Bread Financial Holdings, Inc. (BFH) Q3 2022 Earnings Report, Transcript and Summary

Good morning, and welcome to Bread Financial's Third Quarter Earnings Conference Call. My name is Drew, and I'll be coordinating your call today. [Operator Instructions]. It's now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. The floor is yours.

Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website. On the call today, we have Ralph Andretta, President and Chief Executive Officer of Bread Financial; and Perry Beberman, Executive Vice President and Chief Financial Officer of Bread Financial. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are 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 breadfinancial.com. With that, I would like to turn the call over to Ralph Andretta.

Good morning. 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 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 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 are 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. The outlook for credit sales growth in the fourth quarter looks strong driven by new partner additions and holiday spending. We are already seeing brand partners ramp up their promotions and incentives in preparation for the holiday season. Pretax 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 on consistently delivering over the long term. We improved our funding mix and made significant progress again in the third quarter with retail deposits 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 cardholder value proposition on our AAA products will drive further engagement with AAA's 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. We have made major upgrades in the last year, including transitioning our credit card processing system, converting to the cloud and integrating Alberia, a state-of-the-art collection software help enhance the productivity of our collectors. While we experienced some temporary disruptions during our transition, these upgrades 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-end middle income households feel the pressure of persistently high inflation and increased cost of overall consumer debt. According to an internal sort of study, over 90% of Americans have changed their spending habits due to inflation. We have taken targeted actions to protect inflation-vulnerable segments when prudent. We consistently and proactively adjust our underwriting and credit management to account for 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 reasonable risk management and proactive recession readiness planning. We are confident in our outlook and financial resilience. Moving to Slide 4. I will highlight some of our business development success. This morning, we announced a new long-term credit card relationship with WORLD MARKET, a specialty 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 worldmarket.com. We will leverage our deep expertise of serving specialty retailers, coupled with our sophisticated data and analytics capabilities to offer World Market customers and their 6.5 million reward members a new payment product with valuable rewards and an enhanced shopping experience. Also during the quarter, we signed a multiyear renewal with our valued partner Buckle. Buckle operates over 440 retail stores in 42 states as well as its buckle.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 guests wants and needs. Turning to Bread Pay. We are pleased to have signed WaterRower among dozens of other new small- and medium-sized partners in the third quarter. We have grown our total Bread Pay merchant base by over 50% this year, while developing incremental platform capabilities and enhancements, including ensuring our products are regulatory compliant. Finally, our strategic relationship with Sezzle has experienced faster-than-expected new merchant additions with over 125 merchants enrolled and now able to access Bread Pay's long-term lending solutions since launching in the first quarter. We look forward to building on our business development momentum in the coming quarters. Moving to the bottom half of the page. We remain committed to continuously enhancing our customer experience through technology. Through relationships with MARQETA and VERSATILE CREDIT, we are making it easier for consumers and merchants to access our broad suite of consumer payment products. The program we have developed with MARQETA brings access to our Bread Pay installment lending and split pay products in store, ensuring consumers can access their preferred payment option and the channel of their choice. The virtual card solution we've developed with MARQETA enables customers to seamlessly apply for provision in the digital wallet and purchase in store. We took an innovative approach to the virtual card and working with MARQETA and 2 of the largest digital wallet providers to develop a smoother and faster process that does not require a mobile app download to complete the sale, a market first. This improved virtual card process is accessible in-store through a QR code scan. And by eliminating the app download step, it does not disrupt the merchant checkout flow, which improves customer conversion rates. Bread 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 improve the customer experience and enhance the payment products that our brand partners provide. Bread will continue to expand its presence into a home improvement elective medical and furniture verticals by integrating into Versatile Credit's simple, flexible and diversified sales finance lending platform. VERSATILE has relationships with hundreds of merchants, and this integrated solution extends Bread Pay's distribution and increases speed to market while providing merchants with a turnkey solution. With the addition of these 2 relationships, Bread Pay delivers split pay or pay in 4 at point-of-sale installment loan products both online and in store. We continue to transform our company through the successful execution of our strategy. We have positioned Bread Pay -- 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, Perry Beberman, to review the financials.

