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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
or
Commission file number
(Exact name of registrant as specified in its charter)
(State or other jurisdiction of | (I.R.S. Employer | |
incorporation or organization) | Identification No.) | |
(Zip Code) | ||
(Address of principal executive offices) |
(
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class | Trading symbol | Name of each exchange on which registered |
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.
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).
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.
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. ◻
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes
As of July 22, 2022,
BREAD FINANCIAL HOLDINGS, INC.
INDEX
PART 1: FINANCIAL INFORMATION
Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations (MDA). |
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, 2021, filed with the Securities and Exchange Commission (the SEC) on February 25, 2022 (the 2021 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 set forth in the Risk Factors section in our 2021 Form 10-K, and in subsequent filings we make with the SEC.
OVERVIEW
We are a tech-forward financial services company providing 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, installment lending and buy now, pay later (split-pay). 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.
Effective March 23, 2022, Alliance Data Systems Corporation was renamed Bread Financial Holdings, Inc., and on April 4, 2022, our ticker changed from “ADS” to “BFH” on the New York Stock Exchange (NYSE). Neither the name change nor the NYSE ticker change affected our legal entity structure, nor did either change have an impact on our financial statements. On November 5, 2021, our LoyaltyOne segment was spun off into an independent public company Loyalty Ventures Inc. (traded on The Nasdaq Stock Market LLC under the ticker “LYLT”) and therefore is reflected herein as Discontinued Operations.
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” 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. Bread Financial is also used in this report to include references to transactions and arrangements occurring prior to the name change.
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 within this Form 10-Q 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. We use PPNR as a metric to evaluate our results of operations before income taxes, excluding the volatility that can occur within Provision for credit losses. 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 provides 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 the financial tables and information that follows.
1
BUSINESS ENVIRONMENT
This Business Environment section provides an overview of our results of operations and financial position for the second quarter of 2022, as well as our related outlook for the remainder of 2022 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 in our most recent Annual Report on Form 10-K and in subsequent filings we make with the SEC 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 commentary herein is for the three months ended June 30, 2022 compared with the same period in the prior year.
For the quarter ended June 30, 2022, Credit sales increased from the prior year period as consumer spending remained strong. Net interest income for the quarter increased 20% year-over-year and Interchange revenue, net of retailer share arrangements increased in correlation with Credit sales, while Other non-interest income decreased due to a write-down of our equity method investment in Loyalty Ventures Inc. We continue to be vigilant in monitoring macroeconomic conditions and the impact on consumers and our brand partners, with the increasing probability of a recession due to these macroeconomic and other conditions, including persistently high inflation and the ongoing effects of the global COVID-19 pandemic, all of which remain difficult to predict and therefore could have an impact on our outlook throughout the remainder of 2022. We anticipate Total net interest and non-interest income growth will be aligned with growth in average Total credit card and other loans, with potential upside from an improved full year net interest margin. We expect ongoing interest rate increases by the Board of Governors of the Federal Reserve System (the Federal Reserve) throughout the remainder of 2022; our models indicate these increases would result in a nominal benefit to Net interest income, which is included in our 2022 outlook.
Second quarter 2022 average Total credit card and other loans of $17.0 billion were up 11% from the prior year period, with the end-of-period balance being up 13%. Our outlook for growth in average Total credit card and other loans in 2022, which is based on our new and renewed business announcements including our agreement to acquire AAA’s existing credit card portfolio in the fourth quarter, visibility into our pipeline and the current economic outlook, is in the low-double-digit range relative to 2021. Payment rate variability is a key determinant for achieving this full year growth in average Credit card and other loans in 2022, relative to 2021. We expect the sale of the BJ’s Wholesale Club (BJ’s) portfolio to occur in the middle of the first quarter of 2023. For the second quarter of 2022, BJ’s branded co-brand accounts generated approximately 9% of Total net interest and non-interest income. As of June 30, 2022, BJ’s branded co-brand accounts were responsible for approximately 12% of Total credit card and other loans.
Provision for credit losses increased relative to the second quarter of 2021 due primarily to a large reserve release from the Allowance for credit losses in the prior year period associated with the improved macroeconomic outlook. The increase is also driven by an increase in Credit card and other loans, as well as from economic scenario weightings in our credit reserve modeling reflecting the increasing probability of a recession and other macroeconomic factors including the increasing interest rate environment and persistent inflation. Our Allowance for credit losses increased compared to year-end 2021, with a reserve rate of 11.2% in the second quarter of 2022 and 10.5% at year-end 2021. Notwithstanding the foregoing, our credit metrics continue to remain strong, with our delinquency and net loss rates remaining below the historical averages with a delinquency rate of 4.4% and a net loss rate of 5.6% for the second quarter of 2022. We believe these low rates are the result of our disciplined, proactive risk management, and strong consumer payment behavior. Our outlook assumes a normalization of consumer payment behavior throughout the remainder of 2022, and we continue to expect a net loss rate in the low-to-mid 5% range for 2022 as credit metrics normalize from historically low rates due to the expiration of federal stimulus and assistance programs.
With regard to our expenses, Total non-interest expenses for the second quarter of 2022 were up 12% from the prior year period, due primarily to increased marketing expenses, employee compensation and benefit costs and overall technology modernization expenses. As a result of ongoing investment in technology modernization, digital advancement, marketing, and product innovation, along with strong portfolio growth, we continue to anticipate Total non-interest expenses will increase in 2022. The pace and timing of our investments will be calibrated to align with our full year revenue growth outlook, including our planned incremental investment of more than $125 million in digital and product innovation, marketing, brand and technology enhancements during 2022.
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Overall, our results for the second quarter of 2022 demonstrated the benefits of the strategic actions we have implemented over the last few years, and our business transformation efforts continue to enable sustainable, profitable growth.
CONSOLIDATED RESULTS OF OPERATIONS
The following provides commentary on the variances in our results of operations for the three and six months ended June 30, 2022, compared with the same periods in the prior year, as presented in the accompanying tables. These discussions should be read in conjunction with the discussion under “Business Environment,” above.
Table 1: Summary of Our Financial Performance
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||
| 2022 |
| 2021 |
| $ |
| % |
| 2022 |
| 2021 |
| $ |
| % | ||||||
(Millions, except per share amounts and percentages) | |||||||||||||||||||||
Total net interest and non-interest income | $ | 893 | $ | 764 | 129 | 17 | $ | 1,814 | $ | 1,566 | 248 | 16 | |||||||||
Provision for credit losses | 404 | (14) | 418 | * | 598 | 19 | 579 | * | |||||||||||||
Total non-interest expenses | 473 | 424 | 49 | 12 | 897 | 826 | 71 | 9 | |||||||||||||
Income from continuing operations before income taxes | 16 | 354 | (338) | (95) | 319 | 721 | (402) | (56) | |||||||||||||
Provision for income taxes | 4 | 91 | (87) | (96) | 95 | 190 | (95) | (50) | |||||||||||||
Income from continuing operations | 12 | 263 | (251) | (95) | 224 | 531 | (307) | (58) | |||||||||||||
(Loss) income from discontinued operations, net of taxes | — | 11 | (11) | * | (1) | 29 | (30) | * | |||||||||||||
Net income | 12 | 274 | (262) | (95) | 223 | 560 | (337) | (60) | |||||||||||||
Net income per diluted share | $ | 0.25 | $ | 5.47 | (5.22) | (95) | $ | 4.46 | $ | 11.21 | (6.75) | (60) | |||||||||
Income from continuing operations per diluted share | $ | 0.25 | $ | 5.25 | (5.00) | (95) | $ | 4.47 | $ | 10.63 | (6.16) | (58) | |||||||||
Net interest margin (1) | 18.6 | % | 17.3 | % | 1.3 | 19.0 | % | 17.5 | % | 1.5 | |||||||||||
Return on average equity (2) | 2.2 | % | 56.4 | % | (54.2) | 19.9 | % | 61.0 | % | (41.1) | |||||||||||
Effective income tax rate - continuing operations | 22.7 | % | 25.7 | % | (3.0) | 29.9 | % | 26.3 | % | 3.6 | |||||||||||
| (1) | Net interest margin represents annualized Net interest income divided by average Total interest-earning assets. See also Table 5: Net Interest Margin. |
| (2) | Return on average equity represents annualized Income from continuing operations divided by average Total stockholders’ equity. |
* Not meaningful
3
Table 2: Summary of Total Net Interest and Non-interest Income, After Provision for Credit Losses
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||
| 2022 |
| 2021 |
| $ Change |
| % Change |
| 2022 |
| 2021 |
| $ Change |
| % Change | ||||||
(Millions, except percentages) | |||||||||||||||||||||
Interest income | |||||||||||||||||||||
Interest and fees on loans | $ | 1,064 | $ | 913 | 151 | 17 | $ | 2,130 | $ | 1,854 | 276 | 15 | |||||||||
Interest on cash and investment securities | 9 | 2 | 7 | 401 | 11 | 3 | 8 | 230 | |||||||||||||
Total interest income | 1,073 | 915 | 158 | 17 | 2,141 | 1,857 | 284 | 15 | |||||||||||||
Interest expense | |||||||||||||||||||||
Interest on deposits | 41 | 43 | (2) | (4) | 76 | 90 | (14) | (17) | |||||||||||||
Interest on borrowings | 54 | 57 | (3) | (6) | 98 | 117 | (19) | (16) | |||||||||||||
Total interest expense | 95 | 100 | (5) | (5) | 174 | 207 | (33) | (16) | |||||||||||||
Net interest income | 978 | 815 | 163 | 20 | 1,967 | 1,650 | 317 | 19 | |||||||||||||
Non-interest income | |||||||||||||||||||||
Interchange revenue, net of retailer share arrangements | (102) | (85) | (17) | 19 | (198) | (153) | (45) | 29 | |||||||||||||
Other | 17 | 34 | (17) | (49) | 45 | 69 | (24) | (35) | |||||||||||||
Total non-interest income | (85) | (51) | (34) | 65 | (153) | (84) | (69) | 82 | |||||||||||||
Total net interest and non-interest income | 893 | 764 | 129 | 17 | 1,814 | 1,566 | 248 | 16 | |||||||||||||
Provision for credit losses | 404 | (14) | 418 | * | 598 | 19 | 579 | * | |||||||||||||
Total net interest and non-interest income, after provision for credit losses | $ | 489 | $ | 778 | (289) | (37) | $ | 1,216 | $ | 1,547 | (331) | (21) | |||||||||
* Not meaningful
Total Net Interest and Non-interest Income, After Provision for Credit Losses
Three and six months ended June 30, 2022, compared with the same periods in the prior year:
Interest income: Total interest income increased in the three and six months ended June 30, 2022, primarily resulting from Interest and fees on loans. The increase in each period, relative to the prior year, was due to increases in average credit card and other loans driven by new originations, and increases in finance charge yields of approximately 114 and 145 basis points for the three and six months periods, respectively, increasing revenue by $48 million and $122 million over the prior year periods of comparison, respectively.
