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.
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.
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.
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.
Table 1: Summary of Our Financial Performance
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(Millions, except per share amounts and percentages)
Total net interest and non-interest income
$
983
$
1,031
(48)
(5)
$
2,913
$
3,273
(360)
(11)
Provision for credit losses
369
304
65
21
980
747
233
31
Total non-interest expenses
574
502
72
14
1,525
1,576
(51)
(3)
Income from continuing operations before income taxes
40
225
(185)
(82)
408
950
(542)
(57)
Provision for income taxes
37
52
(15)
(29)
136
257
(121)
(47)
Income from continuing operations
3
173
(170)
(98)
272
693
(421)
(61)
Loss from discontinued operations, net of income taxes (1)
(1)
(2)
1
(64)
(2)
(18)
16
(90)
Net income
2
171
(169)
(99)
270
675
(405)
(60)
Adjusted net income (2)
93
171
(78)
(46)
361
675
(314)
(47)
Net income per diluted share
$
0.05
$
3.42
(3.37)
(99)
$
5.37
$
13.44
(8.07)
(60)
Adjusted net income per diluted share (2)
$
1.83
$
3.42
(1.59)
(47)
$
7.17
$
13.44
(6.27)
(47)
Income from continuing operations per diluted share
$
0.06
$
3.46
(3.40)
(98)
$
5.40
$
13.80
(8.40)
(61)
Adjusted income from continuing operations per diluted share (2)
$
1.84
$
3.46
(1.62)
(47)
$
7.20
$
13.80
(6.60)
(48)
Net interest margin (3)
18.8
%
20.6
%
(1.8)
18.5
%
19.4
%
(0.9)
Return on average tangible common equity (4)
0.5
%
34.3
%
(33.8)
14.8
%
48.9
%
(34.1)
Effective income tax rate — continuing operations
92.2
%
23.0
%
69.2
33.4
%
27.1
%
6.3
__________________________________
(1)Includes amounts that related 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. For additional information refer to Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies” to the unaudited Consolidated Financial Statements.
(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.
(3)Net interest margin represents annualized Net interest income divided by average Total interest-earning assets. See also Table 5: Net Interest Margin.
(4)Return on average tangible common equity (ROTCE) represents annualized Income from continuing operations divided by average Tangible common equity. Tangible common equity (TCE) represents Total stockholders' equity reduced by Goodwill and intangible assets, net. ROTCE is a Non-GAAP financial measure. See “Non-GAAP Financial Measures” and Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.
Table 2: Summary of Total Net Interest and Non-interest Income, After Provision for Credit Losses
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(Millions, except percentages)
Interest income
Interest and fees on loans
$
1,224
$
1,256
(32)
(3)
$
3,645
$
3,697
(52)
(1)
Interest on cash and investment securities
53
45
8
19
161
135
26
19
Total interest income
1,277
1,301
(24)
(2)
3,806
3,832
(26)
(1)
Interest expense
Interest on deposits
153
143
10
7
461
387
74
19
Interest on borrowings
87
76
11
13
268
254
14
5
Total interest expense
240
219
21
9
729
641
88
14
Net interest income
1,037
1,082
(45)
(4)
3,077
3,191
(114)
(4)
Non-interest income
Interchange revenue, net of retailer share arrangements
(95)
(84)
(11)
14
(272)
(244)
(28)
11
Gain on portfolio sale
4
—
4
nm
9
230
(221)
(96)
Other
37
33
4
11
99
96
3
3
Total non-interest income
(54)
(51)
(3)
7
(164)
82
(246)
(301)
Total net interest and non-interest income
983
1,031
(48)
(5)
2,913
3,273
(360)
(11)
Provision for credit losses
369
304
65
21
980
747
233
31
Total net interest and non-interest income, after provision for credit losses
$
614
$
727
(113)
(15)
$
1,933
$
2,526
(593)
(23)
__________________________________
(nm) Not meaningful, denoting a variance of 1,000 percent or more.
Total Net Interest and Non-interest Income, After Provision for Credit Losses
Interest income: Total interest income decreased for the three and nine months ended September 30, 2024, due to the following:
•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.
•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.
Interest expense: Total interest expense increased for the three and nine months ended September 30, 2024, due to the following:
•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.
•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.
Non-interest income: Total non-interest income decreased for the three and nine months ended September 30, 2024, due to the following:
•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.
•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.
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.
Table 3: Summary of Total Non-interest Expenses
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
$ Change
% Change
2024
2023
$ Change
% Change
(Millions, except percentages)
Non-interest expenses
Employee compensation and benefits
$
228
$
210
18
9
$
655
$
647
8
1
Card and processing expenses
77
104
(27)
(26)
241
339
(98)
(29)
Information processing and communication
73
73
—
—
220
222
(2)
(1)
Marketing expenses
38
36
2
5
99
115
(16)
(14)
Depreciation and amortization
22
23
(1)
(7)
68
92
(24)
(27)
Other
136
56
80
142
242
161
81
51
Total non-interest expenses
$
574
$
502
72
14
$
1,525
$
1,576
(51)
(3)
Adjusted total non-interest expenses (1)
478
502
(24)
(5)
1,429
1,576
(147)
(9)
__________________________________
(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.
Total Non-interest Expenses
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.
•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.
•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.
•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.
•Depreciation and amortization was 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.
•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.
Income Taxes
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.
Discontinued Operations
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.
Tangible common equity / tangible assets ratio (TCE/TA) (12)
11.2
%
10.0
%
1.2
11.2
%
10.0
%
1.2
Tangible book value per common share (13)
$
47.48
$
42.45
12
$
47.48
$
42.45
12
Payment rate (14)
14.0
%
14.4
%
(0.4)
14.0
%
14.4
%
(0.4)
Delinquency rate (15)
6.4
%
6.3
%
0.1
6.4
%
6.3
%
0.1
Net loss rate (16)
7.8
%
6.9
%
0.9
8.3
%
7.3
%
1.0
Reserve rate (17)
12.2
%
12.3
%
(0.1)
12.2
%
12.3
%
(0.1)
__________________________________
Note:Beginning in 2024, we revised the calculation of average balances to more closely align with industry practice by incorporating an average daily balance. Prior to 2024, average balances represent the average balance at the beginning and end of each month, averaged over the periods indicated.
(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.
(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)Return on average tangible common equity (ROTCE) represents annualized Income from continuing operations divided by average Tangible common equity. Tangible common equity (TCE) represents Total stockholders' equity reduced by Goodwill and intangible assets, net. ROTCE is a Non-GAAP financial measure. See “Non-GAAP Financial Measures” and Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.
(5)Net interest margin represents annualized Net interest income divided by average Total interest-earning assets. See also Table 5: Net Interest Margin.
(6)Loan yield represents annualized Interest and fees on loans divided by Average credit card and other loans.
(7)Efficiency ratio represents Total non-interest expenses divided by Total net interest and non-interest income.
(8)Double leverage ratio represents Parent Company investment in subsidiaries divided by BFH consolidated equity.
(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.
(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.
(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.
(12)Tangible common equity over tangible assets (TCE/TA) represents TCE divided by Tangible assets (TA), which is Total assets reduced by Goodwill and intangible assets, net. TCE/TA is a Non-GAAP financial measure. See “Non-GAAP Financial Measures” and Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.
(13)Tangible book value per common share represents TCE divided by shares outstanding and is a Non-GAAP financial measure. See “Non-GAAP Financial Measures” and Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.
(14)Payment rate represents consumer payments during the last month of the period, divided by the beginning-of-month Credit card and other loans, including held for sale in applicable periods.
(15)Delinquency rate represents outstanding balances that are contractually delinquent (i.e., balances greater than 30 days past due) as of the end of the period, divided by the outstanding principal amount of Credit card and other loans as of the same period-end.
(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.
(17)Reserve rate represents the Allowance for credit losses divided by End-of-period credit card and other loans.
(1)Beginning in 2024, we revised the calculation of average balances to more closely align with industry practice by incorporating an average daily balance. Prior to 2024, average balances represent the average balance at the beginning and end of each month, averaged over the periods indicated.
(2)Net interest margin represents annualized Net interest income divided by average Total interest-earning assets.
(Millions, except per share amounts and percentages)
Tangible assets (TA)
Total assets
21,736
21,608
1
21,736
21,608
1
Less: Goodwill and intangible assets, net
(754)
(771)
(2)
(754)
(771)
(2)
Tangible assets (TA)
$
20,982
$
20,837
1
$
20,982
$
20,837
1
__________________________________
(nm) Not meaningful, denoting a variance of 1,000 percent or more.
ASSET QUALITY
Given the nature of our business, the credit quality of our assets, in particular our Credit card and other loans, is a key determinant underlying our ongoing financial performance and overall financial condition. When it comes to our Credit card and other loans portfolio, we closely monitor Delinquency rates and Net principal loss rates, which reflect, among other factors, our underwriting, the inherent credit risk in our portfolio 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.
Delinquencies: An account is contractually delinquent if we do not receive the minimum payment due by the specified due date. Our policy is to continue to accrue interest and fee income on all accounts, except in limited circumstances, until the balance and all related interest and fees are paid or charged-off. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent; based upon the level of risk indicated, a collection strategy is deployed. If after exhausting all in-house collection efforts we are unable to collect on the account, we may engage collection agencies or outside attorneys to continue those efforts, or sell the charged-off balances.
The Delinquency rate is calculated by dividing outstanding principal balances that are contractually delinquent (i.e., balances greater than 30 days past due) as of the end of the period, by the outstanding principal amount of Credit card and other loans as of the same period-end.
The following table provides the delinquency trends on our Credit card and other loans portfolio based on the principal balances outstanding as of the dates presented:
Table 7: Delinquency Trends on Credit Card and Other Loans
September 30, 2024
% of Total
December 31, 2023
% of Total
(Millions, except percentages)
Credit card and other loans outstanding ─ principal
As part of our collections strategy, we may offer temporary and short term programs in order to improve the likelihood of collections and meet the needs of our customers. Our modifications, for customers who have requested assistance and meet certain qualifying requirements, come in the form of reduced 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 consumer relief 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 consumer relief programs to determine if they represent a more than insignificant delay in payment granted to borrowers experiencing financial difficulty, in which case they would then be considered a Loan Modification. For additional information, see Note 2 “Credit Card and Other Loans – Modified Credit Card Loans” to our unaudited Consolidated Financial Statements.
Net Principal Losses: Our net principal losses include the principal amount of losses that are deemed uncollectible, less recoveries, and exclude charged-off interest, fees and third-party fraud losses (including synthetic fraud). Charged-off interest and fees reduce Interest and fees on loans, while third-party fraud losses are recorded in Card and processing expenses. Credit card loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days past due. BNPL loans such as our installment loans and our “split-pay” offerings, including unpaid interest, are generally charged-off when a loan becomes 120 days past due. However, in the case of a customer bankruptcy or death, Credit card and other loans, including unpaid interest and fees, as applicable, are charged-off 60 days after receipt of the notification of the bankruptcy or death, but in any case no later than 180 days past due for credit card loans and 120 days past due for BNPL loans.
The net principal loss rate is calculated by dividing net principal losses for the period by the Average credit card and other loans for the same period. Beginning in January 2024, we revised the calculation of Average credit card and other loans to more closely align with industry practice by incorporating an average daily balance. Prior to 2024, 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 provides our net principal losses for the periods presented:
Table 8: Net Principal Losses on Credit Card and Other Loans
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(Millions, except percentages)
Average credit card and other loans
$
17,766
$
17,540
$
18,060
$
18,199
Net principal losses
347
304
1,122
998
Net principal losses as a percentage of average credit card and other loans (1)
7.8
%
6.9
%
8.3
%
7.3
%
__________________________________
(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.
CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES
Overview
We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has sufficient liquidity and capital resources necessary to support our daily operations, our business growth, and our credit ratings related to our Parent Company’s senior unsecured notes and our public secured financings, and meet our regulatory and policy requirements, including capital and leverage ratio requirements applicable to Comenity Bank (CB) and Comenity Capital Bank (CCB) under Federal Deposit Insurance Corporation (FDIC) regulations, in a cost effective and prudent manner through both expected and unexpected market environments. We also monitor our Double Leverage Ratio, which reflects our Parent Company’s investment in its subsidiaries relative to its consolidated equity, and is often used by regulators and other stakeholders as a measure of the use of debt by a parent entity to fund its subsidiaries.
Our primary sources of liquidity include cash generated from operating activities, our bank credit facility, issuances of senior unsecured or convertible debt securities by our Parent Company, financings through our securitization programs, and deposits with the Banks. More broadly, we continuously evaluate opportunities to renew and expand our various sources of liquidity. We aim to satisfy our financing needs with a diverse set of funding sources, and we seek to maintain diversity of funding sources by type of instrument, by tenor and by investor base, among other factors, which we believe will mitigate the impact of disruptions in any one type of instrument, tenor or investor.
Our primary uses of liquidity are for underwriting Credit card and other loans, scheduled payments of principal and interest on our debt, operational expenses, capital expenditures, including digital and product innovation and technology enhancements, stock repurchases and dividends.
