differently than any other co-brand products.
We’ve talked about buying out, pay later and where particularly in paying 4, we’re going to be very prudent about how we approach that and how we sign partners to that because of the competitive economics in that chapter. So — but 10% sales for me seems really good. And it’s across all channels and across all products. So I think that’s an indicator that our customers are engaged with us and are using our products that we’re putting in the marketplace.
Jeff Adelson
And then if I could just fit one last thing on Loyalty. Is there any update on that? The stock price there has continued to come down. Have your plans there changed? Or what are you thinking around potential modernization there?
Perry Beberman
Yes. No, clearly, the stock price has come down, and we reflected that in our write-down. What I’d tell you is — at the time we did the write-down, their share price was around $3.50. We had it on the books for about $8.13. So that Delta is what caused the write-down. We have about $17 million or so remaining on the books. So it’s immaterial to our business overall.
We are 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 modernization, as you can tell, it will not have a meaningful impact to us.
Operator
Our next question comes from Mihir Bhatia with Bank of America. Mihir?
Mihir Bhatia
I did want to start with the reserve. Just to be absolutely clear, are you seeing anything in your data that’s making you take the reserve ratio higher? Or is this primarily driven by the outlook? Like I just want to make sure we’re very clear that in your 2Q data, did you see anything below the line, like obviously, we see the NCO rate like and we understand there’s some normalization. But was there something unusual, something you didn’t expect that impacted your reserve ratio?
Perry Beberman
No, Mihir. Thanks for the question. And to be clear, and I try to be clear, but it’s — there’s a lot going on in the CECL reserve, the modeling, as you know, we expected normalization to occur. And again, we’re performing well against normalization and that’s going to pull through like we’ve had — we’ve been waiting for this to see moderating payment rates, and that’s a good thing in a credit card business because we get more revolve behavior and we’re priced for risk.
And so we feel good about that. So really, it is — I’ll start with — again, when I ran this — when we ran the portfolio through our model, it produced a lower CECL reserve rate than pre-pandemic. So that would tell me the underlying portfolio is strong. What’s causing the rate to go up is the sensitivity of the model to the economic outlook, and we leaned into that because, again, trying to get ahead of it and look around the corner of what could come. Not saying it’s going to come. It’s just, again, trying to be cautious with our portfolio. As simple as that, really.
Mihir Bhatia
No, that’s helpful. And then I just wanted to go to obviously, a nice win with AAA coming on board. Wanted to make sure I understand you. How are you still feeling about the 2023? I think you’ve talked about $20 billion of average loans in 2023. Are you still feeling good about that? Does — do you now have the portfolio necessary to achieve that outlook? Or does that still incorporate some more portfolio wins? Just trying to understand how we should be thinking about that one.
Ralph Andretta
Yes. The — again, the addition of AAA certainly was something that we’re excited about, and we did contemplate as we think about our 2023, $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 3, we are still confident, and we’re confident in that number for 2023.
Perry Beberman
Yes. And I’ll just add on to what Ralph said. Think about this management team that set this goal almost 3 years ago, and it’s going to get to that number. And we’ll be around the hoop on that number, meaning, look, if the economy softens a little bit, we’re not going to chase loan just to hit that number. We’ll give you that as a clear statement. We’ve come in a little bit under because we had to do some risk pullback. I think everyone should flow us for that. If we come in a little over because the wins keep coming and we like the returns that’s what’s going to happen. But we’re around the hoop on that number.
Ralph Andretta
Yes. I think more important than hitting that exact target is ensuring that we’re taking the appropriate risk and we’re getting rewarded for the risk we’re taking. So again, we’re not coming off that number. And we feel — and it can be a combination of acquisition, product growth and deeper penetration in our existing partners.
Mihir Bhatia
Understood. Just one last question for me is just on the CFPB and the late fees, there’s obviously been more chat on that. I understand you don’t disclose just the exact breakup or some late fee within your — but what I was hoping maybe just talk about it philosophically, maybe just how are you approaching this situation with the CFPB review. Are you all engaging with them? And how do you just think about late fees internally? And what can you do to manage that? You should they come out with some kind of lower cap or something like that?