Interest expense: Total interest expense decreased in the three and six months ended June 30, 2022, due to the following:
| ● | Interest on deposits decreased due to lower average interest rates resulting from the mix of deposits outstanding, which decreased interest expense by approximately $6 million and $21 million for the three and six month periods, respectively; partially offset by higher average balances outstanding. |
| ● | Interest on borrowings decreased due primarily to a $3 million and $17 million decrease related to secured borrowings resulting from lower average interest rates for both the three and six month periods. |
Non-interest income: Total non-interest income decreased for the three and six months ended June 30, 2022, due to the following:
| ● | Interchange revenue, net of retailer share arrangements increased for the three and six month periods, respectively, due to increased sales and new retailer share arrangements, resulting in increased interchange revenue, which was more than offset by increases in our brand partners’ share of the economics under the new retailer share arrangements. |
| ● | Other decreased due to the write-down of our equity method investment in Loyalty Ventures Inc. of $21 million and $33 million for the three and six month periods, respectively; partially offset by an increase in ancillary |
4
| revenue, in particular revenue from payment protection products, of $6 million and $9 million over these same periods of comparison, respectively. |
Provision for credit losses: Provision for credit losses increased in the three and six months ended June 30, 2022, driven by reserve releases of $208 million and $373 million, respectively, from the Allowance for credit losses in the prior year periods associated with an improving macroeconomic outlook at such times and lower volumes of Credit card and other loans relative to the current year periods, as well as a reserve build of $166 million in the second quarter 2022, driven by a 6% higher end-of period loan balance and a higher reserve rate due to economic scenario weightings reflecting the increasing probability of a recession and other macroeconomic factors, including the increasing interest rate environment and persistent inflation.
Table 3: Summary of Total Non-interest Expenses
Three Months Ended June 30, | Six Months Ended June 30, | ||||||||||||||||||||
| 2022 |
| 2021 |
| $ Change |
| % Change |
| 2022 |
| 2021 |
| $ Change |
| % Change | ||||||
(Millions, except percentages) | |||||||||||||||||||||
Non-interest expenses | |||||||||||||||||||||
Employee compensation and benefits | $ | 191 | $ | 162 | 29 | 18 | $ | 370 | $ | 320 | 50 | 16 | |||||||||
Card and processing expenses | 84 | 83 | 1 | 1 | 166 | 161 | 5 | 3 | |||||||||||||
Information processing and communication | 61 | 55 | 6 | 11 | 117 | 106 | 11 | 10 | |||||||||||||
Marketing expenses | 50 | 35 | 15 | 41 | 80 | 77 | 3 | 4 | |||||||||||||
Depreciation and amortization | 30 | 22 | 8 | 36 | 51 | 47 | 4 | 8 | |||||||||||||
Other | 57 | 67 | (10) | (15) | 113 | 115 | (2) | — | |||||||||||||
Total non-interest expenses | $ | 473 | $ | 424 | 49 | 12 | $ | 897 | $ | 826 | 71 | 9 | |||||||||
Total Non-interest Expenses
Three and six months ended June 30, 2022, compared with the same periods in the prior year:
Non-interest expenses: Total non-interest expenses increased in the three and six months ended June 30, 2022, due to the following:
| ● | Employee compensation and benefits increased due to increased salaries, contract labor, which itself was driven by continued digital and technology modernization-related hiring, and incentive compensation, as well as higher volume-related staffing levels. |
| ● | Information processing and communication increased due to an increase in data processing expense driven by the Fiserv core processing platform migration. |
| ● | 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 direct to consumer offerings. |
| ● | Depreciation and amortization increased due to increased amortization for developed technology associated with the Lon Inc. acquisition, which was completed in December 2020. |
| ● | Other decreased due to decreased legal and other business activity costs. |
Income Taxes
Provision for income taxes decreased in the three and six months ended June 30, 2022, primarily driven by the decrease in Income from continuing operations before income taxes. The effective tax rate was 22.7% and 25.7% for the three months ended June 30, 2022 and 2021, respectively, and 29.9% and 26.3% for the six months ended June 30, 2022 and 2021, respectively. The decrease in the effective tax rate for the three month period primarily related to a discrete benefit in the current period, partially offset by increases in nondeductible items over those in the prior year period. The increase in the effective tax rate for the six month period was primarily driven by the decrease in Income from continuing operations before income taxes and increases in nondeductible items over those in the prior year period.
5
Table 4: Summary Financial Highlights – Continuing Operations
As of or for the Three Months Ended June 30, | As of or for the Six Months Ended June 30, | ||||||||||||||||
| 2022 |
| 2021 | % Change |
| 2022 |
| 2021 | % Change | ||||||||
(Millions, except per share amounts and percentages) | |||||||||||||||||
Credit sales | $ | 8,140 | $ | 7,401 | 10 | $ | 15,028 | $ | 13,445 | 12 | |||||||
PPNR (1) | 420 | 340 | 24 | 917 | 740 | 24 | |||||||||||
Average credit card and other loans | 17,003 | 15,282 | 11 | 16,827 | 15,533 | 8 | |||||||||||
End-of-period credit card and other loans | 17,769 | 15,724 | 13 | 17,769 | 15,724 | 13 | |||||||||||
End-of-period direct-to-consumer deposits | 4,191 | 2,398 | 75 | 4,191 | 2,398 | 75 | |||||||||||
Return on average assets (2) | 0.2 | % | 4.8 | % | (4.6) | 2.1 | % | 4.9 | % | (2.8) | |||||||
Return on average equity (3) | 2.2 | % | 56.4 | % | (54.2) | 19.9 | % | 61.0 | % | (41.1) | |||||||
Net interest margin (4) | 18.6 | % | 17.3 | % | 1.3 | 19.0 | % | 17.5 | % | 1.5 | |||||||
Loan yield (5) | 25.0 | % | 23.9 | % | 1.1 | 25.3 | % | 23.9 | % | 1.4 | |||||||
Efficiency ratio (6) | 52.9 | % | 55.5 | % | (2.6) | 49.5 | % | 52.7 | % | (3.2) | |||||||
Tangible common equity / tangible assets ratio (TCE/TA) (7) | 7.5 | % | 6.4 | % | 1.1 | 7.5 | % | 6.4 | % | 1.1 | |||||||
Tangible book value per common share (8) | $ | 31.75 | $ | 27.12 | 17 | $ | 31.75 | $ | 27.12 | 17 | |||||||
Cash dividend per common share | $ | 0.21 | $ | 0.21 | — | $ | 0.42 | $ | 0.42 | — | |||||||
Delinquency rate | 4.4 | % | 3.3 | % | 1.1 | 4.4 | % | 3.3 | % | 1.1 | |||||||
Net loss rate (9) | 5.6 | % | 5.1 | % | 0.5 | 5.2 | % | 5.0 | % | 0.2 | |||||||
Reserve rate | 11.2 | % | 10.4 | % | 0.8 | 11.2 | % | 10.4 | % | 0.8 | |||||||
| (1) | PPNR represents increasing/decreasing Income from continuing operations before income taxes by the net provision/release in Provision for credit losses. See also 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 also 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 also Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures. |
| (9) | The three and six months ended June 30, 2022 Net loss rates include 30 basis point and 15 basis point increases, respectively, from the effects of the purchase of previously written-off accounts that were sold to a third-party debt collection agency; this matter remains subject to an ongoing legal dispute with the debt collection agency. |
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Table 5: Net Interest Margin
Three Months Ended June 30, 2022 | Three Months Ended June 30, 2021 | |||||||||||||||||||
| Average Balance |
| Interest Income / Expense |
| Average Yield / Rate |
| Average Balance |
| Interest Income / Expense |
| Average Yield / Rate | |||||||||
(Millions, except percentages) | ||||||||||||||||||||
Cash and investment securities | $ | 3,975 | $ | 9 | 0.84 | % | $ | 3,498 | $ | 2 | 0.19 | % | ||||||||
Credit card and other loans | 17,003 | 1,064 | 25.04 | % | 15,282 | 913 | 23.90 | % | ||||||||||||
Total interest-earning assets | 20,978 | 1,073 | 20.45 | % | 18,780 | 915 | 19.48 | % | ||||||||||||
Direct-to-consumer (retail) deposits | 3,865 | 10 | 1.07 | % | 2,255 | 5 | 0.98 | % | ||||||||||||
Wholesale deposits | 6,994 | 31 | 1.78 | % | 7,580 | 38 | 2.00 | % | ||||||||||||
Interest-bearing deposits | 10,859 | 41 | 1.53 | % | 9,835 | 43 | 1.76 | % | ||||||||||||
Secured borrowings | 5,331 | 28 | 2.11 | % | 4,478 | 31 | 2.72 | % | ||||||||||||
Unsecured borrowings | 1,978 | 26 | 5.15 | % | 2,805 | 26 | 3.74 | % | ||||||||||||
Interest-bearing borrowings | 7,309 | 54 | 2.93 | % | 7,283 | 57 | 3.11 | % | ||||||||||||
Total interest-bearing liabilities | 18,168 | 95 | 2.09 | % | 17,118 | 100 | 2.34 | % | ||||||||||||
Net interest income | $ | 978 | $ | 815 | ||||||||||||||||
Net interest margin (1) | 18.6 | % | 17.3 | % | ||||||||||||||||
Six Months Ended June 30, 2022 | Six Months Ended June 30, 2021 | |||||||||||||||||||
| Average Balance |
| Interest Income / Expense |
| Average Yield / Rate |
| Average Balance |
| Interest Income / Expense |
| Average Yield / Rate |
| ||||||||
(Millions, except percentages) | ||||||||||||||||||||
Cash and investment securities | $ | 3,884 | $ | 11 | 0.56 | % | $ | 3,302 | $ | 3 | 0.20 | % | ||||||||
Credit card and other loans | 16,827 | 2,130 | 25.32 | % | 15,533 | 1,854 | 23.87 | % | ||||||||||||
Total interest-earning assets | 20,711 | 2,141 | 20.67 | % | 18,835 | 1,857 | 19.72 | % | ||||||||||||
Direct-to-consumer (retail) deposits | 3,572 | 17 | 0.94 | % | 2,070 | 11 | 1.08 | % | ||||||||||||
Wholesale deposits | 7,258 | 59 | 1.62 | % | 7,811 | 79 | 2.03 | % | ||||||||||||
Interest-bearing deposits | 10,830 | 76 | 1.39 | % | 9,881 | 90 | 1.83 | % | ||||||||||||
Secured borrowings | 5,162 | 48 | 1.86 | % | 4,550 | 64 | 2.82 | % | ||||||||||||
Unsecured borrowings | 1,991 | 50 | 5.06 | % | 2,817 | 53 | 3.73 | % | ||||||||||||
Interest-bearing borrowings | 7,153 | 98 | 2.75 | % | 7,367 | 117 | 3.17 | % | ||||||||||||
Total interest-bearing liabilities | 17,983 | 174 | 1.93 | % | 17,248 | 207 | 2.40 | % | ||||||||||||
Net interest income | $ | 1,967 | $ | 1,650 | ||||||||||||||||
Net interest margin (1) | 19.0 | % | 17.5 | % | ||||||||||||||||
| (1) | Net interest margin represents annualized Net interest income divided by average Total interest-earning assets. |
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Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures
As of or for the Three Months Ended June 30, | As of or for the Six Months Ended June 30, | ||||||||||||||||
| 2022 |
| 2021 | % Change |
| 2022 |
| 2021 | % Change | ||||||||
(Millions, except percentages) | |||||||||||||||||
Pretax pre-provision earnings (PPNR) | |||||||||||||||||
Income from continuing operations before income taxes | $ | 16 | $ | 354 | (95) | $ | 319 | $ | 721 | (56) | |||||||
