Bread Financial Holdings Aktie

This afternoon is Bread Financial. Welcoming back Perry Beberman, CFO. Perry, welcome back.

Thank you for having me. Appreciate it.

You must be happy camper today with the data you released this morning. Your May results look pretty solid. You've been stacking some wins recently. It looks like your charge-offs are on the cusp of breaking 7%. You're right on the dot there. It looks like your delinquencies are outperforming seasonality, and you're now sitting around 3.7% loan growth, it looks like. So maybe just give us a quick update on what you're seeing in the data.

Yes. No, the data is coming in even a little better than what we had been expecting. As you note, when we talk about things in the first quarter, we had inflected to growth. That growth momentum has continued with our end-of-period loan growth reaching 3.7%, and that's really driven by some of the nice wins that we've put on the board with partners we launched in the fourth quarter, some more in the first quarter, and that's starting to manifest itself along with the declining loss rate. As you note, loss rates at 6.98%, a little better than expected. It's about 99 basis points better than last year. So that trend is continuing to march in the right direction with delinquency formation also improving.

One thing I would note for the second quarter is you should expect the losses to be about flat going into June for the month of June compared to May. And then I'll also note that net interest margin will seasonally be down in the second quarter compared to the first quarter. And then expenses we already guided that they're going to be just under $500 million.

And then the last thing is on noninterest expense during the first quarter earnings kind of guided that we would expect some pressure of about up to $40 million of higher RSA payments, which will pressure the -- that net interest income linked quarter about $40 million. It's now looking like it's going to be closer to $30 million. It's a little better than what we thought it would be.

Thanks for that. So maybe just talk a little bit about the NIM seasonality rather. I know you obviously saw some really nice expansion recently. I think you upgraded your outlook for the year last quarter to be above 2025. So just what are you seeing for this quarter? And what are the puts and takes as you think about the rest of the year?

Yes. So what's -- the NIM is a very dynamic number. We've talked many times. There's so many moving parts in there. I'd say one of the things that now has stopped being a tailwind is the CD book repricing. It's now kind of repriced to the point where what's coming off or coming due that's rolling over is about the same rate as what we're putting on new. So before the higher-priced CDs, they've been replaced by lower priced CDs, that's kind of flattened out. You're seeing some of our pricing actions continue to play through, but at a slowing pace as more of it's already built in.

And then what's a little bit of a headwind in, I'll say, yields is mixing in some better credit risk associated with some of the new products we're putting on that are obviously better VantageScores and some higher lines that can drag down the top line yields, but that's also a helper to long-term loss rates. So your risk-adjusted margin holds up pretty well there.

And then you also have improving delinquency at a faster pace, which means lower billed late fees. So that pressures net interest margin. You've got lots of moving parts as the portfolio continues to churn, it's dynamic. And so the pace of that churn will really predicate where net interest margin lands for the year, which should be pretty close to 2025, maybe a little better, hopefully, but it depends on how quickly some of these other partners come online and grow.

Okay. And you'd probably take that trade-off any day of a year, day, year or...

Any day.

Week. Lower losses, lower NIM. Yes.

Yes.

Maybe just taking a step back before we get into some of the quarterly details as well. I wanted to ask you about your evolution. When investors think about Bread today, I think you're often bucketed through the lens of that old Alliance Data model, highly promotional retail card, a focus on growth, higher levels of leverage in the balance sheet. Maybe just take a step back, remind us fundamentally, how different is Bread today versus the one you joined about 5 years ago? And what do you think the market still underappreciates? Maybe not today, it seems like, but what do you think the market still underappreciated about your transformation?

Well, I think that's -- it's true. There's still room to go in terms of getting us to a valuation that's appropriate for who we are. But the transformation has been remarkable. I mean we focused from the day I've joined and really since the day Ralph Andretta, our CEO, joined a little over 6 years ago on running this place for the long term, making the right decisions every day, whether it means the balance sheet, being responsible with how we're taking care of capital. We've paid down over 70% of our debt.

The company we joined was really over-levered and undercapitalized, paid down 70% of our debt. We've built up our capital ratios to be where they are today where we're going to position of a true excess capital above capital targets. And those capital targets are built the way mature financial services companies build them from building blocks, including stress components and we're positioning ourselves for future regulatory scrutiny, which we're pleased to do. But we run it the right way, and that transformation has been real. It's running it with good disciplined fundamentals, responsible growth, trying to deliver the right returns.

And then even under the hood, a lot of what we've done around enterprise risk management practices, that's not really well, seen by everybody. But the rating agencies have seen it, the regulators have seen it, and it's really manifesting itself into a well-run company and all while continuing to invest in our company. The improvements that we've had in our technology stack and our ability to meet partners where they are and what they need is continue to win us new deal after new deal, and that's been a big part of our transformation.

And I think one of the more interesting developments over the last few years has been your success in the co-brand business. Why do you think Bread has been taking share there? And what do your partners increasingly value today that they didn't maybe even a few years ago?

Well, as you look at the private label market, yes, I can break co-brand into a couple of components. One is you take a traditional, what used to be a private label card type of program. And now you're offering a co-brand product where customers can earn loyalty points and rewards on everyday spend that you can't if you're just doing an isolated private label. So private label is probably -- is more geared for newer to credit, lower credit lines. And now you're stacking up on top of that more of a co-brand and using the private label could be more of a down sell. So that's one aspect of the strategy that a lot of partners are adopting.

And then the other part of co-brands are the co-brand wins like we've had with NFL, AAA, Ford Motor more recently, Crypto.com, those are true top-of-wall type co-brands. And our ability to win there is we have a deep experienced team who's good at running co-brand programs. So if you think about our commercial team, our client partnership team, these are people who run some of the largest co-brand programs in America, and they're now on our team. And similarly, the tech people that we've been hiring in know how to build the right tech to serve those. So I think that's helping us win deals. And our flexibility with our tech stack is really winning over a number of new partners.

And as you continue to develop the pipeline and win over new partners, what's the pipeline looking like today? I think you've had a strong run of wins in home, auto, digital. You just highlighted a few key examples there. Any new verticals you're looking at? Or any areas where you're noticing more inbound interest coming in?

The fun thing being part of Bread Financial is that because of the team that we have in place that I just talked about, we're getting looks at almost every deal that's out there. Now every deal is not going to be the right fit for us, given return profiles, could be very highly competitive, it could be $10 billion or bigger type deals. We're not giving those serious consideration. It doesn't make sense for us or our shareholders or the return profile that we're looking for. But for deals that if some competitors are leaning out of the market in certain spaces and they are good size for us, and we like the returns, we're going to lean in and be competitive. And look, we show up at most of the opportunities that are out there, and we win more than our fair share. And I think we'll have some more announcements later this year.

Great. Well, we look forward to that. And maybe just you touched on the competitiveness or the competitive environment. Just what are you noticing today versus a year ago? Anything to call out? Or is it pretty consistent?

Not getting into names of competitors specifically, but I think you see this over the ebb and flowing over -- if you look at the past 5 years, some of the really large banks have leaned out of some of the retail private label cards or some of those are focused more on the large-scale programs. Some others have had some issues where they've had to pull back, and that's how we picked up some of those furniture brands that we've talked about. But you generally see some of the same people showing up to compete. And those are more mature competitors who are very rational and you end up landing in the same spot. So really, you win a deal based on the relationship or your ability to deliver tech and what they're striving for.

And maybe just like tying it back to the early part of the conversation on credit. I think another important aspect of your evolution has been what your target customer has become. I think Ralph has mentioned a few times now, you're more middle America, you're not really at the lower half of the K anymore in the customer that you target. So to what extent has that shift contributed to the recent improvement in credit performance? And how do you see that evolving as you continue on from here?

It's a good point. So one of the things, and you talk about what I don't think people understood about our company is we were out and talking to investors, and I get these questions about comparing us to really deep subprime competitors. And I was like, wait a second, this narrative is wrong about our company. When you look at the average income of the new customers we're bringing in, it's about $100,000 of household income, and yet they're comparing us to companies that -- where their average income of the customer is $40,000 to $50,000.

So we're not -- when you think about the K economy, we're not serving the bottom end of that K. We're serving the middle portion of the K. And we're not over-concentrated in the top end either. We're not competing for those high spending, high annual fee card-type customers. But the middle part is where -- is our sweet spot. And so we're trying to make sure that we're educating investors about who we are, where we like to play, and it's not low income, it's not people are not creditworthy. It's really that space.

And what are you seeing from that customer right now or even just the back book of customers you have as well as you sort of think about higher gas prices from here? Are you seeing any noticeable shifts in behavior, changes in discretionary spend or shopping trips, et cetera?

So obviously, when it costs more at the pump and if the average person is paying $100 more a month at the gas pump, it's real. They have to pay it. And so some of them have enough cash reserves maybe from some of the tax refunds. If the average household had a tax refund on average about $350 higher that absorbs some of the near-term challenges that they may have with the higher fuel prices, but that's probably run its course at this point.

So now what we're watching is what is customer behavior going to look like going forward? You have seen some, I'll say, pullback in some discretionary spend categories like a little bit of maybe clothing and apparel that's pulled down. You've seen a little bit lower restaurant spend, some increases in grocery. So you start to see some of that movement that you actually expect, but consumers are resilient and choiceful, meaning they're making the choices to continue to manage their credit. And that's what we're finding most encouraging is that, yes, there is inflation, but it's not rampant like it was post COVID.

So right now, customers seem to still be -- are still in a position to deal with it. Labor market is still stable, pretty strong. So while that's holding up, it seems like for now, customers are dealing with the higher fuel prices.

And maybe just sort of any update on post the holiday weekend, we saw a few weeks ago, how your credit sales growth is looking this quarter? I think you put up around 7% the prior quarter. Maybe just how is that looking this quarter?

Credit sales continues to remain very strong, in fact, even accelerating a little bit, but it's still -- the quarter is not over. So we'll continue to watch that. But it's -- the consumer, again, it's resilient, healthy. Some of our growth is because of the new partners that continue to ramp. So like-for-like, it's not necessarily as strong as what our reported numbers might be if you're looking at a comparable customer. But we're putting on the retail verticals, you're seeing good growth in our installment lending is starting to pick up some growth with our installment lending offerings to The Home Depot, Vivint and Cricket Wireless.

Okay. Great. And I think that feeds into the loan growth question here. So as that spending comes back and as you add more partners, you are seeing an inflection in average loan growth already underway here. And you're already kind of at the low single digit that you called out for the year. So why shouldn't we be thinking about even better than low single digit at this point given the recent trends? And maybe just talk about the key drivers and the time line to getting back to that mid- to high single digit you target in the long run?

Yes, I think we'll continue to see how this is playing out. But so far, to your point, it seems like it's a little ahead of schedule so far at this point in the year. We're in very good success with some of the more recent launches. Some of these launch and plateau a little. So you have to see how that continues to build, what happens with the consumer? Do they remain as resilient throughout the back half of the year?

So I think the next half of the year, what happens with the Iran conflict with fuel prices will inform a bit more of how that momentum continues to go. I mean, obviously, I expect end-of-period loan growth to continue to get higher relative to where we are right now. So I think there will be continued growth, but the average, whether we get much beyond that low single digit will yet to be seen. So it really depends how the back half of the year performs.