Ralph Andretta
Yes. So I’ll talk about it philosophically. I’ve been in this business 30 years and one thing you count on is change. And one of the thing you can count on is when change happens, good companies adapt to that change and move forward. As 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 have been reported publicly. And we continue to work closely with the regulators to ensure our views are made known.
What I will say is that the continued diversification of our portfolio ensures that we’re not overly reliant on any one given product or a capability or a fee. So as we continue to diversify our portfolio, the reliance is just not there.
And in terms of our ability to maneuver, we have unique contracts with many of our brand partners that include many different arrangements, all based on different drivers. We don’t disclose the specifics, but certainly, there is movement for regulatory issues and change in law.
Operator
Our next question comes from Reggie Smith with JPMorgan. Reggie?
Reggie Smith
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 an upfront reserve for that? Or how the accounting kind of works for that acquisition?
Perry Beberman
Yes. I’ll start with that question. The answer is yes. The way it works is — and I presume you’re trying to model out the fourth quarter. So yes, when that portfolio comes online, we will have to set up a CECL reserve in that period for those loans, just like any other loan growth. So in the fourth quarter, which is traditionally seasonally high loan growth period for us anyways, we’d have to post up a CECL reserve for those.
Similarly, with a portfolio acquisition through our account, we’ll be establishing that reserve through the P&L as well.
Reggie Smith
Understood. And I guess looking at your reserve, and I know folks have asked the thousand questions on it. I believe, and correct me if I’m wrong, with CECL, it’s no longer like a 12-month reserve, but it’s kind of a life of the account reserve. And I guess my question is, looking at your reserve rate — is there a way of rule of thumb to kind of extrapolate like what is implied in credit losses over the next 12 months or so? Just broadly speaking, is there a way to think about that?
Perry Beberman
No, there really isn’t. To your point, it is — the way CECL works, it’s your expected losses over the life of the loan and those loans to be established at the end of each period. All I can share with you is like we said, the reserve rate outside of economic concern 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 I’m not suggesting that I have 100% confidence that that’s actually going to happen. This is the sensitivity when you apply a 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 a good loss absorption buffer, Look, we’re all hoping this doesn’t happen. And all this reserve gets released back into retained earnings and you’ll continue to have an improved capital position. But this is where we are for now.
Reggie Smith
That makes sense. And if I like to sneak one more in. Obviously, you highlighted the strength in your co-brand portfolio and proprietary cards, obviously, curious, and I know that the mall-based retail is, I think, a core of your business now, are you seeing weak sales, just trying to square that with kind of what some of the other retailers are saying, if that has actually shown in your portfolio? And maybe if you could talk about the sequential trends there? Just curious.
Ralph Andretta
So if you’re in, we’re seeing weakness in our PLCC business and the retail, we’re not. That still remains strong and as is our co-brand and our proprietary products. So there we’ve not seen any weakness. And in fact, 1/3 of our loans are co-brand and apparel. Now probably at 25%, and we’ve diversified that across a number of verticals and products. So — but co-brand sales are about 50% of our sales.
Reggie Smith
Got it. And so just to be clear, you’re saying that apparel and obviously, it’s not a small piece of your portfolio. But your payroll book is holding up pretty well. Is that what you’re saying?
Ralph Andretta
Yes. It’s holding up both in sales and in credit pretty well.
Operator
Our next question comes from John Pancari with Evercore. John?
John Pancari
On the — just on the credit front, regarding the increase in the delinquencies that you saw this quarter. Maybe can you give us a little bit of color on where you saw the increase in some of the drivers, perhaps maybe are you seeing pressure in certain FICO bands, certain products? And do you continue to expect to increase there on the delinquency side?
Perry Beberman
Yes. Thanks for the question. When we look at it, this is where we’ve talked about this, that we were expecting normalization to come through this entire year. And now we’re seeing it again, when you think about our portfolio and the way we’re this business is composed, we were going to see more impacts of the stimulus wind down sooner than others.