Provision for credit losses | 404 | (14) | * | 598 | 19 | * | |||||||||||
Pretax pre-provision earnings (PPNR) | $ | 420 | $ | 340 | 24 | $ | 917 | $ | 740 | 24 | |||||||
Tangible common equity (TCE) | |||||||||||||||||
Total stockholders' equity | 2,275 | 2,048 | 11 | 2,275 | 2,048 | 11 | |||||||||||
Less: Goodwill and intangible assets, net | (694) | (699) | (1) | (694) | (699) | (1) | |||||||||||
Tangible common equity (TCE) | $ | 1,581 | $ | 1,349 | 17 | $ | 1,581 | $ | 1,349 | 17 | |||||||
Tangible assets (TA) | |||||||||||||||||
Total assets | 21,811 | 21,812 | — | 21,811 | 21,812 | — | |||||||||||
Less: Goodwill and intangible assets, net | (694) | (699) | (1) | (694) | (699) | (1) | |||||||||||
Tangible assets (TA) | $ | 21,117 | $ | 21,113 | — | $ | 21,117 | $ | 21,113 | — | |||||||
* Not meaningful
ASSET QUALITY
Given the nature of our business, the quality of our assets, in particular our credit card and other loans (primarily installment 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 two metrics – 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 following table presents the delinquency trends on our credit card and other loans portfolio based on the principal balances outstanding as of June 30, 2022 and December 31, 2021:
Table 7: Delinquency Trends on Credit Card and Other Loans
June 30, | % of | December 31, | % of |
| |||||||
| 2022 |
| Total |
| 2021 |
| Total |
| |||
(Millions, except percentages) |
| ||||||||||
Credit card and other loans outstanding ─ principal | $ | 16,825 |
| 100.0 | % | $ | 16,590 |
| 100.0 | % | |
Outstanding balances contractually delinquent | |||||||||||
31 to 60 days | $ | 262 | 1.6 | % | $ | 219 |
| 1.3 | % | ||
61 to 90 days |
| 169 |
| 1.0 |
| 147 |
| 0.9 | |||
91 or more days |
| 306 |
| 1.8 |
| 281 |
| 1.7 | |||
Total | $ | 737 |
| 4.4 | % | $ | 647 |
| 3.9 | % | |
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As part of our collections strategy, we may offer temporary, short term (six-months or less) loan modifications 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 modification 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 loan modification programs to determine if they represent a more than insignificant delay in payment, in which case they would then be considered a troubled debt restructuring. For additional information, see Note 2, “Credit Card and Other Loans – Modified Credit Card Loans,” to our unaudited Condensed 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. Installment loans, 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 no case longer than 180 days past due for credit card loans and 120 days past due for installment 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 June 30, | Six Months Ended June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | ||||||
(Millions, except percentages) | |||||||||||||
Average credit card and other loans | $ | 17,003 | $ | 15,282 | $ | 16,827 | $ | 15,533 | |||||
Net principal losses |
| 238 |
| 194 |
| 438 |
| 392 | |||||
Net principal losses as a percentage of average credit card and other loans |
| 5.6 | % |
| 5.1 | % |
| 5.2 | % |
| 5.0 | % | |
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, and meet our regulatory and policy requirements (including capital and leverage ratio requirements applicable to Comenity Bank and Comenity Capital Bank (collectively referred to herein as the Banks) under Federal Deposit Insurance Corporation (FDIC) regulations) in a cost effective and prudent manner through expected and unexpected market environments.
Our primary sources of liquidity include cash generated from operating activities, our Credit Agreement and issuances of debt securities, our securitization programs and deposits issued by 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, capital expenditures, including digital and product innovation and technology enhancements, and dividends.
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
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volatility in the financial and capital markets, limiting our access to or increasing our cost of capital, which could make capital unavailable or unavailable on terms acceptable to us.
Funding Sources
Credit Agreement
As of June 30, 2022, we had $607 million in aggregate principal amount of term loans outstanding under our Credit Agreement, as amended, and a $750 million revolving line of credit under which we had no amounts drawn.
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 June 30, 2022, 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 as funding for our non-securitized credit card and other loans, and to fund the securitization enhancement requirements of the Banks. We offer both direct-to-consumer retail deposit products as well as deposits sourced through contractual arrangements with various financial counterparties (often referred to as wholesale 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 July 2022 and June 2027, 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 by type and associated attributes, as of June 30, 2022 and December 31, 2021, respectively:
Table 9: Deposits
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
(Millions, except percentages) | ||||||
Deposits | ||||||
Direct-to-consumer (retail) | $ | 4,191 | $ | 3,180 | ||
Wholesale | 6,808 | 7,847 | ||||
Non-maturity deposit products | ||||||
Non-maturity deposits | $ | 6,360 | $ | 5,586 | ||
Interest rate range | 0.70% – 3.50% | 0.05% – 3.50% | ||||
Weighted-average interest rate | 1.66% | 0.68% | ||||
Certificates of deposit | ||||||
Certificates of deposit | $ | 4,639 | $ | 5,441 | ||
Interest rate range | 0.25% – 3.75% | 0.20% – 3.75% | ||||
Weighted-average interest rate | 2.27% | 1.91% | ||||
Securitization Programs and Conduit Facilities
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. We use a combination of public term asset-backed notes and private conduit facilities for this purpose. During the six months ended June 30, 2022, $962 million of asset-backed term notes matured and were repaid, of which $43 million were previously retained by us and therefore eliminated from the Consolidated Balance Sheets.
As of June 30, 2022, total capacity under our Conduit Facilities was $5.5 billion, of which $4.8 billion had been drawn and was included in Debt issued by consolidated variable interest entities (VIEs) in the Consolidated Balance Sheet. In
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April 2022, the World Financial Network Credit Card Master Trust III amended its 2009-VFC conduit facility, increasing the capacity from $225 million to $275 million and extending the maturity to July 2023. In addition, in April 2022, the World Financial Capital Master Note Trust amended its 2009-VFN conduit facility, increasing the capacity from $1.5 billion to $2.5 billion and extending the maturity to July 2023.
As of June 30, 2022, we had approximately $12.4 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 June 30, 2022, for the Trusts by year:
Table 10: Borrowing Commitment Maturities
| 2022 |
| 2023 |
| Thereafter |
| Total | |||||
(Millions) | ||||||||||||
Fixed rate asset-backed term note securities | $ | 653 | $ | — | $ | — | $ | 653 | ||||
Conduit facilities (1) |
| — |
| 5,525 |
| — |
| 5,525 | ||||
Total (2) | $ | 653 | $ | 5,525 | $ | — | $ | 6,178 | ||||
| (1) | Amount represents borrowing capacity, not outstanding borrowings. |
| (2) | Total amounts do not include $1.8 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 that 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
On February 28, 2022, the Company’s Board of Directors approved a stock repurchase program to acquire up to 200,000 shares of the Company’s outstanding common stock in the open market during the one-year period ending on February 28, 2023. As of June 30, 2022, the Company had repurchased all 200,000 shares of its common stock available under this program for an aggregate of $12 million. Following their repurchase, these 200,000 shares ceased to be outstanding shares of common stock and are now treated as authorized but unissued shares of common stock.
Dividends
During the three and six months ended June 30, 2022, we paid $11 million and $22 million, respectively, in dividends to our shareholders of common stock. On July 28, 2022, our Board of Directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on September 16, 2022, to stockholders of record at the close of business on August 12, 2022.
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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, followed by a discussion of the variance drivers impacting our Operating, Investing and Financing activities, for the six months ended June 30, 2022 compared with the same period in the prior year.
Table 11: Cash Flows
Six Months Ended June 30, | |||||||
| 2022 |
| 2021 |
| |||
(Millions) | |||||||
Total cash provided by (used in) | |||||||
Operating activities | $ | 743 | $ | 733 | |||
Investing activities |
| (897) |
| 535 | |||
Financing activities |
| (72) |
| (1,365) | |||
Effect of foreign currency exchange rates |
| — |
| 1 | |||
Net decrease in cash, cash equivalents and restricted cash | $ | (226) | $ | (96) | |||
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 $743 million and $733 million for the six months ended June 30, 2022 and 2021, respectively. In the first half of 2022, 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, partially offset by a decrease in accounts payable and other liabilities. In the first half of 2021, the net cash provided by operating activities was primarily driven by cash generated from net income.
Cash Flows from Investing Activities primarily include changes in credit card and other loans. Cash used in investing activities was $897 million for the six months ended June 30, 2022, and cash provided by investing activities was $535 million for the six months ended June 30, 2021. In the first half of 2022, the net cash used in investing activities was primarily due to growth in credit sales and the consequential growth in Credit card and other loans, as well as the acquisition of a credit card loan portfolio. In the first half of 2021, the net cash provided by investing activities was due to an increase in payment rates that benefitted from government economic stimulus programs.
Cash Flows from Financing Activities primarily include changes in deposits and long-term debt. Cash used in financing activities was $72 million and $1,365 million for the six months ended June 30, 2022 and 2021, respectively. In the first half of 2022, the net cash used in financing activities was primarily driven by repayments of unsecured borrowings. In the first half of 2021, the net cash used in financing activities was driven by net repayments of asset-backed term notes (securitizations), partially offset by net increases in deposits.