Is there any -- if things do sort of continue at the current pace, and we don't see oil come down meaningfully and gas risks come down meaningfully, would you consider looking at tightening on credit to maybe deal with that? Or how would you think about the risk there?

Yes. That's an excellent question. Some of it -- I think our credit underwriting is a very dynamic process in that it's always on. And it's not a matter of doing wholesale tightening or expansion, it's really about the customer coming in the door or that's already on our books and how are they performing. We were able to monitor tens and tens of data points on them with their off us activity, meaning what you're seeing on the trades and the credit bureaus, you're able to see how they're performing on us, and it happens reflected in their scores, and we have an internal proprietary score, when you combine your VantageScore plus a number of other internal data points.

So if they are showing signs of weakness, obviously, you won't be increasing their lines. You will be tightening accordingly sort of risk detection, and same with the customer coming in the front door, looking for credit, what do they look like when they're coming in? And you'll give them an appropriate line. Again, we'll start them with a low line and grow that line over time as they deserve a higher line.

You sort of touched on the RSA driver of the noninterest income this quarter coming in more at the $30 million as opposed to up to $40 million. So anything to sort of flag there in terms of what drove that refinement? And I think we talked about the rest of the year also continuing to see that impact grow as your credit sales grow and the partner programs sort of...

Well, as a CFO, you never like to see that number get more negative in the P&L, but the reason for it is a good thing, right? It's -- it means that you have -- your margins have been expanding. There's more profit share to be provided back to the brand partners, that credit sales have been growing at an accelerating pace and for partners that are receiving compensation based on basis points on those sales. That grows. It's growing faster than average loans, right?

You just mentioned 7% credit sale growth compared to 2.6%, our average loan growth for the month. That continue to exceed. So that's just causing a greater portion of that. And it also goes to the product mix within that. So it's not a bad thing, but it's part of the -- it's the business model.

Right. Now on expenses, I don't think this is an area we should overlook either. I think you've done a really good job maintaining some positive operating leverage in spite of some slower loan growth until recently. So -- and you're also, I think, in the middle of a cloud migration. So -- what do you think the key to this expense discipline has been? And how can you assure investors that you can maintain it going forward, especially as we think about things like tokens has been very topical at this conference.

That's an excellent topic and one that we should touch on a little bit. But when you think about what we've been talking about for the past 2 years, we really instilled a culture of operational excellence. And that means we're constantly encouraging our associates to find better ways of doing work, and we invest in that. So we -- it's delivered tens of millions of dollars per year that allows us to reinvest into the business in new capabilities and contain our overall expenses to hold them kind of say flattish. And now we're seeing some of that loan growth.

And at the same time, dovetailing into this year, I think there's some expenses that I think I should say I know that we've had to invest in a little maybe more than what we thought we'd have to do towards the back half of last year as agentic commerce-type investments need to be made into AI capabilities that aren't going to pay dividends probably until next year or beyond.

And then your point on tokens, it's one that I don't think anybody has a real handle on yet. We certainly aren't at the point where we have any agentic engineers in motion or -- so we're not consuming a huge portion of tokens, but we are very focused on understanding those costs, understanding the ROI on the AI investments that we make and being very smart and disciplined about that. I mean that is fundamental to the way we do things in general. So there's going to be no change in that discipline.

And you have to understand the cost to deploy something and the value you're going to get in return. Otherwise, it's not worth doing. You're not going to build something and hope it has a return. It really has to have a sound business case.

And speaking of AI and agentic, Ralph did characterize Bread as more of a fast follower in the agentic world. I guess maybe as the technology evolves and larger platforms beginning adopting this, embedding this into their ecosystems, how do you ensure Bread stays competitive as you sort of follow that trend? And where do you think we are? I mean I think we've heard some others say we're still in the on-deck circle. We're not even in the first inning. So...

I think that's a good -- I think it's a nice way to frame that. I might refine Ralph's comment. And in this case, I'm not sure we're a fast follow. I think we're right there with others in the industry at the same place. I would have thought we would have been a fast follow, but it's not a huge investment. So you're working with all the big players, making sure that we are dialed in with what AWS is thinking, Google, everybody and then working with our partners understanding where are they in their agentic journey because we need to be with them and however they want to go with a solution, whether it's us prototyping something, a full agentic commerce capability for them or plugging their payment solution into their agentic ecosystem.

So we have to have a flexible approach to this. And we have an amazing tech team with a Allegra Driscoll at the helm and some of the newer people she's hired in that this is an exciting time. So I think we're well positioned to be right there at the front, not I'll say, the first one to go, but we're all trying to be going at the same pace.

And again, I also want to caveat this with the agentic commerce, it will be a portion of e-commerce sales. And my understanding is that e-commerce in general is what, about 15% to 20%, maybe around 18% of overall retail sales. Say it grows to 25%, 30%. What portion of that will actually be agentically completed? So there's -- it's important to have the capability because it's going to be important to our brand partners, so they don't get disrupted in some portion of their sales. So we'll make sure we have that capability. But I don't see it as the overarching defining win loss for anybody in this industry, but it's going to be a table stakes capability that you have to have as a means for our brand partners to complete their payments.

Well, it sounds exciting. Maybe you can automate your Eagles ticket purchases through agentic next year.

Don't be jealous.

I mean a little bit. I'm not too jealous. We have A.J. Brown now.

Yes, good luck with that.

Yes. I think it will work out. Anyway, so maybe moving on to capital. I think you recently just did another preferred equity raise, puts your Tier 1 ratio back about 14%, as I understand it. What kind of buyback cadence should we be thinking about here with the remaining, I believe, $765 million of authorization you had at the end of last quarter? And as you think about the new capital proposal not finalized yet, obviously, that incremental 100 basis points of capital relief, how are you thinking about deploying that?

Sure. So we did do the $135 million of additional preferreds. And first and foremost, we're going to make sure that we maintain our capital ratios in that 13% to 14% at the end of every quarter, we'll know where we're tracking, and we'll try to deploy capital appropriately. And in this quarter, we have a -- we're going to have a decent amount of new loan growth. We'll fund that first. We'll continue to invest in the business and what's left over above that capital amount, we'll try to return to shareholders.

So we'll keep that cadence going of returning to shareholders. I think we've repurchased over 20% of our shares from 50 million to now under 40 million of common shares outstanding. So I think we now have a track record of being disciplined on that front. As you look forward, we have another, I'd say, about 100 million to go on the preferreds that we could issue to really get ourselves fully optimized. I don't think that will happen until in the fourth quarter or early next year, depending upon what the markets are looking like.

And then to your other point on the Basel III endgame, that is an opportunity because with the standardized approach as it's currently written, it would reduce the amount of risk-weighted assets that we have. So our capital targets remain the same, 12% to 13%, but you're holding it on a lower amount of RWA, which produces some additional capital to either accelerate future growth or return to shareholders.

And I think one other aspect of the model that supports capital over time and some other benefits you get is comes from merging the subsidiary banks you have. So maybe just talk about latest timing there, thoughts around that.

Yes. So we are really pleased. The team had submitted the application to merge our 2 banks into 1 bank. Really, we're at the point now where we've gone through the iterations with the FDIC. So we're thinking it could be any week now that we'll get the notification that we're able to merge those 2 banks.

We get a little bit of capital benefit by being more, I'll say, optimized across the 2 versus having a little bit of a mismatch on some things. But really, the ultimate benefit there is allowing our treasury team to holistically fund one pool of assets with all our capabilities of direct-to-consumer deposits, our asset-backed securities platform that we just built out of our Utah bank and whatever else we need to do. So it's been -- we're looking forward to that. It's not a huge cost benefit. It's really more a funding opportunity to be more efficient on that front.

I think we'll see Tom smiling pretty widely over there at your comments there, nodding his head. I think he agrees. Maybe just to touch on a longer-term question here. You spent several years repositioning the business, as we talked about already. Can you maybe just put a finer point on it, how do you balance the desire to lower your credit losses while driving a higher ROTCE or return against your desire to also drive partner sales? Like how are you balancing all that in today's world? You're competing for these partners. They like what you're offering, but you also want to be disciplined at the same time.

Yes, it's an excellent question. And it really goes to the mosaic of the company that you're putting together the portfolio that is constantly shifting. And so the discipline is when you're evaluating new business you're -- obviously, you have a loss projection anticipation depending upon the profile of the customer. Some new business might have sub-2% losses. Others might have 8% expected losses. So you're piecing it all together, and you want to make sure you're getting paid for the risk you take.

So the pricing component is very important with the loss component and then what capital gets assigned to that and ensuring that the new business that we're putting on hurdles that mid-20s ROTCE at least on a marginal basis to ensure that it's going to be accretive or hit the mark for what we're looking for. And then when you put it all back together, do you have confidence that it lands us on a glide path that we're on to get below -- at or below 6% losses.

Our goal is -- and you -- we've talked about this before, is not to drive to the 6% ahead of schedule, meaning we're not going to do something draconian and really tighten up credit on our existing partners. It's one of the things that we do really well is supporting partners, supporting and unlocking value for them through credit sales and underwriting as deeply as appropriate so that we like the returns we get on those -- on the margins, and we do. And that's why we continue to underwrite in that fashion. And it's been one of the strengths of our company. It's not the only strength but it is something that's foundational and that we do really well.

And I'm curious, I think you always get asked the question about buy now pay later in the fintech threat, so to speak. When you go to your partners, is the offering you have from a big-ticket Bread Pay perspective, is that helping you at all? Are you seeing that come up in conversations more? What kind of are you hearing on that debate as well?

It is interesting. I think when you think about the brand partners, a lot of them feel like they do have to have that button of one of the big buy now, pay later offerings as an option for customers to pay with. And that's fine because a lot of those customers are traditional debit card customers who can't pay cash for something. They need to space it over a few payments. And that's not the space we're looking to play in. We want to offer more installment loan-type products for larger purchases, and that's -- we like the profitability in that space.

We like to keep the customer in our brand partners' ecosystem, whether it's a co-brand product, in a private label or installment loan. So more of these types of customers or part brand partners want to see that as well because we can white label it for them. But they also understand they need to have the payment mechanism of some of these other offerings that just because you want to make sure your customers could pay any way they want.

Awesome. And Perry, maybe just as we sort of wrap up our conversation today, if we fast forward 3 years from now, where do you see Bread? And where do you think investors most underestimate, or what do you think investors most underestimate about your earnings power?

Yes. I think where maybe investors were underestimating us and maybe even so today is the durability of our returns, and our ability to continue to grow and win new business and have a right to win and that we're getting stronger and stronger every day. And you're going to see that continue to manifest itself in our results. When we talked about our path to delivering those mid-20 ROTCEs, it's -- credit is a piece of it. Credit gets down to 6%. Our returns go up. We've optimized our balance sheet. That helps optimize those returns.

And the last piece is scaling. And not -- again, seeking growth just for growth's sake, but the good profitable growth. That helps with our overall efficiency ratios and the things that we've invested in. So it's just the confidence and belief that we will continue to accelerate our growth, and we're going to do it the right way. We're running this place for the long term. And if you look out 3 years from now, we should be a larger, stronger company than we even are today.