We may from time to time retire or purchase our outstanding debt or convertible debt securities through cash purchases or exchanges for other securities, in open market purchases, tender offers, privately negotiated transactions or otherwise. Such repurchases or exchanges would depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, and may be funded through cash on hand, borrowings under our revolving credit facility, the issuance of debt or convertible debt securities or other sources of liquidity. The amounts involved may be material.
We will also need additional financing in the future to repay or refinance our existing debt at or prior to maturity, and to fund our growth, which may include issuance of additional debt, equity or convertible securities or engaging in other capital markets or financing transactions. Given the maturities of certain of our outstanding debt instruments and the macroeconomic outlook, it is possible that we will be required to repay, extend or refinance some or all of our maturing debt in volatile and/or unfavorable markets.
Because of the alternatives available to us, as discussed above, we believe our short-term and long-term sources of liquidity are adequate to fund not only our current operations, but also our near-term and long-term funding requirements including dividend payments, debt service obligations and repayment of debt maturities and other amounts that may ultimately be paid in connection with contingencies. However, the adequacy of our liquidity could be impacted by various factors, including pending or future legislation, regulation or litigation, macroeconomic conditions and volatility in the financial and capital markets, limiting our access to or increasing our cost of capital, which could make capital unavailable, or available but on terms that are unfavorable to us. These factors could significantly reduce our financial flexibility and cause us to contract or not grow our business, which could have a material adverse effect on our results of operations and financial condition.
We have a robust liquidity risk management framework in place which includes ongoing monitoring of our liquidity and funding positions against our risk appetite metrics and key risk indicators. During times where there may be potential risks from adverse developments in the banking industry and/or increased financial sector volatility, we may invoke our contingency funding plan to enhance daily monitoring of our liquidity and funding positions, determine potential mitigating actions if necessary and provide enhanced reporting to our Boards of Directors, at both the Bread Financial and Bank-levels, and regulators.
We maintain a significant majority of our liquidity portfolio on deposit within the Federal Reserve banking system, and we also have a small investment securities portfolio, classified as available-for-sale, which we hold in relation to the Community Reinvestment Act. We do not have any investment securities classified as held-to-maturity.
Credit Ratings
In November 2023, we obtained credit ratings for our Parent Company from the major credit rating agencies, Moody’s Investor Services (Moody’s), Standard & Poor’s (S&P) and Fitch Ratings (Fitch), in order to facilitate debt financings and broaden the investor base for our Parent Company debt securities.
Our management approach is designed, among other things, to maintain appropriate and stable Parent Company senior unsecured debt ratings from the credit rating agencies which help support our access to cost-effective unsecured funding as a component of our overall liquidity and capital resources.
The table below provides a summary of the credit ratings for the senior unsecured long-term debt of Bread Financial Holdings, Inc. as of September 30, 2024:
Bread Financial Holdings, Inc.
Moody’s
S&P
Fitch
Senior unsecured debt
Ba3
BB-
BB-
Outlook
Stable
Stable
Stable
We also seek to maintain appropriate and stable credit ratings for our credit card securitizations issued through World Financial Network Credit Card Master Note Trust (WFNMNT) from the rating agencies (DBRS, S&P and Fitch). The table below provides a summary of the structured finance credit ratings for certain of the asset-backed securities, specifically the Class A notes of WFNMNT as of September 30, 2024:
WFNMNT
DBRS
S&P
Fitch
Class A notes
AAA
AAA
AAA
Credit ratings are not a recommendation to buy or hold any securities and they may be revised or revoked at any time at the sole discretion of the rating agency. Downgrades in the ratings of our unsecured or secured debt could result in higher funding costs, as well as reductions in our borrowing capacity in the unsecured or secured debt markets. We believe our mix of funding, including the proportion of our DTC and wholesale deposits, to total funding, reduces the impact that a credit rating downgrade could have on our funding costs and capacity.
Funding Sources
As referenced above, our primary sources of liquidity include cash generated from operating activities, our bank credit facility, issuances of senior unsecured or convertible debt securities by our Parent Company, financings through our securitization programs, and deposits with the Banks.
Certain of our long-term debt agreements include various restrictive financial and non-financial covenants. If we do not comply with certain of these covenants and an event of default occurs and remains uncured, the maturity of amounts outstanding may be accelerated and become payable, and, with respect to our credit agreement, the associated commitments may be terminated. As of September 30, 2024, we were in compliance with all such covenants.
Credit Agreement
In June 2023, we entered into our credit agreement with Parent Company, as borrower, certain of our domestic subsidiaries, as guarantors, JPMorgan Chase Bank, N.A., as administrative agent and lender, and various other financial institutions, as lenders, which provides for a $700 million senior unsecured revolving credit facility (the Revolving Credit Facility). As of September 30, 2024, all $700 million remained available for future borrowings under the Revolving Credit Facility.
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.
4.25% Convertible Senior Notes Due 2028
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.
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.
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.
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.
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.
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.
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.
In January 2024, we issued and sold an additional $300 million aggregate principal amount of 9.750% Senior Notes due 2029 (Senior Notes due 2029) at an issue price of 101.00% of principal plus accrued interest from December 22, 2023. The Senior Notes due 2029 issued in January 2024 were issued as additional notes under the same indenture pursuant to which the initial $600 million of Senior Notes due 2029 were issued on December 22, 2023. The Senior Notes due 2029 that were issued in both December 2023 and January 2024 constitute a single series of notes and have the same terms, other than the issue date and issue price. We used the proceeds of the January 2024 offering of Senior Notes due 2029, together with $100 million of cash on hand, to fund the redemption of $400 million in aggregate principal amount of our outstanding 7.000% Senior Notes due 2026.
Deposits
We utilize a variety of deposit products to finance our operating activities, including funding for our non-securitized credit card and other loans, and to fund the securitization enhancement requirements of the Banks. We offer 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:
Table 9: Deposits
September 30, 2024
December 31, 2023
(Millions, except percentages)
Deposits
Direct-to-consumer (retail)
$
7,483
$
6,454
Wholesale
5,339
7,140
Total deposits
$
12,822
$
13,594
Non-maturity deposit products
Non-maturity deposits
$
6,706
$
6,597
Interest rate range
0.70% - 5.14%
0.70% - 5.64%
Weighted-average interest rate
4.56
%
4.78
%
Certificates of deposit
Certificates of deposit
$
6,116
$
6,997
Interest rate range
0.80% - 5.70%
0.50% - 5.70%
Weighted-average interest rate
4.73
%
4.50
%
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.
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.
Securitization Programs Including 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. For this purpose, we use a combination of public term asset-backed notes and private conduit facilities (the Conduit Facilities) with a consortium of lenders, including domestic money center, regional and international banks. Borrowings under the Conduit Facilities are included in Debt issued by consolidated VIEs in the Consolidated Balance Sheets.
The table below summarizes our conduit capacities, borrowings and maturities for the periods presented:
Table 10: Conduit Borrowing Capacity Rollforward and Maturities
(Millions)
December 31, 2023
Commitment
September 30, 2024
Conduit Facilities
Capacity
Drawn (6)
Increase
Capacity
Drawn (6)
Maturity Date
Comenity Bank
WFNMNT 2009-VFN (1)
$
2,650
$
2,015
$
—
$
2,650
$
1,380
October 2025
WFNMT 2009-VFC1 (2)
275
260
—
275
191
October 2024
Comenity Capital Bank
WFCMNT 2009-VFN (3)
2,250
1,025
—
2,250
377
February 2025
CCAST 2023-VFN1 (4)
250
250
—
250
250
September 2025
CCAST 2024-VFN1 (5)
—
—
200
200
—
February 2025
Total
$
5,425
$
3,550
$
200
$
5,625
$
2,198
__________________________________
(1)2009-VFN Conduit issued under World Financial Network Credit Card Master Note Trust (WFNMNT).
(2)2009-VFC1 Conduit issued under World Financial Network Credit Card Master Trust III (WFNMT).
(3)2009-VFN Conduit issued under World Financial Capital Master Note Trust (WFCMNT).
(4)2023-VFN1 Conduit issued under Comenity Capital Asset Securitization Trust (CCAST).
(5)2024-VFN1 Conduit issued under CCAST.
(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.
In May 2024, WFNMNT issued $570 million of Series 2024-A public term asset-backed notes, which mature in April 2027. The offering consisted of $500 million of Class A notes with a fixed interest rate of 5.47% per year, $44 million of zero coupon Class M notes, and $26 million of zero coupon Class B notes. The Class M and B notes were retained by us and eliminated from the Consolidated Balance Sheet. As well, in August 2024 WFNMNT issued $500 million of Series 2024-B public term asset-backed notes, which mature in July 2027. The offering consisted of $500 million of Class A notes with a fixed interest rate of 4.62% per year.
As of September 30, 2024, we had approximately $11.6 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.
Early amortization events as defined within each asset-backed securitization transaction are generally driven by asset performance. We do not believe it is reasonably likely that an early amortization event will occur due to asset performance. However, if an early amortization event were declared for a Trust, the trustee of the particular Trust would retain the interest in the loans along with the excess spread that would otherwise be paid to our Bank subsidiary until the investors were fully repaid. The occurrence of an early amortization event would significantly limit or negate our ability to securitize additional credit card loans.
We have secured and continue to secure the necessary commitments to fund our credit card and other loans. However, certain of these commitments are short-term in nature and subject to renewal. There is no guarantee that these funding sources, when they mature, will be renewed on similar terms, or at all, as they are dependent on the availability of the asset-backed securitization and deposit markets at the time.
Regulation RR (Credit Risk Retention) adopted by the FDIC, the SEC, the Federal Reserve Board 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 21, 2024, our Board of Directors approved a stock repurchase program to acquire up to $30 million in shares of our outstanding common stock in the open market during the period ending on December 31, 2024. The rationale for this repurchase program, and the amount thereof, was to offset the impact of dilution associated with issuances of employee restricted stock units, with the objective of reducing the Company’s weighted average diluted share count to approximately 50 million shares for 2024, subject to then current estimates and assumptions applicable as of the date of approval.
During the nine months ended September 30, 2024, under the authorized stock repurchase program, we acquired a total of 0.3 million shares of our common stock for $11 million. Following their repurchase, these 0.3 million shares ceased to be outstanding shares of common stock and are now treated as authorized but unissued shares of common stock. As of September 30, 2024, we had $19 million remaining for future repurchases under the authorized stock repurchase program.
Dividends
During the three and nine months ended September 30, 2024, we paid $10 million and $32 million in dividends to holders of our common stock. On October 24, 2024, our Board of Directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on December 13, 2024, to stockholders of record at the close of business on November 8, 2024.
Contractual Obligations
In the normal course of business, we enter into various contractual obligations that may require future cash payments, the vast majority of which relate to deposits, debt issued by consolidated VIEs, long-term and other debt and operating leases.
We believe that we will have access to sufficient resources to meet these commitments.
Cash Flows
The table below summarizes our cash flow activity for the periods indicated, followed by a discussion of the variance drivers impacting our Operating, Investing and Financing activities:
Table 11: Cash Flows
Nine Months Ended September 30,
2024
2023
(Millions)
Total cash used in:
Operating activities
$
1,380
$
1,370
Investing activities
182
2,579
Financing activities
(1,707)
(4,481)
Net decrease in cash, cash equivalents and restricted cash
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 $1,380 million and $1,370 million for the nine months ended September 30, 2024 and 2023, respectively. The net cash provided by operating activities during these periods was primarily driven by cash generated from net income for the periods after adjusting for the Provision for credit losses in both periods of comparison, and for the nine months ended September 30, 2024, the Loss on debt extinguishment and repurchased Convertible Notes and for the nine months ended September 30, 2023, the Gain on portfolio sale.
Cash Flows from Investing Activities primarily include changes in Credit card and other loans. Cash provided by investing activities was $182 million and $2,579 million for the nine months ended September 30, 2024 and 2023, respectively. The net cash provided by investing activities during the nine months ended September 30, 2024 was primarily due to the paydown of Credit card and other loans, as well as the sale of a credit card loan portfolio, partially offset by the purchase of a credit card loan portfolio. The net cash provided by investing activities during the nine months ended September 30, 2023 was primarily due to the sale of the BJ's portfolio and the paydown of Credit card and other loans.
Cash Flows from Financing Activities primarily include changes in deposits and long-term debt. Cash used in financing activities was $1,707 million and $4,481 million for the nine months ended September 30, 2024 and 2023, respectively. The net cash used in financing activities during these periods was primarily driven by net repayments of both debt issued by consolidated variable interest entities (securitizations) and unsecured borrowings, including our repurchased Convertible Notes, as well as a net decrease in wholesale deposits.
