BREAD FINANCIAL HOLDINGS INC
For the period ended Sep 30, 2024. Filed Oct 31, 2024.
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A company's report for each of its first three quarters. The financial statements are not audited. It shows how the business has moved since the last annual report, and what management says changed.
Sep 30, 2024 · Filed Oct 31, 2024
BFH$101.83-0.7%Stored close · as of Nov 6, 2026
What changed in Management’s Discussion and Analysis?
Read the current filingPrevious report: 10-Q
Period ended 2024-06-30; filed 2024-08-01.
0001101215-24-000181
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)Current report: 10-Q
Period ended 2024-09-30; filed 2024-10-31.
0001101215-24-000224
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)The baseline is this issuer’s latest earlier reporting period of the same form that was filed before the current report. A previous 10-Q is a different quarter, not a year-over-year comparison. Amendments are excluded.
Compared 201 previous paragraphs and 220 current paragraphs.
136 unchanged; 56 reworded; 23 added; 5 removed; 4 previous and 5 current paragraphs rearranged.
Tables are not compared: 15 previous and 18 current tables excluded. Dates, whitespace, punctuation and numbering changes are ignored; changes to financial figures remain significant.
A changed paragraph is not evidence that risk increased or decreased. An unchanged paragraph does not establish that risk stayed the same.
Added paragraphs (23)
Current report
•In August and again in September 2024, we entered into separate, privately negotiated repurchase agreements with a limited number of convertible note holders to repurchase a portion of our outstanding $316 million aggregate principal amount of 4.25% Convertible Senior Notes due 2028 (the Convertible Notes). From a GAAP perspective, we paid a premium to induce these repurchases which resulted in an impact to non-interest expenses. This aggregate $96 million impact is reflected in Total non-interest expenses, with a corresponding $5 million favorable tax impact, also reflected in Net income and consequentially our Earnings per diluted share. We have shown adjustments to these three financial statement line items, for total Company as well as for continuing operations, to exclude the impact from our repurchased Convertible Notes. We use Adjusted total non-interest expenses, Adjusted net income, and Adjusted earnings per diluted share to more clearly evaluate the ongoing operations of the Company.
Current report
Provision for credit losses increased for the quarter ended September 30, 2024, relative to the third quarter of 2023, driven by a $22 million reserve build in the current year period compared with a flat reserve build in the prior year period. The increase in Provision for credit losses also includes net principal losses of $347 million and $304 million during those same respective periods.
Current report
Total non-interest expenses of $574 million increased 14% from the third quarter of 2023. The year-over-year increase was primarily driven by the impact from our repurchased Convertible Notes, which increased Total non-interest expenses by $96 million. Excluding the impact from our repurchased Convertible Notes, Adjusted total non-interest expenses, a Non-GAAP financial measure, decreased 5% from the third quarter of 2023, driven by a decrease in Card and processing expenses, including fraud, partially offset by an increase in Employee compensation and benefits expense due to higher short-term and long-term incentive compensation.
Current report
Our 2024 financial outlook continues to assume a full year Net loss rate in the low 8% range. As a result of the recent hurricanes we have frozen delinquency progression for cardholders in Federal Emergency Management Agency identified impact zones, which will result in a modest shift of approximately $10 million in net credit losses from the fourth quarter of 2024 to the second quarter of 2025, and therefore a slightly lower net loss rate in the fourth quarter and consequently an offsetting higher net loss rate in the second quarter of 2025.
Current report
Note: We are unable to provide a quantitative reconciliation of the forward-looking 2024 financial outlook for the Non-GAAP financial measures above, to their most directly comparable forward-looking GAAP measures, as we cannot reliably predict all of the necessary components of such forward-looking GAAP measures without unreasonable effort.
Current report
•Interest and fees on loans decreased during the three and nine months ended September 30, 2024, due primarily to lower late fees driven by lower early-stage delinquency volumes and from our gradual shift in product mix to a lower proportion of private label accounts, as well as higher reversals of interest and fees resulting from higher gross credit losses; collectively decreasing finance charge and late fee yields by approximately 124 basis points and 13 basis points, respectively.
Current report
(1)Adjusts Total non-interest expenses for the $96 million impact from our repurchased Convertible Notes, included in Other, and therefore represents a Non-GAAP financial measure. See “Non-GAAP Financial Measures” and Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.
Current report
Non-interest expenses: Total non-interest expenses increased for the three month ended September 30, 2024 and decreased for the nine months ended September 30, 2024. Adjusted total non-interest expenses, which represents a Non-GAAP financial measure and has been adjusted for the $96 million impact from our repurchased Convertible Notes, decreased in both periods of comparison.
Current report
•Other increased in both the three and nine month periods primarily related to the impact from our repurchased Convertible Notes; excluding that impact Other expenses decreased in both periods of comparison due to decreased legal and other business activity costs.
Current report
On October 18, 2024, we amended our Revolving Credit Facility to extend the maturity date from June 13, 2026 to October 18, 2028, as well as to delete the provisions relating to our prior term loan facility (which was repaid in full and terminated in December 2023) and make certain other amendments.
Current report
In August 2024 we entered into separate, privately negotiated repurchase agreements with a limited number of Convertible Note holders to repurchase $238 million aggregate principal amount of our outstanding Convertible Notes for a final aggregate cash repurchase price of $374 million, which was funded with cash on hand. The final aggregate cash repurchase price, or settlement value, was subject to adjustment as a portion of the repurchase price for select repurchases was based in part on the daily volume-weighted average price per share of Parent Company’s common stock over an agreed measurement period beginning in August 2024 and ending in September 2024. In connection with these aggregate repurchases, we recognized an $87 million inducement expense in Other non-interest expenses representing the total settlement value, inclusive of transaction fees, in excess of the total conversion value (calculated in accordance with the indenture governing the Convertible Notes), as well as a $60 million reduction in Additional paid-in capital (APIC) related to the total conversion value paid in excess of the carrying value of the Convertible Notes repurchased and a deferred tax impact.
