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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
x QUARTERLY
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended March 31, 2023
or
o TRANSITION
REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
Commission file number 001-15749
_______________________________________
BREAD FINANCIAL HOLDINGS, INC.
(Exact name of registrant as specified in its charter)
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Delaware |
31-1429215 |
(State or other jurisdiction of
incorporation or organization) |
(I.R.S. Employer
Identification No.) |
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3095 Loyalty Circle |
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Columbus, Ohio
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43219 |
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(Address of principal executive offices) |
(Zip Code) |
(614) 729-4000
(Registrant’s telephone number, including area code)
_______________________________________
Securities registered pursuant to Section 12(b) of the
Act:
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Title of each class |
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Trading symbol |
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Name of each exchange on which registered |
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Common stock, par value $0.01 per share |
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BFH |
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New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all
reports required to be filed by Section 13 or 15(d) of the
Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file
such reports), and (2) has been subject to such filing requirements
for the past 90 days.
Yes
x
No
o
Indicate by check mark whether the registrant has submitted
electronically every Interactive Data File required to be submitted
pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter)
during the preceding 12 months (or for such shorter period that the
registrant was required to submit such files).
Yes
x
No
o
Indicate by check mark whether the registrant is a large
accelerated filer, an accelerated filer, a non-accelerated filer, a
smaller reporting company, or an emerging growth company. See
definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company,” and “emerging growth company” in Rule
12b-2 of the Exchange Act.
Large accelerated filer
x
Accelerated filer
o
Non-accelerated filer
o
Smaller reporting company
o
Emerging growth company
o
If an emerging growth company, indicate by check mark if the
registrant has elected not to use the extended transition period
for complying with any new or revised financial accounting
standards provided pursuant to Section 13(a) of the Exchange
Act.
o
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
Yes
o
No
x
As of April 28, 2023, 50,119,706 shares of common stock were
outstanding.
BREAD FINANCIAL HOLDINGS, INC.
INDEX
PART 1: FINANCIAL INFORMATION
Item 2. Management’s Discussion and Analysis of Financial Condition
and Results of Operations (MD&A).
The following discussion should be read in conjunction with the
unaudited Condensed Consolidated Financial Statements and related
notes thereto presented in this quarterly report and the audited
Consolidated Financial Statements and related notes thereto
included in our Annual Report on Form 10-K for the year ended
December 31, 2022, filed with the Securities and Exchange
Commission (the SEC) on February 28, 2023 (the 2022 Form 10-K).
Some of the information contained in this discussion and analysis
constitutes forward-looking statements that involve risks and
uncertainties. Actual results could differ materially from those
discussed in these forward-looking statements. See “Cautionary Note
Regarding Forward-Looking Statements” included elsewhere in this
quarterly report. Factors that could cause or contribute to these
differences include, but are not limited to, those discussed below
and those identified in our other filings with the SEC, including
in the “Risk Factors” and “Management's Discussion and Analysis of
Financial Condition and Results of Operations” sections of our 2022
Form 10-K and this quarterly report.
OVERVIEW
We are a tech-forward financial services company that provides
simple, personalized payment, lending and saving solutions. We
create opportunities for our customers and partners through
digitally enabled choices that offer ease, empowerment, financial
flexibility and exceptional customer experiences. Driven by a
digital-first approach, data insights and white-label technology,
we deliver growth for our partners through a comprehensive product
suite, including private label and co-brand credit cards and buy
now, pay later (BNPL) products such as installment loans and our
“split-pay” offerings. We also offer direct-to-consumer solutions
that give customers more access, choice and freedom through our
branded Bread CashbackTM
American Express®
Credit Card and Bread SavingsTM
products.
Our partner base consists of large consumer-based businesses,
including well-known brands such as (alphabetically) AAA, Academy
Sports + Outdoors, Caesars, Michaels, the NFL, Signet, Ulta and
Victoria’s Secret, as well as small- and medium-sized businesses
(SMBs). Our partner base is well diversified across a broad range
of industries, including specialty apparel, sporting goods, health
and beauty, jewelry, home goods and travel and entertainment. We
believe our comprehensive suite of payment, lending and saving
solutions, along with our related marketing and data and analytics,
offers us a significant competitive advantage with products
relevant across customer segments (Gen Z, Millennial, Gen X and
Baby Boomers). The breadth and quality of our product and service
offerings have enabled us to establish and maintain long-standing
partner relationships. Our primary source of revenue is from
Interest and fees on loans from our various credit card and other
loan products, and to a lesser extent from contractual
relationships with our brand partners.
Throughout this report, unless stated or the context implies
otherwise, the terms “Bread Financial”, the “Company”, “we”, “our”
or “us” refer to Bread Financial Holdings, Inc. and its
subsidiaries on a consolidated basis. References to “Parent
Company” refer to Bread Financial Holdings, Inc. on a parent-only
standalone basis. In addition, in this report, we may refer to the
retailers and other companies with whom we do business as our
“partners”, “brand partners”, or “clients”, provided that the use
of the term “partner”, “partnering” or any similar term does not
mean or imply a formal legal partnership, and is not meant in any
way to alter the terms of Bread Financial’s relationship with any
third parties. We offer our credit products primarily through our
insured depository institution subsidiaries, Comenity Bank and
Comenity Capital Bank, which together are referred to herein as the
“Banks”.
NON-GAAP FINANCIAL MEASURES
We prepare our Consolidated Financial Statements in accordance with
accounting principles generally accepted in the United States of
America (GAAP). However, certain information included herein
constitutes non-GAAP financial measures. Our calculations of
non-GAAP financial measures may differ from the calculations of
similarly titled measures by other companies. In particular,
Pretax pre-provision earnings
(PPNR) is calculated by increasing/decreasing Income from
continuing operations before income taxes by the net
provision/release in Provision for credit losses.
PPNR less gain on portfolio sales
then decreases PPNR by the gain on any portfolio sales in the
period. We use PPNR and PPNR less gain on portfolio sales as
metrics to evaluate our results of operations before income taxes,
excluding the volatility that can occur within Provision for credit
losses and the one-time nature of a gain on the sale of a
portfolio.
Tangible common equity over Tangible assets
(TCE/TA) represents Total stockholders’ equity reduced by Goodwill
and intangible assets, net, (TCE) divided by Tangible assets (TA),
which is Total assets reduced by Goodwill and intangible assets,
net. We use
TCE/TA as a metric to evaluate the Company’s capital adequacy and
estimate its ability to cover potential losses.
Tangible book value per common share
represents TCE divided by shares outstanding. We use Tangible book
value per common share as a metric to estimate the Company’s
potential value in relation to tangible assets per share. We
believe the use of these non-GAAP financial measures provide
additional clarity in understanding our results of operations and
trends. For a reconciliation of these non-GAAP financial measures
to the most directly comparable GAAP measures, please see “Table 6:
Reconciliation of GAAP to Non-GAAP Financial Measures” that
follows.
BUSINESS ENVIRONMENT
This Business Environment section provides an overview of our
results of operations and financial position for the first quarter
of 2023, as well as our related outlook for the remainder of 2023
and certain of the uncertainties associated with achieving that
outlook. This section should be read in conjunction with the other
information included or incorporated by reference in this Form
10-Q, including “Consolidated Results of Operations”, “Risk
Factors” included herein and in our 2022 Form 10-K, and “Cautionary
Note Regarding Forward-Looking Statements”, which provides further
discussion of variances in our results of operations over the
periods of comparison, along with other factors that could impact
future results and the Company achieving its outlook. Unless
otherwise specified, the discussion included herein is for the
three months ended March 31, 2023, compared with the same period in
the prior year.
For the quarter ended March 31, 2023, Credit sales were up 7%
year-over-year to $7.4 billion. Average and End-of-period credit
card and other loans increased 17% and 7%, respectively, driven by
credit sales growth, new brand partner launches, as well as further
moderation in the consumer payment rate; the sale of the BJ's
Wholesale Club (BJ's) portfolio in late-February 2023 also impacted
these figures. Total interest income was up 25% from the first
quarter of 2022, resulting from higher average loan balances
coupled with improved loan yields from rising prime interest rates.
Net interest margin for the first quarter of 2023 was 19.0%,
relative to 19.4% for the first quarter of 2022. Non-interest
income increased $172 million, primarily related to the $230
million Gain on portfolio sale, as well as merchant discount fees
and interchange revenue, offset by impacts from our retailer share
arrangements and customer rewards. Net interest and non-interest
income for the quarter was $1.3 billion, up 40% versus the
first quarter of 2022 resulting from the Gain on portfolio sale,
higher average loan balances, and improved loan
yields.
Provision for credit losses decreased for the quarter ended March
31, 2023, relative to the first quarter of 2022, due to a reserve
release of $235 million in the current period related primarily to
the sale of the BJ's portfolio, offset by higher net principal
losses of $342 million. Our Allowance for credit losses decreased
as of March 31, 2023, relative to December 31, 2022, due primarily
to the reserve release from the sale of the BJ's portfolio.
However, our reserve rate was higher, 12.3% versus 11.5% as of
those same respective dates, as a result of the sale of the BJ’s
portfolio with its higher than average credit quality, seasonality,
and softening economic indicators including the increased cost of
consumer debt, persistent inflation and the possibility of higher
unemployment levels. Consistent with reserve rate impacts, our
Vantage credit risk score distribution mix adjusted downward from
the fourth quarter as a result of the exit of the BJ’s portfolio
and seasonality. Our percentage of Vantage 660+ cardholders remains
above pre-pandemic levels given the strategic decisions we have
made to diversify our product mix and improve our credit mix, with
our co-brand and proprietary card portfolios representing a larger
proportion of our overall portfolio.
Total non-interest expenses increased 28% from the first quarter of
2022. Employee compensation and benefit costs were driven higher by
increased hiring, inclusive of accelerated digital and technology
modernization-related hiring and customer care and collections
staffing. Card and processing expenses were higher, driven by
increased fraud losses and higher direct mail and statement
volumes. Information processing and communications expenses were
higher as a result of the transition of our credit card processing
services and other software licensing expenses.
We also continued strengthening our balance sheet and improving our
capital ratios, including our TCE/TA ratio which was 9.1% as of
March 31, 2023. Direct-to-consumer (DTC) deposits comprised 28% of
our funding mix as of March 31, 2023, further broadening our
funding base.
Our 2023 financial outlook remains unchanged from what we provided
in our 2022 Form 10-K, and continues to assume a more challenging
macroeconomic landscape. We are closely monitoring the impacts of
persistent inflation on consumers and partners, which remain
difficult to predict and therefore could have an impact on our 2023
outlook. We have observed a moderate shift toward non-discretionary
spending with payment rates approaching pre-pandemic levels, and
are expecting the unemployment rate to gradually move to the
mid-to-upper 4% range by year-end 2023. Our outlook
continues to assume that interest rate increases by the Federal
Reserve Board will result in a nominal benefit to Net interest
income.
Our outlook for growth in Average credit card and other loans in
2023, based on our new and renewed brand partner announcements,
visibility into our pipeline, and the current economic outlook, is
in the mid-single digit rate relative to 2022. We expect Total net
interest and non-interest income growth for 2023, excluding the
BJ’s Gain on portfolio sale, to be aligned with growth in Average
credit card and other loans; with a full year 2023 Net interest
margin expected to be consistent with the 2022 full year rate of
19.2%.
In 2023, as a result of ongoing investments in technology
modernization, digital advancement, marketing, and
product
innovation, along with continued portfolio growth, we anticipate an
increase in Total non-interest expenses relative to
2022; although, the pace of growth is projected to decelerate
versus the 2022 rate. We remain focused on delivering positive
operating leverage for the full year (including the BJ's Gain on
portfolio sale), as we manage the pace and timing of our
investments to align with our full year revenue and growth outlook.
Excluding the $230 million BJ's Gain on portfolio sale and a $30
million incremental investment we are opportunistically making by
accelerating our technology and digital transformation, we expect
both adjusted Net interest and non-interest income and Total
non-interest expenses to grow at essentially the same rate for
2023.
Our 2023 financial outlook assumes a Net loss rate of approximately
7%, inclusive of impacts from the 2022 transition of our credit
card processing services as well as continued pressure on
consumers’ ability to pay due to persistent inflation and other
macroeconomic factors, and consequentially our 2023 outlook
reflects our reserve rate increasing to 12.5%. We continue to
closely monitor macroeconomic indicators and the Federal Reserve
Board’s efforts to curb inflation. Specifically with regard to Net
loss rate impacts within 2023, our financial outlook assumes
elevated loss rates during the first half of 2023 due to the
impacts from the 2022 transition of our credit card processing
services, then with lower Net loss rates in the second half of
2023, resulting in the full year Net loss rate of approximately 7%.
Our Net interest margin is also impacted by gross credit losses, in
this case by elevated levels of interest and fee reversals in the
first half of 2023; in the second half of 2023 we anticipate lower
levels of interest and fee reversals, resulting in our outlook for
full year Net interest margin of 19.2%.
In our 2023 financial outlook we also expect our full year
normalized effective tax rate to remain in the range of 25% to 26%,
with quarter-over-quarter variability due to timing of certain
discrete items.
We look forward to building upon our strong results in the first
quarter of 2023 and will continue to execute on our strategic
priorities to build long-term value for our
stakeholders.
CONSOLIDATED RESULTS OF OPERATIONS
The following discussion provides commentary on the variances in
our results of operations for the three months ended March 31,
2023, compared with the same period in the prior year, as presented
in the accompanying tables. This discussion should be read in
conjunction with the discussion under “Business Environment”,
above.
Table 1: Summary of Our Financial Performance
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Three Months Ended March 31, |
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2023 |
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2022 |
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$ Change |
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% Change |
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(Millions, except per share amounts and percentages) |
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Total net interest and non-interest income |
$ |
1,289 |
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$ |
921 |
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368 |
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40 |
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Provision for credit losses |
107 |
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193 |
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(86) |
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(45) |
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
544 |
|
|
426 |
|
|
118 |
|
|
28 |
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
638 |
|
|
302 |
|
|
336 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Provision for income taxes |
183 |
|
|
91 |
|
|
92 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Income from continuing operations |
455 |
|
|
211 |
|
|
244 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income
taxes
(1)
|
— |
|
|
(1) |
|
|
1 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Net income |
455 |
|
|
210 |
|
|
245 |
|
|
nm |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income per diluted share |
$ |
9.08 |
|
|
$ |
4.20 |
|
|
4.88 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Income from continuing operations per diluted share |
$ |
9.08 |
|
|
$ |
4.21 |
|
|
4.87 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Net interest margin
(2)
|
19.0 |
% |
|
19.4 |
% |
|
|
|
(0.4) |
|
|
|
|
|
|
|
|
|
|
Return on average equity
(3)
|
73.0 |
% |
|
38.5 |
% |
|
|
|
34.5 |
|
|
|
|
|
|
|
|
|
|
Effective income tax rate - continuing operations |
28.7 |
% |
|
30.2 |
% |
|
|
|
(1.5) |
|
|
|
|
|
|
|
|
|
__________________________________
(1)On
November 5, 2021, our former LoyaltyOne segment was spun off into
an independent public company Loyalty Ventures Inc. and therefore
is reflected herein as Discontinued Operations.