INFLATION AND SEASONALITY
Although we cannot precisely determine the impact of inflation on our operations, we have generally sought to rely on operating efficiencies from scale, technology modernization and digital advancement, and expansion in lower cost jurisdictions (in select circumstances) to offset increased costs of employee compensation and other operating expenses impacted by inflation. We also recognize that a customer’s ability and willingness to repay us has been negatively impacted by factors such as inflation and the effects of higher interest rates, which results in higher delinquencies that could lead to increased credit losses, as reflected in our elevated Reserve rate. If the efforts to control inflation in the U.S. and globally are not successful and inflationary pressures continue to persist, they could increase the risk of a recession, which may adversely impact our business, results of operations and financial condition.
With respect to seasonality, our revenues, earnings and cash flows are affected by increased consumer spending patterns leading up to and including the holiday shopping season in the fourth quarter of each year and, to a lesser extent, during the first quarter of each year as Credit card and other loans are paid down. Net loss rates for our Credit card and other loans portfolio also have historically exhibited seasonal patterns and generally tend to be the highest in the first quarter of the year. While the effects of the seasonal trends discussed above remain evident, macroeconomic trends, such as those discussed within the Business Environment sections of our quarterly and annual reports on Forms 10-Q and Form 10-K generally have a more significant impact on our key financial metrics and can outweigh any seasonal impacts that we may experience.
LEGISLATIVE, REGULATORY MATTERS AND CAPITAL ADEQUACY
CB is subject to various regulatory capital requirements administered by the State of Delaware and the FDIC. CCB is also subject to various regulatory capital requirements administered by the State of Utah and the FDIC. 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 2023 Form 10-K. For additional detail regarding the CFPB’s final rule relating to credit card late fees, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) — Business Environment” and “Risk Factors” included herein and in our 2023 Form 10-K and our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024.
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.
Quantitative measures, established by regulations to ensure capital adequacy, require the Banks to maintain minimum amounts and ratios of Tier 1 capital to average assets, and Common equity tier 1, Tier 1 capital and Total capital, all to risk weighted assets. Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on CB’s and/or CCB’s operating activities, as well as our operating activities. Based on these regulations, as of September 30, 2024 and 2023, each Bank met all capital requirements to which it was subject, and maintained capital ratios in excess of the minimums required to qualify as well capitalized. The Banks seek to maintain capital levels and ratios in excess of the minimum regulatory requirements inclusive of the 2.5% Capital Conservation Buffer. Although Bread Financial is not a bank holding company as defined under the Bank Holding Company Act, we seek to maintain capital levels and ratios in excess of the minimums required for bank holding companies.
The Banks adopted the option provided by the interim final rule issued by joint federal bank regulatory agencies, which largely delayed the effects of the current expected credit loss (CECL) model on their regulatory capital for two years, until January 1, 2022, after which the effects are phased-in over a three-year period through December 31, 2024. Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period includes both the initial impact of our adoption of CECL as of January 1, 2020, and 25% of subsequent changes in our Allowance for credit losses during each quarter of the two-year period ended December 31, 2021. In accordance with the interim final rule, we began to ratably phase-in these effects on January 1, 2022.
As of September 30, 2024 the actual capital ratios and minimum ratios for each Bank, as well as Bread Financial, are as follows:
Table 12: Capital Ratios
Actual Ratio
Minimum Ratio for Capital Adequacy Purposes
Minimum Ratio to be Well Capitalized under Prompt Corrective Action Provisions
Total Company
Common equity tier 1 capital ratio (1)
13.3
%
4.5
%
6.5
%
Tier 1 capital ratio (2)
13.3
6.0
8.0
Total risk-based capital ratio (3)
14.6
8.0
10.0
Tier 1 leverage capital ratio (4)
11.7
4.0
5.0
Total risk-weighted assets (5)
$
19,010
Comenity Bank
Common equity tier 1 capital ratio (1)
17.4
%
4.5
%
6.5
%
Tier 1 capital ratio (2)
17.4
6.0
8.0
Total risk-based capital ratio (3)
18.8
8.0
10.0
Tier 1 leverage capital ratio (4)
15.2
4.0
5.0
Comenity Capital Bank
Common equity tier 1 capital ratio (1)
16.0
%
4.5
%
6.5
%
Tier 1 capital ratio (2)
16.0
6.0
8.0
Total risk-based capital ratio (3)
17.4
8.0
10.0
Tier 1 leverage capital ratio (4)
14.4
4.0
5.0
__________________________________
(1)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. See below for a reconciliation of our Total stockholders’ equity under GAAP to tier 1 and tier 2 capital under the Basel III Standardized Approach.
(2)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. See below for a reconciliation of our Total stockholders’ equity under GAAP to tier 1 and tier 2 capital under the Basel III Standardized Approach.
(3)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. See below for a reconciliation of our Total stockholders’ equity under GAAP to tier 1 and tier 2 capital under the Basel III Standardized Approach.
(4)Tier 1 leverage capital ratio represents tier 1 capital divided by total average assets, after certain adjustments.
(5)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.
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:
September 30, 2024
(Millions)
Total stockholders’ equity
$
3,112
CECL phase-in adjustment
139
Total stockholders’ equity, net of CECL phase-in
3,251
Less:
Goodwill (1)
594
Intangible assets
120
Other
17
Common equity tier 1 capital
2,520
Tier 1 capital
2,520
Qualifying allowance for credit losses (2)
260
Tier 2 capital
260
Total capital
$
2,780
__________________________________
(1)Goodwill, net of the related $40 million deferred tax liability.
(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.
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:
Three months ended September 30, 2024
Nine months ended September 30, 2024
(Millions)
Common equity tier 1 capital beginning balance
$
2,593
$
2,466
Net income applicable to common equity
2
$
270
Dividends declared on common stock
(11)
(33)
Changes in additional paid-in capital
(55)
(45)
Changes in intangible assets
(9)
(8)
Other (1)
—
(130)
Common equity tier 1 capital
2,520
2,520
Tier 1 capital
2,520
$
2,520
Tier 2 capital beginning balance
258
273
Change in qualifying allowance for credit losses
2
(13)
Tier 2 capital
260
260
Total capital
$
2,780
$
2,780
________________________________
(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.
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.
We are also involved, from time to time, in reviews, investigations, subpoenas, supervisory actions and other proceedings (both formal and informal) by governmental agencies regarding our business, which could subject us to significant fines, penalties, obligations to change our business practices, significant restrictions on our existing business or ability to develop new business, cease-and-desist orders, safety-and-soundness directives or other requirements resulting in increased expenses, diminished income and damage to our reputation.
On November 20, 2023, following the consent of the Board of Managers of Comenity Servicing LLC (the Servicer), the FDIC issued a consent order to the Servicer. The Servicer is not one of our Bank subsidiaries, but is our wholly-owned subsidiary that services substantially all of our loans. The consent order arose out of the June 2022 transition of our credit card processing services to strategic outsourcing partners and addresses certain shortcomings in the Servicer’s information technology (IT) systems development, project management, business continuity management, cloud operations, and third-party oversight. The Servicer entered into the consent order for the purpose of resolving these matters without admitting or denying any violations of law or regulation set forth in the order. The consent order does not contain any monetary penalties or fines.
The Servicer continues to take significant steps to strengthen the organization’s IT governance and address the other issues identified in the consent order, working diligently to ensure that all of the requirements of the consent order are satisfied. Without limiting the generality of the foregoing, the Servicer has taken steps to address each provision within the consent order that required action be taken by a specified deadline, including providing a copy of the consent order to the Parent Company Board of Directors, increasing the size and governance processes of the Servicer’s Board of Managers, establishing an Executive Oversight Committee to oversee and ensure compliance with the consent order, and submitting all required reports and plans of action to the FDIC. The Servicer is committed to complying with each of the ongoing or longer-term requirements of the consent order, including the enhancement of its compliance management processes and related corporate governance, compliance with the applicable system conversion requirements, and enhanced risk management and reporting requirements. In addition, the Board of Directors of each of the Banks oversee the Servicer’s compliance with the requirements of the consent order and provide effective challenge of Servicer management toward that end.
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.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)” included in our 2023 Form 10-K.
RECENTLY ISSUED ACCOUNTING STANDARDS
See the “Recently Adopted and Recently Issued Accounting Standards” under Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies” to the unaudited Consolidated Financial Statements.
This Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give our expectations or forecasts of future events and can generally be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “plan,” “likely,” “may,” “should” or other words or phrases of similar import. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding, and the guidance we give with respect to, our anticipated operating or financial results, future financial performance and outlook, future dividend declarations and future economic conditions.
We believe that our expectations are based on reasonable assumptions. Forward-looking statements, however, are subject to a number of risks and uncertainties that are difficult to predict and, in many cases, beyond our control. Accordingly, our actual results could differ materially from the projections, anticipated results or other expectations expressed in this report, and no assurances can be given that our expectations will prove to have been correct. Factors that could cause the outcomes to differ materially include, but are not limited to, the following:
•macroeconomic conditions, including market conditions, inflation, higher interest rates, labor market conditions, recessionary pressures or a concern over a prolonged economic slowdown, and the related impact on consumer spending behavior, payments, debt levels, savings rates and other behavior;
•global political, market, public health and social events or conditions, including ongoing wars and military conflicts and natural disasters;
•future credit performance of our customers, including the level of future delinquency and write-off rates;
•loss of, or reduction in demand for services from, significant brand partners or customers in the highly competitive markets in which we compete;
•the concentration of our business in U.S. consumer credit;
•increases or volatility in the Allowance for credit losses that may result from the application of the CECL model;
•inaccuracies in the models and estimates on which we rely, including the amount of our Allowance for credit losses and our credit risk management models;
•increases in fraudulent activity;
•failure to identify, complete or successfully integrate or disaggregate business acquisitions, divestitures and other strategic initiatives;
•the extent to which our results are dependent upon our brand partners, including our brand partners’ financial performance and reputation, as well as the effective promotion and support of our products by brand partners;
•continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations;
•increases in the cost of doing business, including market interest rates;
•our level of indebtedness and inability to access financial or capital markets, including asset-backed securitization funding or deposits markets;
•restrictions that limit our Banks’ ability to pay dividends to us;
•pending and future litigation;
•pending and future federal and state legislation, regulation, supervisory guidance and regulatory and legal actions including, but not limited to, those related to financial regulatory reform and consumer financial services practices, as well as any such actions with respect to late fees, interchange fees or other charges;
•increases in regulatory capital requirements or other support for our Banks;
•impacts arising from or relating to the transition of our credit card processing services to third party service providers that we completed in 2022;
•failures or breaches in our operational or security systems, including as a result of cyberattacks, unanticipated impacts from technology modernization projects, failure of our information security controls or otherwise;
•loss of consumer information or other data due to compromised physical or cyber security, including disruptive attacks from financially motivated bad actors and third party supply chain issues;
•any tax or other liability or adverse impacts arising out of or related to the spinoff of our former LoyaltyOne segment or the bankruptcy filings of Loyalty Ventures Inc. (LVI) and certain of its subsidiaries and subsequent litigation or other disputes; and
•those factors identified in our filings with the SEC, including in the “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” sections of our 2023 Form 10-K, 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.
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. In addition, the CFPB issued a final rule earlier this year that, absent a successful legal challenge, will place significant limits on credit card late fees, which would have a significant impact on our business and results of operations for at least the short term and, depending on the effectiveness of the mitigating actions that we have taken or may in the future take in anticipation of, or in response to, the final rule, may potentially adversely impact us over the long term; we cannot provide any assurance as to the effective date of the rule, the result of any pending or future challenges or other litigation relating to the rule, or our ability to mitigate or offset the impact of the rule on our business and results of operations.
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.
(1)Includes amounts that related 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. For additional information refer to Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies” to the unaudited Consolidated Financial Statements.
See Notes to unaudited Consolidated Financial Statements.
Total credit card and other loans (includes loans available to settle obligations of consolidated variable interest entities September 30, 2024, $11,644; December 31, 2023, $12,844, respectively)
17,933
19,333
Allowance for credit losses
(2,190)
(2,328)
Credit card and other loans, net
15,743
17,005
Investments (Fair value: September 30, 2024, $230; December 31, 2023, $217)
277
253
Property and equipment, net
148
167
Goodwill and intangible assets, net
754
762
Other assets
1,363
1,364
Total assets
$
21,736
$
23,141
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits
12,847
13,620
Debt issued by consolidated variable interest entities
3,543
3,898
Long-term and other debt
1,041
1,394
Other liabilities
1,193
1,311
Total liabilities
18,624
20,223
Commitments and contingencies (Note 11)
Stockholders’ equity
Common stock, $0.01 par value; authorized, 200.0 million shares; issued, 49.7 million shares as of September 30, 2024 and 49.3 million shares as of December 31, 2023, respectively.
1
1
Additional paid-in capital
2,124
2,169
Retained earnings
1,003
767
Accumulated other comprehensive loss
(16)
(19)
Total stockholders’ equity
3,112
2,918
Total liabilities and stockholders’ equity
$
21,736
$
23,141
See Notes to unaudited Consolidated Financial Statements.
