Bread Financial Holdings, Inc. — FY 2023 Form 10-K
Reporting period: Fiscal year ended December 31, 2023; this is an annual report, not a standalone fourth-quarter earnings report. Bread Financial (NYSE: BFH) is a consumer financial-services company offering partner-branded and direct-to-consumer credit cards, buy now, pay later products, and online savings products. It operates as one reportable segment, principally through Comenity Bank and Comenity Capital Bank.
Financial performance and position
| Metric | FY 2023 / year-end | FY 2022 / change |
|---|---|---|
| Total net interest and non-interest income | $4.289 billion | $3.826 billion; up 12% |
| Net interest income | $4.266 billion | $4.181 billion; up 2% |
| Provision for credit losses | $1.229 billion | $1.594 billion; down 23% |
| Non-interest expenses | $2.092 billion | $1.932 billion; up 8% |
| Income from continuing operations | $737 million | $224 million |
| Net income | $718 million | $223 million |
| Diluted earnings per share | $14.34 | $4.46 |
| Net interest margin / loan yield | 19.5% / 27.2% | 19.2% / 26.0% |
| Credit sales | $28.9 billion | $32.9 billion; down 12% |
| Average / ending loans | $18.2 billion / $19.3 billion | Average up 3%; ending balance down 10% |
| Delinquency / net principal loss rate | 6.5% / 7.5% | 5.5% / 5.4% |
| Deposits | $13.6 billion total; $6.5 billion direct-to-consumer | Direct-to-consumer deposits up 18% |
| Cash and cash equivalents | $3.590 billion | $3.891 billion |
| Total assets / stockholders’ equity | $23.141 billion / $2.918 billion | $25.407 billion / $2.265 billion |
| Borrowings | $5.292 billion total, including $3.898 billion issued by consolidated securitization entities | $8.007 billion total |
| Capital | Company CET1 ratio 12.2%; tangible common equity/tangible assets 9.6% | 8.7% / 6.0% |
Cash provided by operating activities was $1.987 billion; investing activities provided $788 million, while financing activities used $3.086 billion. Cash, cash equivalents and restricted cash decreased $311 million. Cash-flow statements include combined cash flows from continuing and discontinued operations.
Changes from the prior year
- Revenue rose 12%, supported by higher loan yields as prime rates increased, more interest on cash and investments, and a $230 million gain on the sale of the BJ’s portfolio. The gain contributed to reported growth; excluding portfolio-sale gains, pretax pre-provision earnings increased 4% to $1.967 billion.
- Credit sales fell 12%, reflecting consumer-spending moderation, the BJ’s portfolio sale, and tighter underwriting and credit-line management. Ending loans fell 10%, while average loans rose 3%, partly due to slower customer payment rates and new partner growth.
- Provision expense declined, but credit performance weakened: net principal losses increased $397 million, to $1.365 billion, and the year-end delinquency rate rose to 6.5%. The allowance declined to $2.328 billion, while the reserve rate increased to 12.0%.
- Expenses increased 8%, including higher compensation, processing and technology costs, and fraud expense. The company reported fraud-related operational losses of $127 million, versus $73 million in 2022.
- The BJ’s portfolio sale closed in February 2023 for $2.5 billion on a $2.3 billion loan portfolio. Retail deposits grew, and management reported approximately $500 million of parent-company debt reduction during 2023.
Outlook, management commentary and key risks
- 2024 outlook: Management expects average loans to decline low-single digits from 2023, or grow low-single digits excluding BJ’s. Total net interest and non-interest income excluding portfolio-sale gains is expected to decline low-to-mid single digits; full-year net interest margin is expected to be lower. Non-interest expense is expected to be lower, with the aim of nominal positive operating leverage.
- Credit outlook: The company expects a 2024 net loss rate in the low-8% range, peaking in the first half, with each of the first two quarters in the mid-to-high 8% range. These are forward-looking estimates, not results.
- CFPB late-fee proposal: The 2024 outlook excludes potential effects of the proposed rule. If implemented as proposed, including an $8 safe harbor and a hypothetical October 1, 2024 effective date, management estimated fourth-quarter 2024 income could be approximately 25% lower than fourth-quarter 2023 after certain planned mitigations. Timing, final terms, legal challenges and mitigation effectiveness remain uncertain.
- Regulatory matter: The FDIC issued a November 2023 consent order to Comenity Servicing LLC concerning IT systems development, project management, business continuity, cloud operations and third-party oversight related to the 2022 processing transition. The order carries no monetary penalty; the company says it is addressing the requirements.
- Litigation and contingencies: A LoyaltyOne subsidiary filed a Canadian lawsuit seeking $775 million concerning the former LoyaltyOne spinoff; the company disputes the claims and intends to defend itself. A U.S. securities class action concerning disclosures about LVI was also filed. Outcomes are uncertain.
- Funding and debt: The company relies on deposits, securitizations and capital markets. Year-end parent-company senior debt included $500 million of 7.000% notes due 2026, $316 million of 4.25% convertible notes due 2028 and $600 million of 9.750% notes due 2029. In January 2024, it issued another $300 million of 2029 notes and redeemed $400 million of 2026 notes. The $700 million revolving facility was undrawn at year-end.
- Other material exposures include unsecured consumer lending, high and rising credit losses, inflation and interest rates, partner concentration (the five largest programs represented 47% of income excluding portfolio-sale gains), dependence on technology vendors, cybersecurity and operational risk, and potential constraints on bank dividends to the parent.
- 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; management’s estimate depends on credit models, economic forecasts and qualitative adjustments.
Most important facts for investors to verify
- Whether delinquency and net loss rates track management’s 2024 forecast, and how losses affect the allowance and earnings.
- The final CFPB late-fee rule, effective date, legal challenges, and the realized revenue effect compared with management’s illustrative estimate.
- Progress in complying with the FDIC consent order and whether processing-transition or vendor issues cause further customer, regulatory or financial impacts.
- Renewal, performance and economics of major partner programs, alongside credit-sales trends and the effect of the BJ’s portfolio exit.
- Deposit costs and retention, securitization access and maturities, parent-company debt service, and the ability of the Banks to support parent liquidity and dividends.
- Whether reported earnings growth is sustainable apart from the BJ’s sale gain and changes in credit-loss reserves.