(2)Net
interest margin represents annualized Net interest income divided
by average Total interest-earning assets. See also
Table 5: Net Interest Margin.
(3)Return
on average equity represents annualized Income from continuing
operations divided by average Total stockholders’
equity.
(nm)
Not meaningful, denoting a variance of 100 percent or
more.
Table 2: Summary of Total Net Interest and Non-interest Income,
After Provision for Credit Losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
2022 |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
(Millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest and fees on loans |
$ |
1,289 |
|
|
$ |
1,066 |
|
|
223 |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
Interest on cash and investment securities |
46 |
|
|
2 |
|
|
44 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Total interest income |
1,335 |
|
|
1,068 |
|
|
267 |
|
|
25 |
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on deposits |
117 |
|
|
34 |
|
|
83 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Interest on borrowings |
101 |
|
|
45 |
|
|
56 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Total interest expense |
218 |
|
|
79 |
|
|
139 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Net interest income |
1,117 |
|
|
989 |
|
|
128 |
|
|
13 |
|
|
|
|
|
|
|
|
|
|
Non-interest income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interchange revenue, net of retailer share arrangements |
(87) |
|
|
(96) |
|
|
9 |
|
|
(9) |
|
|
|
|
|
|
|
|
|
|
Gain on portfolio sale |
230 |
|
|
— |
|
|
230 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Other |
29 |
|
|
28 |
|
|
1 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total non-interest income |
172 |
|
|
(68) |
|
|
240 |
|
|
nm |
|
|
|
|
|
|
|
|
|
Total net interest and non-interest income |
1,289 |
|
|
921 |
|
|
368 |
|
|
40 |
|
|
|
|
|
|
|
|
|
|
Provision for credit losses |
107 |
|
|
193 |
|
|
(86) |
|
|
(45) |
|
|
|
|
|
|
|
|
|
|
Total net interest and non-interest income, after provision for
credit losses |
$ |
1,182 |
|
|
$ |
728 |
|
|
454 |
|
|
63 |
|
|
|
|
|
|
|
|
|
__________________________________
(nm)
Not meaningful, denoting a variance of 100 percent or
more.
Total Net Interest and Non-interest Income, After Provision for
Credit Losses
Interest income:
Total interest income increased for the three months ended March
31, 2023, primarily resulting from Interest and fees on loans. The
increase relative to the prior year was due to an increase in
Average credit card and other loans driven by new originations and
moderation in the consumer payment rate, as well as increases in
finance charge yields of approximately 97 basis
points.
Interest expense:
Total interest expense increased for the three months ended March
31, 2023, due to the following:
•Interest
on deposits
increased $83 million due to higher average interest rates
which increased interest expense by $76 million, as well as
higher average balances which increased interest expense by
$7 million.
•Interest
on borrowings
increased $56 million due to higher average interest rates
which increased funding costs $63 million, partially offset by
lower average borrowings which decreased funding costs by
$7 million.
Non-interest income:
Total non-interest income increased for the three months ended
March 31, 2023, due to the following:
•Interchange
revenue, net of retailer share arrangements,
typically a contra-revenue item for us, decreased for the three
month period driven by increased merchant discount fees and
interchange revenue earned, partially offset by increased brand
partner retailer share arrangements.
•Gain
on portfolio sale
reflects the gain we recognized from our previously announced sale
of the BJ's portfolio in late February 2023.
Provision for credit losses
decreased for the three months ended March 31, 2023, due primarily
to a reserve release of $235 million in the current period,
compared with $6 million in the prior year period, with the release
in the current period primarily related to the sale of the BJ's
portfolio. The reserve releases in both years were offset by higher
net principal
losses of $342 million and $199 million for the three months ended
March 31, 2023 and 2022, respectively. We continue to maintain a
higher reserve rate, 12.3% as of March 31, 2023, due to softening
economic indicators, including the increased cost of consumer debt,
persistent inflation and the possibility of higher unemployment
levels.
Table 3: Summary of Total Non-interest Expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
2022 |
|
$ Change |
|
% Change |
|
|
|
|
|
|
|
|
|
(Millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-interest expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Employee compensation and benefits |
$ |
220 |
|
|
$ |
179 |
|
|
41 |
|
|
23 |
|
|
|
|
|
|
|
|
|
|
Card and processing expenses |
120 |
|
|
82 |
|
|
38 |
|
|
46 |
|
|
|
|
|
|
|
|
|
|
Information processing and communication |
75 |
|
|
56 |
|
|
19 |
|
|
34 |
|
|
|
|
|
|
|
|
|
|
Marketing expenses |
39 |
|
|
31 |
|
|
8 |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
34 |
|
|
21 |
|
|
13 |
|
|
63 |
|
|
|
|
|
|
|
|
|
|
Other |
56 |
|
|
57 |
|
|
(1) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
Total non-interest expenses |
$ |
544 |
|
|
$ |
426 |
|
|
118 |
|
|
28 |
|
|
|
|
|
|
|
|
|
Total Non-interest Expenses
Non-interest expenses:
Total non-interest expenses increased in the three months ended
March 31, 2023, due to the following:
•Employee
compensation and benefits
increased due to increased headcount and contract labor, which was
driven by continued digital and technology modernization-related
hiring and customer care and collections staffing, incentive
compensation, as well as increased retirement
benefits.
•Card
and processing expenses
increased due primarily to increased fraud losses and higher direct
mail and statement volumes.
•Information
processing and communication
increased due to an increase in data processing expense driven by
the transition of our credit card processing services and other
software licensing expenses.
•Marketing
expenses
increased due to increased spending associated with higher sales
and brand partner joint marketing campaigns, as well as on
expanding our new brand, products and DTC offerings.
•Depreciation
and amortization
increased due to increased amortization for developed technology
associated with the Lon Inc. acquisition, which was completed in
December 2020, as well as increased amortization of intangible
assets related to recently acquired portfolios. (See further
discussion of the Lon Inc. acquisition under Note 1, “Description
of Business and Basis of Presentation” to the unaudited Condensed
Consolidated Financial Statements.)
Income Taxes
The Provision for income taxes was $183 million and
$91 million for the three months ended March 31, 2023 and
2022, respectively; the effective tax rate was 28.7% and 30.2% for
the same respective periods. The decrease in the effective tax rate
primarily related to flat nondeductible items year-over-year,
compared with an increase in Income from continuing operations
before income taxes in the current year which was related primarily
to the sale of the BJ's portfolio; resulting in an overall increase
in the Provision for income taxes.
Table 4: Summary Financial Highlights – Continuing
Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Three Months Ended March 31, |
|
|
|
2023 |
|
2022 |
|
% Change |
|
|
|
|
|
|
|
(Millions, except per share amounts and percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
Credit sales |
$ |
7,373 |
|
|
$ |
6,887 |
|
|
7 |
|
|
|
|
|
|
|
|
PPNR
(1)
|
745 |
|
|
495 |
|
|
50 |
|
|
|
|
|
|
|
|
Average credit card and other loans |
19,405 |
|
|
16,650 |
|
|
17 |
|
|
|
|
|
|
|
|
End-of-period credit card and other loans |
18,060 |
|
|
16,843 |
|
|
7 |
|
|
|
|
|
|
|
|
End-of-period direct-to-consumer (retail) deposits |
5,630 |
|
|
3,561 |
|
|
58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Return on average assets
(2)
|
7.7 |
% |
|
4.0 |
% |
|
3.7 |
|
|
|
|
|
|
|
|
Return on average equity
(3)
|
73.0 |
% |
|
38.5 |
% |
|
34.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
(4)
|
19.0 |
% |
|
19.4 |
% |
|
(0.4) |
|
|
|
|
|
|
|
|
Loan yield
(5)
|
26.6 |
% |
|
25.6 |
% |
|
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Efficiency ratio
(6)
|
42.2 |
% |
|
46.2 |
% |
|
(4.0) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity / tangible assets ratio (TCE/TA)
(7)
|
9.1 |
% |
|
7.8 |
% |
|
1.3 |
|
|
|
|
|
|
|
|
Tangible book value per common share
(8)
|
$ |
38.44 |
|
|
$ |
31.87 |
|
|
21 |
|
|
|
|
|
|
|
|
Cash dividend per common share |
$ |
0.21 |
|
|
$ |
0.21 |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payment rate
(9)
|
15.6 |
% |
|
17.7 |
% |
|
(2.1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Delinquency rate
(10)
|
5.7 |
% |
|
4.1 |
% |
|
1.6 |
|
|
|
|
|
|
|
|
Net loss rate
(10)
|
7.0 |
% |
|
4.8 |
% |
|
2.2 |
|
|
|
|
|
|
|
|
Reserve rate |
12.3 |
% |
|
10.8 |
% |
|
1.5 |
|
|
|
|
|
|
|
__________________________________
(1)PPNR
is calculated by increasing/decreasing Income from continuing
operations before income taxes by the net provision/release in
Provision for credit losses. PPNR is a non-GAAP financial measure.
See “Non-GAAP Financial Measures” and
Table 6: Reconciliation of GAAP to Non-GAAP Financial
Measures.
(2)Return
on average assets represents annualized Income from continuing
operations divided by average Total assets.
(3)Return
on average equity represents annualized Income from continuing
operations divided by average Total stockholders’
equity.
(4)Net
interest margin represents annualized Net interest income divided
by average Total interest-earning assets. See also
Table 5: Net Interest Margin.
(5)Loan
yield represents annualized Interest and fees on loans divided by
Average credit card and other loans.
(6)Efficiency
ratio represents Total non-interest expenses divided by Total net
interest and non-interest income.
(7)Tangible
common equity (TCE) represents Total stockholders’ equity reduced
by Goodwill and intangible assets, net. Tangible assets (TA)
represents Total assets reduced by Goodwill and intangible assets,
net. TCE/TA is a non-GAAP financial measure. See “Non-GAAP
Financial Measures” and
Table 6: Reconciliation of GAAP to Non-GAAP Financial
Measures.
(8)Tangible
book value per common share represents TCE divided by shares
outstanding and is a non-GAAP financial measure. See “Non-GAAP
Financial Measures” and
Table 6: Reconciliation of GAAP to Non-GAAP Financial
Measures.
(9)Payment
rate represents consumer payments during the last month of the
period, divided by the beginning-of-month Credit card and other
loans, including held for sale in applicable periods.
(10)Delinquency
rate represents outstanding balances that are contractually
delinquent (i.e., balances greater than 30 days past due) as of the
end of the period, divided by the outstanding principal amount of
Credit cards and other loans as of the same period-end.
Net loss rate, an annualized rate, represents net principal losses
for the period divided by the Average credit card and other loans
for the same period, with that Average being the average balance of
the loans at the beginning and end of each month, averaged over the
period. Both rates as of or for the three months ended March 31,
2023 were impacted by the transition of our credit card processing
services.
Table 5: Net Interest Margin
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2023 |
|
Three Months Ended March 31, 2022 |
|
Average Balance |
|
Interest Income / Expense |
|
Average Yield / Rate |
|
Average Balance |
|
Interest Income / Expense |
|
Average Yield / Rate |
|
(Millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
Cash and investment securities |
$ |
4,087 |
|
|
$ |
46 |
|
|
4.49 |
% |
|
$ |
3,794 |
|
|
$ |
2 |
|
|
0.26 |
% |
|
Credit card and other loans |
19,405 |
|
|
1,289 |
|
|
26.57 |
% |
|
16,650 |
|
|
1,066 |
|
|
25.60 |
% |
|
Total interest-earning assets |
23,492 |
|
|
1,335 |
|
|
22.73 |
% |
|
20,444 |
|
|
1,068 |
|
|
20.90 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Direct-to-consumer (retail) deposits |
5,559 |
|
|
49 |
|
|
3.46 |
% |
|
3,278 |
|
|
6 |
|
|
0.79 |
% |
|
Wholesale deposits |
7,866 |
|
|
68 |
|
|
3.48 |
% |
|
7,523 |
|
|
28 |
|
|
1.47 |
% |
|
Interest-bearing deposits |
13,425 |
|
|
117 |
|
|
3.47 |
% |
|
10,801 |
|
|
34 |
|
|
1.26 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Secured borrowings |
4,565 |
|
|
70 |
|
|
6.20 |
% |
|
4,994 |
|
|
20 |
|
|
1.59 |
% |
|
Unsecured borrowings |
1,914 |
|
|
31 |
|
|
6.40 |
% |
|
2,004 |
|
|
25 |
|
|
4.97 |
% |
|
Interest-bearing borrowings |
6,479 |
|
|
101 |
|
|
6.25 |
% |
|
6,998 |
|
|
45 |
|
|
2.56 |
% |
|
Total interest-bearing liabilities |
19,904 |
|
|
218 |
|
|
4.38 |
% |
|
17,799 |
|
|
79 |
|
|
1.77 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest income |
|
|
$ |
1,117 |
|
|
|
|
|
|
$ |
989 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net interest margin
(1)
|
|
|
19.0 |
% |
|
|
|
|
|
19.4 |
% |
|
|
__________________________________
(1)Net
interest margin represents annualized Net interest income divided
by average Total interest-earning assets.
