Bread Financial Holdings, Inc. — FY2022 Form 10-K
Reporting period: Fiscal year ended December 31, 2022; filed February 28, 2023. This is an annual report, not a standalone fourth-quarter results filing. Unless noted, amounts are in U.S. dollars and continuing operations.
Business context
Bread Financial provides private-label and co-brand credit cards, direct-to-consumer credit products, buy-now-pay-later loans, and online savings products. It operates primarily through Comenity Bank and Comenity Capital Bank. The company rebranded from Alliance Data Systems in 2022; its former LoyaltyOne segment was spun off in November 2021 and is reported as discontinued operations.
Key financial results
| Metric | FY2022 | FY2021 | Change |
|---|---|---|---|
| Total net interest and non-interest income | $3.826 billion | $3.272 billion | +17% |
| Net interest income | $4.181 billion | $3.485 billion | +20% |
| Provision for credit losses | $1.594 billion | $544 million | +193% |
| Non-interest expenses | $1.932 billion | $1.684 billion | +15% |
| Income from continuing operations | $224 million | $797 million | -72% |
| Diluted continuing-operations EPS | $4.47 | $15.95 | -72% |
| Net interest margin | 19.2% | 18.2% | +1.0 percentage point |
| Efficiency ratio | 50.5% | 51.5% | Improved 1.0 point |
| Operating cash flow | $1.848 billion | $1.543 billion | +$305 million |
| Investing cash flow | $(5.111) billion | $(1.691) billion | Greater use of cash |
| Financing cash flow | $3.267 billion | $608 million | +$2.659 billion |
Credit sales were $32.9 billion (+11%); average loans were $17.8 billion (+13%) and year-end loans were $21.4 billion (+23%). Loan yield rose to 26.0% from 24.7%. The allowance for credit losses was $2.464 billion, or an 11.5% reserve rate, versus $1.832 billion and 10.5% a year earlier. The filing says the cash-flow statement combines continuing and discontinued operations.
Balance sheet, funding and capital
- At year-end, cash and cash equivalents were $3.891 billion; total assets were $25.407 billion; total stockholders’ equity was $2.265 billion.
- Deposits totaled $13.826 billion, up from $11.027 billion. Direct-to-consumer deposits rose 72% to $5.466 billion and represented about 26% of total funding.
- Total borrowings were $8.007 billion, including $6.115 billion of consolidated securitization trust debt and $1.892 billion of long-term and other debt. The parent had $556 million of term loans and an undrawn $750 million revolver.
- Parent debt included $850 million of 4.750% notes due December 2024 and $500 million of 7.000% notes due January 2026. The credit agreement matures July 2024. Securitization conduit capacity was $6.5 billion, with $6.1 billion drawn; conduit maturities were in 2023.
- The Banks exceeded regulatory well-capitalized standards. Combined Banks’ CET1 ratio was 17.0%; the company’s tangible common equity-to-tangible assets ratio was 6.0%.
- The company paid $0.84 per share in dividends during 2022. Its board declared a further $0.21 quarterly dividend in January 2023, subject to the stated payment terms.
Material changes versus FY2021
- Revenue grew as loan balances and yields rose, but credit provisioning increased by $1.05 billion. Management attributed the reserve build to portfolio growth, higher net losses, and a more cautious economic outlook; the reserve rate rose by 1.0 point.
- Delinquency increased to 5.5% from 3.9%, while the net principal loss rate rose to 5.4% from 4.6%. Management cautions that both 2022 measures were affected by the card-processing transition.
- Expenses rose 15%, including higher compensation, processing, technology and marketing costs. Management reported more than 200 basis points of operating leverage for the year, using its stated measure.
- The company acquired credit card portfolios in April and October, including the AAA portfolio; total portfolio purchases were $1.804 billion in 2022. It also launched the Bread Cashback American Express card and continued expanding Bread Pay and Bread Savings.
- The retained 19% investment in Loyalty Ventures Inc. was written down by $44 million; its carrying amount fell from $50 million to $6 million.
- Retail deposits increased substantially, while the balance sheet expanded to $25.4 billion from $21.7 billion.
Outlook, commentary and principal risks
For 2023, management forecast mid-single-digit growth in average loans versus 2022, reflecting new and renewed partner programs, the sale of BJ’s, and its economic outlook. It expected revenue growth, excluding the BJ’s portfolio gain on sale, broadly in line with average loan growth; full-year net interest margin around 19.2%; higher non-interest expenses; and nominal positive operating leverage. The outlook assumed a net loss rate of approximately 7%, persistent inflation, payment rates approaching pre-pandemic levels, unemployment moving into the mid-to-upper 4% range by year-end, and further Fed rate increases.
- Partner concentration: The five largest card programs generated about 47% of 2022 revenue and 41% of year-end loans. Ulta Beauty and Victoria’s Secret each exceeded 10% of revenue. BJ’s represented about 10% of revenue and 11% of loans in 2022; its portfolio sale closed in late February 2023 for a preliminary price of about $2.5 billion on roughly $2.3 billion of loans.
- Processing transition: The transition to strategic service providers in June 2022 caused platform outages and customer-service interruptions, complaints, reputational damage, regulatory scrutiny, remediation expense and potential lost revenue. Some service-level failures could have allowed partner termination rights; none had been exercised as of the filing, and some had been waived or lapsed.
- Regulatory exposure: Both Banks again became subject to CFPB supervision for federal consumer protection laws. A CFPB proposal published in February 2023 would substantially reduce credit-card late-fee safe harbors; it was a proposal, not a final rule.
- Credit and macro risks: Unsecured lending exposes the company to recession, inflation, rising rates, consumer indebtedness, worsening delinquency and losses, and uncertainty in CECL estimates. Management estimates a 100-basis-point change in the allowance rate could change the allowance by about $210 million.
- Funding and debt: Reliance on deposits and securitization creates refinancing, renewal, cost-of-funds and liquidity risks. Near-term maturities include parent debt in 2024 and conduit facilities in 2023; management states liquidity sources are adequate but notes market access and pricing could deteriorate.
- Other contingencies and unusual items: The company retains possible tax exposure relating to the LoyaltyOne spin-off and financial exposure under legacy indemnities; it completed the final $75 million payment under the Epsilon DOJ-related indemnity in January 2022. The filing describes ordinary-course litigation and regulatory matters but does not identify a specific pending proceeding expected to have a material adverse effect. Unrecognized tax benefits, including interest and penalties, were reported at $282 million in the MD&A discussion.
Deloitte issued unqualified opinions on the financial statements and internal control over financial reporting; the allowance for credit losses was identified as a critical audit matter.
Investor verification priorities
- Track subsequent credit performance, especially delinquency, net loss rates, reserve coverage and the impact of the 2022 processing transition.
- Verify the realized gain and post-sale loan balances from the BJ’s portfolio disposition, and assess the revenue and earnings effect of losing that program.
- Monitor progress on service stability, customer remediation, partner retention and any regulatory or litigation developments tied to the processing conversion.
- Assess refinancing and renewal plans for the 2023 securitization conduits and 2024 parent debt, alongside deposit costs and deposit retention.
- Follow the CFPB late-fee proposal and other consumer-credit regulation for potential effects on fee income, compliance costs and product economics.
- Check the assumptions and sensitivity behind CECL reserves, the retained LVI investment and the potential tax consequences of the LoyaltyOne spin-off.