Current report
In September 2024 we entered into two additional separate, privately negotiated repurchase agreements with holders of our Convertible Notes who approached us to repurchase $25 million aggregate principal amount of our outstanding Convertible Notes for a final aggregate cash repurchase price of $38 million, which was funded with cash on hand. The final aggregate cash repurchase price, or settlement value, was subject to adjustment as a portion of the repurchase price was based in part on the daily volume-weighted average price per share of Parent Company’s common stock over an agreed measurement period during September 2024. In connection with these aggregate repurchases, we recognized a $9 million inducement expense in Other non-interest expenses representing the total settlement value, inclusive of transaction fees, in excess of the total conversion value (calculated in accordance with the indenture governing the Convertible Notes), as well as a $7 million reduction in APIC related to the total conversion value paid in excess of the carrying value of the Convertible Notes repurchased and a deferred tax impact.
Current report
In summary, in total through August and September 2024, we recognized a $96 million inducement expense in Other non-interest expenses representing the settlement value, inclusive of transaction fees, in excess of the conversion value, and a $67 million reduction in APIC representing the excess of the conversion value over the carrying value of the Convertible Notes repurchased and a deferred tax impact.
Current report
Beginning on October 1, 2024, the Convertible Notes became convertible at the option of the holders during the quarterly period ending December 31, 2024, due to the last reported sales price per share of Parent Company’s common stock having exceeded 130% of the conversion price for each of at least 20 trading days, whether or not consecutive, during the 30 consecutive trading days ending on, and including, the last trading day of the immediately preceding quarter i.e., the quarter ended September 30, 2024 (the Common Stock Sale Price Condition). The Common Stock Sale Price Condition is remeasured each quarter, so the Convertible Notes may continue or cease to be convertible in future quarters depending on the performance of our stock price. Upon any such conversion, we will pay cash up to the aggregate principal amount of the Convertible Notes to be converted and pay or deliver, as the case may be, cash, shares of our common stock, or a combination of cash and shares of our common stock (at our election), in respect of the remainder, if any, of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes being converted. As of the date of this report, we have not received any conversion requests.
Current report
All of the Capped Call transactions continue to remain outstanding, notwithstanding the repurchases noted above. Although we do not trade or speculate in derivatives, the Capped Call transactions are expected to remain outstanding, possibly until maturity, with the objective of optimizing the economic value we receive under these transactions, in line with our strategic objectives designed to potentially offset certain of the economic impacts of the Convertible Notes.
Current report
As referenced above, our business is subject to extensive federal and state laws and regulations, as well as related regulation and supervision, including by the FDIC, CFPB and other federal and state authorities. Pending and future laws and regulations (state and federal) may adversely impact our business. We actively monitor legislation and rulemaking that could impact our business and operations, including the FDIC’s proposed rulemakings during the quarter. Among other rulemakings, in August 2024 the FDIC issued (i) proposed rule changes that would expand the scope of deposits that constitute “brokered deposits,” which are subject to greater regulatory requirements (the Proposed Brokered Deposits Rule), and (ii) proposed rule changes that would permit the FDIC to determine that parent companies of legacy industrial banks/loan companies (such as CCB) are “covered companies” subjecting them to regulation by the FDIC (the Proposed ILC Parent Company Rule). We have submitted a comment letter to the FDIC in opposition to the Proposed ILC Parent Company Rule, and we intend to participate in the comment letter process in opposition to the Proposed Brokered Deposits Rule.
Current report
The following table provides a reconciliation of our Total stockholders’ equity under GAAP to Basel III Standardized Approach Common equity tier 1 capital, Tier 1 capital, Tier 2 capital and Total capital, as of the date presented:
Current report
(1)Goodwill, net of the related $40 million deferred tax liability.
Current report
(2)The allowable portion of the Allowance for credit losses, which is a maximum of 1.25% of RWA and is net of applicable CECL phase-in adjustments.
Current report
The following table provides the changes in our Basel III Standardized Approach Common equity tier 1 capital, Tier 1 capital and Tier 2 capital for the periods presented:
Current report
(1)Includes the impact of the CECL phase-in adjustment and the cumulative effect, net of tax, of adopting the proportional amortization method of accounting for our tax credit investment.
Current report
Further information about each Bank’s capital components and calculations can be found in each Bank’s Consolidated Reports of Condition and Income Form FFIEC 041 (Call Reports) as filed with the FDIC.
Current report
On August 22, 2024, each Bank entered into an agreement with the FDIC to pay civil money penalties (CMPs) of $1 million per Bank. The CMPs arose out of the June 2022 transition of our credit card processing services to strategic outsourcing partners and were related to disruptions to the Banks’ customer reward programs and automatic payments following the transition. These issues were self-identified and remediated timely, and the Banks provided full cooperation with the regulators throughout their examination. The Banks’ agreements to pay the CMPs did not require admission of wrongdoing, and there are no operational limitations on the Banks or our business associated with the CMPs.
Removed paragraphs (5)
Previous report
Total non-interest expenses of $469 million decreased 12% from the second quarter of 2023. The year-over-year decrease was primarily driven by a decrease in Card and processing expenses, including fraud. Depreciation and amortization decreased due to lower amortization of developed technology. Marketing expenses were also lower, driven by decreased spending associated with brand partner and BFH joint marketing campaigns, partially offset by higher spending associated with DTC product offerings. We also had lower Employee compensation and benefits expenses due to decreased headcount and a reduction in demand-based outsourced and contract labor.
Previous report
Our 2024 financial outlook assumes a full year Net loss rate in the low 8% range. We are projecting a lower Net loss rate in the second half of 2024 versus the first half as a result of the strategic credit tightening actions we have taken and an assumed gradual modest improvement in economic conditions throughout the year.