And we also think about peers in the industry where we may look a little different. We don’t have a portfolio concentrated in travel. So they had this big contraction of spend during COVID and now you see the bounce back in that category. So we don’t have that tailwind stay to our balance the same way those do.
So we’re more with the general consumer on those things. So I think the pull-through is exactly what we’re expecting to see and some of it is seasonal on top of that.
John Pancari
Okay. All right. And then related to that, the — your loss rate, I know you answered Bill earlier indicating that it could certainly exceed the 6%, being at the 6% on average. Can you help us maybe frame out how you’re thinking about 2023 as you’re looking at the economic outlook, what that could mean in terms of your charge-off rate that you’re expecting in your modeling?
Perry Beberman
So right now, we’re not giving guidance for 2023. We’ll get to that, probably, I guess, in 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 they’re saying, “Hey, we’re going to be — within the guidance of what we said, bit might be on the upper end of that, the low to mid-5s and where you exit will give you a sense of what could be.” Now again, what happens if you hit a period of economic strain into next year, that’s what you’re caring for CECL so that it could be higher. We’re not saying it is going to be as it is right now, the portfolio should be pretty strong and performed really well for the coming periods.
This is about — so if you’re trying to correlate our position on the CECL reserve to what’s actually fundamentally happened in the portfolio and the business we’re building, there are almost 2 different things in a way, right? And that’s what CECL is 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.
John Pancari
Okay. And then one last one, just on the credit front. I know the accounts that were sold to a third party that contributed to the charge-offs you said it’s a 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?
Perry Beberman
Yes. We can’t comment on the ongoing 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 that’s part of our recovery strategy, some that we do in-house for recoveries and some that we sell the paper to third parties.
Operator
Our final question comes from Dominick Gabriele with Oppenheimer & Co. Dominick?
Dominick Gabriele
Great. I just want to reiterate as well, it’s refreshing to see some of the — what might be a more realistic scenario playing through in your numbers with the reserves, so thank you. If you just think about AT&T talking about some of the delayed phone bill billings, and Visa, the other day talking about people not filling up their gas tanks all the way and your reserve changes — maybe you could talk to us about how your underwriting for new accounts has changed given perhaps your more cautious view? And how that could affect the loan growth? You 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.
Perry Beberman
Sure. I 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 you’re a subprime consumer, you have a cell phone. So that’s the piece of it.
So what they may be seeing and the strain in, I’ll say, the deep subprime where we don’t play is an aspect, I think, was 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 based on the credit quality of the consumer when they come through.
We monitor everything at the time of underwriting with the Bureau data, we can see how much leverage they have, stress, strain on the employee, non-employed. So there’s a lot that goes into the sophisticated underwriting tools and not just for underwriting new business but also the sophistication for managing credit lines with the existing portfolio. That’s equally important for line increases and line decrease strategies.
Our account closure, whatever has to happen to make sure we manage around the loss rate that we’re comfortable to ensure we’re getting the risk/reward from those accounts.
Dominick Gabriele
And then I just wanted to follow up on the late fees question and perhaps frame it a different way. Is there any reason that your late fees as a percentage of card average balances would be materially different than the private label card industry net charge-offs if we were to adjust for your FICO score distribution?
Perry Beberman
I think it would be a little bit different, right, because as Ralph talked about earlier, over 1/3 of our portfolio is co-brand imbalances. And the mix continues to shift over time. We’re bringing in more proprietary card. So I wouldn’t give us a 100% correlation to historical experience in private label.
Operator
Thank you. I’ll now pass the conference back over to Ralph Andretta for any closing remarks.
Ralph Andretta
Sure. I just want to thank you all for joining and your continued interest in Bread Financial. I appreciate the questions. And we’re — we feel good about the quarter. We feel good about the adjustments we made, and we’re looking forward to the future. Everyone, have a good day.
Operator
That concludes today’s Bread Financial Second Quarter 2022 Earnings Conference Call. Thank you for your participation. You may now disconnect your lines.
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