Table 6: Reconciliation of GAAP to Non-GAAP Financial
Measures
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of or for the Three Months Ended March 31, |
|
|
|
2023 |
|
2022 |
|
% Change |
|
|
|
|
|
|
|
(Millions, except percentages) |
|
|
|
|
|
|
|
|
|
|
|
|
Pretax pre-provision earnings (PPNR) |
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes |
$ |
638 |
|
|
$ |
302 |
|
|
nm |
|
|
|
|
|
|
|
Provision for credit losses |
107 |
|
|
193 |
|
|
(45) |
|
|
|
|
|
|
|
|
Pretax pre-provision earnings (PPNR) |
$ |
745 |
|
|
$ |
495 |
|
|
50 |
|
|
|
|
|
|
|
|
Less: Gain on portfolio sale |
$ |
(230) |
|
|
$ |
— |
|
|
nm |
|
|
|
|
|
|
|
Pretax pre-provision earnings less gain on portfolio
sale |
$ |
515 |
|
|
$ |
495 |
|
|
4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible common equity (TCE) |
|
|
|
|
|
|
|
|
|
|
|
|
Total stockholders' equity |
2,716 |
|
|
2,268 |
|
|
20 |
|
|
|
|
|
|
|
|
Less: Goodwill and intangible assets, net |
(790) |
|
|
(682) |
|
|
16 |
|
|
|
|
|
|
|
|
Tangible common equity (TCE) |
$ |
1,926 |
|
|
$ |
1,586 |
|
|
21 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Tangible assets (TA) |
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
21,970 |
|
|
20,938 |
|
|
5 |
|
|
|
|
|
|
|
|
Less: Goodwill and intangible assets, net |
(790) |
|
|
(682) |
|
|
16 |
|
|
|
|
|
|
|
|
Tangible assets (TA) |
$ |
21,180 |
|
|
$ |
20,256 |
|
|
5 |
|
|
|
|
|
|
|
__________________________________
(nm)
Not meaningful, denoting a variance of 100 percent or
more.
ASSET QUALITY
Given the nature of our business, the credit quality of our assets,
in particular our Credit card and other loans, is a key determinant
underlying our ongoing financial performance and overall financial
condition. When it comes to our Credit card and other loans
portfolio, we closely monitor Delinquency rates and Net principal
loss rates which reflect, among other factors, our underwriting,
the inherent credit risk in our portfolio, the success of our
collection and recovery efforts, and more broadly, the general
macroeconomic conditions.
Delinquencies:
An account is contractually delinquent if we do not receive the
minimum payment due by the specified due date. Our policy is to
continue to accrue interest and fee income on all accounts, except
in limited circumstances, until the balance and all related
interest and fees are paid or charged-off. After an account becomes
30 days past due, a proprietary collection scoring algorithm
automatically scores the risk of the account becoming further
delinquent; based upon the level of risk indicated, a collection
strategy is deployed. If after exhausting all in-house collection
efforts we are unable to collect on the account, we may engage
collection agencies or outside attorneys to continue those efforts,
or sell the charged-off balances.
The Delinquency rate is calculated by dividing outstanding
principal balances that are contractually delinquent (i.e.,
balances greater than 30 days past due) as of the end of the
period, by the outstanding principal amount of Credit cards and
other loans as of the same period-end.
The following table presents the delinquency trends on our Credit
card and other loans portfolio based on the principal balances
outstanding as of March 31, 2023 and December 31,
2022:
Table 7: Delinquency Trends on Credit Card and Other
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2023 |
|
% of
Total |
|
December 31,
2022 |
|
% of
Total |
|
(Millions, except percentages) |
|
|
|
|
|
|
|
|
Credit card and other loans outstanding ─ principal |
$ |
16,860 |
|
|
100.0 |
% |
|
$ |
20,107 |
|
|
100.0 |
% |
|
Outstanding balances contractually delinquent
(1)
|
|
|
|
|
|
|
|
|
31 to 60 days |
$ |
262 |
|
|
1.6 |
% |
|
$ |
366 |
|
|
1.8 |
% |
|
61 to 90 days |
212 |
|
|
1.2 |
|
|
231 |
|
|
1.2 |
|
|
91 or more days |
489 |
|
|
2.9 |
|
|
515 |
|
|
2.6 |
|
|
Total |
$ |
963 |
|
|
5.7 |
% |
|
$ |
1,112 |
|
|
5.5 |
% |
__________________________________
(1)As
of March 31, 2023 and December 31, 2022 the Outstanding
balances contractually delinquent, and the related % of Total
(i.e., the Delinquency rate), were impacted by the transition of
our credit card processing services.
As part of our collections strategy, we may offer temporary, short
term (six-months or less) forbearance programs in order to improve
the likelihood of collections and meet the needs of our customers.
Our modifications for customers who have requested assistance and
meet certain qualifying requirements, come in the form of reduced
or deferred payment requirements, interest rate reductions and late
fee waivers. We do not offer programs involving the forgiveness of
principal. These temporary loan modifications may assist in cases
where we believe the customer will recover from the short-term
hardship and resume scheduled payments. Under these forbearance
programs, those accounts receiving relief may not advance to the
next delinquency cycle, including charge-off, in the same time
frame that would have occurred had the relief not been granted. We
evaluate our forbearance programs to determine if they represent a
more than insignificant delay in payment, in which case they would
then be considered a modification of loans to borrowers
experiencing financial difficulty (Loan Modifications). For
additional information, see Note 2 “Credit Card and Other Loans –
Modified Credit Card Loans”, to the Consolidated Financial
Statements.
Net Principal Losses:
Our net principal losses include the principal amount of losses
that are deemed uncollectible, less recoveries, and exclude
charged-off interest, fees and third-party fraud losses (including
synthetic fraud). Charged-off interest and fees reduce Interest and
fees on loans while third-party fraud losses are recorded in Card
and processing expenses. Credit card loans, including unpaid
interest and fees, are generally charged-off in the month during
which an account becomes 180 days past due. BNPL loans such as our
installment loans and our “split-pay” offerings, including unpaid
interest, are generally charged-off when a loan becomes 120 days
past due. However, in the case of a customer bankruptcy or death,
Credit card and other loans, including unpaid interest and fees, as
applicable, are charged-off in each month subsequent to 60 days
after receipt of the notification of the bankruptcy or death, but
in any case no later than 180 days past due for Credit card loans
and 120 days past due for BNPL loans.
The net principal loss rate is calculated by dividing net principal
losses for the period by the Average credit card and other loans
for the same period. Average credit card and other loans represent
the average balance of the loans at the beginning and end of each
month, averaged over the periods indicated. The following table
presents our net principal losses for the periods
specified:
Table 8: Net Principal Losses on Credit Card and Other
Loans
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
2022 |
|
|
|
|
|
(Millions, except percentages) |
|
|
|
|
|
|
|
|
Average credit card and other loans |
$ |
19,405 |
|
|
$ |
16,650 |
|
|
|
|
|
|
Net principal losses |
342 |
|
|
199 |
|
|
|
|
|
|
Net principal losses as a percentage of average credit card and
other loans
(1)
|
7.0 |
% |
|
4.8 |
% |
|
|
|
|
__________________________________
(1)Net
principal losses as a percentage of Average credit card and other
loans for the three months ended March 31, 2023 was impacted by the
transition of our credit card processing services.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
We maintain a strong focus on liquidity and capital. Our funding,
liquidity and capital policies are designed to ensure that our
business has the liquidity and capital resources necessary to
support our daily operations, our business growth, our credit
ratings related to our secured financings, and meet our regulatory
and policy requirements, including capital and leverage ratio
requirements applicable to Comenity Bank (CB) and Comenity Capital
bank (CCB) under Federal Deposit Insurance Corporation (FDIC)
regulations, in a cost effective and prudent manner through both
expected and unexpected market environments.
Our primary sources of liquidity include cash generated from
operating activities, our Credit Agreement, issuances of debt
securities, including through our securitization programs, and
deposits with the Banks, in addition to our ongoing efforts to
renew and expand our various sources of liquidity.
Our primary uses of liquidity are for ongoing and varied lending
operations, scheduled payments of principal and interest on our
debt, operational expenses, capital expenditures, including digital
and product innovation and technology enhancements, and
dividends.
We may from time to time seek to retire or purchase our outstanding
debt through cash purchases or exchanges for other securities, in
open market purchases, privately negotiated transactions or
otherwise. Such repurchases or exchanges would depend on prevailing
market conditions, our liquidity requirements, contractual
restrictions and other factors, and may be funded through the
issuance of debt securities. The amounts involved may be
material.
We will also need additional financing in the future to repay or
refinance our existing debt at or prior to maturity, and to fund
our growth. Given the maturities of our current outstanding debt
and the current macroeconomic conditions, it is possible that we
will be required to repay, extend or refinance some or all of our
maturing debt in volatile and/or unfavorable markets.
Because of the alternatives available to us as discussed above, we
believe our short-term and long-term sources of liquidity are
adequate to fund not only our current operations, but also our
near-term and long-term funding requirements including dividend
payments, debt service obligations and repayment of debt maturities
and other amounts that may ultimately be paid in connection with
contingencies. However, the adequacy of our liquidity could be
impacted by various factors, including macroeconomic conditions and
volatility in the financial and capital markets, limiting our
access to or increasing our cost of capital, which could make
capital unavailable, or available but on terms that are unfavorable
to us. These factors could significantly reduce our financial
flexibility and cause us to contract or not grow our business,
which could have a material adverse effect on our results of
operations and financial condition.
In early March 2023, in response to banking industry developments
and increased financial sector volatility, we undertook enhanced
daily monitoring of our liquidity and funding positions, and
provided multiple daily updates to our Boards of
Directors at both the Bread Financial and Bank-levels and
regulators. As a practice, we maintain a significant majority of
our liquidity portfolio on deposit within the Federal Reserve
banking system, we also have a small investment securities
portfolio, classified as available-for-sale, which we hold in
relation to the Community Reinvestment Act; we do not have any
investment securities classified as held-to-maturity. In addition,
executive management increased the frequency of monitoring our DTC
deposit balances and the mix of insured versus uninsured deposits.
We experienced both higher inflows and a modest increase in
outflows of DTC deposits from early March, with the net result
being higher DTC deposit balances as of March 31, 2023, compared
with both December 31, 2022, and with early March
2023.
Funding Sources
Credit Agreement
Our Credit Agreement is dated June 14, 2017, as amended, and
matures July 1, 2024. Our Parent Company, as borrower, and certain
of our non-Bank wholly-owned subsidiaries, as guarantors, are party
to our Credit Agreement, along with various agents and lenders,
including domestic money center, regional and international banks.
As of March 31, 2023, we had $531 million aggregate principal
amount of term loans outstanding and a $750 million revolving
line of credit under the Credit Agreement. As of March 31, 2023,
all $750 million remained available for future borrowings
under our revolving line of credit, as we had no borrowings
outstanding thereunder.
The Credit Agreement includes various restrictive financial and
non-financial covenants. If we do not comply with these covenants,
the maturity of amounts outstanding under the Credit Agreement may
be accelerated and become payable, and the associated commitments
may be terminated. As of March 31, 2023, we were in compliance with
all financial covenants under the Credit Agreement.
Deposits
We utilize a variety of deposit products to finance our operating
activities, including funding for our non-securitized credit card
and other loans, and to fund the securitization enhancement
requirements of the Banks. We offer both DTC retail deposit
products as well as deposits sourced through contractual
arrangements with various financial counterparties (often referred
to as wholesale, including brokered deposits). Across both our
retail and wholesale deposits, the Banks offer various non-maturity
deposit products that are generally redeemable on demand by the
customer, and as such have no scheduled maturity date. The Banks
also issue certificates of deposit with scheduled maturity dates
ranging between April, 2023 and March, 2028, in denominations of at
least $1,000, on which interest is paid either monthly or at
maturity.
The following table summarizes our retail and wholesale deposit
products as of March 31, 2023 and December 31, 2022, by type
and associated attributes:
Table 9: Deposits
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2023 |
|
December 31,
2022 |
|
(Millions, except percentages) |
|
|
|
|
Deposits |
|
|
|
|
Direct-to-consumer (retail) |
$ |
5,630 |
|
|
$ |
5,466 |
|
|
Wholesale |
7,472 |
|
|
8,321 |
|
|
Total deposits |
$ |
13,102 |
|
|
$ |
13,787 |
|
|
|
|
|
|
|
Non-maturity deposit products |
|
|
|
|
Non-maturity deposits |
$ |
6,598 |
|
|
$ |
6,736 |
|
|
Interest rate range |
0.70% - 4.99% |
|
0.70% - 4.70% |
|
Weighted-average interest rate |
4.12 |
% |
|
3.57 |
% |
|
|
|
|
|
|
Certificates of deposit |
|
|
|
|
Certificates of deposit |
$ |
6,504 |
|
|
$ |
7,051 |
|
|
Interest rate range |
0.40% - 5.25% |
|
0.40% - 4.95% |
|
Weighted-average interest rate |
3.33 |
% |
|
3.11 |
% |
Overall, we continue to improve our funding mix through actions
taken to grow our DTC deposits and reduce our Parent Company
unsecured borrowings, while maintaining the flexibility of secured,
unsecured, and wholesale funding. Typical seasonality of Credit
card and other loan balance paydowns in the first quarter of 2023
combined with the sale of the BJ's portfolio, reduced our funding
requirements by over $3 billion from year-end 2022. As a result, we
opportunistically reduced our wholesale and brokered deposits and
paid down a large portion of our secured conduit line balances,
discussed further below.
Conduit Facilities and Securitization Programs
We sell the majority of the credit card loans originated by the
Banks to certain of our master trusts (the Trusts). These
securitization programs are a principal vehicle through which we
finance the Banks’ credit card loans. For this purpose, we use a
combination of public term asset-backed notes, and private conduit
facilities (the Conduit Facilities) with a consortium of lenders,
including domestic money center, regional and international
banks.
As of December 31, 2022, total capacity under our Conduit
Facilities was $6.5 billion, of which $6.1 billion had
been drawn down and was included in Debt issued by consolidated
variable interest entities (VIEs) in the Consolidated Balance
Sheet.
During the first quarter of 2023, we made a number of amendments to
our Conduit Facilities in the ordinary course of business. In
February 2023, the World Financial Network Credit Card Master Note
Trust amended its 2009-VFN Conduit Facility, decreasing the
capacity from $2.8 billion to $2.7 billion and extending
the maturity to October 2024. Also in February 2023, in connection
with the sale of the BJ's portfolio, the World Financial Capital
Master Note Trust amended its 2009-VFN Conduit Facility removing
the assets related to the BJ’s portfolio. In March 2023, CCB repaid
the Comenity Capital Asset Securitization Trust’s 2022-VFN Conduit
Facility and terminated the related lending commitment, decreasing
capacity by $1.0 billion. However, the structure of the applicable
Trust did not change, including the Trust assets, providing for the
option to easily pledge those assets in the future.
