Bread Financial Holdings, Inc. — Q1 2024 Form 10-Q
Reporting period: Three months ended March 31, 2024; comparisons are with the three months ended March 31, 2023, unless noted. Bread Financial is a technology-enabled consumer finance company offering private-label and co-brand credit cards, buy-now-pay-later products, and savings products. It reports one segment; interest and fees on loans are its primary revenue source.
Financial performance and condition
- Revenue and earnings: Total net interest and non-interest income was $991 million, down 23%. Net interest income was $1.052 billion, down 6%; total interest income declined 3%, while interest expense rose 14%, primarily from higher deposit costs. Net income was $134 million versus $455 million; diluted EPS was $2.70 versus $9.08. The prior-year comparison included a $230 million gain on the sale of the BJ’s portfolio.
- Credit provision and expenses: Provision for credit losses was $321 million versus $107 million. Non-interest expenses fell 12% to $482 million, mainly reflecting lower card-processing and fraud costs, marketing, and depreciation and amortization. Pretax pre-provision earnings (a non-GAAP measure) declined 32% to $509 million.
- Margins and returns: Net interest margin was 18.7%, down 0.3 percentage points. Loan yield was 27.0%, up 0.4 points. The efficiency ratio increased to 48.6% from 42.2%.
- Loans and credit quality: Credit sales declined 18% to $6.03 billion, attributed mainly to the BJ’s portfolio sale, tighter underwriting and credit-line management, and moderating consumer spending. Average loans fell 4% to $18.55 billion; period-end loans were $18.19 billion, up 1%. The delinquency rate was 6.2%, down from 6.5% at year-end 2023 but up from 5.7% a year earlier. The net loss rate rose to 8.5% from 7.0%; net principal losses were $394 million versus $342 million. The allowance was $2.255 billion and the reserve rate was 12.4% at quarter-end.
- Cash flow and liquidity: Operating cash flow was $447 million versus $398 million. Investing activities provided $720 million, while financing activities used $975 million; cash, cash equivalents and restricted cash increased $192 million. Cash and cash equivalents were $3.789 billion at quarter-end. Deposits were $13.327 billion, including $6.984 billion of direct-to-consumer deposits; the $700 million revolving facility was fully available.
- Debt and capital: Long-term and other debt was $1.294 billion and debt issued by consolidated variable-interest entities was $3.358 billion. In January, the company issued $300 million of 9.750% notes due 2029 and used the proceeds plus $100 million of cash to redeem $400 million of notes due 2026. It reported reducing parent-level debt by $100 million during the quarter. Company CET1 was 12.6% and tangible common equity to tangible assets was 10.6%; both improved year over year. The company said it was in compliance with debt covenants.
Material changes and management commentary
Quarterly earnings fell substantially year over year, partly because the prior-year quarter included the BJ’s portfolio-sale gain. Excluding portfolio-sale gains, pretax pre-provision earnings were down 1%. The company attributed lower sales and average loan balances to the portfolio disposition, strategic credit tightening, and moderated consumer spending. It cited lower early-stage delinquencies but higher gross losses and interest-and-fee reversals. Management described its reserve posture as conservative amid inflation, consumer debt costs, possible unemployment increases, and resumed student-loan payments.
Outlook, risks and contingencies
- 2024 outlook: Average loans are expected to decline by low-single digits versus 2023. Full-year net interest margin is expected below 2023. Total net interest and non-interest income, excluding portfolio-sale gains, is expected to decline in the mid- to high-teens if the CFPB late-fee rule takes effect May 14, 2024; without the rule taking effect this year, management expects a decline of around mid-single digits. Total non-interest expenses are expected to fall by low- to mid-single digits. The full-year net loss rate is expected in the low-8% range, with a peak around 9% in Q2 and a lower rate in the second half. The normalized effective tax rate is expected at 27%–30%.
- CFPB late-fee rule: The rule would reduce the credit-card late-fee safe-harbor amount to $8 and eliminate inflation adjustments. Litigation seeks to block the rule; the filing says timing and outcome are uncertain. Management expects a significant adverse impact if the rule takes effect and is pursuing mitigation, including pricing changes. It cautions that mitigation may not fully offset the impact. Under a hypothetical October 1 effective date, the rule would reduce Q4 2024 total net interest and non-interest income by about 20% versus Q4 2023, in isolation and net of mitigation.
- Legal and regulatory matters: The FDIC consent order to the loan-servicing subsidiary addresses IT governance, business continuity, cloud operations, and third-party oversight following the 2022 processing transition; it contains no monetary penalty. The company says it is working to meet the requirements. Litigation related to the LoyaltyOne spinoff includes claims seeking approximately $750 million plus interest, fees and expenses, and a separate Canadian claim seeking $775 million. The company disputes the allegations; outcomes are uncertain.
- Other risks: Management identifies consumer credit deterioration, macroeconomic weakness, partner concentration or non-renewals, funding-market access and costs, regulatory changes, litigation, and operational or cybersecurity failures among factors that could affect results. The company states its short- and long-term liquidity sources are adequate, while noting that market or regulatory developments could impair access or increase funding costs.
Key facts for investors to verify
- Whether the CFPB late-fee rule takes effect, is enjoined, or is otherwise delayed, and whether mitigation actions preserve revenue and partner relationships.
- Whether delinquency, charge-off, and reserve trends follow management’s forecast, particularly the expected Q2 loss-rate peak and second-half improvement.
- Whether loan growth, net interest margin, and revenue track the 2024 outlook under tighter underwriting and moderated consumer spending.
- Progress toward satisfying the FDIC consent order and any related operating or compliance costs.
- Developments in the LoyaltyOne-related litigation and tax-refund disputes, including potential financial exposure; the filing does not establish a likely outcome.