All right. Well, we look forward to seeing that play out. And thank you very much, Perry. It's always a pleasure.

Likewise, and hopefully, it's Eagles, Patriots in the Super Bowl.

Yes, we'll see. We'll have to make a little side bet on that, right.

All right. It's a deal.

Take care.

Good morning, and welcome to Bread Financial's First Quarter 2026 Earnings Conference Call. My name is Michelle, and I will be coordinating your call today. [Operator Instructions] It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial. The floor is yours, sir. Please go ahead.

Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breadfinancial.com.

On the call today, we have Ralph Andretta, President and Chief Executive Officer; and Perry Beberman, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website.

With that, I would like to turn the call over to Ralph Andretta.

Thank you, Brian, and good morning to everyone joining the call. Before speaking to our results, as we celebrate 30 years in business and 25 years as a public company in 2026, I want to take a moment to thank our current and former associates. Your commitment to excellence in how we serve both our brand partners and customers is reflective of our enduring value-driven culture.

We are extremely proud of our history and the continued transformation of our company. We remain committed to delivering on our brand promise each and every day. Today, Bread Financial reported strong first quarter results, which were underscored by a return to loan growth alongside increasing growth in credit sales and continued improvement in our credit metrics.

Credit sales grew 7% year-over-year in the first quarter, driven by successful new partner launches across our full product suite and increased shopping activity with our long-standing partners, especially among Gen Z and millennials. Consumers are being thoughtful and budgeting actively amid lower sentiment and confidence and higher fuel costs.

In the quarter, we saw year-over-year sales growth across a broad set of verticals, including health and beauty, jewelry and travel and entertainment. Additionally, our expanding home vertical grew nicely in the quarter. In the current macroeconomic environment, consumers continue to demonstrate resilience as highlighted by credit sales growth as well as improving delinquency rates. We will continue to closely monitor and adapt appropriately to consumer spend and payment behaviors.

On the new brand partner front, we were excited to launch new credit card relationships with Ford and Ethan Allen in the quarter. Our long-term agreement with Ford, which has one of the largest dealer networks in the U.S. with nearly 3,000 franchise dealerships, includes co-brand credit card and installment loan programs. Leveraging our deep expertise in the automotive retail landscape, the program will increase customer loyalty by enhancing their car ownership experience through earned rewards and increasing accessibility to subscriptions, parts and services.

The addition of Ethan Allen, America's #1 premium furniture retailer with nearly 140 design centers and a significant online presence in the U.S. strengthens our prominence in the home vertical with flexible financing options.

We are also offering Bread Pay installment loans for AAA, Dell and Ford as we continue to expand this product offering. Additionally, we are pleased to announce the new comprehensive suite of payment options with Academy Sports, including co-brand, private label and installment loans. Our full product suite, technology advancements, sophisticated underwriting, enhanced loyalty programs and a differentiated partner model are central to our success in winning new partnerships and retaining and strengthening existing relationships and driving higher lifetime customer value.

Our first quarter financial results highlight our company's strong capital and cash flow generation, earning net income of $181 million, generating revenue growth of 5% year-over-year and growing tangible book value per common share by 26% to $61.57. Additionally, during the quarter, we continued to build shareholder value as we retired a total of 3.5 million shares of common stock or 8% of our outstanding shares at year-end 2025. This was a result of both our ongoing stock repurchase activity and the unwind of our capped call transactions.

For 6 consecutive quarters, we have seen improvement in our credit metrics via the year-over-year change in our delinquency and net loss rates. We are pleased with this trend and remain confident that this improvement will continue over time. We believe our emphasis on disciplined credit risk management, coupled with product diversification towards co-brand credit cards and installment products continues to positively impact our risk distribution.

Overall, our solid sustainable results underscore the success of our efforts and emphasis on allocating capital efficiently, growing responsibly and advancing our operational excellence initiatives. Finally, moving to our investment priorities. We continue to invest in our business to drive growth for both Bread Financial and our partners. These investments include digital and technology advancements across our business, including AI.

We are deploying AI responsibly across the enterprise to accelerate operational excellence, which includes increasing productivity and efficiency, driving innovation and strengthening risk management. Our investments are reinforced by a disciplined value tracking framework, ensuring the strong return on investment. Supported by technology advancements, strong capital levels and cash flow generation, we are well positioned to execute on our capital and growth priorities while delivering sustainable long-term value for our shareholders. We remain confident that we will deliver on our 2026 financial targets, which Perry will discuss in more detail. Now I will pass it over to Perry.

Thank you, Ralph. Slide 3 highlights our first quarter performance. During the quarter, credit sales of $6.5 billion increased 7% year-over-year, which can be attributed primarily to new partner growth as well as increased general purpose spending. We are pleased that loan growth has inflected positively as average loans increased 1% to $18.3 billion and end-of-period loans increased 2% to $18.1 billion. We plan to continue building on this momentum throughout 2026.

Direct-to-consumer deposits increased 10% year-over-year to $8.7 billion at quarter end with our average direct-to-consumer deposits representing 48% of total funding, up from 43% a year ago. Revenue increased $48 million, or 5%, primarily reflecting the implementation of pricing changes and lower interest expense, partially offset by lower billed late fees and higher retailer share arrangements.

In total, we generated net income of $181 million and diluted EPS of $4.15. Note that our EPS calculations now reflect dividends paid on preferred equity.

Looking at the financials in more detail on Slide 4. First quarter total net interest income increased 6% year-over-year, driven by the gradual build of our pricing changes and lower interest expense. Noninterest income was $13 million lower year-over-year, driven by higher retailer share arrangements, which includes both higher credit sales-related partner payments and increased profit share driven by improved loan yields and credit losses.

Total noninterest expenses decreased $5 million or 1%, reflecting our ongoing expense discipline and a credit received during the quarter. Looking at the expense line item variances, which can be seen in the appendix, employee compensation and benefits costs increased $5 million, primarily due to higher wages related to annual merit increases and incentive compensation.

Information processing and communication expenses decreased $5 million, primarily due to lower outsourced data processing costs as a result of a credit received in the quarter. Finally, PPNR was strong as it increased $53 million or 11% year-over-year. This is a result of risk-based pricing discipline, driving higher revenue yield while at the same time delivering sound operating expense management.

Turning to Slide 5. Net interest margin of 19.3% increased year-over-year and sequentially as loan yields continue to benefit from the gradual build of pricing changes and funding costs continue to improve. To that end, we are seeing interest expense decrease as our cost of funds benefits from the actions we took last year to reduce our parent senior notes from $900 million to $500 million and reduced the rate paid from 9.75% to 6.75%. Additionally, during the quarter, we repurchased $50 million of our subordinated debt using excess cash and now have $350 million in principal outstanding.

Moving to Slide 6. Our liquidity position remains strong. Total liquid assets and undrawn credit facilities were $6.4 billion at the end of the quarter, representing nearly 29% of total assets. At quarter end, deposits comprised 78% of our total funding with the majority being FDIC-insured direct-to-consumer deposits.

Shifting to capital. We ended the quarter with a CET1 ratio of 13.3%, up 130 basis points compared to last year. As you can see in the upper right table, our CET1 ratio benefited by 340 basis points from core earnings. Common stock repurchases and preferred and common stock dividends reduced our capital ratios by 210 basis points, while the impact from costs related to debt repurchases accounted for approximately 40 basis points of impact to CET1 since the first quarter of 2025.

Additionally, we are very pleased with the outcome of our capped call transactions, which we retained after fully repurchasing our convertible notes last year. We elected to unwind the cap call in exchange for shares of common stock and the result of the full unwind was the retirement of 1.5 million shares in the quarter. As of quarter end, our remaining stock repurchase authorization was $690 million. Our share repurchase cadence going forward will be contingent upon capital generation from our business, our growth outlook, incremental investment expectations and the resulting capital levels against our capital policy targets.

Additionally, we look to further optimize our capital structure in the future by issuing additional preferred shares. The timing of potential additional preferred share issuances will be predicated based on market conditions. That timing will influence the cadence of subsequent common share repurchases. Finally, looking at the bottom right of the slide, our total loss absorption capacity comprising total company tangible common equity plus credit reserves ended the quarter at 25.5% of total loans, demonstrating a strong margin of safety should more adverse economic conditions arise.

We have a proven track record of accreting capital and generating strong cash flow and remain well positioned from a capital, liquidity and reserve perspective. This provides stability and financial flexibility to successfully navigate an ever-changing economic environment while generating increased value for our shareholders.

Moving to credit on Slide 7. Our delinquency rate for the first quarter was 5.59%, down 34 basis points from last year and down 16 basis points sequentially. Our net loss rate was 7.33%, down 83 basis points from last year and down 10 basis points sequentially. We remain pleased with the ongoing gradual improvement in our credit metrics, which continue to benefit from our prudent credit risk management framework, ongoing product mix shift and overall consumer resilience.

New investors often ask how to think about our portfolio and typical customer. Our typical customer represents a middle-income American. For context, our new customers have an average annual income of around $100,000. As Ralph mentioned, our consumers remain resilient as evidenced by improving credit trends in our monthly external credit performance data, what we are seeing in our internal data and hearing from customers contacting us that our teams monitor continuously.

The first quarter reserve rate improved 73 basis points year-over-year to 11.46% due to our improving credit metrics and higher credit quality new vintages as well as stability in our credit risk distribution with 64% of cardholders having a greater than 650 prime credit score. Note that per investor request, we have updated our published credit risk distribution ranges to more closely match peer ranges.

Compared to the prior quarter, the reserve rate increased 26 basis points, which was impacted by the seasonal paydown of holiday-related transactor balances during the first quarter. We continue to apply prudent weightings on the economic scenarios used in our credit reserve modeling given the wide range of potential macroeconomic dynamics, including ongoing uncertainty regarding trade policy and global conflicts and then the downstream impacts on inflation and unemployment. These weightings remained unchanged from the prior quarter.

Turning to Slide 8 and our full year 2026 financial outlook. Our 2026 outlook is unchanged and is based on our strong first quarter business results, continued consumer resilience, inflation remaining above the Federal Reserve target of 2% and a generally stable labor market. As we mentioned earlier, we're pleased to have reached an inflection point to positive loan growth in the first quarter.

We expect full year 2026 average credit card and other loans -- the loan growth to be up low single digits compared to 2025. Growth will continue to be supported by our stable partner base and new business launches, credit sales growth and continued credit loss rate improvement, partially offset by higher cardholder payment rates.

Total revenue growth is anticipated to be up low single digits, largely in line with average loan growth. We anticipate full year net interest margin to be higher than 2025 as a result of continued benefits, albeit slowing from implemented pricing changes and improving funding costs.

The incremental benefits tied to pricing changes slow throughout the year as the majority of our portfolio will have repriced. These NIM tailwinds will be partially offset by lower billed late fees from improving delinquency trends, higher payment rates and a continued shift in risk and product mix. For noninterest income, we expect meaningfully higher retail share arrangements, or RSAs, going forward as a result of both higher credit sales-related partner payments and increased profit share driven by improved loan yields and credit losses.