INFLATION AND SEASONALITY
Although we cannot precisely determine the impact of inflation on our operations, we do not believe, at this time, that we have been significantly affected by inflation. For the most part we have relied on operating efficiencies from scale, technology and expansion in lower cost jurisdictions in select circumstances, as well as decreases in technology and communication costs, to offset increased costs of employee compensation and other operating expenses. We also recognize that a customer’s ability and willingness to repay us can be negatively impacted by factors such as inflation, which may result in greater delinquencies that lead to greater credit losses. If the efforts to control inflation in the U.S. and globally are not successful and inflationary pressures 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
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and financial condition. See Item 1A “Risk Factors” in our 2021 Form 10-K and other filings with the SEC for further information on the risks of inflation on our Company.
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
Comenity Bank is subject to various regulatory capital requirements administered by the State of Delaware and the FDIC. Comenity Capital Bank 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 2021 Form 10-K.
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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 Comenity Bank’s and/or Comenity Capital Bank’s operating activities, as well as our operating activities. Based on these regulations, as of June 30, 2022 and 2021, 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 are considered well capitalized and 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, as of June 30, 2022, are as follows:
Table 12: Capital Ratios
Minimum Ratio to be | |||||||||
| Minimum Ratio for | Well Capitalized under | |||||||
| Actual | Capital Adequacy | Prompt Corrective | ||||||
| Ratio | Purposes | Action Provisions | ||||||
Comenity Bank | |||||||||
Tier 1 Leverage capital ratio (1) | 19.1 | % | 4.0 | % | 5.0 | % | |||
Common Equity Tier 1 capital ratio (2) | 22.7 | 4.5 | 6.5 | ||||||
Tier 1 capital ratio (3) | 22.7 | 6.0 | 8.0 | ||||||
Total Risk-based capital ratio (4) | 24.0 | 8.0 | 10.0 | ||||||
Comenity Capital Bank | |||||||||
Tier 1 Leverage capital ratio (1) | 16.4 | % | 4.0 | % | 5.0 | % | |||
Common Equity Tier 1 capital ratio (2) | 18.0 | 4.5 | 6.5 | ||||||
Tier 1 capital ratio (3) | 18.0 | 6.0 | 8.0 | ||||||
Total Risk-based capital ratio (4) | 19.4 | 8.0 | 10.0 | ||||||
Combined Banks | |||||||||
Tier 1 Leverage capital ratio (1) | 17.7 | % | 4.0 | % | 5.0 | % | |||
Common Equity Tier 1 capital ratio (2) | 20.1 | 4.5 | 6.5 | ||||||
Tier 1 capital ratio (3) | 20.1 | 6.0 | 8.0 | ||||||
Total Risk-based capital ratio (4) | 21.5 | 8.0 | 10.0 | ||||||
| (1) | The Tier 1 Leverage capital ratio represents tier 1 capital divided by total average assets, after certain adjustments. |
| (2) | The Common Equity Tier 1 capital ratio represents common equity tier 1 capital divided by total risk-weighted assets. |
| (3) | The Tier 1 capital ratio represents tier 1 capital divided by total risk-weighted assets. |
| (4) | The Total Risk-based capital ratio represents total capital divided by total risk-weighted assets. |
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. We began to 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 (MDA),” included in our 2021 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.
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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, initiation or completion of strategic initiatives, future dividend declarations and future economic conditions, including, but not limited to, market conditions, inflation and developments in the geopolitical environment. We believe that our expectations are based on reasonable assumptions. Forward-looking statements, however, are subject to a number of risks and uncertainties that could cause actual results to 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. These risks and uncertainties include, but are not limited to, the following:
| ● | the ongoing effects of the global COVID-19 pandemic, which remain difficult to predict; |
| ● | macroeconomic and geopolitical conditions, including, but not limited to, market conditions, inflation, rising interest rates and the increased probability of a recession, and any impact of the war in Ukraine; |
| ● | loss of, or reduction in demand for services from, significant customers or partners; |
| ● | increases in fraudulent activity, net principal losses in credit card and other loans or increases or volatility in the allowance for credit losses that may result from the application of the current expected credit loss model; |
| ● | failure to identify, complete or successfully integrate or disaggregate business acquisitions or divestitures, including our ability to realize the intended benefits of the spinoff of our LoyaltyOne segment; |
| ● | continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations; |
| ● | the expected tax-free treatment of the distribution effected in the LoyaltyOne spinoff for U.S. federal income tax purposes; |
| ● | increases in the cost of doing business, including market interest rates; |
| ● | 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; |
| ● | limitations on consumer credit, loyalty or marketing services from new legislative or regulatory actions related to consumer protection and consumer privacy, including any such actions that may be taken with respect to late fees or other charges; |
| ● | increases in regulatory capital requirements or other support for our Banks; |
| ● | loss or disruption, due to cyberattack or other service failures, of data center operations or capacity; |
| ● | loss of consumer information due to compromised physical or cyber security; and |
| ● | those factors set forth in the Risk Factors section in our 2021 Form 10-K and our subsequent filings with the SEC as well as those factors discussed in the documents incorporated by reference in this Form 10-Q. |
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.
15
Item 1. Financial Statements.
BREAD FINANCIAL HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(Millions, except per share amounts) | ||||||||||||
Interest income | ||||||||||||
Interest and fees on loans | $ | | $ | | $ | | $ | | ||||
Interest on cash and investment securities |
| |
| |
| |
| | ||||
Total interest income |
| |
| |
| |
| | ||||
Interest expense | ||||||||||||
Interest on deposits |
| |
| |
| |
| | ||||
Interest on borrowings |
| |
| |
| |
| | ||||
Total interest expense | | | | | ||||||||
Net interest income | | | | | ||||||||
Non-interest income | ||||||||||||
Interchange revenue, net of retailer share arrangements | ( | ( | ( | ( | ||||||||
Other | | | | | ||||||||
Total non-interest income | ( | ( | ( | ( | ||||||||
Total net interest and non-interest income | | | | | ||||||||
Provision for credit losses | | ( | | | ||||||||
Total net interest and non-interest income, after provision for credit losses | | | | | ||||||||
Non-interest expenses | ||||||||||||
Employee compensation and benefits | | | | | ||||||||
Card and processing expenses | | | | | ||||||||
Information processing and communication | | | | | ||||||||
Marketing expenses | | | | | ||||||||
Depreciation and amortization |
| |
| |
| |
| | ||||
Other | | | | | ||||||||
Total non-interest expenses | | | | | ||||||||
Income from continuing operations before income taxes | | | | | ||||||||
Provision for income taxes |
| |
| |
| |
| | ||||
Income from continuing operations | | | | | ||||||||
Income (loss) from discontinued operations, net of income taxes |
| — |
| |
| ( |
| | ||||
Net income | $ | | $ | | $ | | $ | | ||||
Basic income per share (Note 13) | ||||||||||||
Income from continuing operations | $ | | $ | | $ | | $ | | ||||
Income (loss) from discontinued operations | $ | — | $ | | $ | ( | $ | | ||||
Net income per share | $ | | $ | | $ | | $ | | ||||
Diluted income per share (Note 13) | ||||||||||||
Income from continuing operations | $ | | $ | | $ | | $ | | ||||
Income (loss) from discontinued operations | $ | — | $ | | $ | ( | $ | | ||||
Net income per share | $ | | $ | | $ | | $ | | ||||
Weighted average common shares outstanding (Note 13) | ||||||||||||
Basic |
| |
| |
| |
| | ||||
Diluted |
| |
| |
| |
| | ||||
See Notes to unaudited Condensed Consolidated Financial Statements
16
BREAD FINANCIAL HOLDINGS, INC
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
(Millions) | ||||||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Other comprehensive loss | ||||||||||||
Unrealized loss on available-for-sale debt securities | ( | ( | ( | ( | ||||||||
Tax benefit | | | | | ||||||||
Unrealized loss on available-for-sale debt securities, net of tax |
| ( |
| ( |
| ( |
| ( | ||||
Unrealized gain on cash flow hedges | — | — | — | | ||||||||
Tax benefit | — | — | — | — | ||||||||
Unrealized gain on cash flow hedges, net of tax | — | — | — | | ||||||||
Foreign currency translation adjustments |
| — |
| |
| — |
| ( | ||||
Other comprehensive (loss) income, net of tax |
| ( |
| |
| ( |
| ( | ||||
Total comprehensive income, net of tax | $ | | $ | | $ | | $ | | ||||
See Notes to unaudited Condensed Consolidated Financial Statements.
17
BREAD FINANCIAL HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
(Millions, except per share amounts) | ||||||
ASSETS | ||||||
Cash and cash equivalents | $ | | $ | | ||
Credit card and other loans | ||||||
Total credit card and other loans (includes loans available to settle obligations of consolidated variable interest entities: 2022, $ |
| |
| | ||
Allowance for credit losses |
| ( |
| ( | ||
Credit card and other loans, net |
| |
| | ||
Investment securities | | | ||||
Property and equipment, net |
| |
| | ||
Goodwill and intangible assets, net |
| |
| | ||
Other assets |
| |
| | ||
Total assets | $ | | $ | | ||
LIABILITIES AND STOCKHOLDERS' EQUITY | ||||||
Deposits |
| |
| | ||
Debt issued by consolidated variable interest entities |
| |
| | ||
Long-term and other debt |
| |
| | ||
Other liabilities |
| |
| | ||
Total liabilities |
| |
| | ||
Commitments and contingencies (Note 9) | ||||||
Stockholders’ equity | ||||||
Common stock, $ |
| |
| | ||
Additional paid-in capital |
| |
| | ||
Retained earnings (accumulated deficit) |
| |
| ( | ||
Accumulated other comprehensive loss |
| ( |
| ( | ||
Total stockholders’ equity |
| |
| | ||
Total liabilities and stockholders’ equity | $ | | $ | | ||
See Notes to unaudited Condensed Consolidated Financial Statements.
