BREAD FINANCIAL HOLDINGS, INC. (10-Q)

Overview of Bread Financial Holdings, Inc.

Bread Financial Holdings, Inc. (Bread Financial) is a tech-forward financial services company that provides payment, lending, and saving solutions to millions of U.S. consumers. The company’s payment solutions, including Bread Financial general purpose credit cards and savings products, empower its customers. Additionally, Bread Financial delivers growth for recognized brands in travel, entertainment, health, beauty, jewelry, and specialty apparel through its private label and co-brand credit cards and pay-over-time products.

Bread Financial has continued to diversify its product mix with brand partners through growth of its co-brand credit card programs, which generally have higher credit sales per account and an improved credit risk mix compared to its private label credit card programs. The company also offers its proprietary credit cards along with the expansion of its Bread Pay products, which include installment loans and “split-pay” offerings.

Bread Financial’s partner base consists of large consumer-based businesses, including well-known brands, as well as small- and medium-sized businesses. The company’s partner base is well diversified across a range of industries and retail verticals. Bread Financial believes its comprehensive suite of payment, lending and saving solutions, along with its related marketing and data and analytics, offers it a significant competitive advantage with products relevant across all customer segments.

Financial Performance Highlights

For the three months ended March 31, 2025, Bread Financial reported the following key financial results:

Table 1: Summary of Financial Performance

The key highlights from Bread Financial’s financial performance in the first quarter of 2025 include:

• Total net interest and non-interest income decreased 2% year-over-year, primarily due to lower late fees and lower average credit card and other loan balances, partially offset by higher non-interest income from implemented pricing actions.
• Provision for credit losses decreased 8% year-over-year, with a $69 million reserve release in the current year period compared to a $73 million reserve release in the prior year period.
• Total non-interest expenses decreased 1% year-over-year, driven by lower debt extinguishment costs and decreased card and processing expenses, partially offset by higher information processing and communication expenses and marketing expenses.
• Income from continuing operations and net income increased 5% and 3% year-over-year, respectively, reflecting the lower provision for credit losses and non-interest expenses.
• Net interest margin decreased 0.6 percentage points to 18.1%, primarily due to decreased late fees.
• Return on average tangible common equity remained relatively stable at 23.0%.

Business Environment and Outlook

Bread Financial’s business environment and outlook for 2025 are as follows:

Credit sales of $6.1 billion were up 1% year-over-year, driven by higher general-purpose spending and overall transaction volume as consumer financial health remained relatively steady. However, average credit card and other loans and end-of-period credit card and other loans both decreased 2% primarily due to the macroeconomic environment throughout 2024 driving lower consumer spending and higher gross losses, as well as the company’s ongoing strategic credit tightening.

Total interest income was down 5% from the first quarter of 2024, primarily due to lower late fees and lower average credit card and other loans balances, partially offset by lower reversals of fees resulting from lower gross credit losses. Net interest margin for the first quarter of 2025 was 18.1%, down from 18.7% in the first quarter of 2024, driven primarily by decreased late fees.

Non-interest income increased $25 million year-over-year, primarily driven by implemented pricing actions, including paper statement fees, as well as a reduction in costs associated with brand partner retailer share arrangements, offset by a decrease in merchant discount fees from lower “big ticket” credit sales.

Provision for credit losses decreased, with a $69 million reserve release in the current year period compared to a $73 million reserve release in the prior year period. The reserve releases were offset by net principal losses of $365 million and $394 million during those same respective periods. Bread Financial’s Allowance for credit losses decreased as of March 31, 2025, relative to December 31, 2024, due primarily to a lower credit card and other loans balance.

Total non-interest expenses decreased 1% year-over-year, primarily driven by lower debt extinguishment costs and decreased card and processing expenses, partially offset by higher information processing and communication expenses and marketing expenses.

Bread Financial continues to strengthen its balance sheet, completing a $400 million Subordinated Notes offering and repurchasing $150 million of its common stock. The company’s direct-to-consumer deposits increased 13% to $7.9 billion as of March 31, 2025, with average direct-to-consumer deposits now representing 43% of its total funding.

The company’s 2025 financial outlook has been adjusted from its original outlook to reflect slower credit sales growth and slightly higher inflation, but still generally healthy labor markets. Bread Financial expects 2025 average credit card and other loans to be flat to slightly lower relative to 2024. For 2025 compared to 2024, total net interest and non-interest income, excluding any gains on portfolio sales, is anticipated to be flat to slightly higher after adjusting for the updated outlook on average credit card and other loans.

The company expects to generate nominal positive operating leverage in 2025, excluding any gains on portfolio sales and the pretax impacts from its repurchased Convertible Notes. Bread Financial’s 2025 financial outlook continues to assume a full year net principal loss rate ranging from 8.0% to 8.2%.