Specifically for the second quarter, we expect this dynamic to pressure noninterest income up to $40 million compared to the first quarter of 2026. We manage expense growth based on revenue generation and investment opportunities and expect to deliver positive operating leverage in 2026, excluding the pretax impacts from debt repurchases.

We expect second quarter total expenses to be up sequentially from the first quarter as we continue to invest in our business to drive growth, build new capabilities for our partners and customers and deliver future efficiencies. Initial estimates of the second quarter expenses are just under $500 million.

Given the ongoing gradual improvement in our credit metrics, we are on track to achieve a net loss rate at the low end of our 7.2% to 7.4% targeted range for 2026. This guidance contemplates stable macroeconomic conditions, continued risk and product mix shifts and a resilient consumer. We continue to expect our full year normalized effective tax rate to be in the range of 25% to 27%, with quarter-to-quarter variability due to the timing of certain discrete items.

Our strong results in the first quarter of 2026 are a testament to the successful execution of our company's transformation efforts, the capital generation power of our business model and our financial resilience due to our relentless and disciplined focus on capital and risk management.

We are proving that we will deliver on what we say we will. Our PPNR growth, continued improvement in our credit metrics moving toward our historical loss target and ongoing capital optimization demonstrate our commitment and path to achieving our longer-term mid-20% ROTCE target in the coming years.

In closing, we remain confident in achieving our 2026 outlook and further in our ability to generate attractive returns and increase value for our shareholders throughout the dynamic economic and regulatory environments. Operator, we are now ready to open up the line for questions.

[Operator Instructions] Our first question will come from the line of Vincent Caintic with BTIG.

First one, kind of a broad question on guidance. First quarter was strong. Revenues grew 5% year-over-year and your credit sales were up 7% and loan growth is nice to see that be positive. So I'm a bit surprised to see loan growth and revenue growth guidance kind of low single digits. So I was just wondering maybe if you can talk about what's baked into guidance and any conservatism there and how we should kind of expect that cadence of growth to be for the rest of the year?

Vincent, thanks for the question. Look, we are really pleased with the first 90 days of results. And our thoughts on guidance is we're off to a really good start, and that gives us a high degree of confidence to share that we were able to reaffirm guidance and feel very confident in our ability to achieve the guidance across all the things that you just talked about.

With the degree of uncertainty in the macro environment, it feels a little premature to declare a victory yet that we can then up it. But again, if the trends continue on into the second quarter, I think there's some optimism there. But on average -- remember, on average loan growth, that's an average. So what you're seeing, we're up almost 2% on ending. Expect the year that will continue to grow throughout the year to get us to that low single digit on average. So that's going to build, but we expect to -- ending loans to be higher than low singles.

Okay. Great. That's helpful. And then second question on the share repurchases. So very nice to see the strong quarter and also nice to see the increased authorization. And you talked a little bit about it, but if you could maybe help us on how to think about cadence, how much of future share repurchases are based off of having to raise those preferred equities? And then any thoughts on kind of long-term CET1 framework?

Yes. So when you think about the cadence, when we announced the additional share buyback program, we didn't time bound it. So it's open-ended. The cadence will be informed by, first, the amount of growth that we have in any particular quarter, making sure that, obviously, we maintain our capital ratios that we're supporting the growth, first and foremost.

And then if we have additional capital at that point, we'll try to return it to keep closer to our capital targets. As the cadence around additional share repurchases beyond that, we've talked before about the opportunity around preferred share issuance, and that will be largely market dependent. It seems like you can't wake up any morning and think there's -- you don't know what's going to be the new cycle and what the markets are going to demand.

So obviously, we're actively monitoring those markets and we'll opportunistically issue, and that would then generate some additional opportunity for capital return should that happen. So that's cared for in the overall share authorization. So the cadence and the amount that we're able to use this year will somewhat be dependent on, obviously, earnings generation and the preferred share issuance.

As you look longer term, we had said during our Investor Day back in 2024 that we're looking to optimize our capital stack and the preferred issuance is a component of that. And then the new story would be the Basel III Endgame opportunity, should that go into effect. And for us, we would look at that as the standardized approach, and that could be an opportunity where if it lowers our risk weighting for our assets, that could free up maybe another 100 basis points of opportunity around capital.

So more to come on that. Obviously, everybody is looking at it. And obviously, we're very pleased that the Federal Reserve is thoughtfully looking to simplify in some cases and free up capital for banks. But again, that's in the proposal stage, so nothing we can bank on that yet.

Our next question will come from the line of Mihir Bhatia with Bank of America.

This is Natalie Howe on for Mihir. So I wanted to ask a little bit about how pricing changes are flowing through the model. You talked about how it would be a tailwind through 2027 and you highlighted it as a driver for the quarter. So as that flows through, what else are you looking at for the year as levers for NIM stability? And along with that, where are rate cuts increases fitting into this?

Yes. So when you're talking about pricing changes, that has been a nice tailwind for us. Largely, it's working its way through. And so the degree of benefit that we're going to see incrementally throughout the year is going to slow. It will gradually still be accretive, but it is slowing. So we've got -- most of the portfolio is repriced, and that's something that's been a tailwind. With net interest margin, as we look outward, I'd like to say it's going to be reasonably stable because you do have -- we do have some rate cuts still playing in there, and we are slightly asset sensitive at this point.

You also have ongoing product mix that will affect NIM, cash mix will affect NIM, credit quality, the good and the bad in that, I mean in that as credit quality improves, you may have some lower top line APRs, you may also have -- you will have lower [ reversal ] fees that's also good, but you also have lower late fees that's a drag. So there are a lot of moving parts in there on net interest margin as well.

You have funding that with the work that our treasury team has done and that we've done in terms of increasing direct-to-consumer deposits, that's been a positive. But there's a lot of moving parts. So I think when you think about it, it's stability and -- but we're very pleased with where we are. Our philosophy as it comes to underwriting is going to pay for the risk that we take and making sure that we're appropriately assigning APRs at that time. And you can see that with our strong risk-adjusted margin that we have been delivering.

Got it. And if I could ask really quickly about travel and entertainment. You said that there was strength there in the quarter. But right now with current fuel prices and sentiment, how durable is that as a driver right now? And how are you guys looking at the rest of the year?

Yes. This is Ralph. The consumers are being thoughtful on how they spend their money. So as gas prices go up, they may decide to pull back on T&E, but T&E has been a strong category for us for some time, and we see it being a strong category in the future.

Our next question will come from the line of Bill Ryan with Seaport Research Partners.

First question is on the loan growth. I know you made some pricing changes in terms of how payments are applied that has led to an increase in the accrued interest and fee component of the portfolio. It was up fairly nicely in Q1. How -- I guess, looking forward, how much impact is that going to have on the receivables growth going forward? Is it going to stabilize at some point as a percentage of the portfolio? Or do you still expect that to increase?

Yes, Bill, I appreciate the question. So what you're referring to is the change that we had made last year to our minimum payment due payment hierarchy. And what we did is we adjusted it to conform with what we're able to do with CARD Act. So it just changes the mix a little bit between what portion of interest and fees would be paid versus principal. And so maybe you're looking at trust data or principal-only data, so that's what influences, but total loans includes both principal and interest. So there is no effect in total.

Okay. And just one follow-up question related to the NFL portfolio. I know there were some announcements during the first quarter. Maybe if you could kind of highlight for investors kind of like what those changes were? Are you expecting some acceleration in the portfolio growth? Just give us some highlights of that.

Yes, it's Ralph. The announcement was about American Express being the -- now the brand partner for the NFL, and we're thrilled about that because we're partners with both the NFL and American Express. We're still the issuer of the NFL card. So we believe between the NFL, American Express and us, it's a real touchdown in terms of good for our consumers and good for everything -- for the fans. So we're excited about it. Yet to be determined what we'll do together, but rest assured, it will be a very exciting partnership.

Our next question comes from the line of Moshe Orenbuch with TD Cowen.

I was hoping you could kind of talk a little bit about the competitive dynamic in terms of kind of new customers, like what's out there? And are there specific verticals of yours that you're thinking about as areas for potential either new partnerships or portfolio kind of purchase-type opportunities?

Yes, Moshe. Yes, it's Ralph. Listen, the home vertical has been real strong for us. With the addition of Ethan Allen, we've got Raymour & Flanigan, Furniture First, we find that vertical to be extremely strong. Our vertical in beauty with our beauty partners is extremely strong as well. Adding Ford to our automotive vertical continues to strengthen that with our existing partners. We have a number of de novo opportunities in the pipeline. The pipeline continues to be robust. We win more than our fair share because of our product set and the sophistication of how we underwrite and as well as how we -- the reputation our teams have in the marketplace. So we feel pretty confident that as we move forward, we'll continue to add partners to each of our verticals.

Got it. And I apologize to the extent that you've talked about this was on the call with your NFL partner for some of that time. But essentially, the macroeconomic kind of variables that are out there, outlook has kind of bounced around. And obviously, gas prices kind of matter a lot to your customer. Can you just talk a little bit about how you took -- to the extent, like how are you thinking about that in terms of your outlook for both credit and spend?

Yes. Thanks, Moshe. It's Perry. You're right, there is a lot of moving parts with the economy right now. So as we look at it, top line with full employment and wages outpacing inflation that continues to provide resilience to the consumer. And you've seen that come through in both the spend and credit metrics we put out there. But yes, while that looks good, you look at then the sentiment and confidence are really low.

I mean some historic lows. So -- but with the good support of the employment and wage growth, consumers are still engaging, as I said, in purchasing. They're managing their credit obligations. So the payments have been still solid. And so more so they're probably adjusting their lifestyle, which is -- it's good. And so that's how we've used the word choiceful in the past, and they're adjusting.

Now related to the elevated oil prices, that's something that we're watching because consumers are immediately feeling that at the pump. And so -- but it hasn't yet really pulled through in the form of, I'll say, other price increases yet on goods and services because, as you know, I mean, the higher oil is going -- and higher fertilizer costs or helium costs, it's going to pull through. It's just a matter of when.

So that's something we're cautious about. We think we have cared for in our outlook in terms of being cautious with the reserve rates. Tax refunds, we talked a little bit about that earlier in the call. Overall, it's been a good guide and has helped consumers weather the hopefully short-term price impacts in fuel.

But we haven't seen an overwhelming amount of that be used to pay down credit card debt and really improve payments more than you otherwise would have thought. And a number of customers, when you look at surveys, particularly for those under $100,000 are saying they're going to try to save a little bit and maybe it's trying to build a buffer for what's to come for them. So those things are what we're watching. We're cautious. I mean before I said we're cautiously optimistic entering the year, now I'd say we're more cautious for what's happening out there. But the consumer right now is resilient, and that's encouraging. So we're monitoring it very carefully.

[Operator Instructions] and our next question will come from the line of Sanjay Sakhrani with KBW.

I guess I first wanted to talk a little bit about the late fee mitigation impacts, Perry. I think you mentioned on -- in the press release that, that's coming on. I'm just curious, as we think about the magnitude of the contribution of those mitigation impacts, like how does it sequence over the course of the year? Like does it get more significant as the loan growth materializes more? I'm just -- I want to make sure I understand it. And then how does it sort of continue into next year?