18
BREAD FINANCIAL HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Accumulated | ||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||
Common Stock | Paid-In | Treasury | Retained | Comprehensive | Stockholders’ | |||||||||||||||
Three Months Ended June 30, 2022 |
| Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | ||||||
(Millions) | ||||||||||||||||||||
Balance as of March 31, 2022 |
| | $ | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Net income |
| — | — | — | — | | — |
| | |||||||||||
Other comprehensive loss |
| — | — | — | — | — | ( | ( | ||||||||||||
Stock-based compensation |
| — | — | | — | — | — | | ||||||||||||
Dividends and dividend equivalent rights declared ($ | — | — | — | — | ( | — | ( | |||||||||||||
Other |
| — | — | | — | — | — | | ||||||||||||
Balance as of June 30, 2022 |
| | $ | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Accumulated | ||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||
Common Stock | Paid-In | Treasury | Retained | Comprehensive | Stockholders’ | |||||||||||||||
Three Months Ended June 30, 2021 |
| Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | ||||||
(Millions) | ||||||||||||||||||||
Balance as of March 31, 2021 |
| | $ | | $ | | $ | ( | $ | | $ | ( | $ | | ||||||
Net income |
| — |
| — |
| — |
| — |
| |
| — |
| | ||||||
Other comprehensive income | — | — | — | — | — | | | |||||||||||||
Stock-based compensation | — | — | | — | — | — | | |||||||||||||
Dividends and dividend equivalent rights declared ($ | — | — | — | — | ( | — | ( | |||||||||||||
Other | — | — | | — | — | — | | |||||||||||||
Balance as of June 30, 2021 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||
See Notes to unaudited Condensed Consolidated Financial Statements.
19
BREAD FINANCIAL HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)
Accumulated | ||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||
Common Stock | Paid-In | Treasury | Retained | Comprehensive | Stockholders’ | |||||||||||||||
Six Months Ended June 30, 2022 |
| Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | ||||||
(Millions) | ||||||||||||||||||||
Balance as of December 31, 2021 |
| | $ | | $ | | $ | — | $ | ( | $ | ( | $ | | ||||||
Net income |
| — | — | — | — | | — |
| | |||||||||||
Other comprehensive loss |
| — | — | — | — | — | ( |
| ( | |||||||||||
Stock-based compensation |
| — | | — | — | — |
| | ||||||||||||
Repurchases of common stock | ( | — | ( | ( | ||||||||||||||||
Dividends and dividend equivalent rights declared ($ | — | — | — | — | ( | — |
| ( | ||||||||||||
Other |
| | — | ( | — | — | — | ( | ||||||||||||
Balance as of June 30, 2022 |
| | $ | | $ | | $ | — | $ | | $ | ( | $ | | ||||||
Accumulated | ||||||||||||||||||||
Additional | Other | Total | ||||||||||||||||||
Common Stock | Paid-In | Treasury | Retained | Comprehensive | Stockholders’ | |||||||||||||||
Six Months Ended June 30, 2021 |
| Shares |
| Amount |
| Capital |
| Stock |
| Earnings |
| Loss |
| Equity | ||||||
(Millions) | ||||||||||||||||||||
Balance as of December 31, 2020 |
| | $ | | $ | | $ | ( | $ | | $ | ( | $ | | ||||||
Net income |
| — | — | — | — | | — |
| | |||||||||||
Other comprehensive loss | — | — | — | — | — | ( |
| ( | ||||||||||||
Stock-based compensation | — | — | | — | — | — |
| | ||||||||||||
Dividends and dividend equivalent rights declared ($ | — | — | — | — | ( | — |
| ( | ||||||||||||
Balance as of June 30, 2021 | | $ | | $ | | $ | ( | $ | | $ | ( | $ | | |||||||
See Notes to unaudited Condensed Consolidated Financial Statements.
20
BREAD FINANCIAL HOLDINGS, INC.
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended | ||||||
June 30, | ||||||
| 2022 |
| 2021 | |||
(Millions) | ||||||
CASH FLOWS FROM OPERATING ACTIVITIES | ||||||
Net income | $ | | $ | | ||
Adjustments to reconcile net income to net cash provided by operating activities | ||||||
Provision for credit losses | | | ||||
Depreciation and amortization |
| |
| | ||
Deferred income taxes |
| ( |
| | ||
Non-cash stock compensation |
| |
| | ||
Amortization of deferred financing costs |
| |
| | ||
Amortization of deferred origination costs |
| |
| | ||
Change in other operating assets and liabilities | ||||||
Change in other assets | ( | ( | ||||
Change in other liabilities | ( | | ||||
Other | |
| | |||
Net cash provided by operating activities |
| |
| | ||
CASH FLOWS FROM INVESTING ACTIVITIES | ||||||
Change in credit card and other loans | ( | | ||||
Change in redemption settlement assets |
| — |
| ( | ||
Purchase of credit card loan portfolios |
| ( |
| ( | ||
Capital expenditures |
| ( |
| ( | ||
Purchases of investment securities |
| ( |
| ( | ||
Maturities of investment securities |
| |
| | ||
Other |
| ( |
| | ||
Net cash (used in) provided by investing activities |
| ( |
| | ||
CASH FLOWS FROM FINANCING ACTIVITIES | ||||||
Unsecured borrowings under debt agreements | | | ||||
Repayments/maturities of unsecured borrowings under debt agreements | ( | ( | ||||
Debt issued by consolidated variable interest entities |
| |
| | ||
Repayments/maturities of debt issued by consolidated variable interest entities | ( | ( | ||||
Net decrease in deposits | ( | ( | ||||
Payment of deferred financing costs |
| ( |
| ( | ||
Dividends paid |
| ( |
| ( | ||
Repurchases of common stock |
| ( |
| — | ||
Other |
| ( |
| ( | ||
Net cash used in financing activities |
| ( |
| ( | ||
Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash |
| — |
| | ||
Change in cash, cash equivalents and restricted cash |
| ( |
| ( | ||
Cash, cash equivalents and restricted cash at beginning of period |
| |
| | ||
Cash, cash equivalents and restricted cash at end of period | $ | | $ | | ||
SUPPLEMENTAL CASH FLOW INFORMATION | ||||||
Cash and cash equivalents reconciliation | ||||||
Cash and cash equivalents | $ | | $ | | ||
Restricted cash included within Other assets | | | ||||
Cash, cash equivalents and restricted cash included within Assets of discontinued operations | — | | ||||
Total cash, cash equivalents and restricted cash | $ | | $ | | ||
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.
21
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION
DESCRIPTION OF THE BUSINESS
Effective March 23, 2022, Alliance Data Systems Corporation was renamed Bread Financial Holdings, Inc., and on April 4, 2022, its New York Stock Exchange ticker changed from “ADS” to “BFH”. Neither the name change nor the ticker change affected the Company’s legal entity structure, nor did either change have an impact on the Company’s financial statements.
Bread Financial Holdings, Inc. (BFH or, including its consolidated subsidiaries and variable interest entities (VIEs), the Company) is a tech-forward financial services company providing simple, personalized payment, lending and saving solutions. The Company creates opportunities for its 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, the Company delivers growth for its partners through a comprehensive product suite, including private label and co-brand credit cards, installment lending, and buy now, pay later (split-pay). The Company also offers direct-to-consumer solutions that give customers more access, choice and freedom through its branded Bread CashbackTM American Express® Credit Card and Bread SavingsTM products.
BASIS OF PRESENTATION
The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). For purposes of comparability, certain prior period amounts have been reclassified to conform to the current presentation, in particular, as a result of the spinoff of its LoyaltyOne segment and its classification as discontinued operations, the Company has adjusted the presentation of its Consolidated Financial Statements from its historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.” While neither the Company nor any of its subsidiaries is considered a “bank” within the meaning of the Bank Holding Company Act, the changes from the historical presentation, to the bank holding company presentation, the most significant of which reflect a reclassification of Interest expense within Net interest income, are intended to reflect the Company’s operations going forward and better align the Company with its peers for comparability purposes.
The unaudited Condensed Consolidated Financial Statement should be read in conjunction with the Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 25, 2022; 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 Company’s Allowance for credit losses.
The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which the Company has a controlling financial interest. All intercompany transactions have been eliminated.
22
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
RECENTLY ISSUED ACCOUNTING STANDARDS
In March 2022, the Financial Accounting Standards Board 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, including requiring disclosure of gross principal losses by year of loan origination. The Company is evaluating the new guidance and any impacts on its financial position, results of operations and regulatory risk-based capital, none of which are expected to be material, along with any anticipated impacts on its operational processes, controls and governance.
2. CREDIT CARD AND OTHER LOANS
The Company’s payment and lending solutions result in the generation of credit card and other loans, which are recorded at the time a cardholder 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 are primarily installment loans offered to customers, 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. The Company continues 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, the Company classifies its credit card and other loans as held for investment. The Company sells a majority of its credit card loans originated by Comenity Bank and by Comenity Capital Bank, which together are referred to herein as the “Banks,” to securitization master 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 the Company has the intent and ability to hold them for the foreseeable future. In determining what constitutes the foreseeable future, the Company considers the average life and homogenous nature of its credit card and other loans. In assessing whether its credit card and other loans continue to be held for investment, the Company also considers 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 the Company’s direct-to-consumer 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 its credit card and other loans. Due to the homogenous nature of the Company’s 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. The Company carries these assets at the lower of aggregate cost or fair value, and continues 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.
23
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table presents the Company’s credit card and other loans, as of June 30, 2022 and December 31, 2021, respectively:
| June 30, |
| December 31, | |||
| 2022 |
| 2021 | |||
(Millions) | ||||||
Credit card loans | $ | | $ | | ||
Installment (other) loans | | | ||||
Total credit card and other loans (1)(2) | | | ||||
Less: Allowance for credit losses | ( | ( | ||||
Credit card and other loans, net | $ | | $ | | ||
| (1) | Includes $ |
| (2) | Includes $ |
Credit Card and Other Loans Aging
An account is contractually delinquent if the Company does not receive the minimum payment due by the specified due date. The Company’s 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
The following table presents the delinquency trends on the Company’s credit card and other loans portfolio based on the amortized cost:
Aging Analysis of Delinquent Amortized Cost | ||||||||||||||||||
| 31 to 60 days |
| 61 to 90 days |
| 91 or more days delinquent |
| Total |
| Current |
| Total | |||||||
(Millions) | ||||||||||||||||||
As of June 30, 2022 | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
As of December 31, 2021 | $ | | $ | | $ | | $ | | $ | | $ | | ||||||
| (1) | Installment 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, the Company excludes unbilled finance charges from its amortized cost basis of credit card and other loans. As of June 30, 2022 and December 31, 2021, accrued interest and fees that have not yet been billed to cardholders were $ |
From time to time the Company may re-age cardholders’ accounts, which is intended to assist 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. The Company’s re-aged accounts as a percentage of total credit card and other loans represented
24
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
Net Principal Losses
The Company’s 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
Modified Credit Card Loans
Forbearance Programs
As part of the Company’s collections strategy, the Company may offer temporary, short term (six-months or less) forbearance programs in order to improve the likelihood of collections and meet the needs of the Company’s customers. The Company’s 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. The Company does not offer programs involving the forgiveness of principal. These temporary loan modifications may assist in cases where the Company believes the customer will recover from the short-term hardship and resume scheduled payments. Under these forbearance modification programs, those accounts receiving relief may not advance to the next delinquency cycle, including to charge-off, in the same time frame that would have occurred had the relief not been granted. The Company evaluates its forbearance modification programs to determine if they represent a more than insignificant delay in payment, in which case they would then be considered a troubled debt restructuring (TDR). Loans in these short term programs that are determined to be TDR’s, will be included as such in the disclosures below.
