Bread Financial Holdings, Inc. — Q2 2023 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2023. Amounts are in millions unless stated otherwise. Comparisons are with the corresponding 2022 periods.
Business context
Bread Financial provides private-label and co-brand credit cards, buy-now-pay-later products, and direct-to-consumer savings and card products. Interest and fees on loans are its primary revenue source. The quarter reflected softer consumer spending, tighter underwriting and credit-line management, and the February 2023 sale of the BJ’s Wholesale Club portfolio.
Financial performance
| Metric | Q2 2023 | Q2 2022 | Change |
|---|---|---|---|
| Total net interest and non-interest income | $952 | $893 | +7% |
| Provision for credit losses | $336 | $404 | -17% |
| Non-interest expenses | $530 | $473 | +12% |
| Continuing-operations pretax income | $86 | $16 | Up $70 |
| Continuing-operations net income | $64 | $12 | Up $52 |
| Net income | $48 | $12 | Up $36 |
| Diluted EPS | $0.95 | $0.25 | Up $0.70 |
| Net interest margin | 18.7% | 18.6% | +0.1 percentage point |
Q2 net income includes a $16 million loss from discontinued operations; continuing-operations diluted EPS was $1.27. Q2 pretax pre-provision earnings (a non-GAAP measure) were $422 million versus $420 million.
- Revenue and lending: Credit sales fell 13% to $7.1 billion. Average loans increased 4% to $17.7 billion, while period-end loans rose 1% to $18.0 billion. Interest income increased 12%, supported by higher loan yields and balances; higher deposit and borrowing costs limited net interest income growth to 1%.
- Credit quality: Net principal losses rose to $351 million from $238 million; the annualized net loss rate was 8.0% versus 5.6%. The delinquency rate was 5.5%, up from 4.4% a year earlier. The allowance was $2.208 billion and the reserve rate was 12.3%, compared with 11.2% a year earlier. The reported loss rate was affected by the credit-card processing transition.
- Expenses and margins: Expense growth reflected higher staffing, fraud and customer-service costs, and processing and technology modernization spending. Q2 efficiency ratio was 55.7%, versus 52.9%.
- Six-month results: Total net interest and non-interest income was $2.241 billion, up 24%, including a $230 million BJ’s portfolio-sale gain. Continuing-operations net income was $519 million, versus $224 million; net income was $503 million, versus $223 million. Diluted EPS was $10.02, versus $4.46.
Liquidity, capital and debt
At June 30, cash and cash equivalents were $3.325 billion; total cash, cash equivalents and restricted cash were $3.351 billion. Deposits were $13.048 billion, including $5.993 billion in direct-to-consumer deposits, which represented 33% of the funding mix. Total borrowings were $4.698 billion, down from $8.007 billion at December 31, 2022. Stockholders’ equity was $2.736 billion; the company’s tangible common equity to tangible assets ratio was 9.4%, up from 7.5% a year earlier.
For the first six months, operating cash flow was $741 million, investing activities provided $2.860 billion, and financing activities used $4.177 billion. Investing cash inflows included the BJ’s portfolio sale and loan paydowns; financing outflows included debt and securitization repayments and lower deposits.
During Q2, Bread Financial replaced its prior credit agreement with a $700 million revolving facility and a $575 million delayed-draw term facility, issued $316 million of 4.25% convertible notes due 2028, and repurchased $565 million of its 2024 senior notes through a tender offer. At quarter-end, $285 million of the 2024 notes remained outstanding; $700 million of revolving capacity and $275 million of term-loan capacity remained available. The company reported compliance with debt covenants. The banks also reported capital ratios above “well capitalized” minimums.
Outlook, commentary and risks
- For full-year 2023, management expects average loans to grow in the low-to-mid-single digits. Excluding the BJ’s gain, net interest and non-interest income growth is expected to be slightly above average-loan growth; full-year net interest margin is expected to be in line with 2022’s 19.2%.
- Management expects full-year non-interest expenses to increase versus 2022, but second-half expenses to be below first-half levels, with Q3 below Q2. It continues to target positive operating leverage for the year, including the BJ’s gain. Excluding that gain and a $30 million accelerated technology investment, adjusted income and expenses are expected to grow at essentially the same rate.
- The full-year net loss rate outlook is in the low-to-mid-7% range. Management expects a normalized effective tax rate of 25% to 26%. Its assumptions include elevated but moderating inflation, gradually rising unemployment, and only a nominal benefit to net interest income from further Federal Reserve rate increases.
- Key uncertainties include consumer credit deterioration, inflation, interest rates, unemployment and recession risk; access to deposits and capital markets; securitization and debt maturities; fraud and operational or cybersecurity events; partner performance; and regulatory, legal and consumer-finance developments. The filing notes that both banks are again subject to CFPB supervision and examination for federal consumer-protection laws.
- Management stated that liquidity sources were adequate for expected needs, while cautioning that market volatility could constrain or raise the cost of funding. It continued enhanced monitoring of liquidity following March 2023 banking-sector volatility.
Important facts for investors to verify
- Whether rising delinquency and net loss rates stabilize, and whether the 12.3% reserve rate remains adequate as economic conditions evolve.
- How much reported earnings and cash generation depend on the $230 million BJ’s sale gain and portfolio-related balance changes.
- Whether loan-growth, net loss rate, margin, expense and tax guidance assumptions are achieved, particularly if consumer spending or employment weakens.
- Funding costs, renewal of conduit facilities, debt maturities and the potential dilution or cash obligations associated with the convertible notes.
- The impact of the credit-card processing transition on reported losses and operating costs; the filing says July was expected to be the final month of transition impacts.