Thanks, Ralph. Slide 5 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 product and brand partner additions. Revenue for the quarter was $979 million. Revenue increased 15% versus the third quarter of 2021, while total noninterest 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 6. Total interest income was up 23% from the third quarter of 2021, resulting from 14% higher average loan balances, coupled with improved loan yields. Noninterest income, which primarily includes merchant discount fees and interchange revenue, net of the impact from our retailer 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 30, 2022. Total noninterest expenses increased 13% from the third quarter of 2021 due to increased employee compensation and benefit cost 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 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 details on expense drivers can be found in the appendix of the slide deck. Overall, income from continuing operations was down $72 million for the quarter versus the third quarter of 2021 as improvement in pretax pre-provision earnings, or PPNR, was offset by a higher provision for credit losses in the quarter. Taking out the provision and tax impacts, we are pleased that our PPNR improved 17% year-over-year, marking the sixth consecutive quarter that we have generated 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 7. The left side of the slide highlights our earning asset yields and balances. Third quarter loan yields increased 160 basis points year-over-year and 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 the loan yield to drop in the fourth quarter following normal seasonal trends. Net interest margin improved approximately 100 basis points year-over-year as the increase in earning asset yield outpaced the increase in cost of funds. On the liability side, we saw funding costs increase 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 continue 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 funds over time. Moving to Slide 8, and starting in the upper left with the delinquency rate. Third quarter is our normal seasonal high point for delinquency with a rate of 5.7%, 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 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-5% net loss rate for the third quarter. 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 conservative 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. If current economic trends continue, it is quite possible that 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, 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. Slide 9 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 of AAA portfolio in the fourth quarter. We expect year-end loans to be between $21 billion and $22 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 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 is expected to be down over 100 basis points, consistent with both prepandemic seasonality and the reversing of billed interest and fees related to expected 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 modernization, 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 on expanding our new brand product and direct-to-consumer 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 historic seasonality would result in the October net loss rate being up nearly 100 basis points from September in addition to the impact from continued normalization trends. Over the next 2 quarters, 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 as temporary and remain confident in our through-the-cycle average net loss rate remaining below our historic average of 6%. As I mentioned, we are 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 mix distribution, PPNR margin and diversification of brand partner products, provide marked 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-ready playbook in place for both new and existing accounts with a focus on managing open-to-buy authorizations and helping consumers manage their credit lines and balances in a healthy manner. 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 historic loss levels through a full economic cycle. Operator, we are now ready to open the lines for questions.

[Operator Instructions]. Our first question today comes from Sanjay Sakhrani from KBW.

A question for Perry and one for Ralph, but maybe start with Perry. Perry, could you just talk about the NIM going forward in the different factors that impact it? 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 equation including product mix, the percent of your portfolio that's revolver, transactor. Obviously, the more transactions in your portfolio, you're 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 in funding, the APRs go up on that front, too. So during a period like this, you can see in our NIM, we're getting really good performance. And that dynamic, we expect to continue to occur. Now you do have in periods of higher losses, some reversal of billed interest and fees. But when you think about the full year guidance we've given of a 19% overall NIM, we feel good about that. When you think about cost of funds, as we've talked about, we continue to grow our direct-to-consumer deposits. And we can -- as Fed funds go up, we're fine 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 better alternative in terms of funding costs. So we feel very good about having a strong steady NIM of that 19% that we've guided towards.

Okay. Great. And then, Ralph, obviously, it's a very dynamic market out there. A 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 Bread. I mean, do you see opportunity out there to be more offensive? Maybe you can just chat through sort of what you're seeing.

Yes. Sanjay. I do -- one of the things -- one of the benefits of Bread Financial and us owning Bread in that platform is that we know what the challenges are of a regulated institution. So we took a step back and made sure that our platforms were regulatory-compliant. We know how to underwrite. We know how to collect. We have hundreds of years of experience with the team in terms of managing through different cycles. A lot of the fintechs don't have that. And again, I would emphasize that those products they're paying for is just one1 of many products we offer our consumer base and our brand partner base. So 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, the rewards we're getting back and how that's -- and the stability of that system. And it's a product and a basket of offerings we have for our consumers.

Our next question today comes from Robert Napoli from William Blair.

