Bread Financial Holdings, Inc. — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Bread Financial provides private-label and co-brand credit cards, buy-now-pay-later products, and consumer savings products; interest and fees on loans are its primary revenue source.
Financial performance
| Metric | Q3 2023 | Year-over-year | Nine months 2023 | Year-over-year |
|---|---|---|---|---|
| Total net interest and non-interest income | $1.031 billion | +5% | $3.273 billion | +17% |
| Provision for credit losses | $304 million | Flat | $747 million | Down 17% |
| Non-interest expenses | $502 million | +3% | $1.576 billion | +14% |
| Net income | $171 million | +$37 million | $675 million | +$318 million |
| Diluted EPS | $3.42 | $2.69 prior year | $13.44 | $7.15 prior year |
| Net interest margin | 20.6% | 19.9% prior year | 19.4% | 19.3% prior year |
Q3 interest income rose 7%, primarily from higher loan yields as prime rates increased, while interest expense rose 64%, reflecting higher deposit and borrowing costs. Net interest income was nearly flat at $1.082 billion. The nine-month results include a $230 million gain on the BJ’s portfolio sale; excluding that gain, pretax pre-provision earnings were $1.467 billion, up 4% year over year. These non-GAAP measures are company-defined.
- Q3 credit sales were $6.668 billion, down 13%; average loans were $17.540 billion, essentially flat, and period-end loans were $17.922 billion, down 1% year over year.
- Credit performance weakened: Q3 net principal loss rate was 6.9% versus 5.0%; delinquency rate was 6.3% versus 5.7%. The reserve rate was 12.3% at quarter-end, versus 11.4% a year earlier and 11.5% at year-end 2022.
- At September 30, total assets were $21.608 billion, cash and cash equivalents $3.380 billion, deposits $13.268 billion, and total borrowings $4.223 billion. Stockholders’ equity was $2.864 billion. TCE/TA was 10.0% and the company’s common equity tier 1 ratio was 12.9%.
- Direct-to-consumer deposits were $6.098 billion, up 18% year over year, and represented 35% of the funding mix. The company reported $700 million available under its revolving facility and $275 million of remaining term-loan capacity.
- For the first nine months, operating cash flow was $1.370 billion, investing cash flow was $2.579 billion provided, and financing cash flow was $4.481 billion used; cash, cash equivalents and restricted cash declined $532 million.
Material changes and notable items
- Credit sales and portfolio balances were affected by the late-February sale of the BJ’s portfolio, tighter underwriting and credit-line management, and moderating consumer spending. The sale generated $230 million of gain and $2.499 billion of cash proceeds; the filing also reports a $2.5 billion purchase price for a portfolio with $2.3 billion of loans.
- Q3 provision expense was unchanged despite $86 million higher net principal losses, because the current-period reserve build was lower. For the nine months, provision fell from $902 million to $747 million, reflecting reserve releases, including releases related to the BJ’s sale, partly offset by higher losses.
- Q3 expenses rose chiefly on card processing and fraud costs and increased staffing for technology, digital, customer care and collections; lower marketing and depreciation partly offset the increase.
- In June, the company issued $316 million of 4.25% convertible notes due 2028 and repurchased $565 million of its $850 million 2024 senior notes. The new credit agreement provides a $700 million revolver and a $575 million delayed-draw term facility. Management said financing actions reduced debt by more than $500 million and extended certain maturities.
- The company repurchased $35 million of stock during Q3; the authorized program was fully used. The quarterly dividend remained $0.21 per share.
Outlook, commentary and risks
- Management’s 2023 outlook calls for low-to-mid-single-digit growth in average loans, with full-year net interest and non-interest income growth—excluding the BJ’s sale gain—slightly above loan growth, and full-year net interest margin similar to 2022.
- Expected 2023 non-interest expense growth is approximately 8%–9% versus 2022. The company expected second-half expenses below first-half levels, with Q4 slightly higher sequentially due to seasonal marketing and employee-benefit costs.
- Management projected a full-year net loss rate in the mid-7% range and approximately 8% in Q4, and a normalized effective tax rate of 25%–26%. It cited inflation, higher interest rates, student-loan repayment resumption, gas-price volatility and consumer repayment capacity as pressures.
- The company is awaiting a CFPB credit-card late-fee rule. Management expects a significant reduction in the permitted safe-harbor late-fee amount could materially affect results; possible responses include APR or fee pricing changes, underwriting adjustments, program-economics changes and product diversification. The rule was not assumed to affect the 2023 outlook.
- A Canadian lawsuit connected to the former LoyaltyOne spinoff seeks $775 million; the company disputes the allegations and intends to defend itself. A putative federal securities class action related to LVI disclosures is also pending. Outcomes are uncertain. The filing also identifies potential tax exposure relating to whether the spinoff qualifies for tax-free treatment.
- Other key risks include rising credit losses, fraud, partner concentration or partner departures, funding-market access and refinancing costs, regulation and litigation, and operational or cybersecurity failures. Management reported the company was in compliance with debt covenants, the banks were well capitalized, and disclosure controls were effective.
Important facts for investors to verify
- Whether credit sales, delinquencies and net loss rates stabilize, and how actual Q4 and full-year results compare with management’s loss-rate and growth outlook.
- The effect of the CFPB late-fee rule, including its final terms, timing, legal challenges and potential mitigation effectiveness.
- Funding costs, deposit mix and refinancing needs, particularly the remaining $285 million of 2024 senior notes and maturities of conduit facilities.
- Whether the $230 million BJ’s sale gain is appropriately separated from recurring earnings when assessing performance.
- Developments, potential liabilities and tax consequences from the LVI-related litigation and bankruptcy proceedings.
- October 2023 credit-card portfolio acquisition for approximately $390 million, a subsequent-period event not reflected in September 30 balances.