Yes. When you look at the new portfolio coming on, that is at our target state pricing. So when the repricing on the existing portfolio has taken hold and basically the portfolio is churning through payments and the new purchases coming on at the higher pricing and things of that nature, we're largely most of the way through that pricing pulling through.

So you're going to see a -- over the course of the year, a gradually declining amount of benefit. So think about the first quarter where net interest margin is landing, it's expected to be more stable throughout the year, not really expanding as a result of pricing because other things influencing net interest margin are going to play into effect, which is a more diversified product suite.

So as more customers come in with better credit risk, they have lower APRs, that's going to pull through. Similarly, you're going to see maybe some rate cuts. So I think there's a lot of things happening in there. And even from -- I talked about it earlier on credit that there'll be lower billed late fees as credit continues to improve. So a lot of influences in there, which allowed for those pricing changes that have been made to offset some of those what would have been headwinds. But as you go throughout the year, the benefit of pricing changes alone will start to be muted as most of it will have been affected through actuals.

Got it. Got it. And then I just have like a higher-level question about the charge-off rate. I know we tend to compare it relative to sort of the historical averages, but the mix has shifted on the portfolio as well, right? Like you guys have moved more towards co-brand, maybe upmarket a little bit more.

And so I'm just curious as we think about the path going forward towards normalization. Is the target the same or a little bit lower than it was in the past? And then maybe just as we're talking about credit quality, Perry, you sort of alluded to tax refunds and people saving more. But I'm just curious like how should we think about the magnitude of the impact of tax refunds in the first quarter and if there's any residual impact into the April month?

Thanks, Sanjay. I'll start with the first piece of the equation around the target state of our losses. Because I think there's a view that all co-brands are created equal. And we do have some top of wallet type of co-brands that you heard Ralph talk about the NFL card earlier or AAA or our Caesars partnership. But then we also have a lot of retail partner co-brands.

And in those partner programs, we're still underwriting deep, and we're getting paid for that risk. So the loss profile is kind of replacing what was just only private label. So when we talk about our loss rate target, we're still looking to get to a loss rate target that is around 6% or below. Now if the product mix really shifts, I'll say, strongly towards top of wallet, yes, you may end up with something lower than that.

But largely for what we expect and how we underwrite, how we get paid for the risk and the ROTCE targets that we put out there, that around 6% is where we want to live because that's where we get the best return. So that's what we're putting out there and what we're striving to get because if we went too far upstream, then we wouldn't be able to deliver the returns that we were looking for.

Then specific to tax season, I've mentioned this a little bit earlier or tried to is that we've seen -- our consumers have seen $300 to $350 of higher tax refunds on average, which is nice, but many who are below $100,000 have stated that they're looking to save some more of that. And we have not seen a material increase in payments to date above what you otherwise might have expected.

I think it's helping, but it's also -- they're probably using some of that to offset some of the near-term gas price impacts that they felt at the pump. We're encouraged overall. In some years, you think that might have been more of a stimulus to pay down debt, but consumers are always looking to use it different ways, either to spend on some near-term needs to save or pay down debt.

And in this case, it really hasn't really bent the curve in payments as it related to payments. But that said, our credit metrics for the quarter and even starting through April, we're seeing that the payments are remaining strong. It just isn't like excessively better than what we would have liked to have seen.

Thank you. I'll pass it back to Ralph Andretta for closing remarks.

Well, I want to thank you all for joining the call and your continued interest in Bread Financial. Looking forward to our next quarterly call, and everybody, have a wonderful day.

This concludes today's conference call. Thank you for participating, and you may now disconnect.

Thank you, everyone, for joining. I'm Nick Holowko, the Consumer Finance and mid-cap bank analyst here at UBS, and I'm pleased to welcome Perry Beberman, Chief Financial Officer of Bread Financial, which is one of the largest credit card issuers, primarily focused on private label, co-brand and general purpose credit cards.

Perry, it's great to have you here. So thank you for joining us.

Thank you for having me.

Maybe to get us started this afternoon, let me start by asking about the state of the consumer through the lens of Bread. We've heard a lot this week about the K-shaped economy and how consumers have been managing through this inflationary environment over the past few years. So what have you observed over the past year or so in the health of consumers in your portfolio? And what are you starting to see, if any, changes at the margin?

Yes. I think when we look at the consumer who we serve, we really serve middle America. And we've been talking about the K-economy now for a few years. And it's really, I think, no more prevalent than now. And when you think about who we serve, we really don't serve the top end of the K, which is high net worth, high spenders. And then we also don't serve the bottom end of the K, that long part of the tail, which are really the lower income people on government subsidies, more debit-only non-creditworthy.

We serve, I'd say, the middle part of the K, and that's your near prime to prime customers. As an example, the new vintages we underwrite have around $95,000 of average income. The whole portfolio might be just under $80,000 of average income. So that's kind of core middle America. And what we've seen over the past few years is these families and individuals have really been contending with this period of elevated inflation, I think 30%, 35% compounded inflation over that period of time post-COVID and they've done a really good job adjusting their family budgets and their household budgets to accommodate these higher prices.

So while inflation is still a little elevated right now, and it's not down to the target rate of maybe around that 2%, they've -- it's a lot better than where it's been. It's taken the time to adjust. And what we're seeing is, I'll call it a resilient customer and even a choiceful one and meaning that they're making choices around what they're purchasing, when they're purchasing it and trying to make their budgets go further.

So we're not seeing as much strain. I mean there's still a little bit of strain in the portfolio, but continued improvement, a little encouraged by, hopefully, if the inflation continues to moderate on the back part of the year. Jobs remain constructive. Obviously, we saw a new job revision this morning, which is kind of what we've been seeing is the jobs have been stable. I mean the labor market has been okay, not creating a disruption for our consumer base. And we just expect to see a continued improvement as the year goes on, on credit quality and resumption of spend.

Makes sense. And we saw your January data earlier this week, which showed some continued progress on the credit front. And your 2026 outlook anticipates some continued improvement on the credit losses that you're expecting for the year. Can you maybe help us contextualize the January numbers and think about how that translates into your full year outlook?

Yes. So January was good numbers. They came in right around what we expected. In February, you will see a spike back up seasonally. While they will be improved year-over-year, we were saying that we expect them to get near 8%, so not all the way to 8%, but definitely up more than what you just saw. And we got a little -- we were flat on growth year-over-year, and that's an improvement for us. So that kind of starts to reflect to the story that we've been saying that we expect this year to inflect to some growth and some nice growth throughout the year that will end with higher ending loans and even the average loan guide that we gave in that low single digit.

Credit overall is going to be comprised of a couple of things improving. One, the existing portfolio called the back book, continue to see some gradual improvement throughout the year from our credit strategies, just a consumer that's adapting and probably a little bit of a tailwind from some -- the tax refunds. We didn't put an overly big bet in what that would mean where the consumer spend it or use it to pay down debt. And then the new vintages that we've been putting on have a lower loss rate than the existing portfolio. So those are starting to average in, and that should continue us on a glide path down as we go through the year.

That makes sense. And like you alluded to, good to see loan growth turning flat during the month of January. Maybe just as a follow-up, though, one topic that's come out throughout the week has been the impact of potentially higher tax refunds. Maybe you could just talk to us a little bit about how you're thinking about that, how it's factored into your outlook for the full year?

Yes. So the tax refunds are -- I think this should be a tailwind to the consumer. And for our space, in particular, it will get used in 1 of 3 ways. The consumer will use some of it to pay down debt, which will help improve our delinquencies and that we see every year. And the timing of that is the piece that's always something that we watch carefully because that bleeds in a little bit post the tax refund season. So you may see it closer to March, even past April into May.

Then you also have consumers who may use that tax refund and spend on things that they have been waiting to spend because they've been, like I mentioned earlier, budgeting carefully. So they may take the opportunity to purchase something that they've been holding off on or do a family trip or whatever it be. And others will save. So it will be dependent on where are they in their income level and their -- I almost say a risk band where they are with their current debt levels and what they're choosing to do. But we're going to watch it carefully. I think starting at about a week or 2, we'll start to get some early reads on some of the refunds coming in, but it should benefit our consumer base.

Got it. And maybe as we're thinking about loan growth for the full year, expecting average growth in the low single digits like we said, January flattish. Tax refunds will be a variable. But how do we think about the other building blocks to the loan growth outlook for this year?

Yes. So as we look at loan growth, there's a number of factors that are in there. But one of the biggest things that will create the tailwind for us are the new partner launches that we had last year. So we've got a good, stable partner base to build from. So the partner launches that we put on last year, whether it's Raymour & Flanigan, Cricut, Vivint and others are starting to -- they've launched. They're starting to bring in some good loans. That will continue throughout this year as well as some yet to be announced new launches.

And again, the guide that we put out there does not assume any inorganic growth. There's no portfolio acquisitions assumed in there. We do assume increasing payment rates as delinquencies come down that the inverse of that is higher payment rates. And as the credit mix of the portfolio improves with putting on more co-brand cards, they come with higher payment rates. So all of that is contemplated into our guide.

That makes sense. And I guess you touched on the partners that you've added throughout 2025, adding to that foundation for this year. I think you've also talked about having the majority, if not all, of the top 10 of your programs locked up through at least 2028, potentially some opportunity to add some new partners here in 2026. Maybe can you talk a little bit about the competitive environment and what that could look like in terms of adding inorganic opportunities throughout the year?

Yes. I got to tell you, I am incredibly proud of our business development team. And it's one of the things that I still sit today, am impressed with just the number of new opportunities that are presented to us from really, really large ones that you would expect that we look away from just because too big, too much concentration risk for us and the returns would be too thin.

So we really try to find the deals that are in the sweet spot for us. And there's always a constant pipeline of opportunity. And we win what I'd say is more than our fair share of those opportunities. And you have some competitors that are leaning in or leaning out depending upon their strategic priorities. And I think there's going to be some opportunities in the next year or 2 for us to continue to sign some good new partners.

Got it. Maybe turning over to buy now, pay later, exciting area that's been topical for quite a while, starting to gain share or continuing to gain share as a percentage of consumer payments. You have Bread Pay now around 2% of your outstanding loans and sales, and we continue to hear about the growth of this platform. Maybe could you just talk about buy now, pay later and what that means inside of Bread and what you see in terms of demand from consumer -- from consumers for the product set, demand from merchants and how that can contribute to loan growth over time?

Yes. I think buy now, pay later has certainly been an area that has had good growth across the payment ecosystem and really is for people who want to pay -- get something now and pay for it over time, but often aren't creditworthy in the traditional sense. So a lot of that comes from traditional debit spend. So if you look at the total payment ecosystem, they straddle between debit and low-end credit largely. And for us, it's another product in our product suite. We like it. And now we're at a point where we're working with brand partners and saying, would you like to have something that's white labeled for you, so it keeps the consumer in their ecosystem or we're doing some enterprise-type buy now, pay later offerings with like Vivint Home Security or Cricut Wireless and even Home Depot, we've launched in stores with some of their stores. These are larger tickets, a little bit longer loan durations. We like the economics. So those are places that I think you're going to continue to see some growth in our consumer loans in that regard.