Ralph, Perry, just 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, some good marketing, you've lost some portfolios. What gives you the confidence in 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? Or just any commentary there on why you're 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 in our 660-plus rate than what we were back then. So that credit mix will continue to be a favorable, 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, it's dynamic, it's living breathing. I mean, we've got people focused on it every day, all day, as you would imagine. And leadership is focused on it, weekly routine. So it's you're not going in and making a wholesale change at any point, but being very surgical and deliberate and its dynamic taking 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 where 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 card processing platform. transition that we went through. And so we do feel good about what we're seeing. And so 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 -- that what we saw in terms of our, I'd say, mid- to late-stage delinquency was part of the actions we took as we did customer accommodations, as we work through our conversion of our platform. Now with that, we're also making very targeted changes, ensure we understand the population that is impacted with this high inflationary environment. And the key is just that we're being proactive. For us, overall, this is a business that we're good at. We understand that we're 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'll be fine.

And then just as it relates to 2023, what are your thoughts on loan growth for 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 bob, We have -- we put out our targets 2 years ago, and I think we're holding fast to those targets. So we're expecting average receivables in 2023 to be around $20 billion, mid-20s ROE and that loss rate through the cycle of 6%. Now having said all that, the macroeconomic environment is going to have an impact on that. And we're not going to grow loans for the sake of growing loans. We're going to grow them responsibly with the right return. But at this point, that's kind of our target for 2023.

Yes. And Rob, if I could add, what I'd say is exactly what Ralph said, as the economy deteriorates a little bit, and we need to do more credit pullbacks, we won't hesitate to do that. And like Ralph said, we're not going to chase that number just to hit $20 billion. If the economy slows a little bit, it could be a $19 billion handle. If things really turn around, it could grab a $20 billion handle. And you asked a question about ROE. The way to look at -- I think if you look at the underlying business. If you strip out the build -- the reserve build in there, you can see the underlying performance of the business.

Our next question today comes from Mihir Bhatia from Bank of America. .

I do want to go back to credit losses. I guess -- you mentioned credit losses increasing in 4Q. I think our calculation suggests your guidance implies something like 6.2% or give or take something there. You also have the impact in 1Q from the custom actions you took. I appreciate your guidance, the 6% is on a full year and through the cycle basis. But based on what you're seeing now 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 1Q, you're back below the 6% level?

Yes. I mean, look, I think when you think about where we are in the economic cycle, you're starting to see a little bit of softness out there with the consumer. We have payment normalization occurring. And I think we're going to be around the 6% level up and down when we talk about through the cycle, you do expect some quarters to be above it, others will be below it. every economic cycle is different. And we'll see where we go. But we are taking actions proactively making sure that we are caring for the customers who we think may experience more strain 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. And then just on the loan yields this quarter. Could you pass out -- just given how much it increased just quarter-over-quarter, can you just pass out how much was interest rate driven versus just the payment normalization benefit that was maybe in there?

Yes. So when I think with the NIM expansion, it's what I said earlier, right? You've got a couple of things going on. You do have some NIM expansion because the rate on our assets were moving up faster than the rate on our cost of funds. You have that aspect. And as you look at our delinquency rate rising, that also means you have more late fees that are contributing into yields. You have a combination of those 2 items happening in the period. And I should also mention, it's -- seasonally it's higher. And the fourth quarter is seasonally lower.

Our next question comes from Bill Carcache from Wolfe Research.

Can you give a little bit more detail behind why NCO rates and DQ rates were impacted by the transition of credit card processing services? And maybe along similar lines, if you could also discuss what level of unemployment you would say is implicit in your outlook?

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 an aging legacy system to a state-of-the-art system and going to the cloud, there are bound to be issues and concerns as you go along the way. Our focus was to make sure that consumers and our brand partners were not harmed. So because of that, we've done a couple of things. We kept a payment window open longer to help our consumers make payments. We delay the aging of accounts to ensure that consumers weren't harmed, that they could make a payment because of technology disruption. And we then extended promotional plans that were expiring around the time of the conversion to give consumers more time again to make those payments. So a combination of all those kind of, well, impacted the 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. We still feel confident in that 6% rate. We feel confident in our guidance in 2022. But our focus was to ensure that the consumer may have been disruptive 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 aging of accounts. That's how it impacted us.