Credit Card Loans Modified as TDRs
The Company considers impaired loans to be loans for which it is probable that it will be unable to collect all amounts due according to the original contractual terms of the cardholder agreement, including credit card loans modified as TDRs. In instances where cardholders are experiencing financial difficulty, the Company may modify its 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 TDRs, exclusive of the forbearance programs described above. Modifications, including for temporary hardship and permanent workout programs, include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs’ concessions remain in place for a period no longer than
TDR 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 the Company’s 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.
TDRs are collectively evaluated for impairment on a pooled basis. In measuring the appropriate allowance for credit losses, these modified credit card loans are included in the general pool of credit card loans, with the allowance determined under a contingent loss model. The Company’s impaired credit card loans represented less than
25
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
for credit losses of $
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. The Company recognized $
The following table provides additional information regarding credit card loans modified as TDRs during the specified periods:
Three Months Ended June 30, 2022 | Six Months Ended June 30, 2022 | |||||||||||||||
Pre-modification | Post-modification | Pre-modification | Post-modification | |||||||||||||
Number of | Outstanding | Outstanding | Number of | Outstanding | Outstanding | |||||||||||
| Restructurings |
| Balance |
| Balance |
| Restructurings |
| Balance |
| Balance | |||||
(Millions, except for Number of restructurings) | ||||||||||||||||
Troubled debt restructurings – credit card loans | |
| $ | |
| $ | | |
| $ | |
| $ | | ||
Three Months Ended June 30, 2021 |
| Six Months Ended June 30, 2021 | ||||||||||||||
Pre-modification | Post-modification |
| Pre-modification | Post-modification | ||||||||||||
Number of | Outstanding | Outstanding | Number of | Outstanding | Outstanding | |||||||||||
| Restructurings |
| Balance |
| Balance |
| Restructurings |
| Balance |
| Balance | |||||
(Millions, except for Number of restructurings) | ||||||||||||||||
Troubled debt restructurings – credit card loans | |
| $ | |
| $ | | |
| $ | |
| $ | | ||
The following table provides additional information regarding credit card loans modified as TDRs that have subsequently defaulted within 12 months of their modification dates during the specified periods; the probability of default is factored into the allowance for credit losses:
Three Months Ended | Six Months Ended | |||||||||
June 30, 2022 | June 30, 2022 | |||||||||
Number of | Outstanding |
| Number of | Outstanding | ||||||
| Restructurings |
| Balance |
| Restructurings |
| Balance | |||
(Millions, except for Number of restructurings) | ||||||||||
Troubled debt restructurings that subsequently defaulted |
| | $ | | | $ | | |||
Three Months Ended |
| Six Months Ended | ||||||||
June 30, 2021 | June 30, 2021 | |||||||||
Number of | Outstanding |
| Number of | Outstanding | ||||||
| Restructurings |
| Balance |
| Restructurings |
| Balance | |||
(Millions, except for Number of restructurings) | ||||||||||
Troubled debt restructurings that subsequently defaulted |
| | $ | | | $ | | |||
Credit Quality
Credit Card Loans
As part of the Company’s credit risk management activities, the Company assesses overall credit quality by reviewing information related to the performance of a credit cardholder’s account, as well as information from credit bureaus relating to the cardholder’s broader credit performance. The Company utilizes VantageScore (Vantage) credit scores to assist in its 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. The Company categorizes 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
26
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
customer accounts for which a Vantage score is not available and the Company uses alternative sources to assess credit risk and predict behavior. The table below excludes
June 30, | December 31, | |||||||||||||||||
2022 | 2021 | |||||||||||||||||
| 661 or |
|
| 601 to |
|
| 600 or |
|
| 661 or |
|
| 601 to |
|
| 600 or |
| |
Higher | 660 | Less | Higher | 660 | Less | |||||||||||||
Credit card loans | | % |
| | % |
| | % |
| | % |
| | % |
| | % | |
Installment Loans
The amortized cost basis of the Company’s installment loans totaled $
Unfunded Loan Commitments
The Company is active in originating private label and co-brand credit cards in the United States. The Company manages potential credit risk in its 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 United States and are not significantly concentrated in any one area.
The Company manages its 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 its portfolios and applying consistent underwriting standards. The Company has the unilateral ability to cancel or reduce unused credit card lines at any time. Unused credit card lines available to cardholders totaled approximately $
Portfolio Sales
As of June 30, 2022 and December 31, 2021, there were
Portfolio Acquisitions
In April 2022, the Company acquired a credit card portfolio for cash consideration of approximately $
27
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
3. ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses is an estimate of expected credit losses, measured over the estimated life of its 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 the Company’s 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 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 its 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 with credit performance. The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors. The Company considers 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, the Company also incorporates 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 the Company’s best estimate of current expected credit losses.
Credit Card Loans
The Company uses a “pooled” approach to estimate expected credit losses for financial assets with similar risk characteristics. The Company has evaluated multiple risk characteristics across its credit card loans portfolio, and determined delinquency status and credit quality to be the most significant characteristics for estimating expected credit losses. To estimate its Allowance for credit losses, the Company segments its 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 the Company’s credit card loans, payments were applied to the measurement date balance with
Installment Loans
The Company measures its allowance for credit losses on installment 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 June 30, 2022 and December 31, 2021, the Allowance for credit losses on installment loans was $
Allowance for Credit Losses Rollforward
The following table presents the Company’s Allowance for credit losses for its credit card and other loans. With the acquisition of Lon, Inc. in December 2020, the Company acquired certain installment loans which represented a separate
28
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
portfolio segment; the amount of the related Allowance for credit losses is insignificant and therefore has been included in the table below.
Three Months Ended | Six Months Ended | ||||||||||||
June 30, | June 30, | ||||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 |
| |||||
(Millions) | |||||||||||||
Beginning balance | $ | | $ | | $ | | $ | | |||||
Provision for credit losses (1) |
| |
| ( |
| |
| | |||||
Net principal losses (2) |
| ( |
| ( |
| ( |
| ( | |||||
Ending balance | $ | | $ | | $ | | $ | | |||||
| (1) | Provision for credit losses includes a build/release for the allowance, as well as replenishment of Net principal losses. |
| (2) | Principal losses are presented net of recoveries of $ |
For the three and six months ended June 30, 2022, the factors that influenced the increase in the Allowance for credit losses are the current year periods economic scenario weightings in the Company’s credit reserve modeling reflecting the increasing probability of a recession and other macroeconomic factors, including the increasing interest rate environment and persistent inflation.
4. SECURITIZATIONS
The Company accounts 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.
The Company regularly securitizes the majority of its credit card loans through the transfer of those loans to one of its master trusts (the Trusts). The Company performs the decision making for the Trusts, as well as servicing the cardholder accounts that generate the credit card loans held by the Trusts. In its capacity as a servicer, the Company administers the loans, collects payments and charges-off uncollectible balances. Servicing fees are earned by a subsidiary of the Company, which are eliminated in consolidation.
The Trusts are consolidated VIEs because they have insufficient equity at risk to finance their activities – being the issuance of debt securities and notes, collateralized by the underlying credit card loans. Because the Company performs 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, the Company holds all of the variable interests in the Trusts, with the exception of the liabilities held by third-parties. These variable interests provide the Company 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, the Company is 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 the Company. 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 its securitized credit card loans, during the initial phase of a securitization reinvestment period, the Company generally retains 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.
29
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The Company is required to maintain minimum interests in its Trusts ranging from
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:
June 30, | December 31, | |||||
| 2022 |
| 2021 | |||
(Millions) | ||||||
Total credit card loans – available to settle obligations of consolidated VIEs | $ | | $ | | ||
Of which: principal amount of credit card loans 91 days or more past due | $ | | $ | | ||
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(Millions) | ||||||||||||
Net principal losses of securitized credit card loans | $ | | $ | | $ | | $ | | ||||
5. INVESTMENT SECURITIES
The Company’s investment securities consist of available-for-sale (AFS) securities, which are debt securities, U.S. Treasury bonds and mutual funds. The Company also holds equity securities within its 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. The Company 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. The Company typically invests 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 June 30, 2022 and December 31, 2021, respectively:
June 30, 2022 | December 31, 2021 | |||||||||||||||||||||||
| Amortized |
| Unrealized |
| Unrealized |
|
| Amortized |
| Unrealized |
| Unrealized |
| |||||||||||
| Cost |
| Gains |
| Losses |
| Fair Value |
| Cost |
| Gains |
| Losses |
| Fair Value | |||||||||
(Millions) | ||||||||||||||||||||||||
Available-for-sale securities | $ | | $ | — | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
Equity securities | | — | — | | | — | — | | ||||||||||||||||
Total | $ | | $ | — | $ | ( | $ | | $ | | $ | | $ | ( | $ | | ||||||||
30
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table provides information about the Company’s 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 June 30, 2022 and December 31, 2021, respectively.
