Bread Financial Holdings, Inc. — Q2 2022 Form 10-Q
Reporting period: Three and six months ended June 30, 2022. Amounts are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Business context
Bread Financial provides private-label and co-brand cards, installment lending, buy-now-pay-later products, and direct-to-consumer credit and savings products. The company formerly operated as Alliance Data Systems; it changed its name to Bread Financial in March 2022 and ticker to BFH in April. Its LoyaltyOne segment was spun off in November 2021 and is reported as discontinued operations.
Financial performance and key metrics
- Q2 revenue: Total net interest and non-interest income was $893 million, up 17% year over year. Net interest income rose 20% to $978 million, supported by loan growth and higher finance-charge yields. Non-interest income was negative $85 million, reflecting retailer-share arrangements and lower other income.
- Q2 earnings: Provision for credit losses was $404 million, compared with a $14 million release in Q2 2021. Continuing-operations pretax income fell to $16 million from $354 million; continuing-operations net income was $12 million versus $263 million. Net income was $12 million, or $0.25 per diluted share, versus $274 million, or $5.47 per diluted share.
- First half: Total net interest and non-interest income increased 16% to $1.814 billion, while provision for credit losses was $598 million versus $19 million. Continuing-operations net income was $224 million versus $531 million; net income was $223 million versus $560 million. Diluted EPS was $4.46 versus $11.21.
- Operating indicators: Q2 credit sales rose 10% to $8.14 billion; average loans increased 11% to $17.0 billion and period-end loans rose 13% to $17.769 billion. Net interest margin improved to 18.6% from 17.3%; the efficiency ratio improved to 52.9% from 55.5%. Pretax pre-provision earnings, a non-GAAP measure, rose 24% to $420 million.
- Credit quality: Q2 delinquency rate was 4.4%, up from 3.3% a year earlier; net loss rate was 5.6% versus 5.1%. The allowance for credit losses was $1.992 billion, with an 11.2% reserve rate, compared with $1.832 billion and a 10.5% reserve rate at year-end 2021. Management said metrics remained below historical averages.
- Expenses and unusual items: Q2 non-interest expenses rose 12% to $473 million, mainly from compensation, marketing, and technology modernization. The company recorded a $21 million Q2 write-down of its Loyalty Ventures equity-method investment; the six-month write-down was $33 million. Q2 net loss rate also included a 30-basis-point impact related to purchased previously written-off accounts, subject to an ongoing dispute with a debt collection agency.
Balance sheet, funding, and cash flow
- At June 30, total assets were $21.811 billion, total liabilities $19.536 billion, and stockholders’ equity $2.275 billion. Tangible common equity to tangible assets was 7.5%, versus 6.4% in the comparable prior-year disclosure.
- Cash and cash equivalents were $3.111 billion; cash, cash equivalents, and restricted cash totaled $3.697 billion. Deposits were $11.028 billion, debt issued by consolidated securitization entities was $5.498 billion, and long-term and other debt was $1.939 billion.
- The company had $607 million of term loans outstanding under its credit agreement and an undrawn $750 million revolving credit line; it reported compliance with credit-agreement financial covenants. Securitization conduit capacity was $5.5 billion, of which $4.8 billion was drawn. Approximately $12.4 billion of credit card loans were securitized.
- For the first half, operating cash flow was $743 million versus $733 million; investing cash flow was negative $897 million versus positive $535 million, primarily reflecting loan growth and a portfolio acquisition; financing cash flow was negative $72 million versus negative $1.365 billion. Cash, cash equivalents, and restricted cash decreased $226 million.
- The company repurchased 200,000 shares for $12 million in the first half and paid $22 million in dividends. A quarterly dividend of $0.21 per share was declared for payment in September 2022. Both banks exceeded regulatory capital requirements and qualified as well capitalized.
Outlook, management commentary, and risks
- Management expected 2022 average loan growth in the low-double-digit range versus 2021, with payment-rate variability identified as a key determinant. It anticipated total net interest and non-interest income growth broadly aligned with average loan growth, with possible improvement in full-year net interest margin. Expected Federal Reserve rate increases were modeled to provide a nominal net-interest-income benefit.
- Management expected a 2022 net loss rate in the low-to-mid 5% range as consumer payment behavior normalizes. It anticipated non-interest expenses would rise in 2022 and planned more than $125 million of incremental investment in digital and product innovation, marketing, brand, and technology enhancements.
- The company expected to acquire AAA’s existing credit card portfolio in Q4 2022. It expected the sale of the BJ’s Wholesale Club portfolio around mid-Q1 2023; BJ’s accounts generated about 9% of Q2 total net interest and non-interest income and represented about 12% of loans at June 30.
- Management cited persistent inflation, rising rates, a higher probability of recession, and continuing COVID-19 effects as uncertainties. Other disclosed risks include consumer credit deterioration, partner or customer losses, funding-market access and cost, regulatory or consumer-protection changes, cyber and service disruptions, and consequences of the LoyaltyOne separation.
- The company paid the second $75 million installment in January 2022 under its indemnification obligation related to the DOJ matter involving the divested Epsilon business. It reported no material change in risk factors from prior filings and no material change in market-risk exposure. Management stated liquidity sources were adequate, while noting that market volatility could restrict or raise the cost of funding.
Important facts for investors to verify
- Whether loan growth and finance-charge yields can offset higher credit-loss provisions as delinquencies and losses normalize.
- Allowance adequacy and the assumptions behind economic scenarios, including recession, inflation, and interest-rate expectations.
- Progress, timing, and economics of the AAA portfolio acquisition and BJ’s portfolio sale, including the expected effect of the BJ’s exit.
- Deposit pricing, securitization and conduit renewals, and continued access to funding at acceptable cost.
- Outcome of the debt-collection-agency dispute and its effect on reported net loss rates; also monitor the Loyalty Ventures investment and other legal or regulatory matters.
- Execution and returns on planned technology, marketing, and product investments, alongside expense growth and capital distributions.