8-K: Bread Financial Reports Mixed Q3 Results, Repurchases Convertible Notes

Bread Financial's third quarter results were impacted by a strategic decision to repurchase convertible notes, alongside a slight increase in delinquency and net loss rates.

Summary

• Bread Financial announced its third quarter 2024 results, which included a net income of $2 million, or $0.05 per diluted share.
• Adjusted net income was $93 million, or $1.83 per diluted share, excluding a $91 million post-tax impact from repurchased convertible notes.
• The company repurchased $262 million in principal amount of convertible notes, incurring a $96 million pre-tax expense.
• Average loans increased by 1% year-over-year to $17.8 billion, driven by new partner growth and stabilizing consumer spending.
• The common equity tier 1 (CET1) capital ratio increased by 40 basis points to 13.3%.
• Tangible book value per common share increased by $5.02, or 12%, to $47.48.
• The third quarter delinquency rate was 6.4%, and the net loss rate was 7.8%.
• Direct-to-consumer deposits grew 23% year-over-year to $7.5 billion, representing 41% of total funding.
• Total revenue decreased by 5% year-over-year to $983 million, primarily due to lower late fees and reduced merchant discount fees.
• The company's 2024 outlook remains unchanged from the second quarter, assuming no impact from the CFPB late fee rule.
• The company expects average loan growth to be down low single digits, total revenue to be down low to mid-single digits, and the net loss rate to be in the low 8% range for 2024.

Sentiment

Score: 4

Explanation: The sentiment is moderately negative due to the significant impact of the convertible note repurchase on net income and the increase in credit losses. While there are some positive aspects, such as the growth in deposits and the improved capital ratio, the overall tone is cautious due to the challenging macroeconomic environment and regulatory uncertainty.

Positives

• The company's CET1 capital ratio improved, indicating a stronger capital position.
• Tangible book value per share saw a significant increase, enhancing shareholder value.
• Direct-to-consumer deposit growth was strong, improving the funding mix.
• The company successfully launched the Saks Fifth Avenue credit card program.
• Adjusted expenses decreased year-over-year, demonstrating cost management efforts.
• The company extended the maturity of its undrawn $700 million revolving credit facility from June 2026 to October 2028.

Negatives

• Net income was significantly impacted by the repurchase of convertible notes.
• Total revenue decreased by 5% year-over-year.
• The delinquency and net loss rates increased compared to the same quarter last year.
• Income from continuing operations decreased significantly due to the convertible note repurchase and higher credit losses.
• The company anticipates a decrease in average loan growth and total revenue for 2024.

Risks

• The company faces uncertainty regarding the outcome of litigation related to the CFPB's late fee rule.
• Consumer spending is moderating, impacting credit sales and loan growth.
• The company is experiencing higher gross credit losses, which are pressuring revenue and net interest margin.
• Potential interest rate decreases by the Federal Reserve could further pressure net interest income.
• The company is exposed to macroeconomic conditions, including inflation and potential recessionary pressures.

Future Outlook

The company's 2024 outlook remains unchanged, anticipating a decrease in average loan growth and total revenue, with a net loss rate in the low 8% range. The outlook assumes no impact from the CFPB late fee rule due to ongoing litigation.

Management Comments

• Ralph Andretta, president and chief executive officer, stated that the results demonstrated a commitment to growing the business responsibly and opportunistically allocating capital.
• Ralph Andretta also noted that consumer spending patterns have remained consistent with the second quarter, with a shift towards non-discretionary purchases.
• Perry Beberman, executive vice president and chief financial officer, mentioned that the company is proactively managing credit and remains cautiously optimistic for gradual improvement following the broader economic recovery.
• Perry Beberman also stated that the company remains disciplined in its commitment to capital priorities and is confident in its ability to adapt to potential regulatory and economic changes.

Industry Context

The results reflect a challenging environment for consumer finance companies, with moderating consumer spending and increased credit losses. The company's focus on direct-to-consumer deposits and strategic capital allocation aligns with industry trends towards strengthening balance sheets and diversifying funding sources. The ongoing litigation regarding the CFPB late fee rule is a significant industry-wide concern.

Comparison to Industry Standards

• Bread Financial's CET1 ratio of 13.3% is generally considered healthy compared to other financial institutions, although specific benchmarks vary.
• The company's net loss rate of 7.8% is higher than some industry averages, indicating potential credit quality concerns.
• The 23% year-over-year growth in direct-to-consumer deposits is a positive sign, as many financial institutions are focusing on growing their deposit base.
• Compared to companies like Synchrony Financial and Capital One, Bread Financial's results show a similar trend of managing credit risk and adapting to changing consumer behavior.
• The repurchase of convertible notes is a strategic move to reduce debt and dilution risk, which is a common practice among companies with similar capital structures.

Legal Proceedings

• Litigation associated with the CFPB late fee rule is ongoing, and the outcome and timing of the implementation of the rule is still unknown.

Stakeholder Impact

• Shareholders may be concerned about the decrease in net income and the increase in credit losses.
• Employees may be affected by potential cost-cutting measures.
• Customers may experience changes in pricing and fees due to the company's mitigation strategies.
• Creditors may be impacted by the company's debt management activities.

Next Steps

• The company will continue to implement mitigation strategies to offset the potential impact of the CFPB's final rule on credit card late fees.
• The company will continue to monitor consumer spending patterns and proactively manage credit risk.
• The company will focus on driving digital and technology capabilities to enhance product offerings and customer experience.

Key Dates

Keywords

credit cards, financial services, consumer lending, convertible notes, capital ratio, delinquency rate, net loss rate, direct-to-consumer deposits, CFPB, dividends