Previous report
•Interest and fees on loans: increased during the three months ended June 30, 2024, due primarily to an increase in finance charge yields of approximately 31 basis points, driven by an increase in the prime interest rate; partially offset by lower late fees driven by lower early-stage delinquency volumes and higher reversals of interest and fees resulting from higher gross credit losses. Interest and fees on loans decreased during the six months ended June 30, 2024, due as well to lower late fees driven by lower early-stage delinquency volumes and higher reversals of interest and fees resulting from higher gross credit losses, as well as lower Average credit card and other loans; partially offset by an increase in finance charge yields of approximately 39 basis points, driven by an increase in the prime interest rate.
Previous report
Non-interest expenses: Total non-interest expenses decreased for the three and six months ended June 30, 2024, due to the following:
Previous report
(n/a) Not applicable.
Reworded paragraphs (56)
Previous wording
We are a tech-forward financial services company that provides simple, personalized payment, lending and saving solutions. We create opportunities for our customers and partners through digitally enabled choices that offer ease, empowerment, financial flexibility and exceptional customer experiences. Driven by a digital-first approach, data insights and white-label technology, we deliver growth for our partners through a comprehensive product suite, including private label and co-brand credit cards and buy now, pay later (BNPL) products such as installment loans and our “split-pay” offerings. We also offer direct-to-consumer solutions that give customers more access, choice and freedom through our branded Bread Cashback TMAmerican Express® Credit Card and Bread Savings TM products.
Current wording
We are a tech-forward financial services company that provides simple, personalized payment, lending and saving solutions. We create opportunities for our customers and partners through digitally enabled choices that offer ease, empowerment, financial flexibility and exceptional customer experiences. Driven by a digital-first approach, data insights and white-label technology, we deliver growth for our partners through a comprehensive product suite, including private label and co-brand credit cards and buy now, pay later (BNPL) products such as installment loans and our “split-pay” offerings. We also offer direct-to-consumer solutions that give customers more access, choice and freedom through our branded Bread Cashback®American Express® Credit Card, Bread Rewards TM American Express® Credit Card and Bread Savings® products.
Previous wording
We prepare our audited Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP). However, certain information included herein constitutes non-GAAP financial measures. Our calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies. In particular:
Current wording
We prepare our audited Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP). However, certain information included herein constitutes Non-GAAP Financial
Previous wording
•Pretax pre-provision earnings (PPNR) represents Income from continuing operations before income taxes and the Provision for credit losses. PPNR less gain on portfolio sale then decreases PPNR by the gain on any portfolio sale in the period. We use PPNR and PPNR less gain on portfolio sale as metrics to evaluate our results of operations before income taxes, excluding the volatility that can occur within Provision for credit losses and the one-time nature of a gain on the sale of a portfolio.
Current wording
•Pretax pre-provision earnings (PPNR) represents Income from continuing operations before income taxes and the Provision for credit losses. PPNR excluding gain on portfolio sale and impact from repurchased Convertible Notes then excludes from PPNR the gain on any portfolio sale in the period, as well as the inducement expense from our repurchased Convertible Notes in the period. We use PPNR and PPNR excluding gain on portfolio sale and impact from repurchased Convertible Notes as metrics to evaluate our results of operations before income taxes, excluding the volatility that can occur within Provision for credit losses and the one-time nature of a gain on the sale of a portfolio and/or the impact from repurchased Convertible Notes.
Previous wording
This Business Environment section provides an overview of our results of operations and financial position for the second quarter of 2024, as well as our related outlook for the remainder of 2024 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”, “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” herein, and in our 2023 Form 10-K as well as our Quarterly Report on Form 10-Q for the quarter-ended March 31, 2024, which provide further discussion of variances in our results of operations over the periods of comparison, along with other factors that could impact future results and the Company achieving its outlook. Unless otherwise specified, the discussion included herein is for the three months ended June 30, 2024, compared with the same period in the prior year.
Current wording
This Business Environment section provides an overview of our results of operations and financial position for the third quarter of 2024, as well as our related outlook for the remainder of 2024 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”, “Cautionary Note Regarding Forward-Looking Statements” and “Risk Factors” herein, and in our 2023 Form 10-K as well as our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 and our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, which provide further discussion of variances in our results of operations over the periods of comparison, along with other factors that could impact future results and the Company achieving its outlook. Unless otherwise specified, the discussion included herein is for the three months ended September 30, 2024, compared with the same period in the prior year.
Previous wording
Credit sales of $6.6 billion were down 7% year-over-year reflecting moderating consumer spending and strategic credit tightening, partially offset by new brand partner growth. Average credit card and other loans of $17.9 billion increased 1%, driven primarily by growth in our co-brand products. End-of-period credit card and other loans of $17.7 billion decreased 1% driven by the decline in Credit sales and the factors noted above. Total interest income was up 3% from the second quarter of 2023, primarily as a result of an increase in finance charge yields driven by an increase in the prime interest rate; partially offset by lower late fees driven by lower early-stage delinquency volumes and higher reversals of interest and fees resulting from higher gross credit losses. Net interest margin for the second quarter of 2024 was 18.0%, relative to 18.7% for the second quarter of 2023, driven by higher funding costs, particularly with direct-to-consumer (DTC) deposits. Non-interest income decreased $8 million, primarily driven by a decrease in the current year in merchant discount fees resulting from lower “big ticket” credit sales. Overall, Total net interest and non-interest income for the quarter was $0.9 billion, down 1% versus the second quarter of 2023.
