Bread Financial Holdings, Inc. — Q1 2022 Form 10-Q
Business context and reporting period
Unaudited results for the three months ended March 31, 2022, compared with Q1 2021. Bread Financial provides private-label and co-brand credit cards, installment lending, buy now, pay later, and direct-to-consumer savings and card products. The company was renamed from Alliance Data Systems Corporation on March 23, 2022; its NYSE ticker changed from ADS to BFH on April 4. The LoyaltyOne segment, spun off in November 2021, is reported as discontinued operations.
Financial performance and position
- Income: Total net interest and non-interest income rose 15% to $921 million. Net interest income increased 18% to $989 million, while non-interest income was negative $68 million, including a $12 million loss on the Loyalty Ventures equity-method investment.
- Profit: Continuing-operations pretax income was $302 million, down 18%; continuing-operations net income was $211 million, down 21%. Net income was $210 million versus $286 million, and diluted EPS was $4.20 versus $5.74.
- Credit costs and margins: Provision for credit losses rose to $193 million from $33 million, largely reflecting the prior-year reserve release. Net interest margin was 19.4%, up from 17.7%; loan yield was 25.6%, up from 23.8%. PPNR, a non-GAAP measure, increased 24% to $495 million. Efficiency ratio improved to 46.2% from 50.1%.
- Loans and credit quality: Average loans were $16.65 billion, up 5%; period-end loans were $16.84 billion, up 8% year over year. Delinquency was 4.1% and net loss rate 4.8%; the allowance was $1.83 billion, or 10.8% of loans, versus a 10.5% reserve rate at year-end 2021.
- Cash flow: Operating cash flow was $497 million, investing cash flow was $310 million, and financing used $1.10 billion. Cash, cash equivalents and restricted cash decreased $289 million during the quarter; balance-sheet cash and cash equivalents were $2.93 billion at March 31.
- Debt and liquidity: At March 31, deposits were $10.65 billion, debt issued by consolidated VIEs was $4.82 billion, and long-term and other debt was $1.96 billion. The company had $633 million of term loans outstanding and no borrowings on its $750 million revolving facility; it reported compliance with credit-agreement financial covenants. Total assets were $20.94 billion and stockholders’ equity was $2.27 billion. Both banks exceeded regulatory capital minimums and were classified as well capitalized.
- Capital returns: The company repurchased 200,000 shares for $12 million and paid a $0.21-per-share dividend. The board declared another $0.21 dividend payable in June 2022.
Material changes versus the prior comparable period
- Credit sales increased 14% to $6.89 billion; loan growth and an approximately 180-basis-point increase in finance charge yield supported interest income.
- Interest expense declined 26% to $79 million, while non-interest expenses rose 6% to $426 million, including higher employee and technology costs.
- Higher credit-loss provision more than offset growth in revenue: income after provision fell 5% to $728 million. The prior-year period included an $18 million gain from discontinued operations; Q1 2022 recorded a $1 million discontinued-operations loss.
- Direct-to-consumer deposits were $3.56 billion, up 66% from Q1 2021. Against December 31, 2021, total loans, deposits and cash declined, while equity increased to $2.27 billion from $2.09 billion.
Outlook, commentary, risks and unusual items
- Management projected 2022 average loan growth in the low-double-digit range versus 2021 and a 2022 net loss rate in the low-to-mid 5% range. It expected total net interest and non-interest income growth broadly in line with average loan growth, with possible net interest margin upside.
- Management expected non-interest expenses to increase in 2022 and planned more than $125 million of incremental investment in digital and product innovation, marketing, and technology enhancements. Its outlook included a nominal net-interest-income benefit from anticipated Federal Reserve rate increases.
- Management cited inflation, rising rates, consumer payment-rate normalization, the war in Ukraine, COVID-19 effects, and changes in consumer spending and savings as uncertain factors. Inflation could pressure customers’ repayment capacity; access to deposits and securitization markets, partner demand, cyber and operational resilience, and regulatory changes are also risks.
- The planned sale of the BJ’s Wholesale Club portfolio was expected around mid-Q1 2023. BJ’s accounts represented about 8% of Q1 total net interest and non-interest income and 12% of period-end loans.
- The company paid the second $75 million installment in January 2022 under its indemnification related to the Epsilon DOJ matter. It also reported routine legal and regulatory proceedings, without stating that they were expected to materially affect the business.
- The filing reported no material change in interest-rate market-risk exposure, no impairment charges, and no securitization triggering events. Disclosure controls were deemed effective, with no material change to internal control over financial reporting during the quarter.
Important facts for investors to verify
- Whether loan growth and the projected low-to-mid 5% net loss rate materialize as credit metrics normalize.
- How higher rates affect loan yields, deposit and borrowing costs, and net interest margin versus management’s forecast benefit.
- Whether planned 2022 investments and expense growth generate the expected profitable growth.
- Progress and financial implications of the anticipated BJ’s portfolio sale, given its share of income and loans.
- Liquidity and funding access, including deposit trends, conduit renewals, securitization capacity, and related credit-enhancement requirements.