That's great. Maybe switching gears to focus a little bit on revenues. You've talked at length over the past quarters, months, years about the margin outlook. It's always evolving. For 2026, credit will be a big consideration as we're thinking about where that can go. But maybe isolating some of the pricing changes that you've implemented in recent years, is there any way to think about or frame how long of a runway those factors can be a tailwind and how long it will be before those get fully reflected in your loan yields that you're earning?

So it's an excellent question and a point that we have made pricing changes back as early as in the early 2024 when prime rate had risen rapidly, we needed to lift what we had was basically an APR cap that we wouldn't go above 29.9%. But that was going to -- if we didn't increase pricing, we would have started to see some real NIM compression.

So the first leg of pricing changes that moved up was to care for that and then some additional pricing change that happened early last year to portions of the portfolio. That has continued to work its way through the portfolio through last year, and you'll see that continue to come through this year. The -- and that's how we were able to guide our net interest margin to flat to slightly up because without that, you would have seen basically a declining net interest margin. We're slightly asset sensitive as our deposits won't reprice or other sources of funds won't reprice as fast as variable rate loans.

And second is the product mix improvement that we're seeing, we do risk-based pricing, you're putting on some new accounts and others that have a lower APR. So you would have that. You also have improving delinquency, which means you get lower billed late fees, which means lower yields. So all those things together without the pricing changes we had put into effect, you would have had a declining net interest margin in this environment. So those pricing changes should help out throughout '27 to help mute some of those impacts. So I think by the time you're into 2027, you've largely probably ran its course.

Okay. That's helpful. Maybe turning the page on the other side of PPNR, we have expenses, anticipating another year of positive operating leverage here in 2026. How should we think about the opportunity for efficiency gains? And how much of that is going to be on the revenue side versus remaining opportunities on the expense side?

So culturally, we established operational excellence at our company, and it kicks off tens of millions of dollars of new opportunities in every year since we've done this for the past couple of years, expect the same this year. And again, next year, we actually have run rate benefit and then you find new opportunities. And the whole company has engaged this and embraced it.

So we're able to take those savings and pour them into investments in other investments, whether it's technology, it could be a little bit of AI investment. It funds things like migration to the cloud, but allows us to not have to have these major step-up in expenses to fund critical things as it relates to operating the company.

And then to your point, the fact that we're inflecting to growth this year, and we'll have that low single-digit growth, and we said revenue will follow, that helps create more of that operating leverage is now we're growing expenses will grow this year, but our objective is to obviously have it grow less than revenues. And the degree of positive operating leverage will be largely dependent on the degree of revenue growth.

That's helpful. Okay. Maybe pulling up a little bit and thinking about the transformational stretch you all have had at Bread over the past couple of years and efforts continuing to show up in the results over time. As you look forward to your mid-20s ROTCE target, are there any other big strategic actions left to take? Or is it more about just chipping away at this point, getting more scale on the -- by growing the loan book, experiencing that continued credit normalization or anything else you would call out?

Yes. I think you've hit it really. When I think about it, there's really 3 or 4 things in there that have to happen to achieve the mid-20 ROTCE. And I'd say we're going to have a clear line of sight to that. And this year will be a really nice step in that direction.

First, we have to continue to drive efficiency at the company, which comes from two things: one, getting a little bit of scale. And I mean that -- getting that low single digit, hopefully, it starts to get up to the mid-single-digit growth rate that gives you your revenue scale, containing expenses, so delivering that positive operating leverage, which will drive down the efficiency rate. So that will improve your ROA.

Then you also have to, as you noted, we have to continue to drift down towards that 6% loss rate range. That's the second leg of that ROTCE improvement. And the third, but to a much lesser degree is the final stage of capital stack optimization, which would be issuing up to $300 million of preferred stock, and that helps to get to that optimal cost of -- or the optimal capital.

Makes sense. And I know earlier, we were talking a little bit about the balance between pursuing growth, pursuing returns. But it sounds like in most environments, you'd likely to be more focused on optimizing your returns rather than pursuing growth at the expense of your return thresholds.

That's right. It's an and, right? We need to figure how to grow, grow responsibly, grow profitably and put the right type of growth that's going to deliver the returns that we need to make sure we get the right return on capital.

Got it. One thing that I know you've talked about in past years, and it sounds like you've taken another step on this journey is looking at potentially doing some optimization around the structure of your banks, 2 banks today, Delaware and Utah. Can you talk to us a little bit about any updates on that process and what you might be considering?

Yes. I mean when you think about the transformation of this company over the past 6 years since Ralph has joined and even a little bit before that, they've really tried to simplify who we are and be more of a pure-play financial services consumer finance company. And with that, today, we have 2 banks or legacy banks. One is a Utah Industrial Bank. One is a credit card issue-only bank out of Delaware. And we have different funding capabilities in each because of the bank charters.

So we're able to take direct-to-consumer deposits out of our Utah bank, which we can't do out of the Delaware Bank, but we do have a public ABS out of the Delaware Bank that we don't have in the Utah Bank. So the idea is that if we can put those 2 banks together, it gives our treasury team full funding flexibility for the company. And so we did put an application in December to merge the 2 banks into the Utah Bank and that -- and we'll build out a public ABS in Utah, but then it allows us to continue to fund the way we want to and continue to grow those direct-to-consumer deposits up to what I'll say, more peer levels, which is probably closer to 70% over a number of years. It won't happen quickly, but it gives us that flexibility.

So it really helps with liquidity risk management, capital management and funding flexibility.

That makes sense. And do you envision any -- you obviously highlighted the funding aspect. Would you anticipate any cost savings or revenue synergies as a function of those -- that kind of action in merging the banks? Or is that something longer tail and it's just more operational efficiencies and kind of the things you highlighted?

It's really nominal. It really -- if anything, you might get some cost of funds benefit in there. A little bit of less time responding to 2 banks exam questions. It's one. The consolidated reporting is already -- where we do a combined reporting. So there's really not a lot of efficiency from an operating standpoint. It's more about the funding and a little bit larger scale bank with better capital and risk management.

Okay. Makes sense. Another big topic this week in the last couple of weeks, thinking about how companies across the economy are leveraging AI, especially in financial services. We talked a little bit about AI over breakfast and speculating there. Maybe you could start just by sharing a little bit about where you're playing in AI today and what you see as the greatest opportunities for use cases within Bread Financial.

Yes. AI is certainly seems to be the hot topic nowadays across all industries. It's changing fast. And what I love about our company is the way they embrace change, they embrace new ways of doing things. So we've been leveraging AI, like machine learning models for years. We have over 200 machine learning models in place across our enterprise.

We've deployed bots that have saved our company over 1 million hours of, you call it, work time. And these are all ways to do things. Now the next generation of AI is out, and you can imagine the different use cases. We've got over 60 use cases or initiatives in flight that are deploying AI from small things where the worker is able to use Copilot to help with their day job or you're turning on audit functions within our expense management tool like for travel expenses. There's every -- there's always little things, but then also the big things where you're able to have agent-assisted tools that are AI generated to help the service agent have something to help them answer and respond to questions.

You're using AI to optimize call routing within the -- when the customer calls in around voice response. There's tons of applications. And there's nothing that I think I'd say so far is massive disruption, but continued migration of efficiency of trying to serve the customer in more of a digitally engaged way so that they don't never have to talk to a person on the service side. There's also ways to optimize collection efforts and have the person -- the customer interact in that way.

So I think it's going to -- we're not going to be on, I'll say, on the bleeding edge of this because we're not going to invest billions of dollars to find the use case and then -- but we will be fast follow on AI and feel really good about our positioning. Clearly, we're thinking about it. Our clients are thinking about it, and we're making sure that -- I mean, we were out with our client partnership team this past week, and they're saying, if it's not -- they're not hearing that word Agentic AI 3 times a day in almost every call, the merchants or retailers are thinking about it. And our goal is to make sure that we're able to help them in their purchase path, unlock their sales. So we're staying in lockstep with our retail partners.

Understood. And maybe just as a follow-up, thinking about AI and as it relates to the consumer, and we hear people ask, especially as we're kind of traveling and speaking with people from outside the U.S., like what AI could mean for the health of the consumer and the job market in the economy in the U.S. Any thoughts you'd like to share on where that could go and where we stand today?

Yes, there's a lot of speculation. And it's really hard to know like for our customers that we serve, we serve a lot of middle America, teachers, electricians, plumbers. It just -- it depends where will this efficiency come from and which jobs might get dislocated. Does it create more jobs? Like right now, you got to imagine there's a ton more construction jobs going on. And I think it's a little too early to call, and I don't want to speculate on where that will go.

Wait and see a little bit. Okay. Maybe shifting over to the policy front. Lots of headlines in the credit card world over the past couple of weeks. I think those are beginning to fade a little bit, but maybe a couple of questions related to the topic. First, on the credit card rate cap discussion. I think most people are recognizing that, that's not likely something that's going to get implemented. But do you have any perspective that you'd like to share on the topic? And does the administration's focus on issues tied to affordability impact the way Bread is thinking about maybe some of the sustainability of like the pricing changes made over the past couple of years?

Yes. Look, there's -- as it relates to price controls, price caps, it's not something that I think would be a good policy or practice in our, the way the country runs. And I think what I would tell you is we're very much in line with the industry and the larger players who have already commented on this that it would be restrictive of credit for the vast majority of Americans. It would hurt middle-sized businesses, small businesses, and it would be detrimental to the overall economy.

So not thinking this is going to go that far. But then when you think about overall, we think regulation is good. And I think regulation will be very constructive. So we're actually, I'd say, more bullish on this administration and the way they thought about regulation and the way they've been thinking about bank regulation in particular. So -- and when it comes to affordability, again, their focus on affordability is real.

We talked about earlier, our consumers, what they've been contending with on prices being up as much as they have been over the years, anything they can do to make the everyday cost of things that our consumers need, whether it's farm goods, household goods or prescriptions or cars, whatever it is, if prices can come down, including interest rates, are all good for our consumer. And that affordability focus will help our consumers and our delinquency and losses and hopefully be able to unlock more credit for them.

Makes sense. Maybe on just another note on the regulatory front, maybe not -- maybe another item that's just less likely to go through than not, but the Credit Card Competition Act been another point of discussion. Any thoughts on how impactful that would be or could be for your business, especially as it relates to rewards and the ability to offer cards that can operate on multiple networks. I know you guys are one of the few banks that issues a card on a network outside of Visa and Mastercard. So I would love to get your perspective on that process and any risks you see related to potential litigation there?

So my understanding of that rule right now is that, that would apply to only banks over $100 billion in size. So we would not be impacted by that. And then more broadly on that topic, if consumers were purchasing or that legislation went in place where they could purchase on different networks, the consumer is not going to benefit. This is going to benefit the retailer. So this is something where the banks could end up lower rewards. You just don't know where it's going to go. But the take that I have right now is that it's not something that is going to benefit the consumer. It's more of a merchant play.

Makes sense. As a leg of one of the -- as a marker of the progress you've made over the past couple of years, capital levels have really started to expand meaningfully at the company, CET1 now at 13%. You've been buying back stock. How should we think about capital priorities heading into 2026 and your comfort with where you are and continuing to push the button on the buyback?