Current wording
Credit sales of $6.5 billion were down 3% year-over-year reflecting self-moderated consumer spending and strategic credit tightening, partially offset by new brand partner growth. Average credit card and other loans of $17.8 billion increased 1%, also driven primarily by new brand partner growth, as well as a stabilizing consumer spending trend. End-of-period credit card and other loans of $17.9 billion were flat year-over-year. Total interest income was down 2% from the third quarter of 2023, primarily as a result of lower Interest and fees on loans due to decreased late fees driven by lower early-stage delinquency volumes, our gradual shift in product mix to a lower proportion of private label accounts which tend to have higher late fees, and higher reversals of interest and fees resulting from higher gross credit losses; all partially offset by Interest on cash and investment securities. Net interest margin for the third quarter of 2024 was 18.8%, relative to 20.6% for the third quarter of 2023, driven by decreased late fees and higher funding costs, particularly with direct-to-consumer (DTC) deposits. Year-over-year, Non-interest income decreased $3 million, primarily driven by a decrease in the current year in merchant discount fees resulting from lower “big ticket” credit sales. Overall, Total net interest and non-interest income for the quarter was $983 million, down 5% versus the third quarter of 2023.
Previous wording
Our Allowance for credit losses decreased as of June 30, 2024, relative to December 31, 2023, due primarily to lower Credit card and other loans balances, because seasonally higher transactor balances from the fourth quarter were paid down in the first quarter, lower delinquencies and improved credit quality in the Credit card and other loans portfolio. We continue to maintain an elevated reserve rate of 12.2% as of June 30, 2024, due to the compounding effect of persistent inflation relative to wage growth, the increased cost of consumer debt, the possibility of higher unemployment levels and the potential impacts from the resumption of student loan repayments. We intend to maintain a conservative weighting of economic scenarios in our credit reserve modeling until we see sustained improvement in delinquencies and an improved macroeconomic outlook. From an overall credit quality perspective, our percentage of Vantage 660+ cardholders remains above pre-pandemic levels due to prudent credit tightening and a more diversified product mix, with co-brand and proprietary cards representing a larger portion of our portfolio.
Current wording
Our Allowance for credit losses decreased as of September 30, 2024, relative to December 31, 2023, due primarily to lower Credit card and other loans balances, which are down from their seasonal peak at the beginning of 2024, partially offset by the increased reserve rate. Overall, we continue to maintain an elevated reserve rate, 12.2% as of September 30, 2024, reflecting a conservative weighting of economic scenarios in our credit reserve modeling, which we intend to maintain until we see sustained improvement in delinquencies and an improved macroeconomic outlook. From an overall credit quality perspective, our percentage of Vantage 660+ cardholders remains above pre-pandemic levels due to prudent credit tightening and a more diversified product mix, with co-brand and proprietary cards representing a larger proportion of our portfolio.
Previous wording
We continued strengthening our balance sheet during the second quarter of 2024, reducing our double leverage ratio to 110.1% and growing our Common equity tier 1 capital ratio to 13.8% as of June 30, 2024. Additionally, DTC deposits increased to $7.2 billion as of June 30, 2024, with average DTC deposits now representing 40% of our total funding, up from 33% a year ago.
Current wording
We continued strengthening our balance sheet during the third quarter of 2024, by reducing debt and dilution risk, while growing our Common equity tier 1 capital ratio to 13.3% as of September 30, 2024, a 40 basis points improvement year-over-year. Additionally, DTC deposits increased to $7.5 billion as of September 30, 2024, with average DTC deposits now representing 41% of our total funding, up from 35% a year ago.
Previous wording
During the second quarter of 2024 we made further progress with the implementation of our mitigation strategy in response to the final rule on credit card late fees published by the Consumer Financial Protection Bureau (CFPB). Industry organizations have challenged the final rule in court, and the ultimate outcome of such challenge, including the impact on the final rule, is uncertain. The final rule had an original effective date of May 14, 2024; however, on May 10, 2024, the United States District Court for the Northern District of Texas granted an injunction and stay of the final rule, and the injunction granted remains in effect as of the date of this report. We are closely monitoring the ongoing litigation related to the rule, but will continue to execute on our mitigation strategy given the uncertainty surrounding the timing and outcome. However, because of that uncertainty, we have updated our full year 2024 financial outlook to assume the final rule does not take effect this year. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) — Business Environment” in our Quarterly Report on Form 10-Q for the quarter-ended March 31, 2024 for our 2024 financial outlook inclusive of impacts from the CFPB's final rule on credit card late fees.
Current wording
During the third quarter of 2024 we made further progress with the implementation of our mitigation strategy in response to the final rule on credit card late fees published by the Consumer Financial Protection Bureau (CFPB). Industry organizations have challenged the final rule in court, and the ultimate outcome of such challenge, including the impact on the final rule, is uncertain. The final rule had an original effective date of May 14, 2024; however, on May 10, 2024, the United States District Court for the Northern District of Texas granted an injunction and stay of the final rule, and the injunction granted remains in effect as of the date of this report. We are closely monitoring the ongoing litigation related to the rule, but also continue to execute on our mitigation strategy given the uncertainty surrounding the timing and outcome. Because of that uncertainty, our full year 2024 financial outlook assumes the final rule does not take effect this year. Refer to “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) — Business Environment” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024 for our 2024 financial outlook inclusive of impacts from the CFPB's final rule on credit card late fees.
Previous wording
Our 2024 financial outlook reflects slower Credit sales growth as a result of continued moderation in consumer spending and strategic credit tightening, both of which consequently will impact growth in Credit card and other loans and Net interest and non-interest income, as well as the Net loss rate. In addition, our 2024 outlook assumes multiple interest rate decreases by the Federal Reserve Board in the second half of the year, which will slightly decrease Total net interest income.
Current wording
Our 2024 financial outlook reflects slower Credit sales growth as a result of continued moderation in consumer spending and strategic credit tightening, both of which consequently will impact growth in Credit card and other loans and Net interest and non-interest income, as well as the Net loss rate. In addition, our 2024 outlook assumes ongoing interest rate decreases by the Federal Reserve Board, which will slightly decrease Total net interest income.