Yes. And then to follow up on your question around the CECL reserve rate. Look, what I'd tell you about the reserve rate is we've maintained a conservative economic scenario weighting in there. And so when we do our modeling at the end of 3Q, we take those considerations in place. And what's happened in the last 90 days with the macroeconomic variables that we input into the model both from the baseline and then the risk weighting that you put into other scenarios as a risk overlay, those continue to, I'll 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 will be a little bit higher unemployment, as you mentioned. That's just one variable. And -- but it's all the scenarios combined that 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 in time until we get through, I'd say, whatever the peak is and get to the other side.

Ralph and Perry, that's super helpful. 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 have 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.

I don't think our answer has changed. Since we're supportive of regulation that provides the appropriate consumer protections, and we continue to have a good relationship with our regulators. I think our mantra is fair and responsible lending. We'll continue to do that. Our -- we've not engaged actively with our brand partners on this subject. As it evolves, we'll continue to do that. But I think it's appropriate that we continue to lean into the regulators as we move forward. Rule making is probable, but I can't predict what they'll do. But we think it will be more likely the safe harbor would be reduced rather than eliminated.

Our next question comes from Jeff Adelson from Morgan Stanley. .

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. Yes. So our last outstanding asset-backed security that you noted matured in September. And so that was the only public ABS deal that we had. It's about $685 million of securitized balances. We have over $5 billion, and a lot of that is syndicated through conduit facilities with bank lenders which has about $4 billion outstanding. And so I think what you're talking about is that's -- that one, we let mature. And then what you should expect is, I'd say, we'll be in the market multiple times per year going forward being opportunistic at the right time back in the public ABS market. So that will remain an important funding instrument for us as part of our diversified funding. And again, we've mentioned numerous times, 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, Perry, going back to the comment around the 100 bps of seasonality in October on the net loss rate down. It seems like quick math is that September also saw like a 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 to jump up in the fourth quarter when you do the math and 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 we'll say what it is. And the loss rate for the quarter was 5%. So it's going to elevate as those, I'll say, 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.

Our next question comes from David Scharf from JMP Securities.

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 onboard, BJ's Wholesale rolling off. As we think about 2023 or the end of the year, is there an update on a rough mix for both in-store and digital as well as traditional apparel and nonapparel? Maybe just to kind of bring us current since it's been a while since we've discussed that.

Yes. I think if you think about where we were and where we are now, as we have balanced our portfolio, less than 25% of sales now are with specialty retailers and about 40% of our sales are digital. So that's kind of the -- how we -- how the portfolio has shifted. We have great partner diversification. Specialty apparel and department, so made up 50% of our 2016 sales and now, like I said, it's less than 25%. And greater than -- our loan portfolio is variable price. So 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 PLCC and direct-to-consumer.

Got it. Maybe as a follow-up, very maybe overly generalized question and just the competitive environment, maybe it's a derivative of what Sanjay was asking earlier about fintechs. But I'm asking because earlier this week at Money 2020, it's been a few years since I've been there. I was just struck by how many booths there were for companies related to point-of-sale financing, not just BNPL 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're seeing, new entrants?

It's interesting. I would say, well, a lot of booths, well, it's Vegas.

Fair enough.

Well, I guess to me, it's interesting the way I think about this market is there could be innovation around technology and point of sale and those types of things, which I think are great. And we'll take advantage of those because that's important because that's a lot of consumers want to transact. But at the end of the day, you've got to responsibly underwrite these people, you've got to service them. You've got to make sure that if you collect on them if there's bad debt. You're 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. It's not just, "Oh, we've got this great new piece of technology." Your funding has got to be appropriate. We're a bank so our funding is appropriate. All those things, I believe, give us a competitive advantage. The technology is out there. We'll either help -- we'll either borrow it, we'll partner with them, we'll develop it ourselves. But that core of how you are a financial institution, is always going to be a competitive advantage for us.

Our next question comes from Regi Smith from JPMorgan.

I guess there's a narrative out there that some of these fintechs have, I guess, better data than you guys, that they're more nimble in terms of managing their portfolios. I know you 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 do you guys have to kind of manage through the cycle? Because my sense is that you guys are better positioned than -- and more agile than maybe the market is giving you guys credit for us. So could you talk a little bit about that? And I have a follow-up.