UNAUDITED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
Nine Months Ended September 30, 2024
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Stockholders’ Equity
Shares
Amount
(Millions)
Balance as of December 31, 2023
49.3
$
1
$
2,169
$
767
$
(19)
$
2,918
Cumulative effect of change in accounting principle (1)
—
—
—
(1)
—
(1)
Net income
—
—
—
270
—
270
Other comprehensive income
—
—
—
—
3
3
Stock-based compensation
—
—
41
—
—
41
Repurchases of common stock
(0.3)
—
(11)
—
—
(11)
Repurchases of Convertible Notes
—
—
(67)
—
—
(67)
Dividends and dividend equivalent rights declared ($0.63 per common share)
—
—
—
(33)
—
(33)
Issuance of shares to employees, net of shares withheld for employee taxes
0.7
—
(8)
—
—
(8)
Balance as of September 30, 2024
49.7
$
1
$
2,124
$
1,003
$
(16)
$
3,112
Nine Months Ended September 30, 2023
Common Stock
Additional Paid-In Capital
Retained Earnings
Accumulated Other Comprehensive Loss
Total Stockholders’ Equity
Shares
Amount
(Millions)
Balance as of December 31, 2022
49.9
$
1
$
2,192
$
93
$
(21)
$
2,265
Net income
—
—
—
675
—
675
Other comprehensive loss
—
—
—
—
(6)
(6)
Stock-based compensation
—
—
32
—
—
32
Capped call transactions for convertible senior notes due 2028
—
—
(30)
—
—
(30)
Repurchases of common stock
(0.9)
(35)
(35)
Dividends and dividend equivalent rights declared ($0.63 per common share)
—
—
—
(33)
—
(33)
Issuance of shares to employees, net of shares withheld for employee taxes
0.3
—
(4)
—
—
(4)
Balance as of September 30, 2023
49.3
$
1
$
2,155
$
735
$
(27)
$
2,864
__________________________________
(1)Represents the cumulative effect, net of tax, of adopting the proportional amortization method of accounting for our tax credit investment. For additional information refer to Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies” to the unaudited Consolidated Financial Statements.
See Notes to unaudited Consolidated Financial Statements.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
1. DESCRIPTION OF BUSINESS, BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
DESCRIPTION OF THE BUSINESS
We are a tech-forward financial services company that provides simple, personalized payment, lending and saving solutions. We create opportunities for our customers and partners through digitally enabled choices that offer ease, empowerment, financial flexibility and exceptional customer experiences. Driven by a digital-first approach, data insights and white-label technology, we deliver growth for our partners through a comprehensive product suite, including private label and co-brand credit cards and buy now, pay later (BNPL) products such as installment loans and our “split-pay” offerings. We also offer direct-to-consumer solutions that give customers more access, choice and freedom through our branded Bread Cashback® American Express® Credit Card, Bread RewardsTM American Express® Credit Card and Bread Savings® products.
Our partner base consists of large consumer-based businesses, including well-known brands such as (alphabetically) AAA, Academy Sports + Outdoors, Caesars, Dell Technologies, the NFL, Signet, Ulta and Victoria’s Secret, as well as small- and medium-sized businesses (SMBs). Our partner base is well diversified across a broad range of industries, including travel and entertainment, health and beauty, jewelry, sporting goods, home goods, technology and electronics and the industry in which we first began, specialty apparel. We believe our comprehensive suite of payment, lending and saving solutions, along with our related marketing and data and analytics, allows us to offer products relevant across all customer segments (Gen Z, Millennial, Gen X and Baby Boomers). The breadth and quality of our product and service offerings have enabled us to establish and maintain long-standing partner relationships. We operate our business through a single reportable segment, with our primary source of revenue being from Interest and fees on loans from our various credit card and other loan products, and to a lesser extent from contractual relationships with our brand partners.
Throughout this report, unless stated or the context implies otherwise, the terms “Bread Financial”, “BFH”, the “Company”, “we”, “our” or “us” refer to Bread Financial Holdings, Inc. and its subsidiaries on a consolidated basis. References to “Parent Company” refer to Bread Financial Holdings, Inc. on a parent-only standalone basis. In addition, in this report we may refer to the retailers and other companies with whom we do business as our “partners”, “brand partners”, or “clients”, provided that the use of the term “partner”, “partnering” or any similar term does not mean or imply a formal legal partnership, and is not meant in any way to alter the terms of Bread Financial’s relationship with any third parties. We offer our credit products through our insured depository institution subsidiaries, Comenity Bank and Comenity Capital Bank, which together are referred to herein as the “Banks”.
BASIS OF PRESENTATION
These unaudited Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), and should be read in conjunction with the Consolidated Financial Statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023, filed with the Securities and Exchange Commission on February 20, 2024 (the 2023 Form 10-K). If not significantly different, certain note disclosures included therein have been omitted from these unaudited Consolidated Financial Statements.
The unaudited 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. The unaudited Consolidated Financial Statements also include 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. Such amounts have been classified within Discontinued operations and primarily relate to the after-tax impact of contractual indemnification and tax-related matters. For additional information about our previously disclosed discontinued operations please refer to Note 22, “Discontinued Operations and Bank Holding Company Financial Presentation” to the audited Consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2021. 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 judgment of management, but actual results could differ. The most significant of those estimates and assumptions relate to the Allowance for credit losses, Provision for income taxes and Goodwill.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The accompanying unaudited Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which we have a controlling financial interest. All intercompany transactions have been eliminated.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
There have been no material changes to our significant accounting policies as discussed in Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies” included in our 2023 Form 10-K.
RECENTLY ADOPTED AND RECENTLY ISSUED ACCOUNTING STANDARDS
Accounting Standards Recently Adopted
Standard
Guidance
Timing and Financial Statement Impact
Investments - Equity Method and Joint Ventures: Accounting for Investments in Tax Credit Structures Using the Proportional Amortization Method
Issued March 2023
Expands the election to apply the proportional amortization method of accounting to tax credit investments beyond low-income-housing tax credit investments, when certain conditions are met.
Adopted under the modified retrospective method on January 1, 2024, which resulted in an insignificant decrease to retained earnings. Adoption did not have a significant impact on our results of operations, financial position, regulatory risk-based capital, or on our operational processes, controls and governance in support of the new guidance.
Accounting Standards Recently Issued but Not Yet Adopted
Standard
Guidance
Timing and Financial Statement Impact
Segment Reporting: Improvements to Reportable Segment Disclosures
Issued November 2023
Requires interim and annual disclosure of significant segment expense categories and amounts that are regularly provided to the chief operating decision maker, as well as disclosure of the aggregate amount and description of other segment items beyond significant segment expenses.
Effective beginning with our Annual Report on Form 10-K for the year ending December 31, 2024, and effective for interim reporting periods beginning in 2025. Early adoption is permitted, although we do not plan to early adopt. Adoption will result in expanded disclosures for our single reportable segment but is not expected to have a significant impact on our financial reporting, or on our operational processes, controls and governance in support of the new guidance.
Income Taxes: Improvements to Income Tax Disclosures
Issued December 2023
Requires greater disaggregation of rate reconciliation and income taxes paid information, as well as other changes intended to enhance the transparency and decision-usefulness of income tax disclosures.
Effective beginning with our Annual Report on Form 10-K for the year ending December 31, 2025. Early adoption is permitted, although we do not plan to early adopt. Adoption will require enhancements to our income tax disclosures but is not expected to have a significant impact on our financial reporting, or on our operational processes, controls and governance in support of the new guidance.
2. CREDIT CARD AND OTHER LOANS
Our payment and lending solutions result in the origination of Credit card and other loans, which are recorded at the time a borrower enters into a point-of-sale transaction with a merchant. Credit card loans represent revolving lines of credit and have a range of terms that include credit limits, interest rates and fees, which can be revised over time based on new information about the cardholder, in accordance with applicable regulations and the governing terms and conditions. Cardholders choosing to make a payment of less than the full balance due, instead of paying in full, are subject to finance charges and are required to make monthly payments based on pre-established amounts. Other loans, which consist primarily of BNPL products such as installment loans and our “split-pay” offerings, have a range of fixed terms such as interest rates, fees and repayment periods, and borrowers are required to make pre-established monthly payments over the term of the loan in accordance with the applicable terms and conditions. Credit card and other loans include principal and any related accrued interest and fees and are presented on the Consolidated Balance Sheets net of the Allowance for credit losses. We continue to accrue interest and fee income on all accounts, except in limited circumstances, until the related balance and all related interest and fees are paid or charged-off.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
We generally classify our Credit card and other loans as held for investment. We sell a majority of our credit card loans originated by Comenity Bank (CB) and by Comenity Capital Bank (CCB), which together are referred to herein as the “Banks”, to certain of our master trusts (the Trusts), which are consolidated VIEs, and therefore these loans are restricted for securitization investors. All new originations of Credit card and other loans are determined to be held for investment at origination because we have the intent and ability to hold them for the foreseeable future. In determining what constitutes the foreseeable future, we consider the average life and homogenous nature of our Credit card and other loans. In assessing whether our Credit card and other loans continue to be held for investment, we also consider capital levels and scheduled maturities of funding instruments used. The assertion regarding the intent and ability to hold Credit card and other loans for the foreseeable future can be made with a high degree of certainty given the maturity distribution of our direct-to-consumer (DTC or retail) deposits and other funding instruments; the demonstrated ability to replace maturing time-based deposits and other borrowings with new deposits or borrowings; and historic payment activity on Credit card and other loans. Due to the homogenous nature of our credit card loans, amounts are classified as held for investment on a brand partner portfolio basis. From time to time certain credit card loans are classified as held for sale, as determined on a brand partner portfolio basis. We carry held for sale loans at the lower of aggregate cost or fair value and continue to recognize finance charges on an accrual basis. Cash flows associated with Credit card and other loans originated or purchased for investment are classified as Cash flows from investing activities, regardless of any subsequent change in intent and ability.
The following table provides Credit card and other loans, as of the dates presented:
September 30, 2024
December 31, 2023
(Millions)
Credit card loans
$
17,630
$
18,999
BNPL and other loans
303
334
Total credit card and other loans (1)(2)
17,933
19,333
Less: Allowance for credit losses
(2,190)
(2,328)
Credit card and other loans, net
$
15,743
$
17,005
__________________________________
(1)Includes $11.6 billion and $12.8 billion of Credit card and other loans available to settle obligations of consolidated VIEs as of September 30, 2024 and December 31, 2023, respectively.
(2)Includes $383 million and $371 million, of accrued interest and fees that have not yet been billed to cardholders as of September 30, 2024 and December 31, 2023, respectively.
Credit Card and Other Loans Aging
The following table provides the delinquency trends of our Credit card and other loans portfolio, based on the amortized cost, as of the dates presented:
Aging Analysis of Delinquent Amortized Cost
Credit Card and Other Loans (1)
31 to 60 Days Past Due
61 to 90 Days Past Due
91 or more Days Past Due
Total
Total Current
Total
(Millions)
September 30, 2024
$
379
$
303
$
746
$
1,428
$
16,099
$
17,527
December 31, 2023
$
422
$
323
$
809
$
1,554
$
17,373
$
18,927
__________________________________
(1)BNPL and other loans 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 primary difference between the amortized cost basis included in the table above and the carrying value of our Credit card and other loans relates to the exclusion of unbilled finance charges and fees from the amortized cost basis. As of September 30, 2024 and December 31, 2023, accrued interest and fees that have not yet been billed to cardholders were $383 million and $371 million, respectively, included in Credit card and other loans on the Consolidated Balance Sheets.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
From time to time we may re-age cardholders’ accounts, with the intent of assisting delinquent cardholders who have experienced financial difficulties but who demonstrate both an ability and willingness to repay the amounts due, this practice affects credit card loan delinquencies and principal losses. Accounts meeting specific defined criteria are re-aged when the cardholder makes one or more consecutive payments aggregating to a certain pre-defined amount of their account balance. Upon re-aging, the outstanding balance of a delinquent account is returned to current status. Our re-aged accounts as a percentage of Total credit card and other loans represented 2.9% and 2.8% for the three months ended September 30, 2024 and 2023, respectively, and 4.3% and 2.7% for the nine months ended September 30, 2024 and 2023, respectively. Our re-aging practices comply with regulatory guidelines.
Credit Quality Indicators for Our Credit Card and Other Loans
Given the nature of our business, the credit quality of our assets, in particular our Credit card and other loans, is a key determinant underlying our ongoing financial performance and overall financial condition. When it comes to our Credit card and other loans portfolio, we closely monitor Delinquency rates and Net principal loss rates, which reflect, among other factors, our underwriting, the inherent credit risk in our portfolio 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.
Delinquencies: An account is contractually delinquent if we do not receive the minimum payment due by the specified due date. Our policy is to continue to accrue interest and fee income on all accounts, except in limited circumstances, until the balance and all related interest and fees are paid or charged-off. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent; based upon the level of risk indicated, a collection strategy is deployed. If after exhausting all in-house collection efforts we are unable to collect on the account, we may engage collection agencies or outside attorneys to continue those efforts, or sell the charged-off balances.