Previous wording
As a result of efficiencies gained from our ongoing investments in technology modernization and digital advancement, along with disciplined expense management, we expect Total non-interest expense to be down mid-single digits on a percentage point basis relative to 2023. Expenses are expected to be higher in the second half of 2024 compared with the first half of the year.
Current wording
As a result of efficiencies gained from our ongoing investments in technology modernization and digital advancement, along with disciplined expense management, we expect Total non-interest expenses excluding the impact from our repurchased Convertible Notes, a Non-GAAP financial measure, to be down mid-single digits on a percentage point basis relative to 2023. Total non-interest expenses are projected to be higher sequentially in the fourth quarter of 2024 compared with the third quarter’s Adjusted total non-interest expenses, a Non-GAAP financial measure, due to higher sales volumes and marketing expenses.
Previous wording
In our 2024 financial outlook we also expect our full year normalized effective tax rate to be in the range of 25% to 26%, with quarter-over-quarter variability due to the timing of certain discrete items.
Current wording
In our 2024 financial outlook, we also expect our full year normalized effective tax rate, excluding the impact from our repurchased Convertible Notes, a Non-GAAP financial measure, to be in the range of 25% to 26%, with quarter-over-quarter variability due to the timing of certain discrete items.
Previous wording
We are confident in our ability to deliver strong financial results while remaining responsible and disciplined in our credit management and capital allocation.
Current wording
We remain disciplined in our commitment to our capital priorities and are confident in our ability to adapt our business to potential regulatory and economic changes while achieving strong financial results.
Previous wording
The following discussion provides commentary on the variances in our results of operations for the three and six months ended June 30, 2024, compared with the same periods in the prior year, as presented in the accompanying tables. This discussion should be read in conjunction with the discussion under “Business Environment” above.
Current wording
The following discussion provides commentary on the variances in our results of operations for the three and nine months ended September 30, 2024, compared with the same periods in the prior year, as presented in the accompanying tables. This discussion should be read in conjunction with the discussion under “Business Environment” above.
Previous wording
(2)The share amounts used in calculating Adjusted net income per diluted share and Adjusted income from continuing operations per diluted share have been adjusted for the anti-dilutive impact of our Capped Call transactions, and therefore represent a Non-GAAP financial measure. See “Non-GAAP Financial Measures” and Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.
Current wording
(2)Adjusted for the impact from our repurchased Convertible Notes, and therefore represent Non-GAAP financial measures. See “Non-GAAP Financial Measures” and Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.
Previous wording
Interest income: Total interest income increased for the three months ended June 30, 2024, and decreased for the six months ended June 30, 2024, due to the following:
Current wording
Interest income: Total interest income decreased for the three and nine months ended September 30, 2024, due to the following:
Previous wording
•Interest on cash and investment securities: increased for the three and six months ended June 30, 2024, due to higher average interest rates which increased interest income by $4 million and $11 million, respectively, as well as higher average balances which increased interest income by $6 million and $5 million, respectively.
Current wording
•Interest on cash and investment securities increased during the three and nine months ended September 30, 2024, partially offsetting the decrease in Interest and fees on loans, due to higher average balances which increased interest income by $9 million and $16 million, respectively, as well as, during the nine month period, higher average interest rates which increased interest income by $9 million.
Previous wording
Interest expense: Total interest expense increased for the three and six months ended June 30, 2024, due to the following:
Current wording
Interest expense: Total interest expense increased for the three and nine months ended September 30, 2024, due to the following:
Previous wording
•Interest on borrowings increased due to higher average interest rates which increased funding costs by $11 million and $25 million over the respective periods of comparison, and for the six month period, partially offset by lower average borrowings which decreased funding costs by $22 million.
Current wording
•Interest on deposits increased due to higher average interest rates which increased interest expense by $14 million and $76 million over the respective periods of comparison, partially offset by lower average wholesale deposit balances, which decreased funding costs by $4 million and $2 million over the respective periods of comparisons.
Previous wording
Non-interest income: Total non-interest income decreased for the three and six months ended June 30, 2024, due to the following:
Current wording
Non-interest income: Total non-interest income decreased for the three and nine months ended September 30, 2024, due to the following:
Previous wording
•Interchange revenue, net of retailer share arrangements, typically a contra-revenue item for us, increased for the three and six month periods driven by a decrease in merchant discount fees, from lower “big ticket” credit sales, and interchange revenue earned, partially offset by a reduction in costs associated with brand partner retailer share arrangements.
Current wording
•Interchange revenue, net of retailer share arrangements, typically a contra-revenue item for us, increased for the three and nine month periods driven by a decrease in merchant discount fees, from lower “big ticket” credit sales, and interchange revenue earned, partially offset by a reduction in costs associated with brand partner retailer share arrangements.
Previous wording
•Gain on portfolio sale reflects the gain we recognized from the sale of a credit card portfolio in April 2024, and the gain we recognized from the sale of the BJ's Wholesale Club (BJ’s) portfolio in late February 2023.
Current wording
•Gain on portfolio sale reflects the gain we recognized from the sale of a credit card loan portfolio in April 2024, that was adjusted during the three months ended September 30, 2024 to recognize an incremental amount due under the purchase and sale agreement. For 2023, we recognized a gain from the sale of the BJ's Wholesale Club (BJ’s) portfolio in late February 2023.