Yes. I appreciate that. It's interesting. I think it's quite the opposite. I think the narrative is quite the opposite. We are data rich. We have invested millions in data and analytics technology. We've been through multiple cycles. We have that data lake of information of how consumers react during the past 2 recessions. I would argue that they do not have that level of sophistication. We've invested in artificial intelligence, machine learning across all our models. We use these across risk, marketing and servicing. We have partner information we share with our partners on how -- what's going on by vertical, by industry, by FICO band. We take proactive steps with our population. We focus on the right line assignment. We don't want to put anybody in peril. We're pretty thorough and all that's 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 proactivity 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 you're not -- you're focused on where the stress is and you're not kind of white washing 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 yield of your portfolio and the size of it relative to some of these newer companies. My second question, there's a slide in here in your deck that talks about, I think, your capital ratios and your tangible book value and all that stuff. My question is seeing that. I think you 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?

Yes. So that's a good question, one 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 our 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 do you pay down? Are there stock buybacks or other things. So -- but that's the place where I would get to. And we are not in the rush to make a decision. There's a lot of considerations that go into that, including peer capital levels, our growth plans and what else is out there to be opportunistic. And all of those need to be contemplated before we would make a recommendation on the stock buyback. .

Our next question comes from John Pancari from Evercore ISI.

On the -- on 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 within -- over the next couple of quarters? And then separately, just you also indicated some improvement in your underlying early-stage delinquency buckets. Where are you seeing that improvement? And what's driving that? And could it continue?

Yes. So one thing is, again, I think I've given you a pretty good guidance of where the full year is going to come out in that upper end of our low to mid-5% and so that should compute of 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 during this transition period, where we had some, I'll say, anomalies in the delinquency stuff that we -- some of that, we definitely expected. So, and as Ralph talked about, when we did some customer-friendly accommodations. So that's -- we're seeing that and you'll see that shortly when we start to release our delinquent see in the next couple of months. .

Okay. So that improvement was mainly tied to the elevated impact of the transition.

Sorry, Ralph. But yes, it was the 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. All right. And then my first part of my question was just like in terms of the elevated losses, 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 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 have been in the mid-5s. So that tells you roughly what the basis points of betterment was in this quarter 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. 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're expecting -- you think that could continue. In terms of your outlook, do you ultimately modeling some moderation from the cooling economic backdrop and Fed actions, et cetera? And how would you -- can you maybe talk us around how to size up what you expect on that front?

Yes. So like anything else we do, it's thoughtful and it's data-driven, and it's historically driven. So -- and we are in constant communication with our brand partners and what they're seeing at the TIL. And based on multiple data points, not just the macro economy, we moderate ourselves either up or down based on everything we're hearing and seeing with our brand partners and the macroeconomic environment and performance.

Our final question comes from Alexander Villalobos from Jefferies.

John Hecht can't be on the call because of other earnings. But he did want to ask a little bit more about the reserve rate and net charge-offs, but going more into next year. You guys were pretty clear about 4Q. But just how should we think about the following year? Obviously, there's a lot of uncertainty, but if there's any guide on that, that would be helpful.

Yes. So again, with the reserve, I gave some dollar-based comments in my prepared remarks, right, in that what you've seen. If the macroeconomic 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 improving outlooks. And then 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 $1.5 billion, you could do the math at pretty much something close to the exact reserve rate that we have today, we 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 dollar reserve release in that quarter, plus you've got a normal seasonal movement in the portfolio. So those are 2 big things that are going to happen in terms of the big dollar swings. And then in terms of what would happen with the rate, it will depend on a lot of things, which will be the core delinquency in the portfolio, 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 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, and that would make me think that even with a higher quality portfolio like AAA 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 you're going to reset what that reserve rate needs to look like. But BJ sat a little bit lower loss rate in the total portfolio, so one would naturally think the reserve rate could go up but the dollars would come out. So it's all those things, and there's a lot of things that we monitor from internal performance, the macro trends. Look, we're still in a strong unemployment environment, the consumer overall is healthy. If they want a job, there's jobs to be had. There's a lot of open jobs. It's going to be interesting, right? When you think about the economy overall, and we've talked about almost the tale of 2 economies right now. The high-end consumer has to be really want -- is absorbing the inflation those at a bank. They're back to traveling, and that's going on for them. Now they may start to feel pressure. If they're thinking they're going to go buy a home. Mortgage prices -- mortgage ratio has doubled in the past 6 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.

We have no further questions, so I'll now pass it back to Ralph Andretta 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 2022 Bridge Financial Earnings Conference Call.