10-Q: Bread Financial Holdings Reports Mixed Q3 Results Amid Strategic Shifts

Bread Financial Holdings saw a decrease in net income for the third quarter of 2024, impacted by strategic credit tightening and expenses related to convertible note repurchases, despite growth in direct-to-consumer deposits.

Summary

• Bread Financial Holdings reported a 5% decrease in total net interest and non-interest income to $983 million for the third quarter of 2024 compared to the same period last year.
• The company's provision for credit losses increased by 21% to $369 million, driven by a $22 million reserve build and higher net principal losses.
• Total non-interest expenses increased by 14% to $574 million, primarily due to a $96 million impact from repurchased convertible notes.
• Adjusted total non-interest expenses, excluding the impact of the convertible notes, decreased by 5% year-over-year.
• Credit sales were down 3% year-over-year to $6.5 billion, reflecting self-moderated consumer spending and strategic credit tightening.
• Average credit card and other loans increased by 1% to $17.8 billion, driven by new brand partner growth.
• Net interest margin decreased to 18.8% from 20.6% in the third quarter of 2023, due to decreased late fees and higher funding costs.
• Direct-to-consumer deposits increased to $7.5 billion, representing 41% of total funding, up from 35% a year ago.
• The company expects 2024 average credit card and other loans to be down low-single digits, and total net interest and non-interest income to be down in the lowto mid-single digits.

Sentiment

Score: 4

Explanation: The document presents mixed results with some positive aspects like growth in DTC deposits and improved capital ratios, but the negative aspects such as decreased income, increased credit losses, and higher expenses outweigh the positives, leading to a slightly negative sentiment.

Positives

• Adjusted total non-interest expenses decreased by 5% year-over-year, indicating improved cost management.
• Direct-to-consumer deposits increased significantly, improving the company's funding mix.
• The Common equity tier 1 capital ratio improved to 13.3%, indicating a stronger balance sheet.
• The company made progress in implementing its mitigation strategy in response to the CFPB's final rule on credit card late fees.
• The company has a diversified partner base across various industries.

Negatives

• Total net interest and non-interest income decreased by 5% year-over-year.
• Provision for credit losses increased by 21% year-over-year.
• Total non-interest expenses increased by 14% year-over-year, primarily due to the impact of repurchased convertible notes.
• Credit sales decreased by 3% year-over-year, reflecting a slowdown in consumer spending and strategic credit tightening.
• Net interest margin decreased to 18.8% from 20.6% in the third quarter of 2023.
• The company expects 2024 average credit card and other loans to be down low-single digits.

Risks

• The company faces risks related to macroeconomic conditions, including inflation, higher interest rates, and potential recessionary pressures.
• There is uncertainty surrounding the final rule on credit card late fees published by the CFPB and its potential impact on the company's business.
• The company's credit performance is subject to the level of future delinquency and write-off rates.
• The company's results are dependent on its brand partners, including their financial performance and reputation.
• The company faces risks related to its level of indebtedness and access to financial markets.
• Pending and future litigation could adversely impact the company's business.
• The company is subject to extensive federal and state laws and regulations, which could change and impact the business.
• The company faces risks related to failures or breaches in its operational or security systems, including cyberattacks.

Future Outlook

The company expects 2024 average credit card and other loans to be down low-single digits, and total net interest and non-interest income to be down in the lowto mid-single digits. Total non-interest expenses, excluding the impact from repurchased convertible notes, are expected to be down mid-single digits. The company also expects a full year net loss rate in the low 8% range.

Management Comments

• The company is confident in its ability to adapt its business to potential regulatory and economic changes while achieving strong financial results.
• The company remains disciplined in its commitment to its capital priorities.

Industry Context

The results reflect a broader trend of consumer spending moderation and strategic credit tightening in the financial services industry. The company's focus on growing direct-to-consumer deposits aligns with a trend of financial institutions seeking more stable and cost-effective funding sources. The company's ongoing efforts to mitigate the impact of the CFPB's final rule on credit card late fees are also reflective of the regulatory challenges facing the industry.

Comparison to Industry Standards

• Bread Financial's net interest margin of 18.8% is lower than some of its peers in the credit card industry, which may indicate higher funding costs or lower yields on assets.
• The company's delinquency rate of 6.4% is within the range of other consumer lenders, but the net loss rate of 7.8% is higher than some industry benchmarks, suggesting a need for improved credit risk management.
• The increase in direct-to-consumer deposits to 41% of total funding is a positive trend, as it reduces reliance on wholesale funding, which can be more volatile and expensive.
• The company's Common equity tier 1 capital ratio of 13.3% is above the regulatory minimum, indicating a strong capital position compared to industry standards.
• The company's efficiency ratio of 58.4% is higher than some of its peers, suggesting a need for further cost optimization.

Legal Proceedings

• The company is involved in various lawsuits, claims, disputes, or potential claims or disputes, arising in the ordinary course of business.
• The company is a defendant in an adversary proceeding filed by the liquidating trustee in LVIs Chapter 11 bankruptcy case, alleging fraudulent transfers.
• The company is a defendant in an action in Delaware Chancery Court, alleging breaches of fiduciary duties in connection with the LVI spinoff.
• The company is a defendant in a lawsuit filed by LoyaltyOne, Co. in Canada, alleging breaches of fiduciary duties in connection with the LVI spinoff.
• The company is a defendant in a putative federal securities class action, concerning disclosures made about LVIs business prior to the spinoff.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the increase in credit losses.
• Employees may be affected by ongoing strategic adjustments in customer care staffing.
• Customers may be impacted by changes in credit card terms and conditions.
• Brand partners may be affected by changes in the company's business strategy and financial performance.
• Creditors may be impacted by changes in the company's credit ratings and access to financial markets.

Next Steps

• The company will continue to implement its mitigation strategy in response to the CFPB's final rule on credit card late fees.
• The company will continue to monitor the ongoing litigation related to the CFPB's final rule.
• The company will continue to focus on growing its direct-to-consumer deposits and reducing its Parent Company unsecured borrowings.
• The company will continue to evaluate opportunities to renew and expand its various sources of liquidity.

Key Dates

Keywords

credit cards, loans, financial services, consumer lending, deposits, securitization, non-interest expenses, net interest margin, credit losses, CFPB, convertible notes, capital adequacy