Previous wording
Provision for credit losses decreased during the three months ended June 30, 2024, driven by a $92 million reserve release in the current period compared with a $15 million reserve release in the prior year period, with the reserve releases in both periods offset by net principal losses of $382 million and $351 million during those same respective periods. Provision for credit losses increased during the six months ended June 30, 2024, driven by a $164 million reserve release in the current period compared with a $252 million reserve release in the prior year period, with the release in the prior year period primarily related to the sale of the BJ's portfolio. The reserve releases in both years were offset by net principal losses of $775 million and $694 million during those same respective periods. We continue to maintain an elevated reserve rate, 12.2% as of June 30, 2024, due to the compounding effect of persistent inflation relative to wage growth, the increased cost of consumer debt, the possibility of higher unemployment levels and the potential impacts from the resumption of student loan repayments.
Current wording
Provision for credit losses increased during the three months ended September 30, 2024, driven by a $22 million reserve build in the current year period compared with a flat reserve build in the prior year period. The increase in Provision for credit losses also includes net principal losses of $347 million and $304 million during those same respective periods. Provision for credit losses increased during the nine months ended September 30, 2024, driven by a $142 million reserve release in the current year period compared with a $251 million reserve release in the prior year period, with the release in the prior year period primarily related to the sale of the BJ's portfolio. The reserve releases in both years were offset by net principal losses of $1,122 million and $998 million during those same respective periods. Overall, we continue to maintain an elevated reserve rate, 12.2% as of September 30, 2024, reflecting a conservative weighting of economic scenarios in our credit reserve modeling, which we intend to maintain until we see sustained improvement in delinquencies and an improved macroeconomic outlook.
Previous wording
•Employee compensation and benefits decreased due to a reduction in customer care and collections staffing as well as a reduction in demand-based outsourced and contract labor; partially offset by higher short- and long-term incentive compensation.
Current wording
•Employee compensation and benefits increased in both the three and nine month periods due to higher short-term and long-term incentive compensation, partially offset by ongoing strategic adjustments in customer care staffing, as well as a reduction in demand-based outsourced and contract labor.
Previous wording
•Card and processing expenses decreased due primarily to lower fraud losses, as well as reduced volume-related card and statement costs.
Current wording
•Card and processing expenses decreased in both the three and nine month periods due primarily to lower fraud losses, as well as reduced volume-related card and statement costs.
Previous wording
•Marketing expenses decreased due primarily to decreased spending associated with brand partner and BFH joint marketing campaigns, partially offset by higher spending associated with DTC product offerings.
Current wording
•Marketing expenses were essentially flat during the three month period and decreased during the nine month period due primarily to decreased spending associated with brand partner and BFH joint marketing campaigns, partially offset by higher spending associated with DTC product offerings.
Previous wording
•Depreciation and amortization decreased due to lower amortization for developed technology associated with an acquisition completed in late 2020.
Current wording
•Depreciation and amortizationwas essentially flat during the three month period and decreased during the nine month period due to lower amortization for developed technology associated with an acquisition completed in late 2020.
Previous wording
The Provision for income taxes increased for the three months ended June 30, 2024 primarily driven by an increase in Income from continuing operations before income taxes. The effective tax rate was 26.0% for both the three month periods ended June 30, 2024 and 2023. The Provision for income taxes decreased for the six months ended June 30, 2024 primarily driven by the decrease in Income from continuing operations before income taxes in the current year relative to the prior year period, which itself was higher due to the gain on the sale of the BJ's portfolio. The effective tax rate was 27.1% and 28.3% for the six month periods ended June 30, 2024 and 2023, respectively; the decrease in the effective tax rate was driven primarily by a discrete benefit in the current year period.
Current wording
The Provision for income taxes decreased for the three months ended September 30, 2024 primarily driven by a decrease in Income from continuing operations before income taxes. The effective tax rate was 92.2% and 23.0% for the three month periods ended September 30, 2024 and 2023, respectively. The increase in the effective tax rate resulted from an increase in nondeductible items in the current year period, primarily related to the nondeductible portion of our repurchased Convertible Notes transactions, and a favorable discrete item in the prior year period. The Provision for income taxes decreased for the nine months ended September 30, 2024 primarily driven by a decrease in Income from continuing operations before income taxes in the current year relative to the prior year period, which itself was higher due to the gain on the sale of the BJ's portfolio. The effective tax rate was 33.4% and 27.1% for the nine month periods ended September 30, 2024 and 2023, respectively. The increase in the effective tax rate was also driven primarily by an increase in nondeductible items in the current year period related to the nondeductible portion of our repurchased Convertible Notes transactions.
Previous wording
The Income (loss) from discontinued operations, net of income taxes includes amounts that relate to the previously disclosed discontinued operations associated with the spinoff of our former LoyaltyOne segment in 2021 and the sale of our former Epsilon segment in 2019, and primarily relate to contractual indemnification and tax-related matters. For additional information refer to Note 22, “Discontinued Operations and Bank Holding Company Financial Presentation” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Current wording
The Loss from discontinued operations, net of income taxes includes amounts that relate to the previously disclosed discontinued operations associated with the spinoff of our former LoyaltyOne segment in 2021 and the sale of our former Epsilon segment in 2019, and primarily relate to contractual indemnification and tax-related matters. For additional information refer to Note 22, “Discontinued Operations and Bank Holding Company Financial Presentation” to the Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021.
Previous wording
(1)PPNR represents Income from continuing operations before income taxes and the Provision for credit losses. PPNR is a non-GAAP financial measure. See “Non-GAAP Financial Measures” and Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.
Current wording
(1)PPNR represents Income from continuing operations before income taxes and the Provision for credit losses. PPNR is a Non-GAAP financial measure. PPNR excluding gain on portfolio sale and impact from repurchased Convertible Notes excludes from PPNR the gain on any portfolio sale in the period, as well as the impact from our repurchased Convertible Notes in the period, and is also a Non-GAAP financial measure. See “Non-GAAP Financial Measures” and Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.
Previous wording
(9)Common equity tier 1 capital ratio represents tier 1 capital divided by total risk-weighted assets. In the calculation of tier 1 capital, we follow the Basel III Standardized Approach and therefore Total stockholders' equity has been reduced, primarily by Goodwill and intangible assets, net.