As of March 31, 2023, total capacity under our Conduit Facilities
was $5.4 billion, of which $3.0 billion had been drawn
and included in Debt issued by consolidated variable interest
entities in the Consolidated Balance Sheet.
In April 2023, the World Financial Capital Master Note Trust
amended its 2009-VFN Conduit Facility, decreasing the capacity from
$2.5 billion to $2.3 billion and extending the maturity to February
2025.
As of March 31, 2023, we had approximately $12.2 billion of
securitized credit card loans. Securitizations require credit
enhancements in the form of cash, spread deposits, additional loans
and subordinated classes. The credit enhancement is principally
based on the outstanding balances of the series issued by the
Trusts and by the performance of the credit card loans in the
Trusts.
The following table shows the maturities of borrowing commitments
as of March 31, 2023, for the Trusts by year:
Table 10: Borrowing Commitment Maturities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2023 |
|
2024 |
|
Thereafter |
|
Total |
|
(Millions) |
|
|
|
|
|
|
|
|
Conduit facilities
(1)
|
2,775 |
|
|
2,650 |
|
|
— |
|
|
5,425 |
|
|
Total
(2)
|
$ |
2,775 |
|
|
$ |
2,650 |
|
|
$ |
— |
|
|
$ |
5,425 |
|
__________________________________
(1)Amount
represents borrowing capacity, not outstanding
borrowings.
(2)Total
amounts do not include $1.1 billion of debt issued by the
Trusts, which was retained by us as a credit enhancement and
therefore has been eliminated from the Total.
Early amortization events as defined within each asset-backed
securitization transaction are generally driven by asset
performance. We do not believe it is reasonably likely that an
early amortization event will occur due to asset performance.
However, if an early amortization event were declared for a Trust,
the trustee of the particular Trust would retain the interest in
the loans along with the excess spread that would otherwise be paid
to our Bank subsidiary until the investors were fully repaid. The
occurrence of an early amortization event would significantly limit
or negate our ability to securitize additional credit card
loans.
We have secured and continue to secure the necessary commitments to
fund our Credit card and other loans. However, certain of these
commitments are short-term in nature and subject to renewal. There
is no guarantee that these funding sources, when they mature, will
be renewed on similar terms, or at all, as they are dependent on
the availability of the asset-backed securitization and deposit
markets at the time.
Regulation RR (Credit Risk Retention) adopted by the FDIC, the SEC,
the Federal Reserve and certain other federal regulators mandates a
minimum five percent risk retention requirement for
securitizations. Such risk retention requirements may limit our
liquidity by restricting the amount of asset-backed securities we
are able to issue or affecting the timing of future issuances of
asset-backed securities. We satisfy such risk retention
requirements by maintaining a seller’s interest calculated in
accordance with Regulation RR.
Stock Repurchase Programs
During the three months ended March 31, 2023, our Board of
Directors did not approve any new stock repurchase programs, and,
except as disclosed in Part II, Item 2. “Unregistered Sales of
Equity Securities and Use of Proceeds” of this report, we did not
repurchase any shares of outstanding common stock during the
period.
Dividends
During the three months ended March 31, 2023, we paid
$11 million in dividends to holders of our common
stock.
On April 27, 2023, our Board of Directors declared a quarterly cash
dividend of $0.21 per share on our common stock, payable on June
16, 2023, to stockholders of record at the close of business on May
12, 2023.
Contractual Obligations
In the normal course of business, we enter into various contractual
obligations that may require future cash payments, the vast
majority of which relate to deposits, debt issued by consolidated
VIEs, long-term and other debt and operating leases.
We believe that we will have access to sufficient resources to meet
these commitments.
Cash Flows
The table below summarizes our cash flow activity for the periods
indicated, followed by a discussion of the variance drivers
impacting our Operating, Investing and Financing
activities.
Table 11: Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
2023 |
|
2022 |
|
(Millions) |
|
|
|
|
Total cash provided by (used in) |
|
|
|
|
Operating activities |
$ |
398 |
|
|
$ |
497 |
|
|
Investing activities |
3,141 |
|
|
310 |
|
|
Financing activities |
(3,834) |
|
|
(1,096) |
|
|
|
|
|
|
Net (decrease) increase in cash, cash equivalents and restricted
cash |
$ |
(295) |
|
|
$ |
(289) |
|
Cash Flows from Operating Activities
primarily include net income adjusted for (i) non-cash items
included in net income, such as provision for credit losses,
depreciation and amortization, deferred taxes and other non-cash
items, and (ii) changes in the balances of operating assets and
liabilities, which can fluctuate in the normal course of business
due to the amount and timing of payments. We generated cash flows
from operating activities of $398 million and $497 million for the
three months ended March 31, 2023 and 2022, respectively. For the
three months ended March 31, 2023, the net cash provided by
operating activities was primarily driven by cash generated from
net income for the period after adjusting for the Provision for
credit losses and the Gain on portfolio sale. For the three months
ended March 31, 2022, the net cash provided by operating
activities was primarily driven by cash generated from net income
for the period, and increases in accounts payable and other
liabilities.
Cash Flows from Investing Activities
primarily include changes in Credit card and other loans. Cash
provided by investing activities was $3,141 million and $310
million for the three months ended March 31, 2023 and 2022,
respectively. For the three months ended March 31, 2023, the net
cash provided by investing activities was primarily due to the sale
of the BJ's portfolio and the seasonal paydowns of Credit card and
other loans. For the three months ended March 31, 2022, the
net cash provided by investing activities was due to the seasonal
paydowns of Credit card and other loans.
Cash Flows from Financing Activities
primarily include changes in deposits and long-term debt. Cash used
in financing activities was $3,834 million and $1,096 million for
the three months ended March 31, 2023 and 2022, respectively. For
the three months ended March 31, 2023 and 2022, the net cash used
in financing activities was primarily driven by net repayments of
asset-backed term notes and debt issued by consolidated variable
interest entities (securitizations), and lower
deposits.
INFLATION AND SEASONALITY
Although we cannot precisely determine the impact of inflation on
our operations, we have generally sought to rely on operating
efficiencies from scale, technology modernization and digital
advancement, and expansion in lower cost jurisdictions (in select
circumstances) to offset increased costs of employee compensation
and other operating expenses impacted by inflation. We also
recognize that a customer’s ability and willingness to repay us has
been negatively impacted by factors such as inflation, which
results in greater delinquencies that could lead to greater credit
losses, as reflected in our increased Allowance for credit losses.
If the efforts to control inflation in the U.S. and globally are
not successful and inflationary pressures continue to persist, they
could magnify the slowdown in the domestic and global economies and
increase the risk of a recession, which may adversely impact our
business, results of operations and financial
condition.
With respect to seasonality, our revenues, earnings and cash flows
are affected by increased consumer spending patterns leading up to
and including the holiday shopping period in the fourth quarter
and, to a lesser extent, during the first quarter as Credit card
and other loans are paid down.
LEGISLATIVE AND REGULATORY MATTERS
CB is subject to various regulatory capital requirements
administered by the State of Delaware and the FDIC. CCB is also
subject to various regulatory capital requirements administered by
the FDIC, as well as the State of Utah. Failure to meet minimum
capital requirements can trigger certain mandatory and possibly
additional discretionary actions by our regulators. Under capital
adequacy guidelines and the regulatory framework for prompt
corrective action, both Banks must meet specific capital guidelines
that involve quantitative measures of their assets and liabilities
as calculated under regulatory accounting practices. The capital
amounts and classification are also subject to qualitative
judgments by these regulators about components, risk weightings and
other factors. In addition, both Banks are limited in the amounts
they can pay as dividends to the Parent Company. For additional
information about legislative and regulatory matters impacting us,
see “Business–Supervision and Regulation” under Part I of our 2022
Form 10-K.
Quantitative measures, established by regulations to ensure capital
adequacy, require the Banks to maintain minimum amounts and ratios
of Tier 1 capital to average assets, and Common equity tier 1, Tier
1 capital and Total capital, all to risk weighted assets. Failure
to meet these minimum capital requirements can result in certain
mandatory, and possibly additional discretionary actions by the
Banks’ regulators that if undertaken, could have a direct material
effect on CB’s and/or CCB’s operating activities, as well as our
operating activities. Based on these regulations, as of March 31,
2023 and 2022, each Bank met all capital requirements to which it
was subject, and maintained capital ratios in excess of the
minimums required to qualify as well capitalized. The Banks seek to
maintain capital levels and ratios in excess of the minimum
regulatory requirements inclusive of the 2.5% Capital Conservation
Buffer. The actual capital ratios and minimum ratios for each Bank,
as well as the Combined Banks, are as follows as of March 31,
2023:
Table 12: Capital Ratios
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Actual Ratio |
|
Minimum Ratio for
Capital Adequacy
Purposes |
|
Minimum Ratio to be
Well Capitalized under
Prompt Corrective
Action Provisions |
|
Comenity Bank |
|
|
|
|
|
|
Common Equity Tier 1 capital ratio
(1)
|
18.3 |
% |
|
4.5 |
% |
|
6.5 |
% |
|
Tier 1 capital ratio
(2)
|
18.3 |
|
|
6.0 |
|
|
8.0 |
|
|
Total Risk-based capital ratio
(3)
|
19.7 |
|
|
8.0 |
|
|
10.0 |
|
|
Tier 1 Leverage capital ratio
(4)
|
15.7 |
|
|
4.0 |
|
|
5.0 |
|
|
|
|
|
|
|
|
|
Comenity Capital Bank |
|
|
|
|
|
|
Common Equity Tier 1 capital ratio
(1)
|
21.7 |
% |
|
4.5 |
% |
|
6.5 |
% |
|
Tier 1 capital ratio
(2)
|
21.7 |
|
|
6.0 |
|
|
8.0 |
|
|
Total Risk-based capital ratio
(3)
|
23.0 |
|
|
8.0 |
|
|
10.0 |
|
|
Tier 1 Leverage capital ratio
(4)
|
16.4 |
|
|
4.0 |
|
|
5.0 |
|
|
|
|
|
|
|
|
|
Combined Banks |
|
|
|
|
|
|
Common Equity Tier 1 capital ratio
(1)
|
20.2 |
% |
|
4.5 |
% |
|
6.5 |
% |
|
Tier 1 capital ratio
(2)
|
20.2 |
|
|
6.0 |
|
|
8.0 |
|
|
Total Risk-based capital ratio
(3)
|
21.6 |
|
|
8.0 |
|
|
10.0 |
|
|
Tier 1 Leverage capital ratio
(4)
|
16.1 |
|
|
4.0 |
|
|
5.0 |
|
__________________________________
(1)The
Common Equity Tier 1 capital ratio represents common equity tier 1
capital divided by total risk-weighted assets.
(2)The
Tier 1 capital ratio represents tier 1 capital divided by total
risk-weighted assets.
(3)The
Total Risk-based capital ratio represents total capital divided by
total risk-weighted assets.
(4)The
Tier 1 Leverage capital ratio represents tier 1 capital divided by
total average assets, after certain adjustments.
The Banks adopted the option provided by the interim final rule
issued by joint federal bank regulatory agencies, which largely
delayed the effects of CECL on their regulatory capital for two
years, until January 1, 2022, after which the effects are phased-in
over a three-year period through December 31, 2024. Under the
interim final rule, the amount of adjustments
to regulatory capital deferred until the phase-in period includes
both the initial impact of our adoption of CECL as of January 1,
2020 and 25% of subsequent changes in our Allowance for credit
losses during each quarter of the two-year period ended December
31, 2021. In accordance with the interim final rule, we began to
ratably phase-in these effects on January 1, 2022.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no significant changes to our critical accounting
policies and estimates from the information provided in Item 7,
“Management’s Discussion and Analysis of Financial Condition and
Results of Operations (MD&A)” included in our 2022 Form
10-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
See the “Recently Issued Accounting Standards” under Note 1,
“Description of Business and Basis of Presentation” to the
unaudited Condensed Consolidated Financial Statements.
Cautionary Note Regarding Forward-Looking Statements
This Form 10-Q and the documents incorporated by reference herein
contain forward-looking statements within the meaning of Section
27A of the Securities Act of 1933, as amended, and Section 21E of
the Securities Exchange Act of 1934, as amended. Forward-looking
statements give our expectations or forecasts of future events and
can generally be identified by the use of words such as “believe,”
“expect,” “anticipate,” “estimate,” “intend,” “project,” “plan,”
“likely,” “may,” “should” or other words or phrases of similar
import. Similarly, statements that describe our business strategy,
outlook, objectives, plans, intentions or goals also are
forward-looking statements. Examples of forward-looking statements
include, but are not limited to, statements we make regarding, and
the guidance we give with respect to, our anticipated operating or
financial results, future financial performance and outlook, future
dividend declarations and future economic conditions.
We believe that our expectations are based on reasonable
assumptions. Forward-looking statements, however, are subject to a
number of risks and uncertainties that are difficult to predict
and, in many cases, beyond our control. Accordingly, our actual
results could differ materially from the projections, anticipated
results or other expectations expressed in this report, and no
assurances can be given that our expectations will prove to have
been correct. Factors that could cause the outcomes to differ
materially include, but are not limited to, the
following:
•macroeconomic
conditions, including market conditions, inflation, rising interest
rates, unemployment levels and the increased probability of a
recession or prolonged economic slowdown, and the related impact on
consumer spending behavior, payments, debt levels, savings rates
and other behavior;
•global
political, market, public health and social events or conditions,
including the ongoing war in Ukraine and the continuing effects of
the COVID-19 pandemic;
•future
credit performance of our customers, including the level of future
delinquency and write-off rates;
•loss
of, or reduction in demand for services from, significant brand
partners or customers in the highly competitive markets in which we
compete;
•the
concentration of our business in U.S. consumer credit;
•increases
or volatility in the Allowance for credit losses that may result
from the application of the current expected credit loss (CECL)
model;
•inaccuracies
in the models and estimates on which we rely, including the amount
of our Allowance for credit losses and our credit risk management
models;
•increases
in fraudulent activity;
•failure
to identify, complete or successfully integrate or disaggregate
business acquisitions, divestitures and other strategic
initiatives, including failure to realize the intended benefits of
the spinoff of our former LoyaltyOne segment;
•the
extent to which our results are dependent upon our brand partners,
including our brand partners’ financial performance and reputation,
as well as the effective promotion and support of our products by
brand partners;
•continued
financial responsibility with respect to a divested business,
including required equity ownership, guarantees, indemnities or
other financial obligations;
•increases
in the cost of doing business, including market interest
rates;
•our
level of indebtedness and inability to access financial or capital
markets, including asset-backed securitization funding or deposits
markets;
•restrictions
that limit our Banks’ ability to pay dividends to us;
•pending
and future litigation;
•pending
and future legislation, regulation, supervisory guidance and
regulatory and legal actions including, but not limited to, those
related to financial regulatory reform and consumer financial
services practices, as well as any such actions with respect to
late fees, interchange fees or other charges;
•increases
in regulatory capital requirements or other support for our
Banks;
•impacts
arising from or relating to the transition of our credit card
processing services to third party service providers that we
completed in 2022;
•failures
or breaches in our operational or security systems, including as a
result of cyberattacks, unanticipated impacts from technology
modernization projects or otherwise;
•loss
of consumer information due to compromised physical or cyber
security;
•any
tax liability, disputes or other adverse impacts arising out of or
related to the spinoff of our former LoyaltyOne segment or the
recent bankruptcy filings of LVI and certain of its subsidiaries;
and
•those
factors identified in our filings with the SEC, including in the
“Risk Factors” and “Management's Discussion and Analysis of
Financial Condition and Results of Operations” sections of our 2022
Form 10-K and this quarterly report.
