Bread Financial Holdings, Inc. — Q1 2023 Form 10-Q
Reporting period: Three months ended March 31, 2023; comparisons are generally with Q1 2022. Balance-sheet figures are compared with December 31, 2022. Bread Financial provides credit cards, buy now, pay later products, and savings products, primarily through its bank subsidiaries and brand partners.
Financial performance
| Metric | Q1 2023 | Comparable period / change |
|---|---|---|
| Total net interest and non-interest income | $1.289 billion | $921 million; up 40% |
| Net interest income | $1.117 billion | $989 million; up 13% |
| Net income | $455 million | $210 million |
| Diluted EPS | $9.08 | $4.20 |
| Provision for credit losses | $107 million | $193 million; down 45% |
| Non-interest expenses | $544 million | $426 million; up 28% |
| Net interest margin | 19.0% | 19.4% |
| Operating cash flow | $398 million | $497 million |
Q1 income included a $230 million gain on the sale of the BJ’s Wholesale Club (BJ’s) credit card portfolio. Pretax pre-provision earnings were $745 million, but $515 million excluding that gain. Loan interest income rose 21%, supported by larger average balances and higher yields; total interest expense increased to $218 million from $79 million amid higher deposit and borrowing rates.
Balance sheet, funding and capital
- At March 31, cash and cash equivalents were $3.611 billion; total assets were $21.970 billion, down from $25.407 billion at year-end.
- Credit card and other loans were $18.060 billion gross and $15.837 billion net of a $2.223 billion allowance. Deposits were $13.138 billion; debt issued by consolidated VIEs was $3.015 billion and long-term and other debt was $1.869 billion.
- Cash, cash equivalents and restricted cash decreased $295 million in the quarter. Investing activities provided $3.141 billion, principally from the BJ’s portfolio sale and seasonal loan paydowns; financing activities used $3.834 billion, principally for debt repayments and lower deposits.
- The company reported a 9.1% tangible common equity to tangible assets ratio. Its banks’ combined Common Equity Tier 1 ratio was 20.2% and they exceeded well-capitalized regulatory minimums. The $750 million revolving credit facility was undrawn and available; $531 million of term loans was outstanding, and the company reported compliance with credit agreement covenants.
- Direct-to-consumer deposits were $5.630 billion, 28% of the funding mix. The company said it increased liquidity monitoring amid March banking-sector volatility; most of its liquidity portfolio was held at the Federal Reserve.
Material changes and credit trends
- Credit sales grew 7% to $7.373 billion. Average loans increased 17% year over year to $19.405 billion; period-end loans rose 7% to $18.060 billion. The BJ’s portfolio sale reduced period-end balances and funding needs.
- The BJ’s sale closed in late February for $2.5 billion on a $2.3 billion loan portfolio, producing the $230 million gain and a $235 million reserve release. The allowance fell from $2.464 billion at year-end to $2.223 billion, while the reserve rate rose to 12.3% from 11.5% at year-end.
- Credit performance weakened year over year: the annualized net loss rate was 7.0%, versus 4.8%; delinquency was 5.7%, versus 4.1%. The filing says these measures were affected by the 2022 card-processing transition. Payment rate declined to 15.6% from 17.7%.
- Costs increased in employee compensation, card and processing, information processing, marketing, and depreciation. Management cited expanded hiring, technology modernization, fraud losses, higher mail and statement volumes, and processing-transition costs.
Outlook, commentary and risks
- Management said its 2023 outlook was unchanged from the 2022 Form 10-K. It expects average loans to grow at a mid-single-digit rate and full-year net interest margin to be about 19.2%, consistent with the 2022 full-year rate.
- Excluding the BJ’s gain and a planned $30 million incremental technology and digital investment, management expects adjusted income growth and non-interest expense growth at essentially the same rate. It targets positive full-year operating leverage including the BJ’s gain.
- The outlook assumes a full-year net loss rate of approximately 7%, a reserve rate rising to 12.5%, and a normalized effective tax rate of 25%–26%. Management expects elevated losses in the first half and lower losses in the second half, and assumes Federal Reserve rate increases provide a nominal net-interest-income benefit.
- Management cited persistent inflation, shifting consumer spending toward non-discretionary items, payment rates moving toward pre-pandemic levels, and expected unemployment in the mid-to-upper 4% range by year-end. It warned that macroeconomic conditions, consumer credit deterioration, funding costs or access, partner performance, fraud, processing-transition effects, regulation, and litigation could affect results.
- The company wrote off the remaining $6 million carrying value of its LVI investment, which was valued at zero at March 31. LVI entered bankruptcy proceedings in March. Bread Financial disclosed potential disputes and litigation connected with the LoyaltyOne spinoff, including a putative securities class action, and potential tax consequences if the spinoff’s tax-free treatment is challenged; the company said it believes claims are without merit and intends to defend itself.
Important facts for investors to verify
- How much of Q1 earnings growth reflects recurring operations versus the one-time $230 million BJ’s portfolio-sale gain and related reserve release.
- Whether credit losses, delinquency and the allowance develop in line with management’s 2023 assumptions, accounting for the processing-transition effects noted in the filing.
- Deposit stability, funding costs, refinancing needs and access to conduit, securitization and other financing markets.
- Developments in the LVI bankruptcy, related litigation and the potential tax treatment of the LoyaltyOne spinoff.
- The timing and impact of technology and digital investments, fraud losses, and elevated non-interest expense growth.