The Delinquency rate is calculated by dividing outstanding principal balances that are contractually delinquent (i.e., balances greater than 30 days past due) as of the end of the period, by the outstanding principal amount of Credit card and other loans as of the same period-end. As of September 30, 2024 and December 31, 2023, our Delinquency rates were 6.4% and 6.5%, respectively.
Net Principal Losses: Our net principal losses include the principal amount of losses that are deemed uncollectible, less recoveries, and exclude charged-off interest, fees and third-party fraud losses (including synthetic fraud). Charged-off interest and fees reduce Interest and fees on loans, while third-party fraud losses are recorded in Card and processing expenses. Credit card loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days past due. BNPL loans such as our installment loans and our “split-pay” offerings, including unpaid interest, are generally charged-off when a loan becomes 120 days past due. However, in the case of a customer bankruptcy or death, Credit card and other loans, including unpaid interest and fees, as applicable, are charged-off 60 days after receipt of the notification of the bankruptcy or death, but in any case no later than 180 days past due for credit card loans and 120 days past due for BNPL loans. We record the actual losses for unpaid interest and fees as a reduction to Interest and fees on loans, which were $232 million and $204 million for the three months ended September 30, 2024 and 2023, respectively, and $773 million and $689 million for the nine months ended September 30, 2024 and 2023, respectively.
The net principal loss rate is calculated by dividing net principal losses for the period by the Average credit card and other loans for the same period. Beginning in January 2024, we revised the calculation of Average credit card and other loans to more closely align with industry practice by incorporating an average daily balance. Prior to 2024, Average credit card and other loans represent the average balance of the loans at the beginning and end of each month, averaged over the periods indicated. For the three months ended September 30, 2024 and 2023, our Net principal loss rates were 7.8% and 6.9%, respectively, for the nine months ended September 30, 2024 and 2023, our Net Principal loss rates were 8.3% and 7.3%, respectively.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Overall Credit Quality: As part of our credit risk management activities for our credit card loans portfolio, we assess overall credit quality by reviewing information from credit bureaus and other sources relating to our cardholders’ broader credit performance. We utilize VantageScore (Vantage) credit scores to assist in our assessment of credit quality. Vantage credit scores are obtained at origination of the account and are refreshed monthly thereafter to assist in predicting customer behavior. We categorize these Vantage credit scores into the following three credit score categories: (i) 661 or higher, which are considered the strongest credits and therefore have the lowest credit risk; (ii) 601 to 660, considered to have moderate credit risk; and (iii) 600 or less, which are considered weaker credits and therefore have the highest credit risk. In certain limited circumstances there are customer accounts for which a Vantage score is not available and we use alternative sources to assess credit risk and predict behavior. The table below excludes less than 0.1% of the total credit card loans balance as of September 30, 2024 and December 31, 2023, representing those customer accounts for which a Vantage credit score is not available. The following table reflects the distribution of credit card loans by Vantage score as of the dates presented:
Vantage
September 30, 2024
December 31, 2023
661 or Higher
601 to 660
600 or Lower
661 or Higher
601 to 660
600 or Lower
Credit card loans
57
%
27
%
16
%
57
%
27
%
16
%
As part of our credit risk management activities for our BNPL loans portfolio, we also assess overall credit quality by reviewing information from credit bureaus. We have historically utilized Fair Isaac Corporation (FICO) credit scores to assist in our assessment of the credit quality for our BNPL loans portfolio, but in early 2024 we completed a transition to Vantage scoring. The scoring scale produced by both FICO and Vantage is similar in that scores of 600 or less are considered weaker scores and as per our categorization method would have the highest credit risk. The amortized cost basis of BNPL loans totaled $292 million and $317 million as of September 30, 2024 and December 31, 2023, respectively. As of September 30, 2024, approximately 84% of these loans were originated with customers with scores of 661 or above, and correspondingly approximately 16% of these loans were originated with customers with scores below 661. Similarly, as of December 31, 2023, approximately 82% and 18% of these loans were originated with customers with scores of 661 or above, and below 661, respectively.
Modified Credit Card Loans
Consumer Relief Programs
As part of our collections strategy, we may offer temporary and short term programs in order to improve the likelihood of collections and meet the needs of our customers. Our modifications, for customers who have requested assistance and meet certain qualifying requirements, come in the form of reduced 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 consumer relief 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 consumer relief programs to determine if they represent a more than insignificant delay in payment granted to borrowers experiencing financial difficulty, in which case they would then be considered a Loan Modification. Loans in these short term programs that are determined to be Loan Modifications, will be included as such in the disclosure below.
In instances where cardholders are experiencing financial difficulty, we may modify our credit card loans with the intention of minimizing losses and improving collectability, while providing cardholders with financial relief; such credit card loans are classified as Loan Modifications, exclusive of the temporary, short-term consumer relief programs described above. Loan Modifications include concessions consisting primarily of a reduced minimum payment, late fee waiver, and/or an interest rate reduction. The majority of concessions remain in place for a period no longer than 12 months; however, for certain modifications the concessions remain in place through the payoff of the credit card loans if the cardholder complies with the terms of the program.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Loan Modification concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments, and the cardholder’s ability to make future purchases is either limited, or suspended until the cardholder successfully exits from the modification program. In accordance with the terms of our workout programs, the credit agreement reverts back to its original contractual terms (including the contractual interest rate) when the customer exits the program, which is either when all payments have been made in accordance with the program, or when the customer defaults out of the program.
Loan Modifications are collectively evaluated for impairment on a pooled basis in measuring the appropriate Allowance for credit losses. The following table provides information relating to credit card loans to borrowers experiencing financial difficulty that were granted a concession under a Loan Modification program during the periods presented:
Three Months Ended September 30, 2024
Three Months Ended September 30, 2023
Account Balances (1)
% of Total Credit Card Loans
Weighted Average Interest Rate Reduction (% points)
Account Balances (1)
% of Total Credit Card Loans
Weighted Average Interest Rate Reduction (% points)
(Millions, except percentages)
Credit card loans
$
94
0.5
%
21.8
%
$
86
0.5
%
20.2
%
Nine Months Ended September 30, 2024
Nine Months Ended September 30, 2023
Account Balances (1)
% of Total Credit Card Loans
Weighted Average Interest Rate Reduction (% points)
Account Balances (1)
% of Total Credit Card Loans
Weighted Average Interest Rate Reduction (% points)
(Millions, except percentages)
Credit card loans
$
238
1.4
%
21.7
%
$
189
1.1
%
20.1
%
__________________________________
(1)Represents the outstanding balances as of September 30, 2024 and 2023, of all Loan Modifications undertaken in the past three and nine months, respectively, for credit card loans that remain in modification programs as of September 30, 2024 and 2023. The outstanding balances include principal, accrued interest and fees.
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 Loan Modification programs.
The following table reflects the performance of our credit card loans that were modified within the 12 months prior to the dates presented and remain in a Loan Modification program as of the dates presented:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides additional information regarding credit card Loan Modifications that have subsequently defaulted within 12 months of their modification dates (or since implementation beginning January 1, 2023), for the periods presented; the probability of default is factored into the Allowance for credit losses:
Three Months Ended September 30, 2024
Three Months Ended September 30, 2023
Number of Modifications
Outstanding Balance
Number of Modifications
Outstanding Balance
(Millions, except for Number of modifications)
Loan Modifications that subsequently defaulted
7,653
$
14
4,047
$
7
Nine Months Ended September 30, 2024
Nine Months Ended September 30, 2023
Number of Modifications
Outstanding Balance
Number of Modifications
Outstanding Balance
(Millions, except for Number of modifications)
Loan Modifications that subsequently defaulted
16,342
$
29
6,567
$
11
Unfunded Lending Commitments
We manage potential credit risk in unfunded lending commitments by reviewing each potential customer’s credit application and evaluating the applicant’s financial history and ability and perceived willingness to repay. Credit card loans are made primarily on an unsecured basis, and our Cardholders reside throughout the U.S. and are not significantly concentrated in any one geographic area.
We manage our potential risk in credit commitments by limiting the total amount of credit, both by individual customer and across our credit card loan portfolio, by monitoring the size and maturity of our loan portfolio and applying consistent risk-based underwriting standards reflective of current and anticipated macroeconomic conditions. We have the unilateral ability to cancel or reduce unused credit card lines at any time. Unused credit card lines available to cardholders totaled approximately $105 billion and $113 billion as of September 30, 2024 and December 31, 2023, respectively. While this amount represented the total available unused credit card lines, we have not experienced and do not anticipate that all cardholders will access their entire available line at any given point in time.
Portfolio Sales
As of September 30, 2024 and December 31, 2023, there were no credit card loans held for sale.
In late April 2024 we sold a credit card loan portfolio for cash consideration of $102 million. We recognized a gain on sale 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.
We previously announced the non-renewal of our contract with BJ’s Wholesale Club (BJ’s) and the sale of the BJ’s portfolio, which closed in late February 2023, for a total purchase price of $2.5 billion on a loan portfolio of $2.3 billion, resulting in a $230 million Gain on portfolio sale.
Portfolio Acquisition
In August 2024, we acquired a credit card loan portfolio for cash consideration of approximately $383 million, subject to customary purchase price adjustments.
In October 2023, we acquired a credit card portfolio for cash consideration of $388 million.
3. ALLOWANCE FOR CREDIT LOSSES
The Allowance for credit losses represents our estimate of expected credit losses over the estimated life of our Credit card and other loans, incorporating future macroeconomic forecasts in addition to information about past events and current
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
conditions. Our estimate under the Current Expected Credit Loss (CECL) approach is significantly influenced by the composition, characteristics and quality of our portfolio of credit card and other loans, as well as the prevailing economic conditions and forecasts utilized. The estimate of the Allowance for credit losses includes an estimate for uncollectible principal as well as unpaid interest and fees. Principal losses, net of recoveries are deducted from the Allowance for credit losses. Losses of unpaid interest and fees as well as any adjustments to the Allowance for credit losses associated with unpaid interest and fees are recorded as a reduction to Interest and fees on loans. The Allowance for credit losses is maintained through an adjustment to the Provision for credit losses and is evaluated for appropriateness on a quarterly basis.
In estimating our Allowance for credit losses, for each identified segment of loans sharing similar risk characteristics, management uses modeling and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors. This modeling uses historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships, to determine expected credit performance. Our quantitative estimate of expected credit losses under CECL is impacted by certain forecasted macroeconomic variables. We consider the macroeconomic forecast used to be reasonable and supportable over the estimated life of the Credit card and other loans portfolio, with no reversion period. In addition to the quantitative estimate of expected credit losses, we also incorporate qualitative adjustments for certain factors such as Company-specific risks, changes in current macroeconomic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the Allowance for credit losses reflects our best estimate of current expected credit losses.
Credit Card Loans
We use a “pooled” approach to estimate expected credit losses for financial assets with similar risk characteristics. We have evaluated multiple risk characteristics across our credit card loans portfolio, and determined delinquency status and overall credit quality to be the most significant characteristics for estimating expected credit losses. To estimate our Allowance for credit losses, we segment our credit card loans on the basis of delinquency status, credit quality risk score and product. These risk characteristics are evaluated on at least an annual basis, or more frequently as facts and circumstances warrant. In determining the estimated life of our credit card loans, payments were applied to the measurement date balance with no payments allocated to future purchase activity. We use a combination of First In First Out and the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act) methodologies to model balance paydown.
BNPL Loans
We measure our Allowance for credit losses on BNPL loans using a statistical model to estimate projected losses over the remaining terms of the loans, inclusive of an assumption for prepayments. The model is based on the historical statistical relationship between loan loss performance and certain macroeconomic data pooled based on credit quality risk score, term of the underlying loans, vintage and geographic location. As of September 30, 2024 and December 31, 2023, the Allowance for credit losses on BNPL loans was $31 million and $32 million, respectively.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Allowance for Credit Losses Rollforward
The following table provides our Allowance for credit losses for our Credit card and other loans. The amount of the related Allowance for credit losses on BNPL and other loans is insignificant and therefore has been included in the table below for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(Millions)
Beginning balance
$
2,164
$
2,207
$
2,328
$
2,464
Provision for credit losses (1)
369
304
980
747
Change in the estimate for uncollectible unpaid interest and fees
5
—
5
5
Net principal losses (2)
(348)
(304)
(1,123)
(1,009)
Ending balance
$
2,190
$
2,207
$
2,190
$
2,207
__________________________________
(1)Provision for credit losses includes a build/release for the Allowance, as well as replenishment of Net principal losses.
(2)Net principal losses are presented net of recoveries of $85 million and $69 million for the three months ended September 30, 2024 and 2023, respectively, and $286 million and $242 million for the nine months ended September 30, 2024 and 2023, respectively. Net principal losses for the nine months ended September 30, 2023 include a $10 million adjustment related to the effects of the purchase of previously written-off accounts that were sold to a third-party debt collection agency; no such adjustment was made in the current period.