If one or more of these or other risks or uncertainties
materialize, or if our underlying assumptions prove to be
incorrect, actual results may vary materially from what we
projected. Further risks and uncertainties include, but are not
limited to, the impact of strategic initiatives on us or our
business if any transactions are undertaken, and whether the
anticipated benefits of such transactions can be
realized.
Any forward-looking statements contained in this Form 10-Q speak
only as of the date made, and we undertake no obligation, other
than as required by applicable law, to update or revise any
forward-looking statements, whether as a result of new information,
subsequent events, anticipated or unanticipated circumstances or
otherwise.
Item 1. Financial Statements.
BREAD FINANCIAL HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
2023 |
|
2022 |
|
|
|
|
|
(Millions, except per share amounts) |
|
|
|
|
|
|
|
|
Interest income |
|
|
|
|
|
|
|
|
Interest and fees on loans |
$ |
1,289 |
|
|
$ |
1,066 |
|
|
|
|
|
|
Interest on cash and investment securities |
46 |
|
|
2 |
|
|
|
|
|
|
Total interest income |
1,335 |
|
|
1,068 |
|
|
|
|
|
|
Interest expense |
|
|
|
|
|
|
|
|
Interest on deposits |
117 |
|
|
34 |
|
|
|
|
|
|
Interest on borrowings |
101 |
|
|
45 |
|
|
|
|
|
|
Total interest expense |
218 |
|
|
79 |
|
|
|
|
|
|
Net interest income |
1,117 |
|
|
989 |
|
|
|
|
|
|
Non-interest income |
|
|
|
|
|
|
|
|
Interchange revenue, net of retailer share arrangements |
(87) |
|
|
(96) |
|
|
|
|
|
|
Gain on portfolio sale |
230 |
|
|
— |
|
|
|
|
|
|
Other |
29 |
|
|
28 |
|
|
|
|
|
|
Total non-interest income |
172 |
|
|
(68) |
|
|
|
|
|
|
Total net interest and non-interest income |
1,289 |
|
|
921 |
|
|
|
|
|
|
Provision for credit losses |
107 |
|
|
193 |
|
|
|
|
|
|
Total net interest and non-interest income, after provision for
credit losses |
1,182 |
|
|
728 |
|
|
|
|
|
|
Non-interest expenses |
|
|
|
|
|
|
|
|
Employee compensation and benefits |
220 |
|
|
179 |
|
|
|
|
|
|
Card and processing expenses |
120 |
|
|
82 |
|
|
|
|
|
|
Information processing and communication |
75 |
|
|
56 |
|
|
|
|
|
|
Marketing expenses |
39 |
|
|
31 |
|
|
|
|
|
|
Depreciation and amortization |
34 |
|
|
21 |
|
|
|
|
|
|
Other |
56 |
|
|
57 |
|
|
|
|
|
|
Total non-interest expenses |
544 |
|
|
426 |
|
|
|
|
|
|
Income from continuing operations before income taxes |
638 |
|
|
302 |
|
|
|
|
|
|
Provision for income taxes |
183 |
|
|
91 |
|
|
|
|
|
|
Income from continuing operations |
455 |
|
|
211 |
|
|
|
|
|
|
Income (loss) from discontinued operations, net of income
taxes
(1)
|
— |
|
|
(1) |
|
|
|
|
|
|
Net income |
$ |
455 |
|
|
$ |
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic income per share (Note 13) |
|
|
|
|
|
|
|
|
Income from continuing operations |
$ |
9.10 |
|
|
$ |
4.23 |
|
|
|
|
|
|
Income (loss) from discontinued operations |
$ |
— |
|
|
$ |
(0.01) |
|
|
|
|
|
|
Net income per share |
$ |
9.10 |
|
|
$ |
4.22 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted income per share (Note 13) |
|
|
|
|
|
|
|
|
Income from continuing operations |
$ |
9.08 |
|
|
$ |
4.21 |
|
|
|
|
|
|
Income (loss) from discontinued operations |
$ |
— |
|
|
$ |
(0.01) |
|
|
|
|
|
|
Net income per share |
$ |
9.08 |
|
|
$ |
4.20 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (Note 13) |
|
|
|
|
|
|
|
|
Basic |
50.0 |
|
49.9 |
|
|
|
|
|
Diluted |
50.1 |
|
50.0 |
|
|
|
|
__________________________________
(1)On
November 5, 2021, our former LoyaltyOne segment was spun off into
an independent public company, Loyalty Ventures Inc., and therefore
is reflected herein as Discontinued Operations.
See Notes to unaudited Condensed Consolidated Financial
Statements.
BREAD FINANCIAL HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE
INCOME
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
2023 |
|
2022 |
|
|
|
|
|
(Millions) |
|
|
|
|
|
|
|
|
Net income |
$ |
455 |
|
|
$ |
210 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss) |
|
|
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale debt
securities |
3 |
|
|
(9) |
|
|
|
|
|
|
Tax (expense) benefit |
(1) |
|
|
2 |
|
|
|
|
|
|
Unrealized gain (loss) on available-for-sale debt securities, net
of tax |
2 |
|
|
(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss), net of tax |
2 |
|
|
(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income, net of tax |
$ |
457 |
|
|
$ |
203 |
|
|
|
|
|
See Notes to unaudited Condensed Consolidated Financial
Statements.
BREAD FINANCIAL HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2023 |
|
December 31,
2022 |
|
(Millions, except per share amounts) |
|
|
|
|
ASSETS |
|
|
|
|
Cash and cash equivalents |
$ |
3,611 |
|
|
$ |
3,891 |
|
|
Credit card and other loans |
|
|
|
|
Total credit card and other loans (includes loans available to
settle obligations of consolidated variable interest entities
March 31, 2023, $12,172; December 31, 2022, $15,383,
respectively)
|
18,060 |
|
|
21,365 |
|
|
Allowance for credit losses |
(2,223) |
|
|
(2,464) |
|
|
Credit card and other loans, net |
15,837 |
|
|
18,901 |
|
|
Investment securities |
228 |
|
|
221 |
|
|
Property and equipment, net |
180 |
|
|
195 |
|
|
Goodwill and intangible assets, net |
790 |
|
|
799 |
|
|
Other assets |
1,324 |
|
|
1,400 |
|
|
Total assets |
$ |
21,970 |
|
|
$ |
25,407 |
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY |
|
|
|
|
Deposits |
13,138 |
|
|
13,826 |
|
|
Debt issued by consolidated variable interest entities |
3,015 |
|
|
6,115 |
|
|
Long-term and other debt |
1,869 |
|
|
1,892 |
|
|
Other liabilities |
1,232 |
|
|
1,309 |
|
|
Total liabilities |
19,254 |
|
|
23,142 |
|
|
Commitments and contingencies (Note 9) |
|
|
|
|
Stockholders’ equity |
|
|
|
|
Common stock, $0.01 par value; authorized, 200.0 million shares;
issued, 50.1 million shares as of March 31, 2023 and 49.9
million shares as of December 31, 2022,
respectively.
|
1 |
|
|
1 |
|
|
Additional paid-in capital |
2,197 |
|
|
2,192 |
|
|
Retained earnings |
537 |
|
|
93 |
|
|
Accumulated other comprehensive loss |
(19) |
|
|
(21) |
|
|
Total stockholders’ equity |
2,716 |
|
|
2,265 |
|
|
Total liabilities and stockholders’ equity |
$ |
21,970 |
|
|
$ |
25,407 |
|
See Notes to unaudited Condensed Consolidated Financial
Statements.
BREAD FINANCIAL HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’
EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2023 |
|
Common Stock |
|
Additional
Paid-In
Capital |
|
|
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Loss |
|
Total
Stockholders’
Equity |
|
Shares |
|
Amount |
|
|
|
|
|
|
(Millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2023 |
|
49.9 |
|
$ |
1 |
|
|
$ |
2,192 |
|
|
|
|
$ |
93 |
|
|
$ |
(21) |
|
|
$ |
2,265 |
|
|
Net income |
|
— |
|
— |
|
|
— |
|
|
|
|
455 |
|
|
— |
|
|
455 |
|
|
Other comprehensive income |
|
— |
|
— |
|
|
— |
|
|
|
|
— |
|
|
2 |
|
|
2 |
|
|
Stock-based compensation |
|
— |
|
— |
|
|
10 |
|
|
|
|
— |
|
|
— |
|
|
10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends and dividend equivalent rights declared ($0.21 per common
share)
|
|
— |
|
— |
|
|
— |
|
|
|
|
(11) |
|
|
— |
|
|
(11) |
|
|
Issuance of shares to employees, net of shares withheld for
employee taxes |
|
0.2 |
|
— |
|
|
(5) |
|
|
|
|
— |
|
|
— |
|
|
(5) |
|
|
Balance as of March 31, 2023 |
|
50.1 |
|
$ |
1 |
|
|
$ |
2,197 |
|
|
|
|
$ |
537 |
|
|
$ |
(19) |
|
|
$ |
2,716 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2022 |
|
Common Stock |
|
Additional
Paid-In
Capital |
|
|
|
Retained
Earnings |
|
Accumulated
Other
Comprehensive
Loss |
|
Total
Stockholders’
Equity |
|
Shares |
|
Amount |
|
|
|
|
|
|
(Millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance as of January 1, 2022 |
|
49.9 |
|
$ |
1 |
|
|
$ |
2,174 |
|
|
|
|
$ |
(87) |
|
|
$ |
(2) |
|
|
$ |
2,086 |
|
|
Net income |
|
— |
|
— |
|
|
— |
|
|
|
|
210 |
|
|
— |
|
|
210 |
|
|
Other comprehensive loss |
|
— |
|
— |
|
|
— |
|
|
|
|
— |
|
|
(7) |
|
|
(7) |
|
|
Stock-based compensation |
|
— |
|
— |
|
|
7 |
|
|
|
|
— |
|
|
— |
|
|
7 |
|
|
Repurchases of common stock |
|
(0.2) |
|
— |
|
|
(12) |
|
|
|
|
— |
|
|
— |
|
|
(12) |
|
|
Dividends and dividend equivalent rights declared ($0.21 per common
share)
|
|
— |
|
— |
|
|
— |
|
|
|
|
(10) |
|
|
— |
|
|
(10) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of shares to employees, net of shares withheld for
employee taxes |
|
0.1 |
|
— |
|
|
(6) |
|
|
|
|
— |
|
|
— |
|
|
(6) |
|
|
Balance as of March 31, 2022 |
|
49.8 |
|
$ |
1 |
|
|
$ |
2,163 |
|
|
|
|
$ |
113 |
|
|
$ |
(9) |
|
|
$ |
2,268 |
|
See Notes to unaudited Condensed Consolidated Financial
Statements.
BREAD FINANCIAL HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH
FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
2023 |
|
2022 |
|
(Millions) |
|
|
|
|
CASH FLOWS FROM OPERATING ACTIVITIES |
|
|
|
|
Net income |
$ |
455 |
|
|
$ |
210 |
|
|
Adjustments to reconcile net income to net cash provided by
operating activities |
|
|
|
|
Provision for credit losses |
107 |
|
|
193 |
|
|
Depreciation and amortization |
34 |
|
|
21 |
|
|
Deferred income taxes |
(19) |
|
|
(48) |
|
|
Non-cash stock compensation |
9 |
|
|
7 |
|
|
Amortization of deferred financing costs |
7 |
|
|
6 |
|
|
Amortization of deferred origination costs |
22 |
|
|
21 |
|
|
Gain on portfolio sale |
(230) |
|
|
— |
|
|
Change in other operating assets and liabilities |
|
|
|
|
Change in other assets |
81 |
|
|
(2) |
|
|
Change in other liabilities |
(77) |
|
|
73 |
|
|
Other |
9 |
|
|
16 |
|
|
Net cash provided by operating activities |
398 |
|
|
497 |
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES |
|
|
|
|
Change in credit card and other loans |
735 |
|
|
339 |
|
|
Proceeds from sale of credit card loan portfolio |
2,502 |
|
|
— |
|
|
Purchase of credit card loan portfolio |
(81) |
|
|
— |
|
|
Net purchase of investment securities |
(4) |
|
|
(6) |
|
|
Other, including capital expenditures |
(11) |
|
|
(23) |
|
|
Net cash provided by investing activities |
3,141 |
|
|
310 |
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES |
|
|
|
|
Unsecured borrowings under debt agreements |
185 |
|
|
175 |
|
|
Repayments/maturities of unsecured borrowings under debt
agreements |
(210) |
|
|
(200) |
|
|
Debt issued by consolidated variable interest entities |
325 |
|
|
525 |
|
|
Repayments/maturities of debt issued by consolidated variable
interest entities |
(3,425) |
|
|
(1,162) |
|
|
Net decrease in deposits |
(689) |
|
|
(405) |
|
|
|
|
|
|
Dividends paid |
(11) |
|
|
(10) |
|
|
Other |
(9) |
|
|
(19) |
|
|
Net cash used in financing activities |
(3,834) |
|
|
(1,096) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in cash, cash equivalents and restricted cash |
(295) |
|
|
(289) |
|
|
Cash, cash equivalents and restricted cash at beginning of
period |
3,927 |
|
|
3,923 |
|
|
Cash, cash equivalents and restricted cash at end of
period |
$ |
3,632 |
|
|
$ |
3,634 |
|
|
|
|
|
|
|
SUPPLEMENTAL CASH FLOW INFORMATION |
|
|
|
|
|
|
|
|
|
Cash and cash equivalents reconciliation |
|
|
|
|
Cash and cash equivalents |
$ |
3,611 |
|
|
$ |
2,930 |
|
|
Restricted cash included within Other assets |
21 |
|
|
704 |
|
|
Total cash, cash equivalents and restricted cash |
$ |
3,632 |
|
|
$ |
3,634 |
|
The unaudited Condensed Consolidated Statements of Cash Flows are
presented with the combined cash flows from continuing and
discontinued operations.