Current wording
(9)Common equity tier 1 capital ratio represents tier 1 capital divided by total risk-weighted assets. In the calculation of tier 1 capital, we follow the Basel III Standardized Approach and therefore Total stockholders' equity has been reduced, primarily by Goodwill and intangible assets, net. For additional information, see “Legislative, Regulatory Matters and Capital Adequacy” included elsewhere in this report.
Previous wording
(10)Total risk-based capital ratio represents total capital divided by total risk-weighted assets. In the calculation of total capital, we follow the Basel III Standardized Approach and therefore tier 1 capital has been increased by tier 2 capital, which for us is the allowable portion of the Allowance for credit losses.
Current wording
(10)Total risk-based capital ratio represents total capital divided by total risk-weighted assets. In the calculation of total capital, we follow the Basel III Standardized Approach and therefore tier 1 capital has been increased by tier 2 capital, which for us is the allowable portion of the Allowance for credit losses. For additional information, see “Legislative, Regulatory Matters and Capital Adequacy” included elsewhere in this report.
Previous wording
(11)Total risk-weighted assets are generally measured by allocating assets, and specified off-balance sheet exposures, to various risk categories as defined by the Basel III Standardized Approach.
Current wording
(11)Total risk-weighted assets are generally measured by allocating assets, and specified off-balance sheet exposures, to various risk categories as defined by the Basel III Standardized Approach. For additional information, see “Legislative, Regulatory Matters and Capital Adequacy” included elsewhere in this report.
Previous wording
(16)Net loss rate, an annualized rate, represents net principal losses for the period divided by Average credit card and other loans for the same period. Net loss rate for the three and six months ended June 30, 2023 was impacted by the transition of our credit card processing services in June 2022.
Current wording
(16)Net loss rate, an annualized rate, represents net principal losses for the period divided by Average credit card and other loans for the same period. Net loss rate for the three and nine months ended September 30, 2023 was impacted by the transition of our credit card processing services in June 2022.
Previous wording
Given the nature of our business, the credit quality of our assets, in particular our Credit card and other loans, is a key determinant underlying our ongoing financial performance and overall financial condition. When it comes to our Credit card and other loans portfolio, we closely monitor Delinquency rates and Net principal loss rates, which reflect, among other factors, our underwriting, the inherent credit risk in our portfolio and the success of our collection and recovery efforts. These rates also reflect, more broadly, the general macroeconomic conditions, including the effects of persistent inflation and higher interest rates. Our Delinquency and Net principal loss rates are also impacted by the size of our Credit card and other loans portfolio, which serves as the denominator in the calculation of these rates. Accordingly, changes in the size of our portfolio (whether due to credit tightening, acquisitions or dispositions of portfolios or otherwise) may cause movements in our Delinquency and Net principal loss rates that are not necessarily indicative of the underlying credit quality of the overall portfolio.
Current wording
Given the nature of our business, the credit quality of our assets, in particular our Credit card and other loans, is a key determinant underlying our ongoing financial performance and overall financial condition. When it comes to our Credit card and other loans portfolio, we closely monitor Delinquency rates and Net principal loss rates, which reflect, among other factors, our underwriting, the inherent credit risk in our portfolio and the success of our collection and recovery efforts. These rates also reflect, more broadly, the general macroeconomic conditions, including the compounding effect of persistent inflation relative to wage growth, and higher interest rates. Our Delinquency and Net principal loss rates are also impacted by the size of our Credit card and other loans portfolio, which serves as the denominator in the calculation of these rates. Accordingly, changes in the size of our portfolio (whether due to credit tightening, acquisitions or dispositions of portfolios or otherwise) may cause movements in our Delinquency and Net principal loss rates that are not necessarily indicative of the underlying credit quality of the overall portfolio.
Previous wording
(1)Net principal losses as a percentage of Average credit card and other loans for the three and six months ended June 30, 2023 were impacted by the transition of our credit card processing services in June 2022.
Current wording
(1)Net principal losses as a percentage of Average credit card and other loans for the three and nine months ended September 30, 2023 were impacted by the transition of our credit card processing services in June 2022.
Previous wording
•The share amounts used in calculating Adjusted net income per diluted share and Adjusted income from continuing operations per diluted share have been adjusted for the anti-dilutive impact of our capped call transactions. In connection with the issuance of our $316 million aggregate principal amount of 4.25% Convertible Senior Notes due 2028 (the Convertible Notes) on June 13, 2023, we entered into privately negotiated capped call transactions (the Capped Calls) that are expected generally to reduce potential dilution to our common stock and/or offset certain cash payments we may be required to make in excess of the principal amount of the Convertible Notes upon conversion, redemption or repurchase thereof, with such reduction and/or offset subject to a cap of $61.48 per share. We use Adjusted net income per diluted share and Adjusted income from continuing operations per diluted share to evaluate the dilutive impact of our Convertible Notes after the anti-dilutive impact of the Capped Calls is considered.
Current wording
In June 2023, we issued and sold $316 million aggregate principal amount of 4.25% Convertible Senior Notes due 2028 (the Convertible Notes). The Convertible Notes bear interest at an annual rate of 4.25%, payable semi-annually in arrears on June 15 and December 15 of each year. The Convertible Notes mature on June 15, 2028, unless earlier repurchased, redeemed or converted. In connection with the issuance of the Convertible Notes, we entered into privately negotiated capped call (Capped Call) transactions with certain financial institution counterparties. These transactions are expected generally to reduce potential dilution to our common stock upon any conversion of Convertible Notes and/or offset any cash payments we are required to make in excess of the principal amount of the Convertible Notes, with such reduction and/or offset subject to a cap, based on the cap price. For additional information on the issuance of our Convertible Notes and our Capped Call transactions, see “Consolidated Liquidity and Capital Resources” under Part II of our 2023 Form 10-K.