During the three months ended September 30, 2024 the balance of the Allowance for credit losses increased, primarily due to the acquisition of the previously mentioned credit card loan portfolio. The decrease in the Allowance for credit losses during the nine months ended September 30, 2024 is the result of the decline from the seasonal peak in Credit card and other loans as of December 31, 2023, partially offset by the increased reserve rate over the period. The increase in the reserve rate from 12.0% as of December 31, 2023 to 12.2% as of September 30, 2024, is due primarily to lower Credit card and other loans balances, which are down from their seasonal peak at the beginning of 2024. 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.
4. SECURITIZATIONS
We account for transfers of financial assets as either sales or financings. Transfers of financial assets that are accounted for as a sale are removed from the Consolidated Balance Sheets with any realized gain or loss reflected in the Consolidated Statements of Income during the period in which the sale occurs. Transfers of financial assets that are not accounted for as a sale are treated as a financing.
We regularly securitize the majority of our credit card loans through the transfer of those loans to one of our Trusts. We perform the decision making for the Trusts, as well as servicing the cardholder accounts that generate the credit card loans held by the Trusts. In our capacity as a servicer, we administer the loans, collect payments and charge-off uncollectible balances. Servicing fees are earned by a subsidiary, which are eliminated in consolidation.
The Trusts are consolidated VIEs because they have insufficient equity at risk to finance their activities – the issuance of debt securities and notes, collateralized by the underlying credit card loans. Because we perform the decision making and servicing for the Trusts, we have the power to direct the activities that most significantly impact the Trusts’ economic performance (the collection of the underlying credit card loans). In addition, we hold all of the variable interests in the Trusts, with the exception of the liabilities held by third-parties. These variable interests provide us with the right to receive benefits and the obligation to absorb losses, which could be significant to the Trusts. As a result of these considerations, we are deemed to be the primary beneficiary of the Trusts and therefore consolidate the Trusts.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The Trusts issue debt securities and notes, which are non-recourse to us. The collections on the securitized credit card loans held by the Trusts are available only for payment of those debt securities and notes, or other obligations arising in the securitization transactions. For our securitized credit card loans, during the initial phase of a securitization reinvestment period, we generally retain principal collections in exchange for the transfer of additional credit card loans into the securitized pool of assets. During the amortization or accumulation period of a securitization, the investors’ share of principal collections (in certain cases, up to a maximum specified amount each month) is either distributed to the investors or held in an account until it accumulates to the total amount due, at which time it is paid to the investors in a lump sum.
Under the Indentures of each Trust and its Indenture Supplements, we are required to maintain minimum interests in our Trusts ranging from a minimum of 4% up to a maximum of 10% of the securitized credit card loans. This requirement is met through a transferor’s interest and is supplemented through excess funding deposits which represent cash amounts deposited with the trustee of the securitizations. Cash collateral, restricted deposits are generally released proportionately as investors are repaid. Under the terms of the Trusts, the occurrence of certain triggering events associated with the performance of the securitized credit card loans in each Trust could result in certain required actions, including payment of Trust expenses, the establishment of reserve funds, or early amortization of the debt securities and/or notes, in a worst-case scenario. During the three and nine months ended September 30, 2024 and 2023, no such triggering events occurred.
The following tables reflect the total securitized credit card loans and related delinquencies, and net principal losses of securitized credit card loans for the periods presented:
September 30, 2024
December 31, 2023
(Millions)
Total credit card loans – available to settle obligations of consolidated VIEs
$
11,644
$
12,844
Of which: principal amount of credit card loans 91 days or more past due
$
306
$
323
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(Millions)
Net principal losses of securitized credit card loans
$
200
$
179
$
637
$
592
5. INVESTMENTS
Investments include investment securities and various other investments primarily held by the Banks for Community Reinvestment Act (CRA) purposes. Investment securities consist of available-for-sale (AFS) debt securities, which are mortgage-backed securities and municipal bonds, and equity securities, which are mutual funds. Investment securities are carried at fair value on the Consolidated Balance Sheets. We also have other investments, which primarily include a portfolio of investments in certain limited partnerships and limited liability companies accounted for under the equity method, and therefore are recorded at cost and adjusted each period for our share of the investee’s earnings or losses, less any impairment. Other investments also include an insignificant tax credit investment where we elected to apply the proportional amortization method of accounting, for which the impacts of both the amortization of the investment and income tax benefits are fully recognized in the Provision for income taxes.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides a summary of our Investments as of the dates presented:
September 30, 2024
December 31, 2023
(Millions)
Investment securities:
Available-for-sale debt securities
$
182
$
171
Equity securities
48
46
Total investment securities
230
217
Equity method and other investments
47
36
Total Investments
$
277
$
253
For AFS debt securities in an unrealized loss position, any estimated credit losses are recognized in the Consolidated Statements of Income by establishing or adjusting an existing Allowance for credit losses for such losses. We typically invest in highly-rated securities with low probabilities of default; therefore, we did not have an Allowance for credit losses as of September 30, 2024 and December 31, 2023, and did not recognize any credit losses for the periods presented. Any unrealized gains, or any portion of an AFS debt security’s non-credit-related unrealized losses are recorded in the Consolidated Statements of Comprehensive Income, net of tax. Realized gains and losses are recorded in Other non-interest expenses in the Consolidated Statements of Income upon disposition of the AFS debt security, using the specific identification method. Gains and losses on investments in equity securities and CRA-related equity method investments are recorded in Other non-interest expenses in the Consolidated Statements of Income.
The table below reflects unrealized gains and losses on AFS debt securities as of the dates presented:
September 30, 2024
December 31, 2023
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
Amortized Cost
Unrealized Gains
Unrealized Losses
Fair Value
(Millions)
Available-for-sale securities
$
199
$
—
$
(17)
$
182
$
192
$
—
$
(21)
$
171
Total
$
199
$
—
$
(17)
$
182
$
192
$
—
$
(21)
$
171
The following tables provide information about AFS debt securities in a gross unrealized loss position and the length of time that individual securities have been in a continuous unrealized loss position, as of the dates presented:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
As of September 30, 2024, our AFS debt securities included mortgage-backed securities, which do not have a single maturity date, with an amortized cost and estimated fair value of $171 million and $156 million, respectively, and municipal bonds, all of which have a maturity date greater than ten years, with an amortized cost and estimated fair value of $28 million and $26 million, respectively.
There were no realized gains or losses from the sale of any investment securities for the three and nine months ended September 30, 2024 and 2023.
6. DEPOSITS
Deposits were categorized as interest-bearing or non-interest-bearing as follows, as of the dates presented:
Deposits by deposit type as of the dates presented:
September 30, 2024
December 31, 2023
(Millions)
Savings accounts
Direct-to-consumer (retail)
$
3,105
$
2,863
Wholesale
3,601
3,734
Certificates of deposit
Direct-to-consumer (retail)
4,378
3,591
Wholesale
1,738
3,406
Cardholder credit balances
25
26
Total deposits
$
12,847
$
13,620
The scheduled maturities of certificates of deposit were as follows as of September 30, 2024:
(Millions)
2024 (1)
$
761
2025
3,926
2026
560
2027
657
2028
184
Thereafter
28
Total certificates of deposit
$
6,116
__________________________________
(1)The 2024 balance includes $3 million in unamortized debt issuance costs, which are associated with the entire portfolio of certificates of deposit.
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.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. BORROWINGS OF LONG-TERM AND OTHER DEBT
Long-term and other debt consisted of the following as of the dates presented:
Description
September 30, 2024
December 31, 2023
Contractual Maturities
Interest Rates
(Millions, except percentages)
Long-term and other debt:
Revolving line of credit
$
—
$
—
June 2026
(1)
Convertible senior notes due 2028
54
316
June 2028
4.25%
Senior notes due 2026
100
500
January 2026
7.00%
Senior notes due 2029
900
600
March 2029
9.75%
Subtotal
1,054
1,416
Less: Unamortized debt issuance costs
13
22
Total long-term and other debt
$
1,041
$
1,394
Debt issued by consolidated VIEs:
Fixed rate asset-backed term note securities
$
1,350
$
350
Various – May 2026 to Jul. 2027
4.62% to 5.47%
Conduit asset-backed securities
2,198
3,550
Various – Oct. 2024 to Oct. 2025
(2)
Subtotal
3,548
3,900
Less: Unamortized debt issuance costs
5
2
Total debt issued by consolidated VIEs
$
3,543
$
3,898
Total borrowings of long-term and other debt
$
4,584
$
5,292
______________________________
(1)The interest rate is based upon the Secured Overnight Financing Rate (SOFR) plus an applicable margin.
(2)The interest rate is based upon SOFR, or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. As of September 30, 2024, the interest rates ranged from 5.94% to 6.13% with a weighted average rate of 5.97%. As of December 31, 2023, the interest rates ranged from 6.36% to 6.59% with a weighted average rate of 6.48%.
Certain of our long-term debt agreements include various restrictive financial and non-financial covenants. If we do not comply with certain of these covenants and an event of default occurs and remains uncured, the maturity of amounts outstanding may be accelerated and become payable, and, with respect to our credit agreement, the associated commitments may be terminated. As of September 30, 2024, we were in compliance with all such covenants.
Long-term and Other Debt
Credit Agreement
In June 2023, we entered into our credit agreement with Parent Company, as borrower, certain of our domestic subsidiaries, as guarantors, JPMorgan Chase Bank, N.A., as administrative agent and lender, and various other financial institutions, as lenders, which provides for a $700 million senior unsecured revolving credit facility (the Revolving Credit Facility). As of September 30, 2024, all $700 million remained available for future borrowings under the Revolving Credit Facility.
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.
4.25% Convertible Senior Notes Due 2028
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
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 Convertible Notes and Capped Call transactions, see Note 10, “Borrowings of Long-Term and Other Debt,” to the audited Consolidated Financial Statements included in our 2023 Form 10K.
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.
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.
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.
Prior to the repurchases of the Convertible Notes in August and September 2024, the embedded conversion feature within the Convertible Notes was both, considered indexed to the Company’s own equity, and met the equity classification conditions; therefore it did not require accounting as a derivative under GAAP. Upon entering into the repurchase agreements that themselves required cash settlement of our conversion obligation in excess of the aggregate principal amount of the Convertible Notes, the embedded conversion feature for those particular Convertible Notes no longer met the equity classification conditions; therefore requiring bifurcation and accounting as a derivative. Of the total $96 million recognized in Other non-interest expenses, $49 million represented the mark-to-market on the embedded conversion features over the measurement period from the date the repurchase agreements were executed until settlement thereof. These fair value adjustments were determined using the daily volume-weighted average price per share of Parent Company’s common stock over the measurement period. As all of the repurchases were negotiated and settled during the quarter ended September 30, 2024, there were no embedded conversion features requiring bifurcation and accounting as a derivative as of September 30, 2024.
Following the settlement of these repurchases, $54 million of Convertible Notes remained outstanding as of September 30, 2024. For these Convertible Notes, the embedded conversion feature is both, considered indexed to the Company’s own equity, and meets the equity classification conditions; therefore not requiring accounting as a derivative. 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.
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
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
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.
9.750% Senior Notes due 2029
In January 2024, we issued and sold an additional $300 million aggregate principal amount of 9.750% Senior Notes due 2029 (Senior Notes due 2029) at an issue price of 101.00% of principal plus accrued interest from December 22, 2023. The Senior Notes due 2029 issued in January 2024 were issued as additional notes under the same indenture pursuant to which the initial $600 million of Senior Notes due 2029 were issued on December 22, 2023. The Senior Notes due 2029 that were issued in both December 2023 and January 2024 constitute a single series of notes and have the same terms, other than the issue date and issue price. We used the proceeds of the January 2024 offering of Senior Notes due 2029, together with $100 million of cash on hand, to fund the redemption of $400 million in aggregate principal amount of our outstanding 7.000% Senior Notes due 2026.
Debt Issued by Consolidated VIEs
An asset-backed security is a security whose value and income payments are derived from and collateralized by a specified pool of underlying assets – in our case, our credit card loans. The sale of the pool of underlying assets to general investors is accomplished through a securitization process. We regularly sell our credit card loans to our Trusts, which are consolidated. The liabilities of these consolidated VIEs include asset-backed securities for which creditors, or beneficial interest holders, do not have recourse to our general credit.
Conduit Facilities
We maintained committed syndicated bank Conduit Facilities to support the funding of our credit card loans for our Trusts. Borrowings outstanding under each private Conduit Facility bear interest at a margin above SOFR, or the asset-backed commercial paper costs of each individual conduit provider.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The table below summarizes our conduit capacities, borrowings and maturities for the periods presented:
(Millions)
December 31, 2023
Commitment
September 30, 2024
Conduit Facilities
Capacity
Drawn (6)
Increase
Capacity
Drawn (6)
Maturity Date
Comenity Bank
WFNMNT 2009-VFN (1)
$
2,650
$
2,015
$
—
$
2,650
$
1,380
October 2025
WFNMT 2009-VFC1 (2)
275
260
—
275
191
October 2024
Comenity Capital Bank
WFCMNT 2009-VFN (3)
2,250
1,025
—
2,250
377
February 2025
CCAST 2023-VFN1 (4)
250
250
—
250
250
September 2025
CCAST 2024-VFN1 (5)
—
—
200
200
—
February 2025
Total
$
5,425
$
3,550
$
200
$
5,625
$
2,198
__________________________________
(1)2009-VFN Conduit issued under World Financial Network Credit Card Master Note Trust (WFNMNT).