I thank you for the recognition of the progress that we made on capital. It's one of the things that we were really proud of. And since I joined the company and Ralph as well, we have stayed focused on our capital priorities, and they have not changed. One, first and foremost, we're going to support and fund profitable, responsible growth. Two, we're going to invest in this company to make sure that we're moving forward with our tech priorities and other priorities. We're going to pay down our debt and get that locked in, which we've now done. We've got that paid down from $900 million to start last year down to $500 million to end the year.

We introduced subordinated debt. We did our first leg of preferred stock at the end of the year. And so where we finished the -- and we started to buy back shares. So we -- and that was the last piece is being able to return capital to shareholders and doing it after we built up capital and hit those targets. So it was a real inflection point starting in the third quarter of this past year and into the fourth quarter that now we can do all of these things simultaneously.

So we finished the year with still $240 million of share authorizations outstanding. So you should expect as we go through this year, we'll continue to make sure we maintain our capital targets in that 13% to 14% range because we have a midpoint and then try to return excess capital beyond that if we're not holding capital for future growth or other investments. But I would expect that type of discipline to persist going forward.

Makes sense. Well, I think it's pretty clear all the progress that you've made over the past couple of years. It's an exciting time to see you returning to growth mode. Any parting thoughts you'd leave with us as we're heading out to the rest of the first quarter and looking out to see what happens exactly as we play out 2026?

No, I appreciate that. I'd say, overall, we are very, I'll say, cautiously optimistic, but excited for 2026. After the culmination of this multiyear transformation of the balance sheet, our tech stack, and that's always going to be on. We talked earlier. We get to focus on growing the business, winning where we deserve to win with new partnerships, focusing on the customer, continue to accelerate the development of capabilities that are going to help our merchant partners as well as serve the customer.

We're excited about that and looking forward to, again, continue to see credit improvement. I think we're going to be in an environment where while the economy is uncertain, generally, our view is probably a little more constructive in that while the trade policies of the administration can wrinkle some feathers, the intent is to create more jobs in the U.S., right, create more demand for our goods through the trade deals and get more investment here.

And even with today's revised job report, you're starting to see an acceleration of jobs, even though the revisions are always tough to understand. But the investment and that I expect to see in jobs in the future, if this plays out, should create opportunities. So again, I think the labor market is going to hold up. Inflation, again, the back end of the year, it doesn't look like the tariffs have been impactful in terms of driving up inflation as some had thought. Now they're tamping down that expectation. The consumer is resilient. So really encouraged about what's happened with we get slow, steady progress on the asset quality front. So everything is really coming together and excited about for what this is going to mean for '26 results.

Awesome. We are excited as well. But I guess we've reached the end of our time. So thank you very much, Perry, for joining us here and keep us game.

Well, thank you.

For those who don't know me, I'm Mihir Bhatia. I cover consumer finance and payments at Bank of America. Next on stage, we have Bread Financial. Bread Financial is a leading private label card issuer. Over the past few years, they have expanded their offerings to provide co-brand and proprietary cards and buy now, pay later loans. I'm delighted to welcome both Ralph Andretta, who is CEO; and Perry Beberman, who's the CFO of Bread. They both are also recently celebrating -- birthdays around now, so you can wish them happy birthday afterwards. But -- so thank you for joining us. Really appreciate you guys doing this conference for us again.

So maybe just to kick things off, Perry. This morning -- we'll start with you, Perry, but this morning, you filed financials. So maybe just talk to us a little bit about Jan results, anything we should keep in mind as we think about January results going into next quarter. I know there's always a step-up in February, but anything else you want investors to keep in mind?

Yes. No, we were really pleased with how January losses and delinquency came in as well as the loan growth coming in flat, which is a nice little bit of reflection. I'm sure we'll talk more about loan growth outlook for the rest of the year. The thing to remember, as you pointed out, is February steps up materially, seasonally. So we -- what we say is it's going to get closer to 8% as you look out for February, and then it'll come back down, and you got to day waiting, just normal seasonality. So that's important for everybody to remember. As it relates to overall first quarter, I think everything is shaping up as we expect. So remind you and others what we said during our earnings call when we gave guidance was that the first quarter will just be slightly down in expenses, noninterest expenses. We had $500 million of expenses in the fourth quarter. It will be slightly down in the first quarter. And I think what's happened, sometimes people look at prior years, where there were some onetime charges in those years as it related to some, say, personnel actions that might have been in there that were not in there. So this comp will look closer. You don't have those onetime step downs. And those are adjusted expenses that exclude the debt repurchase costs. So that's really the only other thing that I want to make sure that you're aware of and investors.

Got it. And we're going to dig into numbers over the course of the next half an hour, 40 minutes or so. But before we do that, Ralph, it's 5 years since you took over the seat, like you said, you had a few good weeks before COVID. So maybe four normalized...

Remember those three weeks finally.

Maybe four normalized years. But as you reflect on it, just how are you feeling about the progress you've made. Maybe hit on like some of the highlights of the -- how -- what's changed, and where is work still to be done?

Yes. I think one of the biggest highlights is to my left, we're having a competent, very professional team. And really, that's always been -- really having a good team to work with has been just extraordinary. But we came out of the fourth quarter really strong. We came out of last year really strong. That's telling for us. We've had a transformation now going on since COVID, and we're closer to it than others, but there's three things that -- 3 or 4 things I'm really proud of. The team we've put together is exceptional. I'm really proud of that. The work we've done on the balance sheet is exceptional, really strengthening our balance sheet and paying down our debt, moving tangible value to barely there to -- I think we ended the year at 57, 57 last year, if I remember correctly, moving that in the right direction, getting rated by the rating agencies, I think, was a great step in the right direction. So all those things really have moved forward. When we first got here, we had choices to make, and it was either do you invest in the business, do you strengthen the balance sheet? Do you return value to shareholders? Here we are a few years later, and we can do all three. And that's a really nice place to be. And we've added really nice partners during the process and really nice products. So we're close to the transformation. We live it every day. I think the market is catching up to that. And our view is, we're going to continue to do the right things, continue to focus on what's important, continue to be transparent with investors and analysts and let them see what we've done.

Got it. Right. So let's talk about your customers for a second. Maybe compared to some of the other companies presenting at the conference, your customer base is a little bit more subprime, a little bit more middle income. Give us an update. How are they feeling? How is the core customer at Bread doing?

Yes. So overall, I think our customer reflects the broader economy. And we talk about the K economy, and where we -- our sweet spot is kind of the middle of the K, right? So you think about the top of the K, those are your super prime customers, the higher net worth, the high spend. That's not who we mainly go after. And then you use the subprime word. That's the lower end of the bottom part of the K. We don't target those as part of our underwriting and the population that we're trying to serve. It's really the middle, like you said, Middle America. And by way of example, the newer ventures we put on have about $94,000 average income. That's truly middle America. The -- when we do underwrite deeper to near prime, some of those customers do fall into that subprime category when they get a little distressed. But again, we're getting paid for the risk we take. Overall, though, that population has been dealing with a challenging macro environment post-COVID, right? They've dealt with now 30%, 35% of compounded inflation, and they've adjusted their decisions. And so when you hear us talk about or others talk about a resilient consumer, these are consumers who have adjusted the way they spend, the way they budget, the way they plan and have done a good job. And the word I would say we use is resilient. I wouldn't say they're strong, but they're resilient, and they're hanging in there, and they've got a hand on their finances, and they're making choices. We talk about a choiceful customer, where maybe they're not going for the top shelf, they're going to the middle shelf or from middle shelf to the bottom shelf or the quantity of what they're buying, but they're doing a good job of being resilient. And so with inflation coming down a little bit, maybe not all the way to target, it's still better than what it was. And that they're able to navigate this. And the job market still remains constructive. And hopefully, we start to see some investment in the jobs that are promised from all the investment coming into this country, better trade deals, et cetera. But I think we're still optimistic on the overall consumers' outlook despite what sentiment is, that's the soft data, hard data says the consumer is resilient. And so we feel pretty good about where things are and should continue to drive credit improvement and continued sales growth for us.

Got it. Now we're going to dig into the numbers and 2026 outlook in a second, and I promise we'll get to that. So -- but before we do that, I did want to spend a few minutes just on the product diversity at Bread. We always focus on the credit card partnerships, the Caesars, NFL card, Victoria's Secret card, what have you. But the product diversity has increased quite a bit. And I was wondering if you could just spend a few minutes, just how you frame -- how you think about it? Like help frame it for us, like when you look at it internally, when you break down the business, what are you looking at? How are you thinking about the different pieces of the business, like the different products, categorize them maybe?

Sure. When -- you mentioned when we started. When I first started here, we were a private label credit card shop. That's what we were. And if you look at us today, we've really derisked our portfolio. I look at it in a couple of ways. It's like products across the enterprise and then verticals where we use those products, right? So you think about the products we have today, we'll have private label, we'll always have private label. We have co-brand, really good product, right? We have direct-to-consumer products, whether it's deposits and our direct-to-consumer credit cards. We have the buy now, pay later platform, where you have the split pay, but more importantly, the installment loan that walks into personal loans. So we have 7 or 8 products that you can kind of lean in into the consumer. And then when you look at the verticals, you've mentioned Victoria's Secret, we have soft retail, we have jewelry, we have beauty, we have T&E, we have home improvement and furniture. We just -- that vertical has just really emerged with the Raymour & Flanigan and Furniture First and Bed Bath & Beyond, but that's a new vertical for us. We have an electronics vertical. We have Dell, HP, B&H Photo. So we have all those verticals, and we can use our products in each of those verticals. So for example, where we have PLCC, we now have a co-brand products that we have both of those so the consumer can earn more points with a co-brand product. If they can't qualify for a co-brand, we can give them a PLCC at a lower line. So we're casting a wider net on the consumer by the products we have. So we feel good about that, and then we continue to grow those verticals as -- and continue to expand our verticals.

So just staying with that for a second, as you expand the product set, what are you hearing from partners? How is the product expanded product set, maybe deepening your relationship with some of your partners and expanding the products you offer? Any resistance and pushback you're getting?

No, because it gives the partner choice. It gives them the ability to widen their net and have better opportunity for people to purchase from them, right? So where somebody wouldn't qualify for a co-brand, they qualify for that PLCC card. But they also -- the partner gains incremental revenue because people are using that co-brand card outside of the partner. So there's other benefits that the partner has. So they're very open to that type of relationship. Two things you want to do with an existing partner, right? You want to increase penetration into their base, and you want to increase that penetration with new and different products. So you can excite that base. And the partner is very open to that. And we're digital first. So we're looking for how do we make digital first and foremost, and how we take the friction out of the process. So the partner is very helpful to that. Obviously, some more than others, but they're very helpful towards that.

Okay. So let's -- maybe, Perry, we'll turn to numbers a little bit. Fourth quarter purchase volumes were maybe a little bit better than we had. I think most of the Street had. Momentum feels decent coming into 2026. January, we saw loan growth positive. It's a good sign, I think. You're ready to call it, we've inflected on loan growth and purchase volume?