See Notes to unaudited Condensed Consolidated Financial
Statements.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF THE BUSINESS
We are a tech-forward financial services company that provides
simple, personalized payment, lending and saving solutions. We
create opportunities for our customers and partners through
digitally enabled choices that offer ease, empowerment, financial
flexibility and exceptional customer experiences. Driven by a
digital-first approach, data insights and white-label technology,
we deliver growth for our partners through a comprehensive product
suite, including private label and co-brand credit cards and buy
now, pay later (BNPL) products such as installment loans and our
“split-pay” offerings. We also offer direct-to-consumer solutions
that give customers more access, choice and freedom through our
branded Bread CashbackTM
American Express®
Credit Card and Bread SavingsTM
products.
Our partner base consists of large consumer-based businesses,
including well-known brands such as (alphabetically) AAA, Academy
Sports + Outdoors, Caesars, Michaels, the NFL, Signet, Ulta and
Victoria’s Secret, as well as small- and medium-sized businesses
(SMBs). Our partner base is well diversified across a broad range
of industries, including specialty apparel, sporting goods, health
and beauty, jewelry, home goods and travel and entertainment. We
believe our comprehensive suite of payment, lending and saving
solutions, along with our related marketing and data and analytics,
offers us a significant competitive advantage with products
relevant across customer segments (Gen Z, Millennial, Gen X and
Baby Boomers). The breadth and quality of our product and service
offerings have enabled us to establish and maintain long-standing
partner relationships. Our primary source of revenue is from
Interest and fees on loans from our various credit card and other
loan products, and to a lesser extent from contractual
relationships with our brand partners.
Throughout these unaudited Condensed Consolidated Financial
Statements, unless stated otherwise, the terms “Bread Financial”,
the “Company”, “we”, “our” or “us” refer to Bread Financial
Holdings, Inc. and our subsidiaries and variable interest entities
(VIEs) on a consolidated basis. References to “Parent Company”
refer to Bread Financial Holdings, Inc. on a parent-only stand
alone basis. In December 2020 we acquired Lon Inc., known at the
time as Bread, which subsequent to the acquisition has been fully
integrated into our ongoing business strategy and
operations.
BASIS OF PRESENTATION
These unaudited Condensed Consolidated Financial Statements have
been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP), and should be read
in conjunction with the Consolidated Financial Statements and notes
thereto included in our Annual Report on Form 10-K for the year
ended December 31, 2022, filed with the Securities and
Exchange Commission on February 28, 2023. If not significantly
different, certain note disclosures included therein have been
omitted from these unaudited Condensed Consolidated Financial
Statements.
The unaudited Condensed Consolidated Financial Statements included
herein reflect all adjustments, which consist of normal, recurring
adjustments that are, in the opinion of management, necessary to
state fairly the results for the interim periods presented. Results
of operations reported for interim periods are not necessarily
indicative of results for the entire year. The preparation of
financial statements in conformity with GAAP requires management to
make estimates and assumptions that affect the reported amounts of
assets, liabilities, revenue and expenses, and the disclosures of
contingent assets and liabilities. These accounting estimates and
assumptions reflect the best judgement of management, but actual
results could differ. The most significant of those estimates and
assumptions relate to the Allowance for credit losses.
The accompanying unaudited Condensed Consolidated Financial
Statements include the accounts of the Company and all subsidiaries
in which we have a controlling financial interest. All intercompany
transactions have been eliminated.
RECENTLY ADOPTED ACCOUNTING STANDARDS
In March 2022, the Financial Accounting Standards Board (FASB)
issued new accounting and disclosure guidance for troubled debt
restructurings effective January 1, 2023, with early adoption
permitted. Specifically, the new guidance eliminates the previous
recognition and measurement guidance for troubled debt
restructurings while enhancing the disclosure requirements for
certain loan modifications and write-offs. Effective January 1,
2023 we adopted the guidance,
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
with no significant impact on our results of operations, financial
position, regulatory risk-based capital, or on our operational
processes, controls and governance in support of the new
guidance.
RECENTLY ISSUED ACCOUNTING STANDARDS
The recently issued accounting standards from our standard setters
e.g., the FASB, relate to topics that are outside our industry or
are otherwise not impactful on our results of operations, financial
position, cash flows, or disclosures related thereto.
2. CREDIT CARD AND OTHER LOANS
Our payment and lending solutions result in the generation of
Credit card and other loans, which are recorded at the time a
borrower enters into a point-of-sale transaction with a merchant.
Credit card loans represent revolving amounts due and have a range
of terms that include credit limits, interest rates and fees, which
can be revised over time based on new information about the
cardholder, in accordance with applicable regulations and the
governing terms and conditions. Cardholders choosing to make a
payment of less than the full balance due, instead of paying in
full, are subject to finance charges and are required to make
monthly payments based on pre-established amounts. Other loans,
which consist of BNPL products such as installment loans and our
“split-pay” offerings, have a range of fixed terms such as interest
rates, fees and repayment periods, and borrowers are required to
make pre-established monthly payments over the term of the loan in
accordance with the applicable terms and conditions. Credit card
and other loans are presented on the Consolidated Balance Sheets
net of the Allowance for credit losses, and include principal and
any related accrued interest and fees. We continue to accrue
interest and fee income on all accounts, except in limited
circumstances, until the related balance and all related interest
and fees are paid or charged-off; an Allowance for credit losses is
established for uncollectable interest and fees.
Primarily, we classify our Credit card and other loans as held for
investment. We sell a majority of our Credit card loans originated
by Comenity Bank (CB) and by Comenity Capital Bank (CCB), which
together are referred to herein as the “Banks”, to certain of our
master trusts (the Trusts), which are themselves consolidated VIEs,
and therefore these loans are restricted for securitization
investors. All new originations of Credit card and other loans are
determined to be held for investment at origination because we have
the intent and ability to hold them for the foreseeable future. In
determining what constitutes the foreseeable future, we consider
the average life and homogenous nature of our Credit card and other
loans. In assessing whether our Credit card and other loans
continue to be held for investment, we also consider capital levels
and scheduled maturities of funding instruments used. The assertion
regarding the intent and ability to hold Credit card and other
loans for the foreseeable future can be made with a high degree of
certainty given the maturity distribution of our direct-to-consumer
(retail) deposits and other funding instruments; the demonstrated
ability to replace maturing time-based deposits and other
borrowings with new deposits or borrowings; and historic payment
activity on Credit card and other loans. Due to the homogenous
nature of our Credit card loans, amounts are classified as held for
investment on a brand partner portfolio basis. From time to time
certain Credit card loans are classified as held for sale, as
determined on a brand partner basis. We carry these assets at the
lower of aggregate cost or fair value, and continue to recognize
finance charges on an accrual basis. Cash flows associated with
Credit card and other loans originated or purchased for investment
are classified as Cash flows from investing activities, regardless
of any subsequent change in intent and ability.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table presents Credit card and other loans, as of
March 31, 2023 and December 31, 2022,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2023 |
|
December 31,
2022 |
|
(Millions) |
|
|
|
|
Credit card loans |
$ |
17,757 |
|
|
$ |
21,065 |
|
|
BNPL (other) loans |
303 |
|
|
300 |
|
|
Total credit card and other loans
(1)(2)
|
18,060 |
|
|
21,365 |
|
|
Less: Allowance for credit losses |
(2,223) |
|
|
(2,464) |
|
|
Credit card and other loans, net |
$ |
15,837 |
|
|
$ |
18,901 |
|
__________________________________
(1)Includes
$12.2 billion and $15.4 billion of Credit card and other loans
available to settle obligations of consolidated VIEs as of
March 31, 2023 and December 31, 2022,
respectively.
(2)Includes
$301 million and $307 million, of accrued interest and fees
that have not yet been billed to cardholders as of March 31,
2023 and December 31, 2022, respectively.
Credit Card and Other Loans Aging
The following table presents the delinquency trends of our Credit
card and other loans portfolio based on the amortized
cost:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Aging Analysis of Delinquent Amortized Cost
Credit Card and Other Loans
(1)
|
|
|
|
|
|
31 to 60 Days Past Due |
|
61 to 90 Days Past Due |
|
91 or more Days Past Due |
|
Total |
|
Total
Current |
|
Total |
|
(Millions) |
|
|
|
|
|
|
|
|
|
|
|
|
As of March 31, 2023 |
$ |
316 |
|
|
$ |
270 |
|
|
$ |
702 |
|
|
$ |
1,288 |
|
|
$ |
16,445 |
|
|
$ |
17,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2022 |
$ |
444 |
|
|
$ |
296 |
|
|
$ |
732 |
|
|
$ |
1,472 |
|
|
$ |
19,559 |
|
|
$ |
21,031 |
|
__________________________________
(1)BNPL
loan delinquencies have been included with credit card loan
delinquencies in the table above, as amounts were insignificant as
of each period presented. As permitted by GAAP, we exclude unbilled
finance charges and fees from our amortized cost basis of Credit
card and other loans. As of March 31, 2023 and
December 31, 2022, accrued interest and fees that have not yet
been billed to cardholders were $301 million and $307 million,
respectively, included in Credit card and other loans on the
Consolidated Balance Sheets.
From time to time we may re-age cardholders’ accounts, with the
intent of assisting delinquent cardholders who have experienced
financial difficulties but who demonstrate both an ability and
willingness to repay the amounts due; this practice affects credit
card loan delinquencies and principal losses. Accounts meeting
specific defined criteria are re-aged when the cardholder makes one
or more consecutive payments aggregating to a certain pre-defined
amount of their account balance. Upon re-aging, the outstanding
balance of a delinquent account is returned to current status. For
the three months ended March 31, 2023 and 2022, re-aged
accounts as a percentage of Total credit card and other loans
represented 2.1% and 1.6%,
respectively. Our re-aging practices comply with regulatory
guidelines.
Credit Quality Indicators for Our Credit Card and Other
Loans
Given the nature of our business, the credit quality of our assets,
in particular our Credit card and other loans, is a key determinant
underlying our ongoing financial performance and overall financial
condition. When it comes to our Credit card and other loans
portfolio, we closely monitor Delinquency rates and Net principal
loss rates which reflect, among other factors, our underwriting,
the inherent credit risk in our portfolio, the success of our
collection and recovery efforts, and more broadly, the general
macroeconomic conditions.
Delinquencies:
An account is contractually delinquent if we do not receive the
minimum payment due by the specified due date. Our policy is to
continue to accrue interest and fee income on all accounts, except
in limited circumstances, until the
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
balance and all related interest and fees are paid or charged-off.
After an account becomes 30 days past due, a proprietary collection
scoring algorithm automatically scores the risk of the account
becoming further delinquent; based upon the level of risk
indicated, a collection strategy is deployed. If after exhausting
all in-house collection efforts we are unable to collect on the
account, we may engage collection agencies or outside attorneys to
continue those efforts, or sell the charged-off
balances.
The Delinquency rate is calculated by dividing outstanding
principal balances that are contractually delinquent (i.e.,
balances greater than 30 days past due) as of the end of the
period, by the outstanding principal amount of Credit cards and
other loans as of the same period-end. As of March 31, 2023
and December 31, 2022, our Delinquency rates were 5.7% and
5.5%, respectively.
Net Principal Losses:
Our net principal losses include the principal amount of losses
that are deemed uncollectible, less recoveries, and exclude
charged-off interest, fees and third-party fraud losses (including
synthetic fraud). Charged-off interest and fees reduce Interest and
fees on loans while third-party fraud losses are recorded in Card
and processing expenses. Credit card loans, including unpaid
interest and fees, are generally charged-off in the month during
which an account becomes 180 days past due. BNPL loans such as our
installment loans and our “split-pay” offerings, including unpaid
interest, are generally charged-off when a loan becomes 120 days
past due. However, in the case of a customer bankruptcy or death,
Credit card and other loans, including unpaid interest and fees, as
applicable, are charged-off in each month subsequent to 60 days
after receipt of the notification of the bankruptcy or death, but
in any case no later than 180 days past due for Credit card loans
and 120 days past due for BNPL loans. We record the actual losses
for unpaid interest and fees as a reduction to Interest and fees on
loans, which were $242 million and $136 million for the three
months ended March 31, 2023 and 2022,
respectively.
The net principal loss rate is calculated by dividing net principal
losses for the period by the Average credit card and other loans
for the same period. Average credit card and other loans represent
the average balance of the loans at the beginning and end of each
month, averaged over the periods indicated. For the three months
ended March 31, 2023 and 2022, our Net principal loss rates
were 7.0% and 4.8%, respectively.
Overall Credit Quality:
As part of our credit risk management activities for our credit
card loans portfolio, we assess overall credit quality by reviewing
information from credit bureaus and other sources relating to our
cardholders' broader credit performance. We utilize VantageScore
(Vantage) credit scores to assist in our assessment of credit
quality. Vantage credit scores are obtained at origination of the
account and are refreshed monthly thereafter to assist in
predicting customer behavior. We categorize these Vantage credit
scores into the following three credit score categories: (i) 661 or
higher, which are considered the strongest credits and therefore
have the lowest credit risk; (ii) 601 to 660, considered to have
moderate credit risk; and (iii) 600 or less, which are considered
weaker credits and therefore have the highest credit risk. In
certain limited circumstances there are customer accounts for which
a Vantage score is not available and we use alternative sources to
assess credit risk and predict behavior. The table below excludes
0.1% and 0.6% of the total credit card loans balance as of
March 31, 2023 and December 31, 2022, respectively,
representing those customer accounts for which a Vantage credit
score is not available. The following table reflects the
distribution of our Credit card loans by Vantage score as of
March 31, 2023 and December 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2023 |
|
December 31,
2022 |
|
661 or
Higher |
|
601 to
660 |
|
600 or
Lower |
|
661 or
Higher |
|
601 to
660 |
|
600 or
Lower |
|
Credit card loans |
58 |
% |
|
27 |
% |
|
15 |
% |
|
62 |
% |
|
26 |
% |
|
12 |
% |
As part of our credit risk management activities for our BNPL loans
portfolio, we also assess overall credit quality by reviewing
information from credit bureaus. In this case we utilize Fair Isaac
Corporation (FICO) credit scores to assist in our assessment of
credit quality. The amortized cost basis of BNPL loans totaled $302
million and $299 million as of March 31, 2023 and
December 31, 2022, respectively. As of March 31, 2023,
approximately 85% of these loans were originated with customers
with FICO scores of 660 or above, and correspondingly approximately
15% of these loans were
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
originated by customers with FICO scores below 660. Similarly, as
of December 31, 2022, approximately 86% and 14% of these loans
were originated by customers with FICO scores of 660 or above, and
below 660, respectively.