(2)2009-VFC1 Conduit issued under World Financial Network Credit Card Master Trust III (WFNMT).
(3)2009-VFN Conduit issued under World Financial Capital Master Note Trust (WFCMNT).
(4)2023-VFN1 Conduit issued under Comenity Capital Asset Securitization Trust (CCAST).
(5)2024-VFN1 Conduit issued under CCAST.
(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.
Fixed Rate Asset-Backed Term Notes
In May 2024, WFNMNT issued $570 million of Series 2024-A public term asset-backed notes, which mature in April 2027. The offering consisted of $500 million of Class A notes with a fixed interest rate of 5.47% per year, $44 million of zero coupon Class M notes, and $26 million of zero coupon Class B notes. The Class M and B notes were retained by us and eliminated from the Consolidated Balance Sheet. As well, in August 2024 WFNMNT issued $500 million of Series 2024-B public term asset-backed notes, which mature in July 2027. The offering consisted of $500 million of Class A notes with a fixed interest rate of 4.62% per year.
8. OTHER NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSES
The following table provides the components of Other non-interest income for the periods presented:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table provides the components of Other non-interest expenses for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(Millions)
Repurchased Convertible Notes
$
96
$
—
$
96
$
—
Professional services and regulatory fees
25
29
85
101
Occupancy expense
5
5
17
16
Other (1)
10
22
44
44
Total other non-interest expenses
$
136
$
56
$
242
$
161
__________________________________
(1)Primarily related to costs associated with various other individually insignificant operating activities.
9. 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 a 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 assumptions about estimates market participants would use in pricing the asset or liability based on the best information available under the circumstances. In particular, Level 3 inputs and valuation techniques involve judgment and as a result are not necessarily indicative of amounts we would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.
We monitor the market conditions and evaluate the fair value hierarchy levels at least quarterly. For the three and nine months ended September 30, 2024 and 2023, there were no transfers into or out of Level 3, and no transfers between Levels 1 and 2.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
The following table summarizes the carrying values and fair values of our financial assets and financial liabilities as of the dates presented:
September 30, 2024
December 31, 2023
Carrying Amount
Fair Value
Carrying Amount
Fair Value
(Millions)
Financial assets
Credit card and other loans, net
$
15,743
$
18,050
$
17,005
$
19,802
Investment securities
230
230
217
217
Financial liabilities
Deposits
12,847
12,875
13,620
13,583
Debt issued by consolidated VIEs
3,543
3,571
3,898
3,900
Long-term and other debt
1,041
1,130
1,394
1,457
Valuation Techniques Used in the Fair Value Measurement of Financial Assets and Financial Liabilities
Credit card and other loans, net: Our Credit card and other loans are recorded at amortized cost, less the Allowance for credit losses, on the Consolidated Balance Sheets. In estimating the fair values, we use a discounted cash flow model (i.e., Level 3 inputs), primarily because a comparable whole loan sales market for similar loans does not exist, and therefore there is a lack of observable pricing inputs. We use various internally derived inputs, including projected income, discount rates and forecasted write-offs. Economic value attributable to future loans generated by the cardholder accounts is not included in the fair values.
Investment securities: Investment securities consist of AFS debt securities, including both mortgage-backed securities and municipal bonds, as well as equity securities, which are mutual funds, and are recorded at fair value on the Consolidated Balance Sheets. Quoted prices of identical or similar investment securities in active markets are used to estimate the fair values (i.e., Level 1 or Level 2 inputs).
Deposits: Money market and other non-maturity deposits carrying values approximate their fair values because they are short-term in duration and have no defined maturity. GAAP requires that the fair values of deposit liabilities with no stated maturities equal their carrying values and does not permit recognition of the inherent funding value of the instruments. Certificates of deposit are recorded at their historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, with the fair value being estimated based on the currently observable market rates available to us for similar deposits with similar remaining maturities (i.e., Level 2 inputs). Interest payable is included within Other liabilities on the Consolidated Balance Sheets.
Debt issued by consolidated VIEs: We record debt issued by our consolidated VIEs at amortized cost (including unamortized fees, issuance costs, premiums and discounts, where applicable) on the Consolidated Balance Sheets. Interest payable is included within Other liabilities on the Consolidated Balance Sheets. Fair value is estimated based on the currently observable market rates available to us for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction (i.e., Level 2 inputs).
Long-term and other debt: We record long-term and other debt at amortized cost (including unamortized fees, issuance costs, premiums and discounts, where applicable) on the Consolidated Balance Sheets. Interest payable is included within Other liabilities on the Consolidated Balance Sheets. The fair value is estimated based on the currently observable market rates available to us for similar debt instruments with similar remaining maturities, or quoted market prices for the same transaction (i.e., Level 2 inputs).
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Financial Instruments Measured at Fair Value on a Recurring Basis
The following tables summarize our financial instruments measured at fair value on a recurring basis, categorized by the fair value hierarchy described in the preceding paragraphs as of the dates presented:
September 30, 2024
Total
Level 1
Level 2
Level 3
(Millions)
Investment securities
$
230
$
48
$
182
$
—
Total assets measured at fair value
$
230
$
48
$
182
$
—
December 31, 2023
Total
Level 1
Level 2
Level 3
(Millions)
Investment securities
$
217
$
46
$
171
$
—
Total assets measured at fair value
$
217
$
46
$
171
$
—
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 equity method investments, property and equipment, right-of-use assets, deferred contract costs, 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. We did not have any impairments for the three and nine months ended September 30, 2024 or for the three months ended September 30, 2023. During the nine months ended September 30, 2023 we wrote-off the remaining $6 million of our equity method investment in Loyalty Ventures Inc. (LVI).
Financial Instruments Disclosed but Not Carried at Fair Value
The fair values of financial instruments that are measured at amortized cost are estimates, and require management’s judgment; therefore, these fair value estimates may not be indicative of future fair values, nor can our fair value be estimated by aggregating all of the amounts presented. The following tables summarize our 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 the dates presented:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
December 31, 2023
Fair Value
Level 1
Level 2
Level 3
(Millions)
Financial assets
Credit card and other loans, net
$
19,802
$
—
$
—
$
19,802
Total
$
19,802
$
—
$
—
$
19,802
Financial liabilities
Deposits
$
13,583
$
—
$
13,583
$
—
Debt issued by consolidated VIEs
3,900
—
3,900
—
Long-term and other debt
1,457
—
1,457
—
Total
$
18,940
$
—
$
18,940
$
—
10. REGULATORY MATTERS AND CAPITAL ADEQUACY
Regulatory Matters
CB is subject to various regulatory capital requirements administered by the State of Delaware and the FDIC. CCB is also subject to various regulatory capital requirements administered by the State of Utah and the FDIC. 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.
Quantitative measures, established by regulations to ensure capital adequacy, require the Banks to maintain minimum amounts and ratios of Tier 1 capital to average assets, and Common equity tier 1, Tier 1 capital and Total capital, all to risk weighted assets. Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on CB’s and/or CCB’s operating activities, as well as our operating activities. Based on these regulations, as of September 30, 2024 and 2023, each Bank met all capital requirements to which it was subject, and maintained capital ratios in excess of the minimums required to qualify as well capitalized. The Banks seek to maintain capital levels and ratios in excess of the minimum regulatory requirements inclusive of the 2.5% Capital Conservation Buffer. Although Bread Financial is not a bank holding company as defined under the Bank Holding Company Act, we seek to maintain capital levels and ratios in excess of the minimums required for bank holding companies. As of September 30, 2024 the actual capital ratios and minimum ratios for each Bank, as well as Bread Financial, are as follows:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Actual Ratio
Minimum Ratio for Capital Adequacy Purposes
Minimum Ratio to be Well Capitalized under Prompt Corrective Action Provisions
Total Company
Common equity tier 1 capital ratio (1)
13.3
%
4.5
%
6.5
%
Tier 1 capital ratio (2)
13.3
6.0
8.0
Total risk-based capital ratio (3)
14.6
8.0
10.0
Tier 1 leverage capital ratio (4)
11.7
4.0
5.0
Total risk-weighted assets (5)
$
19,010
Comenity Bank
Common equity tier 1 capital ratio (1)
17.4
%
4.5
%
6.5
%
Tier 1 capital ratio (2)
17.4
6.0
8.0
Total risk-based capital ratio (3)
18.8
8.0
10.0
Tier 1 leverage capital ratio (4)
15.2
4.0
5.0
Comenity Capital Bank
Common equity tier 1 capital ratio (1)
16.0
%
4.5
%
6.5
%
Tier 1 capital ratio (2)
16.0
6.0
8.0
Total risk-based capital ratio (3)
17.4
8.0
10.0
Tier 1 leverage capital ratio (4)
14.4
4.0
5.0
__________________________________
(1)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.
(2)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.
(3)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.
(4)Tier 1 leverage capital ratio represents tier 1 capital divided by total average assets, after certain adjustments.
(5)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.
We are also involved, from time to time, in reviews, investigations, subpoenas, supervisory actions and other proceedings (both formal and informal) by governmental agencies regarding our business, which could subject us to significant fines, penalties, obligations to change our business practices, significant restrictions on our existing business or ability to develop new business, cease-and-desist orders, safety-and-soundness directives or other requirements resulting in increased expenses, diminished income and damage to our reputation.
On November 20, 2023, following the consent of the Board of Managers of Comenity Servicing LLC (the Servicer), the FDIC issued a consent order to the Servicer. The Servicer is not one of our Bank subsidiaries, but is our wholly-owned subsidiary that services substantially all of our loans. The consent order arose out of the June 2022 transition of our credit card processing services to strategic outsourcing partners and addresses certain shortcomings in the Servicer’s information technology (IT) systems development, project management, business continuity management, cloud operations, and third-party oversight. The Servicer entered into the consent order for the purpose of resolving these matters without admitting or denying any violations of law or regulation set forth in the order. The consent order does not contain any monetary penalties or fines.
The Servicer continues to take significant steps to strengthen the organization’s IT governance and address the other issues identified in the consent order, working diligently to ensure that all of the requirements of the consent order are satisfied. Without limiting the generality of the foregoing, the Servicer has taken steps to address each provision within the consent
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
order that required action be taken by a specified deadline, including providing a copy of the consent order to the Parent Company Board of Directors, increasing the size and governance processes of the Servicer’s Board of Managers, establishing an Executive Oversight Committee to oversee and ensure compliance with the consent order, and submitting all required reports and plans of action to the FDIC. The Servicer is committed to complying with each of the ongoing or longer-term requirements of the consent order, including the enhancement of its compliance management processes and related corporate governance, compliance with the applicable system conversion requirements, and enhanced risk management and reporting requirements. In addition, the Board of Directors of each of the Banks oversee the Servicer’s compliance with the requirements of the consent order and provide effective challenge of Servicer management toward that end.
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.
11. COMMITMENTS AND CONTINGENCIES
Legal Proceedings
From time to time we are subject to various lawsuits, claims, disputes, or potential claims or disputes, and other proceedings, arising in the ordinary course of business that we believe, based on our current knowledge, will not have a material adverse effect on our business, consolidated financial condition or liquidity, including claims and lawsuits alleging breaches of our contractual obligations, arbitrations, class actions and other litigation, arising in connection with our business activities. However, in light of the uncertainties involved in such matters, including the fact that some pending legal proceedings are at preliminary stages or seek an indeterminate amount of damages, penalties or fines, it is possible that the outcome of legal proceedings could have a material impact on our results of operations. Certain legal proceedings involving us or our subsidiaries are described further below.
On February 20, 2024, we and our general counsel were named as defendants in an adversary proceeding filed by the liquidating trustee in LVI’s Chapter 11 bankruptcy case in the United States Bankruptcy Court for the Southern District of Texas, captioned Pirinate Consulting Group, LLC v. Bread Financial Holdings, Inc., Case No. 24-03027 (Bankr. S.D. Tex.), alleging actual and constructive fraudulent transfers, among other claims, in connection with our spinoff of LVI. Also on February 20, 2024, the liquidating trustee filed an action in the United States District Court for the District of Delaware against us, each of the members of our Board of Directors at the time of the spinoff, and certain members of our management team, captioned Pirinate Consulting Group, LLC v. Bread Financial Holdings, Inc., Case No. 24-cv-00226-RGA (D. Del.), alleging certain breaches of fiduciary duties (and aiding and abetting breaches of fiduciary duties) in connection with the spinoff. Subsequently, the liquidating trustee voluntarily dismissed without prejudice the complaint in the District of Delaware and commenced on March 20, 2024 a substantially similar action in Delaware Chancery Court, captioned Pirinate Consulting Group, LLC v. Bread Financial Holdings, Inc., Case No. 2024-0277-MTZ (Del. Ch.), against the same parties and asserting the same claims. Among other things, in each of the Texas and Delaware actions, the liquidating trustee seeks damages in the amount of approximately $750 million plus interest, fees and expenses.
