BREAD FINANCIAL HOLDINGS, INC. quarterly report, Q3 FY2022

Full document

Bread Financial Holdings, Inc. — Q3 2022 Form 10-Q

Reporting period: Quarter and nine months ended September 30, 2022; unaudited. Comparisons are with the corresponding 2021 periods unless noted. Bread Financial provides private-label and co-brand cards, installment lending, buy-now-pay-later, and direct-to-consumer savings and card products. The former LoyaltyOne segment was spun off in November 2021 and is reported as discontinued operations.

Financial performance

  • Q3 revenue: Total net interest and non-interest income was $979 million, up 15%. Net interest income increased 20% to $1.085 billion; total non-interest income was negative $106 million, reflecting retailer-share arrangements and other items.
  • Q3 earnings: Income from continuing operations was $134 million, down 35%; net income was $134 million, down 40%; diluted EPS was $2.69 versus $4.47. For the first nine months, net income was $357 million versus $783 million and diluted EPS was $7.15 versus $15.68.
  • Credit and expenses: Q3 provision for credit losses rose 89% to $304 million. Total non-interest expenses rose 13% to $486 million. Pretax pre-provision earnings, a non-GAAP measure, increased 17% to $493 million.
  • Margins and returns: Q3 net interest margin was 19.9%, up 1.0 percentage point; loan yield was 27.2%, up 1.6 points. Return on average equity was 22.8%, down from 38.0%; efficiency ratio improved to 49.7% from 50.6%.
  • Loan growth and credit quality: Q3 credit sales were $7.689 billion, up 4%. Average loans were $17.598 billion, up 14%, and period-end loans were $18.126 billion, up 16%. Delinquency rate was 5.7% versus 3.8% a year earlier; Q3 net loss rate was 5.0% versus 3.9%. Allowance for credit losses was $2.073 billion, with an 11.4% reserve rate versus 10.5% at year-end 2021. The company cautioned that processing-transition timing affected reported delinquency and loss metrics.
  • Liquidity, funding and capital: September 30 cash and cash equivalents were $3.583 billion; deposits were $12.444 billion. Consolidated VIE debt was $4.015 billion and long-term and other debt was $1.916 billion. The company had $582 million of term loans outstanding under its Credit Agreement and no borrowings under its $750 million revolver. It reported compliance with Credit Agreement covenants; both banks exceeded regulatory “well capitalized” minimums. TCE/TA was 8.0%.
  • Cash flows: For the first nine months, operating activities provided $1.351 billion, investing activities used $1.488 billion, and financing activities used $178 million; cash, cash equivalents and restricted cash declined $315 million. Investing outflows primarily reflected loan growth and portfolio acquisition.

Material changes and unusual items

  • Loan and interest income increased with higher average balances, slower consumer payment rates and higher finance-charge yields. Higher funding rates and deposit balances increased Q3 interest expense.
  • The allowance build and higher provision reflected loan growth and reserve-model assumptions giving greater weight to recession risk, persistent inflation and higher consumer debt costs. The nine-month provision comparison was also affected by a $363 million reserve release in 2021.
  • Other non-interest income included an $11 million Q3 and $44 million nine-month write-down of the retained equity-method investment in Loyalty Ventures Inc.; its carrying value was $6 million at September 30.
  • Non-interest expense growth reflected compensation, technology modernization and processing-transition costs, and marketing. The company said it completed the transition of credit-card processing services to outsourcing partners but was still addressing remaining performance issues.
  • In October 2022, the company acquired a credit-card portfolio for approximately $1.6 billion in cash. Management also cited the acquisition of AAA’s existing card portfolio in its growth outlook.

Outlook, commentary and risks

  • For 2022, management expected average loan growth in the low double digits versus 2021 and total net interest and non-interest income growth broadly aligned with average loan growth, with slight upside from improved full-year net interest margin versus 2021.
  • Management expected the full-year net loss rate at the high end of its previously communicated low-to-mid-5% range, with losses typically highest in Q4. It anticipated sequentially higher non-interest expenses for the remainder of 2022 and planned more than $125 million of incremental 2022 investment in digital and product innovation, marketing, brand and technology enhancements.
  • The company expected the sale of the BJ’s Wholesale Club portfolio around mid-Q1 2023. BJ’s co-brand accounts represented about 10% of Q3 total net interest and non-interest income and 13% of period-end loans.
  • Management highlighted uncertainty from inflation, rising rates, recession risk and consumer payment behavior. Processing-transition issues led to customer accommodations, including late-fee waivers. Other disclosed risks include credit losses, partner concentration, funding-market access, regulatory changes, and cybersecurity or service disruptions.
  • Effective October 1, 2022, both banks became subject to CFPB supervision and examination for federal consumer-protection laws after Comenity Capital Bank exceeded the applicable asset threshold for four consecutive quarters.
  • The board declared a $0.21-per-share quarterly dividend payable December 16, 2022. The company had repurchased all 200,000 shares authorized under its 2022 repurchase program for $12 million.

Investor verification priorities

  1. Track whether processing-platform performance stabilizes and whether reported delinquencies and losses normalize after timing effects and customer accommodations.
  2. Test the allowance and loss outlook against actual consumer payment behavior, recession conditions and Q4 seasonality.
  3. Verify the execution and economics of the AAA portfolio acquisition and the planned BJ’s portfolio sale, including resulting loan growth and partner concentration.
  4. Monitor deposit costs, securitization and conduit renewals, debt maturities, and access to funding markets as rates change.
  5. Assess the impact of CFPB oversight and any consumer-protection actions on fees, interchange, operating costs and bank capital.