Modified Credit Card Loans
Forbearance Programs
As part of our collections strategy, we may offer temporary, short
term (six-months or less) forbearance programs in order to improve
the likelihood of collections and meet the needs of our customers.
Our modifications for customers who have requested assistance and
meet certain qualifying requirements, come in the form of reduced
or deferred payment requirements, interest rate reductions and late
fee waivers. We do not offer programs involving the forgiveness of
principal. These temporary loan modifications may assist in cases
where we believe the customer will recover from the short-term
hardship and resume scheduled payments. Under these forbearance
programs, those accounts receiving relief may not advance to the
next delinquency cycle, including charge-off, in the same time
frame that would have occurred had the relief not been granted. We
evaluate our forbearance programs to determine if they represent a
more than insignificant delay in payment, in which case they would
then be considered a modification of loans to borrowers
experiencing financial difficulty (Loan Modifications) Loans in
these short term programs that are determined to be Loan
Modifications, will be included as such in the disclosures
below.
Credit Card Loans - Modifications for Borrowers Experiencing
Financial Difficulty (Loan Modifications)
We consider impaired loans to be loans for which it is probable
that we will be unable to collect all amounts due according to the
original contractual terms of the cardholder agreement, including
Loan Modifications. In instances where cardholders are experiencing
financial difficulty, we may modify our credit card loans with the
intention of minimizing losses and improving collectability, while
providing cardholders with financial relief; such credit card loans
are classified as Loan Modifications, exclusive of the forbearance
programs described above. Loan Modifications, including for
temporary hardship and permanent workout programs, include
concessions consisting primarily of a reduced minimum payment, late
fee waiver, and an interest rate reduction. The temporary programs’
concessions remain in place for a period no longer than twelve
months, while the permanent programs remain in place through the
payoff of the credit card loans if the cardholder complies with the
terms of the program.
Loan Modification concessions do not include the forgiveness of
unpaid principal, but may involve the reversal of certain unpaid
interest or fee assessments, and the cardholder’s ability to make
future purchases is either limited, or suspended until the
cardholder successfully exits from the modification program. In
accordance with the terms of our temporary hardship and permanent
workout programs, the credit agreement reverts back to its original
contractual terms (including the contractual interest rate) when
the customer exits the program, which is either when all payments
have been made in accordance with the program, or when the customer
defaults out of the program.
Loan Modifications are collectively evaluated for impairment on a
pooled basis in measuring the appropriate Allowance for credit
losses. Our impaired credit card loans represented less than 2% of
total credit card loans as of both March 31, 2023 and
December 31, 2022. As of those same dates, our recorded
investment in impaired credit card loans was $283 million and $257
million, respectively, with an associated Allowance for credit
losses of $88 million and $70 million, respectively. The average
recorded investment in impaired credit card loans was $268 million
and $272 million for the three months ended March 31, 2023 and
2022, respectively.
Interest income on these impaired credit card loans is accounted
for in the same manner as non-impaired credit card loans, and cash
collections are allocated according to the same payment hierarchy
methodology applied for credit card loans not in modification
programs. We recognized $4 million for both the three months ended
March 31, 2023 and 2022, in interest income associated with
credit card loans in modification programs, during the period that
such loans were impaired.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table provides additional information regarding
credit card Loan Modifications for the periods
specified:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, 2023 |
|
Three Months Ended March 31, 2022 |
|
Number of
Modifications |
|
Pre-modification
Outstanding
Balance |
|
Post-modification
Outstanding
Balance |
|
Number of
Modifications |
|
Pre-modification
Outstanding
Balance |
|
Post-modification
Outstanding
Balance |
|
(Millions, except for Number of Loan Modifications) |
|
|
|
|
|
|
|
|
|
|
|
|
Loan Modifications – credit card loans |
46,484 |
|
$ |
77 |
|
|
$ |
77 |
|
|
37,998 |
|
$ |
56 |
|
|
$ |
56 |
|
The following table provides additional information regarding
credit card Loan Modifications that have subsequently defaulted
within 12 months of their modification dates, for the periods
specified; the probability of default is factored into the
Allowance for credit losses:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, 2023 |
|
Three Months Ended
March 31, 2022 |
|
Number of
Modifications |
|
Outstanding
Balance |
|
Number of
Modifications |
|
Outstanding
Balance |
|
(Millions, except for Number of modifications) |
|
|
|
|
|
|
|
|
Loan Modifications that subsequently defaulted |
18,663 |
|
$ |
27 |
|
|
21,653 |
|
$ |
29 |
|
Unfunded Loan Commitments
We are active in originating private label and co-brand credit
cards in the U. S. We manage potential credit risk in unfunded
lending commitments by reviewing each potential customer’s credit
application and evaluating the applicant’s financial history and
ability and perceived willingness to repay. Credit card loans are
made primarily on an unsecured basis. Cardholders reside throughout
the U.S. and are not significantly concentrated in any one
geographic area.
We manage our potential risk in credit commitments by limiting the
total amount of credit, both by individual customer and in total,
by monitoring the size and maturity of our portfolios and applying
consistent underwriting standards. We have the unilateral ability
to cancel or reduce unused credit card lines at any time. Unused
credit card lines available to cardholders totaled approximately
$114 billion and $128 billion as of March 31, 2023 and
December 31, 2022, respectively. While this amount represented
the total available unused credit card lines, we have not
experienced and do not anticipate that all cardholders will access
their entire available line at any given point in
time.
Portfolio Sales
As of March 31, 2023 and December 31, 2022, there were no
credit card loans held for sale.
We previously announced the non-renewal of our contract with BJ’s
Wholesale Club (BJ's) and the sale of the BJ’s portfolio, which
closed in late February 2023, for a total purchase price of
$2.5 billion on a loan portfolio of $2.3 billion,
resulting in a $230 million Gain on portfolio
sale.
3. ALLOWANCE FOR CREDIT LOSSES
The Allowance for credit losses is an estimate of expected credit
losses, measured over the estimated life of our Credit card and
other loans that considers forecasts of future economic conditions
in addition to information about past events and current
conditions. The estimate under the credit reserving methodology
referred to as the Current Expected Credit Loss (CECL) model is
significantly influenced by the composition, characteristics and
quality of our portfolio of Credit card and other loans, as well as
the prevailing economic conditions and forecasts utilized. The
estimate of the Allowance for credit losses includes an estimate
for uncollectible principal as well as unpaid interest and fees.
Principal losses, net of recoveries are deducted from the
Allowance. Principal losses for unpaid interest and fees as well as
any adjustments to the Allowance
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
associated with unpaid interest and fees are recorded as a
reduction to Interest and fees on loans. The Allowance is
maintained through an adjustment to the Provision for credit losses
and is evaluated for appropriateness.
In estimating our Allowance for credit losses, for each identified
group, management utilizes various models and estimation techniques
based on historical loss experience, current conditions, reasonable
and supportable forecasts and other relevant factors. These models
utilize historical data and applicable macroeconomic variables with
statistical analysis and behavioral relationships, to determine
expected credit performance. Our quantitative estimate of expected
credit losses under CECL is impacted by certain forecasted economic
factors. We consider the forecast used to be reasonable and
supportable over the estimated life of the Credit card and other
loans, with no reversion period. In addition to the quantitative
estimate of expected credit losses, we also incorporate qualitative
adjustments for certain factors such as Company-specific risks,
changes in current economic conditions that may not be captured in
the quantitatively derived results, or other relevant factors to
ensure the Allowance for credit losses reflects our best estimate
of current expected credit losses.
Credit Card Loans
We use a “pooled” approach to estimate expected credit losses for
financial assets with similar risk characteristics. We have
evaluated multiple risk characteristics across our credit card
loans portfolio, and determined delinquency status and overall
credit quality to be the most significant characteristics for
estimating expected credit losses. To estimate our Allowance for
credit losses, we segment our credit card loans on the basis of
delinquency status, credit quality risk score and product. These
risk characteristics are evaluated on at least an annual basis, or
more frequently as facts and circumstances warrant. In determining
the estimated life of our Credit card loans, payments were applied
to the measurement date balance with no payments allocated to
future purchase activity. We use a combination of First In First
Out and the Credit Card Accountability, Responsibility, and
Disclosure Act of 2009 (CARD Act) methodologies to model balance
paydown.
BNPL Loans
We measure our Allowance for credit losses on BNPL loans using a
statistical model to estimate projected losses over the remaining
terms of the loans, inclusive of an assumption for prepayments. The
model is based on the historical statistical relationship between
loan loss performance and certain macroeconomic data pooled based
on credit quality risk score, term of the underlying loans, vintage
and geographic location. As of March 31, 2023 and
December 31, 2022, the Allowance for credit losses on BNPL
loans was $24 million and $21 million, respectively.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Allowance for Credit Losses Rollforward
The following table presents our Allowance for credit losses for
our Credit card and other loans. The amount of the related
Allowance for credit losses on BNPL loans is insignificant and
therefore has been included in the table below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
2023 |
|
2022 |
|
|
|
|
|
(Millions) |
|
|
|
|
|
|
|
|
Beginning balance |
$ |
2,464 |
|
|
$ |
1,832 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Provision for credit losses
(1)
|
107 |
|
|
193 |
|
|
|
|
|
|
Change in the estimate for uncollectible unpaid interest and
fees |
5 |
|
|
— |
|
|
|
|
|
|
Net principal losses
(2)
|
(353) |
|
|
(199) |
|
|
|
|
|
|
Ending balance |
$ |
2,223 |
|
|
$ |
1,826 |
|
|
|
|
|
__________________________________
(1)Provision
for credit losses includes a build/release for the Allowance, as
well as replenishment of Net principal losses.
(2)Net
principal losses are presented net of recoveries of $92 million and
$43 million for the three months ended March 31, 2023 and
2022, respectively. Net principal losses for the three months ended
March 31, 2023 include a $10 million adjustment related to the
effects of the purchase of previously written-off accounts that
were sold to a third-party debt collection agency; no such
adjustment was made in the comparative period.
For the three months ended March 31, 2023, the factors that
influenced the increase in the Allowance for credit losses are
higher net principal losses and a higher reserve rate due to
softening economic indicators including the increased cost of
consumer debt, persistent inflation and the possibility of higher
unemployment levels.
4. SECURITIZATIONS
We account for transfers of financial assets as either sales or
financings. Transfers of financial assets that are accounted for as
sales are removed from the Consolidated Balance Sheets with any
realized gain or loss reflected in the Consolidated Statements of
Income during the period in which the sale occurs. Transfers of
financial assets that are not accounted for as a sale are treated
as a financing.
We regularly securitize the majority of our credit card loans
through the transfer of those loans to one of our Trusts. We
perform the decision making for the Trusts, as well as servicing
the cardholder accounts that generate the credit card loans held by
the Trusts. In our capacity as a servicer, we administer the loans,
collects payments and charges-off uncollectible balances. Servicing
fees are earned by a subsidiary, which are eliminated in
consolidation.
The Trusts are consolidated VIEs because they have insufficient
equity at risk to finance their activities – the issuance of debt
securities and notes, collateralized by the underlying credit card
loans. Because we perform the decision making and servicing for the
Trusts, it has the power to direct the activities that most
significantly impact the Trusts’ economic performance (the
collection of the underlying credit card loans). In addition, we
hold all of the variable interests in the Trusts, with the
exception of the liabilities held by third-parties. These variable
interests provide us with the right to receive benefits and the
obligation to absorb losses, which could be significant to the
Trusts. As a result of these considerations, we are deemed to be
the primary beneficiary of the Trusts and therefore consolidates
the Trusts.
The Trusts issue debt securities and notes, which are non-recourse
to us. The collections on the securitized credit card loans held by
the Trusts are available only for payment of those debt securities
and notes, or other obligations arising in the securitization
transactions. For our securitized credit card loans, during the
initial phase of a securitization reinvestment period, we generally
retain principal collections in exchange for the transfer of
additional credit card loans into the securitized pool of assets.
During the amortization or accumulation period of a securitization,
the investors’ share of principal collections (in certain cases, up
to a maximum specified amount each month) is either distributed to
the investors or held in an account until it accumulates to the
total amount due, at which time it is paid to the investors in a
lump sum.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
We are required to maintain minimum interests in our Trusts ranging
from 4% to 10% of the securitized credit card loans. This
requirement is met through a transferor’s interest and is
supplemented through excess funding deposits which represent cash
amounts deposited with the trustee of the securitizations. Cash
collateral, restricted deposits are generally released
proportionately as investors are repaid. Under the terms of the
Trusts, the occurrence of certain triggering events associated with
the performance of the securitized credit card loans in each Trust
could result in certain required actions, including payment of
Trust expenses, the establishment of reserve funds, or early
amortization of the debt securities and/or notes, in a worst-case
scenario. During the three months ended March 31, 2023 and
2022, no such triggering events occurred.
The following tables provide the total securitized credit card
loans and related delinquencies, and net principal losses of
securitized credit card loans for the periods
specified:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2023 |
|
December 31,
2022 |
|
(Millions) |
|
|
|
|
Total credit card loans – available to settle obligations of
consolidated VIEs |
$ |
12,172 |
|
|
$ |
15,383 |
|
|
Of which: principal amount of credit card loans 91 days or more
past due |
$ |
281 |
|
|
$ |
307 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended March 31, |
|
|
|
2023 |
|
2022 |
|
|
|
|
|
(Millions) |
|
|
|
|
|
|
|
|
Net principal losses of securitized credit card loans |
$ |
217 |
|
|
$ |
116 |
|
|
|
|
|
5. INVESTMENT SECURITIES
Investment securities consist of available-for-sale (AFS)
securities, which are debt securities and mutual funds. We also
hold equity securities within our investment securities portfolio.