We and certain current and former members of our management team have also been named as defendants in other litigation matters relating to the LVI spinoff. LoyaltyOne, Co. (the LVI subsidiary that operated its Canadian AIR MILES business) filed suit against us and our general counsel in the Ontario Superior Court of Justice in Canada on October 18, 2023, in an action captioned LoyaltyOne, Co. v. Bread Financial Holdings, Inc. et al. The lawsuit asserts that our general counsel, in his capacity as a pre-spinoff director of LoyaltyOne, Co., breached various fiduciary duties owed to LoyaltyOne, Co. in connection with the LVI spinoff and certain other transactions, and that Bread Financial assisted in and benefited from those breaches. The lawsuit seeks damages in the amount of $775 million. LoyaltyOne, Co. is also contesting our entitlement to certain potential tax refunds under the tax matters agreement, in proceedings pursuant to the Canadian Companies’ Creditors Arrangement Act in the Commercial List of the Ontario Superior Court of Justice, captioned In re Matter of a Plan of Compromise or Arrangement of LoyaltyOne, Co., Case No. CV-23-00696017-00CL. Finally, on April 27, 2023, we and certain current and former members of our management team were named as defendants in a putative federal securities class action filed in the United States District Court for the Southern District of Ohio,
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
captioned Newtyn Partners, LP v. Alliance Data Systems n/k/a Bread Financial Holdings, Inc., Case No. 23-cv-1451-EAS (S.D. Ohio), concerning disclosures made about LVI’s business prior to the spinoff. The lead plaintiff in this matter filed an amended complaint on March 21, 2024 and is seeking, among other things, a class action designation and an award of damages in an amount to be proven at trial, plus fees and expenses.
In all these actions related to the spinoff, we believe the allegations contained in the complaints are without merit and intend to defend the cases. We cannot predict at this point the length of time that these actions will be ongoing or the liability, if any, which may arise therefrom.
Some matters pending against us specify the damages sought, others seek an unspecified amount of damages or are at very early stages of the legal process. In matters where the amount of damages claimed against us are stated, the claimed amount may be exaggerated and/or unsupported. While some matters have not yet progressed sufficiently through discovery or have had development of important factual information and legal issues to enable us to estimate an amount of loss or a range of possible loss, other matters may have progressed sufficiently to enable an estimate of an amount of loss, or a range of possible loss. We accrue for a loss contingency when it is both probable that a loss has occurred, and the amount of loss can be reasonably estimated; however, there may be instances in which an exposure to a loss contingency exceeds our accrual. On a quarterly basis we evaluate developments in the legal proceedings against us that could cause an increase or decrease in the amount of the accrual that has been previously recorded.
12. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS
The changes in each component of Accumulated other comprehensive loss, net of tax effects, are as follows for the periods presented:
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
Nine Months Ended September 30, 2023
Net Unrealized Losses on AFS Securities
Foreign Currency Translation Adjustments
Accumulated Other Comprehensive Loss
(Millions)
Balance as of December 31, 2022
$
(18)
$
(3)
$
(21)
Changes in other comprehensive loss
(6)
—
(6)
Balance as of September 30, 2023
$
(24)
$
(3)
$
(27)
13. STOCKHOLDERS’ EQUITY
Stock Repurchase Programs
On February 21, 2024, our Board of Directors approved a stock repurchase program to acquire up to $30 million in shares of our outstanding common stock in the open market during the period ending on December 31, 2024. The rationale for this repurchase program, and the amount thereof, was to offset the impact of dilution associated with issuances of employee restricted stock units, with the objective of reducing the Company’s weighted average diluted share count to approximately 50 million shares for 2024, subject to then current estimates and assumptions applicable as of the date of approval.
During the nine months ended September 30, 2024, under the authorized stock repurchase program, we acquired a total of 0.3 million shares of our common stock for $11 million. Following their repurchase, these 0.3 million shares ceased to be outstanding shares of common stock and are now treated as authorized but unissued shares of common stock. As of September 30, 2024, we had $19 million remaining for future repurchases under the authorized stock repurchase program.
Stock Compensation Expense
During the nine months ended September 30, 2024, we awarded 1,305,297 service-based restricted stock units (RSUs) with a weighted average grant date fair market value per share of $37.77 as determined on the date of grant. Service-based restricted stock units typically vest ratably over three years provided that the participant is employed by us on each such vesting date.
During the nine months ended September 30, 2024, we awarded 221,358 performance-based restricted stock units with a fair market value of $37.57 to our Named Executive Officers. Performance-based RSUs cliff vest at the end of three years, if specific performance measures tied to our financial performance are met, which are measured annually over the three-year period. For the performance-based RSUs awarded in 2024, the predefined vesting criteria typically permit a range from 0% to 150% to be earned. Accruals of compensation cost for an award with a performance condition are based on the probable outcome of that performance condition. If the performance targets are met, the awards will vest with respect to the entire award on February 15, 2027, provided that the participant is employed by us on the vesting date.
For the three months ended September 30, 2024 and 2023, we recognized $13 million and $10 million in stock-based compensation expense, respectively. For the nine months ended September 30, 2024 and 2023, we recognized $41 million and $32 million in stock-based compensation expense, respectively.
Dividends
During the three and nine months ended September 30, 2024, we paid $10 million and $32 million in dividends to holders of our common stock. On October 24, 2024, our Board of Directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on December 13, 2024, to stockholders of record at the close of business on November 8, 2024.
14. INCOME TAXES
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
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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.
We are 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. U.S. Federal income tax returns are no longer subject to examination for years before 2015, and with a few exceptions, state and local income tax returns are no longer subject to examination for years before 2015. Foreign income tax returns are no longer subject to examination for years before 2018.
15. EARNINGS PER SHARE
Basic earnings (losses) per share (EPS) is based only on the weighted average number of common shares outstanding, excluding any dilutive effects of unvested restricted stock awards, or other dilutive securities. Diluted EPS is based on (i) the weighted average number of common and potentially dilutive common shares (unvested restricted stock awards outstanding during the year), pursuant to the Treasury Stock method, and (ii) the potential conversion of the Convertible Notes, pursuant to the If-converted method.
The following table sets forth the computation of basic and diluted EPS attributable to common stockholders for the periods presented:
Three Months Ended September 30,
Nine Months Ended September 30,
2024
2023
2024
2023
(Millions, except per share amounts)
Numerator
Income from continuing operations
$
3
$
173
$
272
$
693
Loss from discontinued operations, net of income taxes (1)
(1)
(2)
(2)
(18)
Net income
$
2
$
171
$
270
$
675
Denominator
Weighted average common stock outstanding – basic
49.7
49.9
49.6
50.0
Weighted average effect of dilutive securities
Add: net effect of dilutive unvested restricted stock awards (2)
1.0
0.2
0.5
0.2
Add: dilutive effect of Convertible Notes (3)(4)
0.3
—
0.2
—
Weighted average common stock outstanding – diluted
51.0
50.1
50.3
50.2
Basic EPS
Income from continuing operations
$
0.06
$
3.47
$
5.48
$
13.85
Loss from discontinued operations
$
(0.01)
$
(0.03)
$
(0.04)
$
(0.37)
Net income per share
$
0.05
$
3.44
$
5.44
$
13.48
Diluted EPS
Income from continuing operations
$
0.06
$
3.46
$
5.40
$
13.80
Loss from discontinued operations
$
(0.01)
$
(0.04)
$
(0.03)
$
(0.36)
Net income per share
$
0.05
$
3.42
$
5.37
$
13.44
__________________________________
(1)Includes amounts that related to the previously disclosed discontinued operations associated with the spinoff of our former
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
LoyaltyOne segment in 2021 and the sale of our former Epsilon segment in 2019. For additional information refer to Note 1, “Description of Business, Basis of Presentation and Summary of Significant Accounting Policies” to the unaudited Consolidated Financial Statements.
(2)As the effect would have been anti-dilutive, for the three months ended September 30, 2024 and 2023, nil and approximately 0.5 million, respectively, and for the nine months ended September 30, 2024, and 2023 approximately 0.7 million and 1.2 million, respectively, restricted stock awards were excluded from each calculation of weighted average dilutive common shares.
(3)Holders of the Convertible Notes may convert their notes under certain conditions until March 15, 2028, and on or after such date without condition. Upon any such conversion, we will repay the aggregate principal amount of the Convertible Notes in cash, and pay or deliver, as the case may be, cash, shares of our common stock or a combination of both (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. At our option, we may redeem for cash, all or a portion of the Convertible Notes on or after June 21, 2026, and before the 51st scheduled trading day before the maturity date, but only if the closing price of our common stock reaches specified targets as defined in the indenture governing the Convertible Notes. We may also, from time to time, retire or purchase all or a portion of the outstanding Convertible Notes through cash purchases or exchanges for other securities, in open market purchases, tender offers, privately negotiated transactions or otherwise.
The conversion feature of the Convertible Notes has a dilutive impact on EPS when the average market price of our common stock for the period exceeds the conversion price of $38.43 per share. For the three months ended September 30, 2024 the average market price exceeded the conversion price and the dilutive effect is therefore included in the table above. With the three months ended June 30, 2024 being the first period in which the average market price of our common stock exceeded the conversion price, a weighted average of the quarterly results from the Dilutive effect of Convertible Notes is computed, and has been reflected in the table above for the nine months ended September 30, 2024.
(4)In connection with the issuance of the Convertible Notes, we entered into privately negotiated Capped Calls 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 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. Diluted weighted average common stock does not include the impact of the Capped Calls we entered into concurrently with the issuance of the Convertible Notes, as the effect would have been anti-dilutive. If shares were delivered to us under the Capped Calls, those shares would offset, up to the cap, the dilutive effect of the shares that we would issue upon conversion of the Convertible Notes.
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 changes in the relationship between the interest rates on our assets (such as Credit card and other loans and Investments) and the interest rates on our liabilities (such as Deposits, Debt issued by consolidated variable interest entities and Long-term and other debt), which may include repricing risk, basis risk, yield curve risk and options risk, and their consequential impact on economic value, capitalization levels, cost of capital and earnings.
There has been no material change from our 2023 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.
Refer to (i) Part II, Item 1A, “Risk Factors—The LoyaltyOne spinoff could result in substantial tax liability to us and our stockholders, and more generally, we have been adversely affected by LVI’s performance, and we may continue to be adversely affected by LVI’s ongoing bankruptcy proceedings or litigation or other disputes involving or relating to LVI.” in our Quarterly Report on Form 10-Q for the quarter ended March 31, 2024, (ii) Note 10, “Commitments and Contingencies” to our unaudited Consolidated Financial Statements, and (iii) “Risk Factors—Legal, Regulatory and Compliance Risks” of our 2023 Form 10-K, each of which is incorporated herein by reference.
Item 1A. Risk Factors.
There have been no material changes to the Risk Factors previously disclosed in our 2023 Form 10-K, as supplemented by 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. 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. For a discussion of the recent trends and uncertainties impacting our business, see also “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A) — Business Environment”.
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 by or on behalf of us during the three months ended September 30, 2024:
Period
Total Number of
Shares Purchased (1)
Average Price Paid per Share
Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs
Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs
(Millions)
July 1-31
2,798
$
49.22
—
$
19
August 1-31
1,609
53.86
—
19
September 1-30
1,456
53.26
—
19
Total
5,863
$
51.50
—
$
19
__________________________________
(1)During the periods presented, (i) 5,863 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 401(k) Plan and (ii) no shares of our common stock were repurchased by the Company, pursuant to a Rule 10b5-1 trading plan previously adopted by the Company, during an open trading window.
(c)During the three months ended September 30, 2024, no Section 16 officer or director of the Parent Company adopted or terminated a “Rule 10b5-1 trading arrangement” or “non-Rule 10b5-1 trading arrangement,” as each term is defined in Item 408(a) of Regulation S-K.
The following financial information from Bread Financial Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2024, formatted in Inline XBRL: (i) Consolidated Statements of Income, (ii) Consolidated Statements of Comprehensive Income, (iii) Consolidated Balance Sheets, (iv) Consolidated Statements of Stockholders’ Equity, (v) Consolidated Statements of Cash Flows and (vi) Notes to Consolidated Financial Statements.
*104
(a)
Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).
__________________________________
*Filed herewith
**Furnished herewith
^ Certain exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Bread Financial Holdings, Inc. hereby undertakes to furnish supplementally copies of any of the omitted exhibits upon request by the U.S. Securities and Exchange Commission.
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: October 31, 2024
By:
/s/ RALPH J. ANDRETTA
Ralph J. Andretta
President and Chief Executive Officer
DATE: October 31, 2024
By:
/s/ PERRY S. BEBERMAN
Perry S. Beberman
Executive Vice President and Chief Financial Officer