June 30, 2022 | ||||||||||||||||||
Less than 12 months | 12 Months or Greater | Total | ||||||||||||||||
|
| Unrealized |
|
| Unrealized |
|
| Unrealized | ||||||||||
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | |||||||
(Millions) | ||||||||||||||||||
Available-for-sale securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
December 31, 2021 | ||||||||||||||||||
Less than 12 months | 12 Months or Greater | Total | ||||||||||||||||
|
| Unrealized |
|
| Unrealized |
|
| Unrealized | ||||||||||
| Fair Value |
| Losses |
| Fair Value |
| Losses |
| Fair Value |
| Losses | |||||||
(Millions) | ||||||||||||||||||
Available-for-sale securities | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
Total | $ | | $ | ( | $ | | $ | ( | $ | | $ | ( | ||||||
As of June 30, 2022, the amortized cost and estimated fair value of the Company’s AFS debt securities, which are mortgage-backed securities with no stated maturities, was $
There were
6. DEPOSITS
As of June 30, 2022 and December 31, 2021, deposits were categorized as interest-bearing or non-interest-bearing as follows:
| June 30, |
| December 31, | |||
| 2022 |
| 2021 | |||
(Millions) | ||||||
Interest-bearing | $ | | $ | | ||
Non-interest-bearing (including cardholder credit balances) | | — | ||||
Total deposits | $ | | $ | | ||
Deposits by deposit type as of June 30, 2022 and December 31, 2021 were as follows:
| June 30, |
| December 31, | |||
| 2022 |
| 2021 | |||
(Millions) | ||||||
Savings accounts | ||||||
Direct-to-consumer (retail) | $ | | $ | | ||
Wholesale | | | ||||
Certificates of deposit | ||||||
Direct-to-consumer (retail) | | | ||||
Wholesale | | | ||||
Cardholder credit balances | | — | ||||
Total deposits | $ | | $ | | ||
31
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The scheduled maturities of certificates of deposit as of June 30, 2022 were as follows:
(Millions) | |||
2022(1) | $ | | |
2023 |
| | |
2024 |
| | |
2025 |
| | |
2026 |
| | |
Thereafter |
| | |
Total certificates of deposit | |
| (1) | The 2022 balance includes $ |
As of June 30, 2022 and December 31, 2021, certificates of deposit that exceeded applicable FDIC insurance limits, which are generally $250,000 or more, in the aggregate, were $
7. OTHER NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSES
The following table provides the components of Other non-interest income:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
(Millions) | ||||||||||||
Payment protection products | $ | | $ | | $ | | $ | | ||||
Loss from equity method investment | ( | — | ( | — | ||||||||
Other |
| — |
| |
| |
| | ||||
Total other non-interest income | $ | | $ | | $ | | $ | | ||||
The following table provides the components of Other non-interest expenses:
Three Months Ended | Six Months Ended | |||||||||||
June 30, | June 30, | |||||||||||
| 2022 |
| 2021 | 2022 |
| 2021 | ||||||
(Millions) | ||||||||||||
Professional services and regulatory fees | $ | | $ | | $ | | $ | | ||||
Occupancy expense | | | | | ||||||||
Other(1) | | | | | ||||||||
Total other non-interest expenses | $ | | $ | | $ | | $ | | ||||
| (1) | Primarily related to costs associated with various other individually insignificant operating activities. |
32
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 the Company 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.
The Company monitors the market conditions and evaluates the fair value hierarchy levels quarterly. For the three and six months ended June 30, 2022 and 2021, there were
The following table summarizes the carrying values and fair values of the Company’s financial assets and financial liabilities:
June 30, 2022 | December 31, 2021 | |||||||||||
Carrying | Fair | Carrying | Fair | |||||||||
| Amount |
| Value |
| Amount |
| Value | |||||
(Millions) | ||||||||||||
Financial assets | ||||||||||||
Credit card and other loans, net | $ | | $ | | $ | | $ | | ||||
Investment securities |
| |
| |
| |
| | ||||
Financial liabilities | ||||||||||||
Deposits |
| |
| |
| |
| | ||||
Debt issued by consolidated VIEs |
| |
| |
| |
| | ||||
Long-term and other debt |
| |
| |
| |
| | ||||
Valuation Techniques Used in the Fair Value Measurement of Financial Assets and Financial Liabilities
Credit card and other loans, net: The Company’s Credit card and other loans are recorded at historical cost, less an allowance for credit losses, on the Consolidated Balance Sheets. In estimating the fair values, the Company uses 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. The Company uses 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, U.S. Treasury bonds 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).
33
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
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 the Company 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: The Company records debt issued by its 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 the Company 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: The Company records its 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 the Company for similar debt instruments with similar remaining maturities, or quoted market prices for the same transaction (i.e., Level 2 inputs).
The following tables summarize the Company’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by the fair value hierarchy described in the preceding paragraphs:
June 30, 2022 | ||||||||||||
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
(Millions) | ||||||||||||
Investment securities | $ | | $ | | $ | | $ | — | ||||
Total assets measured at fair value | $ | | $ | | $ | | $ | — | ||||
December 31, 2021 | ||||||||||||
| Total |
| Level 1 |
| Level 2 |
| Level 3 | |||||
(Millions) | ||||||||||||
Investment securities | $ | | $ | | $ | | $ | — | ||||
Total assets measured at fair value | $ | | $ | | $ | | $ | — | ||||
Financial Instruments Disclosed but Not Carried at Fair Value
The following tables summarize the Company’s 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 June 30, 2022 and December 31, 2021 respectively. The fair values of these financial instruments are estimates as of June 30, 2022 and December 31, 2021, and require management’s judgment; therefore, these figures may not be indicative of future fair values, nor can the fair value of the Company be estimated by aggregating all of the amounts presented.
June 30, 2022 | ||||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
(Millions) | ||||||||||||
Financial assets | ||||||||||||
Credit card and other loans, net | $ | | $ | — | $ | — | $ | | ||||
Total | $ | | $ | — | $ | — | $ | | ||||
Financial liabilities | ||||||||||||
Deposits | $ | | $ | — | $ | | $ | — | ||||
Debt issued by consolidated VIEs |
| |
| — |
| |
| — | ||||
Long-term and other debt |
| |
| — |
| |
| — | ||||
Total | $ | | $ | — | $ | | $ | — | ||||
34
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
December 31, 2021 | ||||||||||||
| Fair Value |
| Level 1 |
| Level 2 |
| Level 3 | |||||
(Millions) | ||||||||||||
Financial assets | ||||||||||||
Credit card and other loans, net | $ | | $ | — | $ | — | $ | | ||||
Total | $ | | $ | — | $ | — | $ | | ||||
Financial liabilities | ||||||||||||
Deposits | $ | | $ | — | $ | | $ | — | ||||
Debt issued by consolidated VIEs |
| |
| — |
| |
| — | ||||
Long-term and other debt |
| |
| — |
| |
| — | ||||
Total | $ | | $ | — | $ | | $ | — | ||||
Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis
Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property and equipment, right-of-use assets, deferred contract assets, goodwill, and intangible assets. These assets are not measured at fair value on a recurring basis but are subject to fair value adjustments in certain circumstances, such as upon impairment. The Company recognized a write-down of its equity method investment in Loyalty Ventures Inc. of $
9. COMMITMENTS AND CONTINGENCIES
Regulatory Matters
Comenity Bank is regulated, supervised and examined by the State of Delaware and the Federal Deposit Insurance Corporation (FDIC). The Company’s industrial bank, Comenity Capital Bank, is regulated, supervised and examined by the State of Utah and the FDIC. While neither of the Banks is currently subject to regular examinations by the Consumer Financial Protection Bureau (CFPB) due to each Bank’s total assets not having exceeded $10.0 billion for four consecutive quarters, the Company has in the past been, and expects in the future to become, subject to supervision and examination by the CFPB with respect to federal consumer protection laws.
Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank to maintain minimum amounts and ratios of Tier 1 capital to average assets, 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 Comenity Bank’s and/or Comenity Capital Bank’s operating activities, as well as those of the Company. Based on these regulations, as of June 30, 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.
35
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The actual capital ratios and minimum ratios for each Bank, as well as the Combined Banks, as of June 30, 2022, are as follows:
Minimum Ratio to be | |||||||||
| Minimum Ratio for | Well Capitalized under | |||||||
| Actual | Capital Adequacy | Prompt Corrective | ||||||
| Ratio | Purposes | Action Provisions | ||||||
Comenity Bank | |||||||||
Tier 1 Leverage capital ratio (1) | | % | | % | | % | |||
Common Equity Tier 1 capital ratio (2) | | | | ||||||
Tier 1 capital ratio (3) | | | | ||||||
Total Risk-based capital ratio (4) | | | | ||||||
Comenity Capital Bank | |||||||||
Tier 1 Leverage capital ratio (1) | | % | | % | | % | |||
Common Equity Tier 1 capital ratio (2) | | | | ||||||
Tier 1 capital ratio (3) | | | | ||||||
Total Risk-based capital ratio (4) | | | | ||||||
Combined Banks | |||||||||
Tier 1 Leverage capital ratio (1) | | % | | % | | % | |||
Common Equity Tier 1 capital ratio (2) | | | | ||||||
Tier 1 capital ratio (3) | | | | ||||||
Total Risk-based capital ratio (4) | | | | ||||||
| (1) | The Tier 1 Leverage capital ratio represents tier 1 capital divided by total average assets, after certain adjustments. |
| (2) | The Common Equity Tier 1 capital ratio represents common equity tier 1 capital divided by total risk-weighted assets. |
| (3) | The Tier 1 capital ratio represents tier 1 capital divided by total risk-weighted assets. |
| (4) | The Total Risk-based capital ratio represents total capital divided by total risk-weighted assets. |
Indemnification
On July 1, 2019, the Company completed the sale of its Epsilon segment to Publicis Groupe S.A. (Publicis). Under the terms of the agreement governing that transaction, the Company agreed to indemnify Publicis and its affiliates from and against any losses arising out of or related to a United States Department of Justice (DOJ) investigation. The DOJ investigation related to third-party marketers who sent, or allegedly sent, deceptive mailings and the provision of data and services to those marketers by Epsilon’s data practice. Epsilon actively cooperated with the DOJ in connection with the investigation. On January 19, 2021, Epsilon entered into a deferred prosecution agreement (DPA) with the DOJ to resolve the matters that were the subject of the investigation. Pursuant to the DPA, Epsilon agreed, among other things, to pay penalties and consumer compensation in the aggregate amount of $
Legal Proceedings
From time to time the Company is involved in various claims and lawsuits and other proceedings, arising in the ordinary course of business that it believes will not have a material adverse effect on its business, consolidated financial condition or liquidity, including claims and lawsuits alleging breaches of the Company’s contractual obligations, arbitrations, class actions and other litigation, arising in connection with its business activities. The Company is also involved, from time to time, in reviews, investigations, subpoenas and other proceedings (both formal and informal) by governmental agencies regarding its business (collectively, “regulatory matters”), which could subject the Company to significant fines,
36
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
penalties, obligations to change its business practices or other requirements resulting in increased expenses, diminished income and damage to the Company’s reputation.
10. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in each component of accumulated other comprehensive loss, net of tax effects, are as follows:
Net | Net Unrealized | Net Unrealized | Foreign | Accumulated | |||||||||||
Unrealized | Gains (Losses) | Gains (Losses) | Currency | Other | |||||||||||
| Gains (Losses) |
| on Cash |
| on Net |
| Translation |
| Comprehensive | ||||||
Three Months Ended June 30, 2022 |
| on AFS Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments |
| Loss | |||||
(Millions) | |||||||||||||||
Balance as of March 31, 2022 |
| $ | ( |
| $ | — |
| $ | — |
| $ | ( |
| $ | ( |
Changes in other comprehensive loss | ( | — | — | — | ( | ||||||||||
Balance as of June 30, 2022 |
| $ | ( |
| $ | — |
| $ | — |
| $ | ( |
| $ | ( |
Net | Net Unrealized | Net Unrealized | Foreign | Accumulated | |||||||||||
Unrealized | Gains (Losses) | Gains (Losses) | Currency | Other | |||||||||||
| Gains (Losses) |
| on Cash |
| on Net |
| Translation |
| Comprehensive | ||||||
Three Months Ended June 30, 2021 |
| on Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments (1) |
| Loss | |||||
(Millions) |
| ||||||||||||||
Balance as of March 31, 2021 |
| $ | |
| $ | — |
| $ | ( |
| $ | ( |
| $ | ( |
Changes in other comprehensive (loss) income | ( | — | — | | | ||||||||||
Balance as of June 30, 2021 |
| $ | |
| $ | — |
| $ | ( |
| $ | ( |
| $ | ( |
Net | Net Unrealized | Net Unrealized | Foreign | Accumulated | |||||||||||
Unrealized | Gains (Losses) | Gains (Losses) | Currency | Other | |||||||||||
Gains (Losses) | on Cash | on Net | Translation | Comprehensive | |||||||||||
Six Months Ended June 30, 2022 |
| on Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments |
| Loss | |||||
(Millions) |
| ||||||||||||||
Balance as of December 31, 2021 |
| $ | |
| $ | — |
| $ | — |
| $ | ( |
| $ | ( |
Changes in other comprehensive loss | ( | — | — | — | ( | ||||||||||
Balance as of June 30, 2022 |
| $ | ( |
| $ | — |
| $ | — |
| $ | ( |
| $ | ( |
Net | Net Unrealized | Net Unrealized | Foreign | Accumulated | |||||||||||
Unrealized | Gains (Losses) | Gains (Losses) | Currency | Other | |||||||||||
Gains (Losses) | on Cash | on Net | Translation | Comprehensive | |||||||||||
Six Months Ended June 30, 2021 |
| on Securities |
| Flow Hedges |
| Investment Hedge |
| Adjustments (1) |
| Loss | |||||
(Millions) |
| ||||||||||||||
Balance as of December 31, 2020 |
| $ | |
| $ | ( |
| $ | ( |
| $ | ( |
| $ | ( |
Changes in other comprehensive (loss) income | ( | | — | ( | ( | ||||||||||
Balance as of June 30, 2021 |
| $ | |
| $ | — |
| $ | ( |
| $ | ( |
| $ | ( |
| (1) | Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates from the Company’s LoyaltyOne segment, which was spun off in November 2021. |
11. STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
On February 28, 2022, the Company’s Board of Directors approved a stock repurchase program to acquire up to
37
BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
this program for an aggregate of $
During the six months ended June 30, 2021, the Company did
Stock Compensation Expense
During the six months ended June 30, 2022, the Company awarded
During the six months ended June 30, 2022, the Company awarded
For the three months ended June 30, 2022 and 2021, the Company recognized $
Dividends
During the three and six months ended June 30, 2022, the Company paid $
12. INCOME TAXES
The effective tax rate was
The Company is under examination by the Internal Revenue Service as well as tax authorities in various states. The tax years under examination and open for examination vary by jurisdiction, but with some exceptions, the tax returns filed by the Company are no longer subject to U.S. federal income tax and state and local examinations for the years before 2015 or foreign income tax examinations for years before 2018.
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BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
13. EARNINGS PER SHARE
The following table sets forth the computation of basic and diluted EPS attributable to common stockholders for the three and six months ended June 30, 2022 and 2021:
Three Months Ended June 30, | Six Months Ended June 30, | |||||||||||
| 2022 |
| 2021 |
| 2022 |
| 2021 | |||||
(Millions, except per share amounts) | ||||||||||||
Numerator | ||||||||||||
Income from continuing operations | $ | | $ | | $ | | $ | | ||||
Income (loss) from discontinued operations, net of income taxes | — | | ( | | ||||||||
Net income | $ | | $ | | $ | | $ | | ||||
Denominator | ||||||||||||
Basic: Weighted average common stock |
| |
| |
| |
| | ||||
Weighted average effect of dilutive securities | ||||||||||||
Add: net effect of dilutive unvested restricted stock awards (1) |
| |
| |
| |
| | ||||
Diluted |
| |
| |
| |
| | ||||
Basic EPS | ||||||||||||
Income from continuing operations | $ | | $ | | $ | | $ | | ||||
Income (loss) from discontinued operations | $ | — | $ | | $ | ( | $ | | ||||
Net income per share | $ | | $ | | $ | | $ | | ||||
Diluted EPS | ||||||||||||
Income from continuing operations | $ | | $ | | $ | | $ | | ||||
Income (loss) from discontinued operations | $ | — | $ | | $ | ( | $ | | ||||
Net income per share | $ | | $ | | $ | | $ | | ||||
| (1) | For the three and six months ended June 30, 2022 and 2021, an insignificant amount of restricted stock awards were excluded from each calculation of weighted average dilutive common shares as the effect would have been anti-dilutive. |
14. DISCONTINUED OPERATIONS
LoyaltyOne
On November 5, 2021, the separation of Loyalty Ventures Inc. (Loyalty Ventures) from the Company was completed after market close (the Separation). The Separation, which has been classified as discontinued operations, was achieved through the Company’s distribution of
The Company accounts for its
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BREAD FINANCIAL HOLDINGS, INC.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)
The following table summarizes the results of operations of the Company’s former LoyaltyOne segment, direct costs identifiable to the LoyaltyOne segment, and the allocation of interest expense on corporate debt, for the three and six months ended June 30, 2021:
| Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | |||||
(Millions) | |||||||
Total interest income | $ | — | $ | — | |||
Total interest expense (1) | | | |||||
Net interest income | ( | ( | |||||
Total non-interest income | | | |||||
Total non-interest expenses | | | |||||
Income before provision from income taxes | | | |||||
Provision for income taxes | | | |||||
Income from discontinued operations, net of income taxes | $ | | $ | | |||
| (1) | The Company’s Credit Agreement, as amended, required a $ |
The following table summarizes the depreciation and amortization, and capital expenditures of the Company’s former LoyaltyOne segment for the three and six months ended June 30, 2021:
| |||||||
(Millions) | Three Months Ended June 30, 2021 | Six Months Ended June 30, 2021 | |||||
Depreciation and amortization | $ | | $ | | |||
Capital expenditures | $ | | $ | | |||
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Item 3.Quantitative and Qualitative Disclosures About Market Risk.
Market Risk
Market risk is the risk to earnings or asset and liability values resulting from movements in market prices. Our principal market risk exposure arises from volatility in interest rates and their impact on economic value, capitalization levels, cost of capital and earnings.
There has been no material change from our 2021 Form 10-K related to our exposure to interest rate risk or other market risks.
Item 4. | Controls and Procedures. |
Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, our disclosure controls and procedures are effective and designed to ensure that the information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the requisite time periods specified in the applicable rules and forms, and that it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
There have not been any changes in our internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the fiscal quarter to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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PART II: OTHER INFORMATION
Item 1. Legal Proceedings.
For a description of legal proceedings applicable to our business, see Indemnification and Legal Proceedings in Note 9, “Commitments and Contingencies”, of the Notes to unaudited Condensed Consolidated Financial Statements.
Item 1A. Risk Factors.
There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the year-ended December 31, 2021 or our Quarterly Report on Form 10-Q for the quarter-ended March 31, 2022. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our business.
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds. |
The following table presents information with respect to purchases of our common stock made during the three months ended June 30, 2022:
Total Number of | Approximate Dollar | |||||||||
Shares Purchased as | Value of Shares that | |||||||||
Part of Publicly | May Yet Be | |||||||||
Total Number of | Average Price Paid | Announced Plans or | Purchased Under the | |||||||
Period |
| Shares Purchased (1) |
| per Share |
| Programs |
| Plans or Programs | ||
(Millions) | ||||||||||
April 1-30 |
| 2,950 | $ | 55.74 | — | $ | — | |||
May 1-31 |
| 2,356 |
| 52.28 |
| — |
| — | ||
June 1-30 | 3,407 | 47.34 | — | — | ||||||
Total |
| 8,713 | $ | 51.52 | — | $ | — | |||
| (1) | During the periods presented, 8,713 shares of our common stock were purchased by the administrator of our Bread Financial 401(k) Plan for the benefit of the employees who participated in that portion of the Plan. |
Item 3. | Defaults Upon Senior Securities. |
None.
Item 4.Mine Safety Disclosures.
Not applicable.
Item 5. | Other Information. |
| (a) | None |
| (b) | None |
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Item 6.Exhibits.
| a) | Exhibits: |
EXHIBIT INDEX
Incorporated by Reference | ||||||||||
|---|---|---|---|---|---|---|---|---|---|---|
Exhibit No. | Filer | Description | Form | Exhibit | Filing Date | |||||
3.1 | (a) | Third Amended and Restated Certificate of Incorporation of the Registrant. | 8-K | 3.2 | 6/10/16 | |||||
3.2 | (a) | 8-K | 3.1 | 3/24/22 | ||||||
3.3 | (a) | 8-K | 3.1 | 4/29/19 | ||||||
3.4 | (a) | 8-K | 3.2 | 3/24/22 | ||||||
4 | (a) | Specimen Certificate for shares of Common Stock of the Registrant. | 10-Q | 4 | 8/8/03 | |||||
10.1 | (b) (c) (d) | 10-D | 99.2 | 6/15/22 | ||||||
*31.1 | (a) | |||||||||
*31.2 | (a) | |||||||||
**32.1 | (a) | |||||||||
**32.2 | (a) | |||||||||
*101 | (a) | The following financial information from Bread Financial Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income (Loss), (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements. | ||||||||
*104 | (a) | Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101). | ||||||||
* Filed herewith
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** Furnished herewith
| (a) | Bread Financial Holdings, Inc. |
| (b) | WFN Credit Company, LLC |
| (c) | World Financial Network Credit Card Master Trust |
| (d) | World Financial Network Credit Card Master Note Trust |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, Bread Financial Holdings, Inc. has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
BREAD FINANCIAL HOLDINGS, INC. | ||
DATE: August 4, 2022 | ||
By: | /s/ RALPH J. ANDRETTA | |
Ralph J. Andretta | ||
President and Chief Executive Officer | ||
DATE: August 4, 2022 | ||
By: | /s/ PERRY S. BEBERMAN | |
Perry S. Beberman | ||
Executive Vice President and Chief Financial Officer | ||
45