Collectively, these investments are carried at fair value on the
Consolidated Balance Sheets within Investment
securities.
For any AFS debt securities in an unrealized loss position, the
CECL methodology requires estimation of the lifetime expected
credit losses which then would be recognized in the Consolidated
Statements of Income by establishing, or adjusting an existing
allowance for those credit losses. We did not have any such credit
losses for the periods presented. Any unrealized gains, or any
portion of a security’s non-credit-related unrealized losses are
recorded in the Consolidated Statements of Comprehensive Income,
net of tax. We typically invest in highly-rated securities with low
probabilities of default.
Gains and losses on investments in equity securities are recorded
in Other non-interest expenses in the Consolidated Statements of
Income.
Realized gains and losses are recognized upon disposition of the
investment securities, using the specific identification method.
The table below reflects unrealized gains and losses as of
March 31, 2023 and December 31, 2022,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
December 31, 2022 |
|
Amortized
Cost |
|
Unrealized
Gains |
|
Unrealized
Losses |
|
Fair Value |
|
Amortized
Cost |
|
Unrealized
Gains |
|
Unrealized
Losses |
|
Fair Value |
|
(Millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
$ |
177 |
|
|
$ |
— |
|
|
$ |
(21) |
|
|
$ |
156 |
|
|
$ |
175 |
|
|
$ |
— |
|
|
$ |
(23) |
|
|
$ |
152 |
|
|
Equity securities |
72 |
|
|
— |
|
|
— |
|
|
72 |
|
|
69 |
|
|
— |
|
|
— |
|
|
69 |
|
|
Total |
$ |
249 |
|
|
$ |
— |
|
|
$ |
(21) |
|
|
$ |
228 |
|
|
$ |
244 |
|
|
$ |
— |
|
|
$ |
(23) |
|
|
$ |
221 |
|
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following tables provide information about AFS debt securities
with gross unrealized losses and the length of time that individual
securities have been in a continuous unrealized loss position, as
of March 31, 2023 and December 31, 2022,
respectively:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
Less than 12 months |
|
12 Months or Greater |
|
Total |
|
Fair Value |
|
Unrealized
Losses |
|
Fair Value |
|
Unrealized
Losses |
|
Fair Value |
|
Unrealized
Losses |
|
(Millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
$ |
44 |
|
|
$ |
(2) |
|
|
$ |
111 |
|
|
$ |
(19) |
|
|
$ |
155 |
|
|
$ |
(21) |
|
|
Total |
$ |
44 |
|
|
$ |
(2) |
|
|
$ |
111 |
|
|
$ |
(19) |
|
|
$ |
155 |
|
|
$ |
(21) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
Less than 12 months |
|
12 Months or Greater |
|
Total |
|
Fair Value |
|
Unrealized
Losses |
|
Fair Value |
|
Unrealized
Losses |
|
Fair Value |
|
Unrealized
Losses |
|
(Millions) |
|
|
|
|
|
|
|
|
|
|
|
|
Available-for-sale securities |
$ |
95 |
|
|
$ |
(9) |
|
|
$ |
57 |
|
|
$ |
(14) |
|
|
$ |
152 |
|
|
$ |
(23) |
|
|
Total |
$ |
95 |
|
|
$ |
(9) |
|
|
$ |
57 |
|
|
$ |
(14) |
|
|
$ |
152 |
|
|
$ |
(23) |
|
As of March 31, 2023, the amortized cost and estimated fair
value of AFS debt securities, which are mortgage-backed securities
with no stated maturities, was $177 million and $156 million,
respectively.
There were no realized gains or losses from the sale of any
investment securities for the three months ended March 31,
2023 and 2022.
6. DEPOSITS
Deposits were categorized as interest-bearing or
non-interest-bearing as follows, as of March 31, 2023 and
December 31, 2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2023 |
|
December 31,
2022 |
|
(Millions) |
|
|
|
|
Interest-bearing |
$ |
13,102 |
|
|
$ |
13,787 |
|
|
Non-interest-bearing (including cardholder credit
balances) |
36 |
|
|
39 |
|
|
Total deposits |
$ |
13,138 |
|
|
$ |
13,826 |
|
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
Deposits by deposit type as of March 31, 2023 and
December 31, 2022 were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31,
2023 |
|
December 31,
2022 |
|
(Millions) |
|
|
|
|
Savings accounts |
|
|
|
|
Direct-to-consumer (retail) |
$ |
2,734 |
|
|
$ |
2,782 |
|
|
Wholesale |
3,864 |
|
|
3,954 |
|
|
Certificates of deposit |
|
|
|
|
Direct-to-consumer (retail) |
2,896 |
|
|
2,684 |
|
|
Wholesale |
3,608 |
|
|
4,367 |
|
|
Cardholder credit balances |
36 |
|
|
39 |
|
|
Total deposits |
$ |
13,138 |
|
|
$ |
13,826 |
|
The scheduled maturities of certificates of deposit were as follows
as of March 31, 2023:
|
|
|
|
|
|
|
(Millions) |
|
|
2023
(1)
|
$ |
3,247 |
|
|
2024 |
1,679 |
|
|
2025 |
613 |
|
|
2026 |
300 |
|
|
2027 |
583 |
|
|
Thereafter |
82 |
|
|
Total certificates of deposit |
$ |
6,504 |
|
__________________________________
(1)The
2023 balance includes $7 million in unamortized debt issuance
costs, which are associated with the entire portfolio of
certificates of deposit.
As of March 31, 2023 and December 31, 2022, deposits that
exceeded applicable FDIC insurance limits, which are generally
$250,000 per depositor, per insured bank, were estimated to be $478
million (4% of Total deposits) and $719 million (5% of Total
deposits), respectively. The measurement of estimated uninsured
deposits aligns with regulatory guidelines.
7. OTHER NON-INTEREST INCOME AND OTHER NON-INTEREST
EXPENSES
The following table provides the components of Other non-interest
income for the three months ended March 31, 2023 and
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
2023 |
|
2022 |
|
|
|
|
|
(Millions) |
|
|
|
|
|
|
|
|
Payment protection products |
$ |
34 |
|
|
$ |
38 |
|
|
|
|
|
|
Loss from equity method investment |
(6) |
|
|
(12) |
|
|
|
|
|
|
Other |
$ |
1 |
|
|
$ |
2 |
|
|
|
|
|
|
Total other non-interest income |
$ |
29 |
|
|
$ |
28 |
|
|
|
|
|
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table provides the components of Other non-interest
expenses for the three months ended March 31, 2023 and
2022:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended
March 31, |
|
|
|
2023 |
|
2022 |
|
|
|
|
|
(Millions) |
|
|
|
|
|
|
|
|
Professional services and regulatory fees |
$ |
38 |
|
|
$ |
31 |
|
|
|
|
|
|
Occupancy expense |
5 |
|
|
6 |
|
|
|
|
|
|
Other
(1)
|
13 |
|
|
20 |
|
|
|
|
|
|
Total other non-interest expenses |
$ |
56 |
|
|
$ |
57 |
|
|
|
|
|
__________________________________
(1)Primarily
related to costs associated with various other individually
insignificant operating activities.
8. FAIR VALUES OF FINANCIAL INSTRUMENTS
Fair value is defined under GAAP as the price that would be
required to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date; with such transaction based on the principal market, or in
the absence of a principal market the most advantageous market for
the specific instrument. GAAP provides for a three-level fair value
hierarchy that classifies the inputs to valuation techniques used
to measure fair value, defined as follows:
Level 1:
Inputs that are unadjusted quoted prices for identical assets or
liabilities in active markets that the entity can
access.
Level 2:
Inputs, other than those included within Level 1, that are
observable for the asset or liability, either directly or
indirectly, for substantially the full term of the asset or
liability, including quoted prices for similar assets or
liabilities in active markets, quoted prices for identical or
similar assets or liabilities in inactive markets, or inputs other
than quoted prices that are observable for the asset or
liability.
Level 3:
Inputs that are unobservable (e.g., internally derived assumptions)
and reflect an entity’s own estimates about estimates market
participants would use in pricing the asset or liability based on
the best information available under the circumstances. In
particular, Level 3 inputs and valuation techniques involve
judgment and as a result are not necessarily indicative of amounts
we would realize in a current market exchange. The use of different
assumptions or estimation techniques may have a material effect on
the estimated fair value amounts.
We monitor the market conditions and evaluate the fair value
hierarchy levels quarterly. For the three months ended
March 31, 2023 and 2022, there were no transfers into or out
of Level 3, and no transfers between Levels 1 and 2.
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following table summarizes the carrying values and fair values
of our financial assets and financial liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
December 31, 2022 |
|
Carrying
Amount |
|
Fair
Value |
|
Carrying
Amount |
|
Fair
Value |
|
(Millions) |
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
Credit card and other loans, net |
$ |
15,837 |
|
|
$ |
18,061 |
|
|
$ |
18,901 |
|
|
$ |
21,328 |
|
|
Investment securities |
228 |
|
|
228 |
|
|
221 |
|
|
221 |
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
Deposits |
13,138 |
|
|
13,015 |
|
|
13,826 |
|
|
13,731 |
|
|
Debt issued by consolidated VIEs |
3,015 |
|
|
3,015 |
|
|
6,115 |
|
|
6,115 |
|
|
Long-term and other debt |
1,869 |
|
|
1,744 |
|
|
1,892 |
|
|
1,759 |
|
Valuation Techniques Used in the Fair Value Measurement of
Financial Assets and Financial Liabilities
Credit card and other loans, net:
Our Credit card and other loans are recorded at historical cost,
less the Allowance for credit losses, on the Consolidated Balance
Sheets. In estimating the fair values, we use a discounted cash
flow model (i.e., Level 3 inputs), primarily because a comparable
whole loan sales market for similar loans does not exist, and
therefore there is a lack of observable pricing inputs. We use
various internally derived inputs, including projected income,
discount rates and forecasted write-offs; economic value
attributable to future loans generated by the cardholder accounts
is not included in the fair values.
Investment securities:
Investment securities consist of AFS securities, which are debt
securities and mutual funds, as well as equity securities, and are
recorded at fair value on the Consolidated Balance Sheets. Quoted
prices of identical or similar investment securities in active
markets are used to estimate the fair values (i.e., Level 1 or
Level 2 inputs).
Deposits:
Money market and other non-maturity deposits carrying values
approximate their fair values because they are short-term in
duration and have no defined maturity. Certificates of deposit are
recorded at their historical issuance cost on the Consolidated
Balance Sheets, adjusted for unamortized fees, with fair value
being estimated based on the currently observable market rates
available to us for similar deposits with similar remaining
maturities (i.e., Level 2 inputs). Interest payable is included
within Other liabilities on the Consolidated Balance
Sheets.
Debt issued by consolidated VIEs:
We record debt issued by consolidated VIEs at historical issuance
cost on the Consolidated Balance Sheets, adjusted for unamortized
fees, as well as premiums or discounts, as applicable. Interest
payable is included within Other liabilities on the Consolidated
Balance Sheets. Fair value is estimated based on the currently
observable market rates available to us for similar debt
instruments with similar remaining maturities or quoted market
prices for the same transaction (i.e., Level 2
inputs).
Long-term and other debt:
We record long-term and other debt at historical issuance cost on
the Consolidated Balance Sheets, adjusted for unamortized fees, as
well as premiums or discounts, as applicable. Interest payable is
included within Other liabilities on the Consolidated Balance
Sheets. The fair value is estimated based on the currently
observable market rates available to us for similar debt
instruments with similar remaining maturities, or quoted market
prices for the same transaction (i.e., Level 2
inputs).
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
The following tables summarize financial assets and financial
liabilities measured at fair value on a recurring basis,
categorized by the fair value hierarchy described in the preceding
paragraphs:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
(Millions) |
|
|
|
|
|
|
|
|
Investment securities |
$ |
228 |
|
|
$ |
45 |
|
|
$ |
183 |
|
|
$ |
— |
|
|
Total assets measured at fair value |
$ |
228 |
|
|
$ |
45 |
|
|
$ |
183 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
Total |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
(Millions) |
|
|
|
|
|
|
|
|
Investment securities |
$ |
221 |
|
|
$ |
44 |
|
|
$ |
177 |
|
|
$ |
— |
|
|
Total assets measured at fair value |
$ |
221 |
|
|
$ |
44 |
|
|
$ |
177 |
|
|
$ |
— |
|
Financial Instruments Disclosed but Not Carried at Fair
Value
The following tables summarize financial assets and financial
liabilities that are measured at amortized cost, and not required
to be carried at fair value on a recurring basis, as of
March 31, 2023 and December 31, 2022, respectively. The
fair values of these financial instruments are estimates as of
March 31, 2023 and December 31, 2022, and require
management’s judgment; therefore, these figures may not be
indicative of future fair values, nor can our fair value be
estimated by aggregating all of the amounts presented.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 31, 2023 |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
(Millions) |
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
Credit card and other loans, net |
$ |
18,061 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
18,061 |
|
|
Total |
$ |
18,061 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
18,061 |
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
Deposits |
$ |
13,015 |
|
|
$ |
— |
|
|
$ |
13,015 |
|
|
$ |
— |
|
|
Debt issued by consolidated VIEs |
3,015 |
|
|
— |
|
|
3,015 |
|
|
— |
|
|
Long-term and other debt |
1,744 |
|
|
— |
|
|
1,744 |
|
|
— |
|
|
Total |
$ |
17,774 |
|
|
$ |
— |
|
|
$ |
17,774 |
|
|
$ |
— |
|
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(CONTINUED)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2022 |
|
Fair Value |
|
Level 1 |
|
Level 2 |
|
Level 3 |
|
(Millions) |
|
|
|
|
|
|
|
|
Financial assets |
|
|
|
|
|
|
|
|
Credit card and other loans, net |
$ |
21,328 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
21,328 |
|
|
Total |
$ |
21,328 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
21,328 |
|
|
|
|
|
|
|
|
|
|
|
Financial liabilities |
|
|
|
|
|
|
|
|
Deposits |
$ |
13,731 |
|
|
$ |
— |
|
|
$ |
13,731 |
|
|
$ |
— |
|
|
Debt issued by consolidated VIEs |
6,115 |
|
|
— |
|
|
6,115 |
|
|
— |
|
|
Long-term and other debt |
1,759 |
|
|
— |
|
|
1,759 |
|
|
— |
|
|
Total |
$ |
21,605 |
|
|
$ |
— |
|
|
|