Asset Quality and Credit Performance

Bread Financial closely monitors the credit quality of its credit card and other loans portfolio, focusing on delinquency rates and net principal loss rates. As of March 31, 2025, the company’s delinquency rate was 5.9%, unchanged from December 31, 2024. The net principal loss rate for the first quarter of 2025 was 8.2%, down from 8.5% in the first quarter of 2024.

The company’s overall credit quality remains stable, with the percentage of Vantage 660+ cardholders continuing to remain above pre-pandemic levels due to prudent credit tightening and a more diversified product mix. As of March 31, 2025, approximately 57% of credit card loans were originated with customers with Vantage scores of 661 or higher, 27% with scores between 601 and 660, and 16% with scores of 600 or lower.

Bread Financial’s Allowance for credit losses decreased as of March 31, 2025, relative to December 31, 2024, due primarily to a lower credit card and other loans balance. The company’s reserve rate was 12.2% as of March 31, 2025, reflecting appropriately prudent weightings on the economic scenarios in its credit reserve modeling.

The company also provides temporary and short-term consumer relief programs to assist delinquent cardholders who have experienced financial difficulties but demonstrate an ability and willingness to repay. As of March 31, 2025, credit card loans in these modification programs represented 0.6% of total credit card loans, with a weighted average interest rate reduction of 22.8 percentage points.

Liquidity and Capital Resources

Bread Financial maintains a strong focus on liquidity and capital, with policies designed to ensure the business has sufficient liquidity and capital resources to support its daily operations, business growth, and credit ratings, as well as meet regulatory and policy requirements.

The company’s primary sources of liquidity include cash generated from operating activities, its bank credit facility, issuances of senior unsecured, subordinated or convertible debt securities, financings through its securitization programs, and deposits with its bank subsidiaries. Bread Financial’s primary uses of liquidity include underwriting credit card and other loans, scheduled debt payments, operational expenses, capital expenditures, stock repurchases, and dividends.

During the first quarter of 2025, Bread Financial engaged in several financing-related transactions, including:

• Repurchasing $7 million in principal value of its Convertible Notes, leaving only $3 million remaining.
• Redeeming the remaining $100 million in aggregate principal amount of its 7.000% Senior Notes due 2026.
• Issuing $400 million aggregate principal amount of 8.375% Fixed-Rate Reset Subordinated Notes due 2035.

The company also has a $700 million senior unsecured revolving credit facility, which was undrawn as of March 31, 2025, with all $700 million remaining available for future borrowings.

Bread Financial’s direct-to-consumer deposits increased 13% to $7.9 billion as of March 31, 2025, with average direct-to-consumer deposits now representing 43% of its total funding. The company also utilizes securitization programs, including public term asset-backed notes and private conduit facilities, to finance the majority of its credit card loans.

As of March 31, 2025, Bread Financial’s total risk-based capital ratio was 15.5%, well above the minimum ratios required to be considered well-capitalized under regulatory guidelines. The company’s common equity tier 1 capital ratio was 12.0%, and its tier 1 leverage capital ratio was 10.3%.

Regulatory Matters and Capital Adequacy

Bread Financial’s 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 authorities. The company’s bank subsidiaries, Comenity Bank and Comenity Capital Bank, are subject to various regulatory capital requirements administered by their respective state banking regulators and the FDIC.

As of March 31, 2025, both bank subsidiaries met all capital requirements to which they were subject and maintained capital ratios in excess of the minimums required to qualify as well-capitalized. Bread Financial also seeks to maintain capital levels and ratios in excess of the minimums required for bank holding companies, although it is not defined as such under the Bank Holding Company Act.

The company is also involved in various reviews, investigations, and proceedings by governmental agencies regarding its business, which could subject it to significant fines, penalties, or other requirements. In November 2023, the FDIC issued a consent order to Bread Financial’s wholly-owned subsidiary, Comenity Servicing LLC, related to certain IT and operational issues, which the subsidiary is working to address.

Conclusion

Bread Financial delivered a solid financial performance in the first quarter of 2025, with growth in income from continuing operations and net income, despite a slight decline in total net interest and non-interest income. The company’s credit quality metrics remained stable, and it continued to strengthen its balance sheet and liquidity position through various financing activities.

Looking ahead, Bread Financial has adjusted its 2025 financial outlook to reflect slower credit sales growth and slightly higher inflation, but still generally healthy labor markets. The company remains focused on responsible growth, disciplined capital allocation, and continued execution on its operational excellence efforts, while maintaining flexibility to adapt to changing market conditions and the regulatory landscape. Bread Financial is well-positioned to generate additional capital, deliver strong returns, and create sustainable, long-term value for its shareholders.