Previous wording
We utilize a variety of deposit products to finance our operating activities, including funding for our non-securitized credit card and other loans, and to fund the securitization enhancement requirements of the Banks. We offer DTC retail deposit products, including Individual Retirement Account savings and certificates of deposit which CCB began offering in June 2024, as well as deposits sourced through contractual arrangements with various financial counterparties (often referred to as wholesale deposits, and includes brokered deposits). Across both our retail and wholesale deposits, the Banks offer various non-maturity deposit products that are generally redeemable on demand by the customer, and as such have no scheduled maturity date. The Banks also issue certificates of deposit with scheduled maturity dates ranging between July 2024 and June 2029, in denominations of at least $1,000, on which interest is paid either monthly or at maturity.
Current wording
We utilize a variety of deposit products to finance our operating activities, including funding for our non-securitized credit card and other loans, and to fund the securitization enhancement requirements of the Banks. We offer DTC retail deposit products, including Individual Retirement Account savings and certificates of deposit which CCB began offering in June 2024, as well as deposits sourced through contractual arrangements with various financial counterparties (often referred to as wholesale deposits, and includes brokered deposits). Across both our retail and wholesale deposits, the Banks offer various non-maturity deposit products that are generally redeemable on demand by the customer, and as such have no scheduled maturity date. The Banks also issue certificates of deposit with scheduled maturity dates ranging between October 2024 and September 2029, 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 the dates presented:
Previous wording
As of June 30, 2024 and December 31, 2023, deposits that exceeded applicable FDIC insurance limits, which are generally $250,000 per depositor, per insured bank, per ownership category, were estimated to be $517 million (4% of Total deposits) and $509 million (4% of Total deposits), respectively. The measurement of estimated uninsured deposits aligns with regulatory guidelines.
Current wording
As of September 30, 2024 and December 31, 2023, deposits that exceeded applicable FDIC insurance limits, which are generally $250,000 per depositor, per insured bank, per ownership category, were estimated to be $543 million (4% of Total deposits) and $509 million (4% of Total deposits), respectively. The measurement of estimated uninsured deposits aligns with regulatory guidelines.
Previous wording
Overall, we continue to improve our funding mix through actions taken to grow our DTC deposits and reduce our Parent Company unsecured borrowings, while maintaining the flexibility of secured, unsecured, and wholesale funding. Typical seasonality of credit card and other loan balance pay downs in the first quarter of each year, and efforts undertaken in 2024 to reduce our long-term unsecured debt, lowered our funding requirements by approximately$1.2 billion from year-end 2023. As a result, we opportunistically reduced our wholesale and brokered deposits and paid down a portion of our secured conduit line balances, discussed further below.
Current wording
Overall, we continue to improve our funding mix through actions taken to grow our DTC deposits and reduce our Parent Company unsecured borrowings, while maintaining the flexibility of secured, unsecured, and wholesale funding. Typical seasonality of credit card and other loan balance pay downs in the first quarter of each year, and efforts undertaken in 2024 to reduce our long-term unsecured debt, lowered our funding requirements by approximately $1.5 billion from year-end 2023. As a result, we opportunistically reduced our wholesale and brokered deposits, repurchased a portion of our outstanding Convertible Notes and paid down a portion of our secured conduit line balances, shown further below.
Previous wording
(6)Amounts drawn do not include $0.8 billion and $1.2 billion of debt issued by the Trusts as of June 30, 2024 and December 31, 2023, respectively, which were not sold, but were retained by us as a credit enhancement and therefore have been eliminated from the Total.
Current wording
(6)Amounts drawn do not include $0.7 billion and $1.2 billion of debt issued by the Trusts as of September 30, 2024 and December 31, 2023, respectively, which were not sold, but were retained by us as a credit enhancement and therefore have been eliminated from the Total.
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Rearranged current paragraphs (5)
Current report — wording carried from elsewhere
Measures. Our calculations of Non-GAAP Financial Measures may differ from the calculations of similarly titled measures by other companies. In particular:
Current report — wording carried from elsewhere
•Interest on borrowings increased during the three month period due to higher average borrowings which increased funding costs by $7 million, as well as higher average interest rates which increased funding costs by $4 million. Whereas during the nine month period, Interest on borrowings increased due to higher average interest rates which increased funding costs by $38 million, partially offset by lower average borrowings which decreased funding costs by $24 million.
Current report — wording carried from elsewhere
4.25% Convertible Senior Notes Due 2028
Current report — wording carried from elsewhere
Following the settlement of these repurchases, $54 million of Convertible Notes remained outstanding as of September 30, 2024. We may, from time to time, seek to retire or repurchase our remaining outstanding Convertible Notes through cash purchases or exchanges for other securities, in open market purchases, tender offers, privately negotiated transactions or otherwise.
Current report — wording carried from elsewhere
As of September 30, 2024 the actual capital ratios and minimum ratios for each Bank, as well as Bread Financial, are as follows:
Rearranged previous paragraphs (4)
Previous report — wording carried elsewhere
Provision for credit losses decreased for the quarter ended June 30, 2024, relative to the second quarter of 2023, driven by a $92 million reserve release in the current period compared with a $15 million reserve release in the prior year period. The reserve releases in both years were offset by net principal losses of $382 million and $351 million for the three months ended June 30, 2024 and 2023, respectively.
Previous report — wording carried elsewhere
•Interest on deposits increased due to higher average interest rates which increased interest expense by $25 million and $63 million over the respective periods of comparison.
Previous report — wording carried elsewhere
The following table summarizes our retail and wholesale deposit products by type and associated attributes as of the dates presented:
Previous report — wording carried elsewhere
As of June 30, 2024, we had $19 million remaining for future repurchases under the authorized stock repurchase program.