I'd like to see a few more months of consistent growth, but this is setting up in line with what our expectation was. So anything can happen with the consumer, but we're certainly starting to get that momentum that helped us feel confident in giving our guide of up single digits, low single digits this year. Some of that will be aided by -- as we talked about some of the new partners coming online and also just continued improvement in credit quality. And those things together should manifest itself into some loan growth.

Yes. So maybe just talking about purchase volume, just, we had the winter storm. Did you guys see any effect from that? Any -- give us a month-to-date, quarter-to-date update, if you can, on purchase volume at least?

So it wasn't an overly big impact. So January was starting out really well. What also happens, our people bring a pull forward spend. Everybody knew this big storm was happening. They went to the grocery stores, they had to get provisions. They went out their Home Depot or whatever they had to go to, get stuff. So I think it actually pulled forward some spend. And then yes, when you might have had a little lower spend in a few days of the storm, and then they resume. So it wasn't a material impact from what we saw. I mean it certainly in some retailers, people were not out at some stores. But -- so then coming into February, we're still continuing to see solid trends.

And then just wanted to dig in a little bit on T&E spend. That was particularly strong in 4Q. I guess two questions on that. One, you guys know what drove that for you all? And then just how is that trend holding up here in 1Q? And like do you expect that to continue to stay strong?

So as our portfolio mix has continued to shift, right, as Ralph just talked about the offerings that we have out there, a little more co-brand, we're starting to see some of that seasonal pattern, which you'll see some summer months, we get a little more T&E. And obviously, November, December are big T&E months. I think in our portfolio, you're starting to see that, particularly some of our specific T&E-type brand partners. But also when you have more co-brand, top of [ Ulta, ] you can pick up more of that spend. So I'd expect that to more -- have a little more seasonal activity throughout the year.

No that makes sense. And then on the 2026 outlook, we don't need to go through every number, like you just laid it out. I think people kind of understand it. But just talk maybe like really big picture, when you sit back, like these are a couple of areas where there's real opportunity. This is the area where there's some -- maybe some risk, and we really got to execute, a couple of things have to fall our way. Kind of like as you think about the guide, where is the opportunities and risks?

Look, when we give a guide, to be candid, we're trying to make sure we've incorporated all known risks, all known opportunities that we're executing against. So we hold our teams accountable to execute that. But when we look at it, we want to make sure we're giving something that we look at you and the investors and that we can get something that's credible that we have a chance to make sure we meet or beat. On the loan side, I think clearly, there's a lot of unknowns in there in terms of what can happen from a macro standpoint, and we can even use tax refunds as an easy example. Well, if more consumers pay down debt, I mean payment rates will be higher, which means loans come in lower, or do they spend more, which means loans are a little higher, which could be great, then you have the delinquency and loss factors. So overall, I'd tell you that the guide on revenue, we feel very confident in that with -- in line with loans. And if things shift to the good, obviously, we would signal that. Loans, we just need to execute on the new partner launches, the ones we've recently launched and make sure they deliver. And the health of the consumer, we feel pretty good with that. We talked about that one. On losses, based on January coming in kind of as expected, that sets up well. Again, the tax refund coming in higher and lower with those, we did not overplan that into our guide. So just because it's too much of an unknown of how the refund will get used, we model a little bit more traditional refund behaviors. So that's one that could improve it. I don't think the refund activity would be a headwind to us achieving our loss rate. If anything, it will be a tailwind to out be on the low end of that.

Maybe on -- just staying on tax refunds, and I know we -- who knows how it plays out? Obviously, most people are expecting larger refunds, you get that. But what happened like with stimulus? Like what does the Bread consumer typically do? Like is it more spend it, save it, pay down debt? What does the Bread consumer typically do with these windfall games, if you will?

Yes. So again, we talked about the K economy, where we aren't over concentrated more in the middle. It's -- it varies based on income and risk score. So you almost create a matrix. And depending on where you are in there, if you have -- if you already have a decent amount of savings, likely part is you're going to save that refund, or you've been saving up for a big trip, or it's not too dissimilar to what you saw with stimulus or go out and buy some luxury brand thing that you really shouldn't have been buying, but you did for your income cohort. But you do see all the different -- you really do see a variety of that. For people who are a little more stretched, a family of four, they may pay down debt and be responsible with that. So we do see truly a variety of that a mixture. And I don't -- I'm not saying it was 1/3, 1/3, 1/3 because you can't tie it perfectly, but it's something like that.

Okay. Got it. Maybe let's talk about credit a little bit more. Credit has been trending nicely for a few quarters now. I guess just two questions that arise that we get a lot from investors really. As credit continues to trend better, the comps do get tougher this year like because you improved last year. So should we expect the year-over-year improvements to continue at the rate they have been? Do you think there'll be a slowdown? I mean your guide implies a little bit less improvement if you take the midpoint, right? What's driving that? And then the other question is just you're at 5.5% -- like you've guided to 5.5%, 6% long-term guidance. You're at 7% plus. You seem somewhat comfortable there. So just how do you react to both those?

Yes. I apologize if I've given anybody the impression that I'm comfortable at 7% because if you were inside the walls of our company, we have lots of conversations with the team. We need to do better, and that there's a clear expectation to get around 6%. 5.5%, I'm not sure I've given that number recently, but we'll say around 6% is where we're comfortable because of the way we underwrite. We underwrite for profit and returns. And so that's what -- while we're, I'll say, accepting of a 7% and not trying to force it down faster by taking credit actions that would then hurt returns. So because of the way we underwrite, and the way we price, we could have taken an action in '23, '24, '25 and choked off credit a bit more, put on much smaller new vintages that drove for instead of, say, a 6% target for that new vintage, a 4% target. And we could have then gotten our loss rate down faster in total. However, that would have been damaging to our brand partners because they would have had less credit sales, it would have been damaging to our investors because these new vintages we're putting on have very healthy returns. So we would be chopping off some very strong returning segments within that new vintage. So that's why I think when you're saying. Comfortable means we're not taking, what I'll say, more honing actions to drive it down faster. The year-over-year comps, exactly what you said, are just coming in a little slower, at least on our guide, that's where we are. I mean we'll be hopeful that we can beat that, but it's still a lot of year to go before we're going to be comfortable saying that. But everything is tracking and trending well towards that glide path to get back to close to 6%.

Got it. I want to dig in a little bit maybe on the first part of that about just partners and like what -- how the partners react when you tighten credit, and what that created? Maybe you could talk a little bit about more about that. Just how closely do you work with partners in setting the credit guidelines? How much of a say do they have in terms of where you set them, and when you can tighten, when you don't? And how do you think about that equation? And what does that actually mean long term?

Yes. Our focus of our partners is responsible growth, right? They want responsible growth, we want responsible growth. And they're pushing for us to underwrite. But agreements we have -- and we kind of honor the agreements we have, but it's about being responsible, giving people the opportunity to spend within their means because the partners don't want these people to go bad either because it's a reflection of them, it's a reflection of us. So the partners are pretty reasonable. We work with them continuously about how we can offer credit, where we can offer credit. The first thing we have in mind is we're a bank, safety and soundness of the bank is key, right? And that's what we focus on. And to the extent that we can extend credit, and again, Perry is right, we extend credit for profitability. Is there profitability in what we do, and how we do it. So the partners get that. And we have a team that's really focused on making sure that they understand why we grant credit or sometimes why we don't grant credit, and how we can work together to get better data and smarter data from there -- from them that makes us comfortable to go ahead and grant that credit. But it's an ongoing conversation. It's not -- it's continuous. It's not ad hoc.

Got it. And then just staying with credit, like in terms -- I wanted to ask about the reserve rate. Is it fair for me to be -- to assume that I guess there will be quarterly variability might be transactors and all that stuff, I think people understand. But in general, the reserve rate from where you are should be gradually trending down as loss rates improve. But the real question is, where should we think about that ending up long term? How do you think of it like a lot of other companies, people look at day 1 CECL, probably not fair to look at that for you all, given it was a completely different management team, different profile of the business. What's the right long-term reserve rate for Bread?

Long term, based on the portfolio construct that we have, and where we think we're going, and the loss rate gliding down to 6% and going with, I'll say, more of a neutral economy outlook, I would say you're around that 10% range is where that would be. Now if our portfolio is constructed very differently, and you had a 5% loss rate, I might give you a different answer. But that's not what I think the path for our company is. And so you should expect, as you have seen, it's going to be more so credit-quality driven and macro outlook inputs. Those two things combined are what will glide that number down. The -- in fact, you've seen it where we've actually peaked in losses and reduced the reserve rate because delinquency came down. And that's the first input into a model, right?

Okay. No, that makes sense. On the competitive intensity dynamic partners, I guess a question that we've been getting a little bit more is like what's the current state of play? How competitive is it? We've seen some big portfolios moving. I mean, again, like probably like too large for you all to really be in that. But in general, like what is the dynamic, right? Is the path of growth for you all from here more wins, competitive wins? Is it more just de novo programs that you have to build? How are we thinking about that? What does pipeline look like?

The pipeline continues to be robust. And I think one of the things for us that I really enjoy about this business is we can compete up and down that chain of partners. So we can do the de novos, which we really like because there's no upfront capital outlay. You build as you go, and we like that. And if you look at a $100 million portfolio, you put 10 of those together, that's $1 billion and not a lot of customization and a good rate, and you're building your reserves as you go. So there's good returns on those. And you build a partner. Ulta is a clear example of that. That started -- went from 0 to 60, it's one of our biggest partners. So we can do that. But we can also compete at that $0.5 billion to $1 billion level, where we have the expertise, and the capital now to go after those, the ones that make sense to us. So we like those as well. And renewals are always a -- as we think about renewals, those are always good places to go. So if you think about new de novo partners, deeper penetration in your renewal -- in your existing base and that purchase of the one-off portfolio and moving that forward. It's a combination of all three. There's competition in the marketplace. I think some of our traditional competitors are probably moving on. If you think about some of the big ones, now they have other fish to fry in terms of acquisitions and other things. So there could be opportunities there for us as well. And then you've got some new fintech entrants. Sure we can have those fintech entrants come in with the hottest technology. And we like that because that hot technology keeps us on our toes, but hot technology without expertise is just hot technology. So we like the combination of that hot technology and the expertise. And we win on price, but we win also on how to manage partners because that's our business. We're in the partnership business, and we manage the partner holistically, not just a piece of the partner, and that's the important part.

When we think about verticals, one of the things that we've heard from companies like yours, and this is getting credit, one of the things that surprised me a little bit maybe this quarter was like they talked about their right to win in certain verticals that they just are best-in-class. So they usually win in that vertical, and they are up. Is there -- are there certain verticals where Bread is just a little bit -- you feel like we're really on the front foot here. This is our right to win. We're going to -- if we're competing here, we're going to win certain verticals or categories?

We have a really good expertise in beauty. I mean if you think about our partners in beauty, we have really good expertise there, and that's been a really good vertical for us. Jewelry has always been a good cornerstone for as we move forward. But we've been growing verticals quite frankly, if you think -- we were talking about technology and if you think about technology, we talked about Dell, HP, B&H Photo, those are really good digital and technology verticals. I'm pleased to see we won last year a Crypto.com, which is really kind of prove to the marketplace that we have our digital shops in place. So that's an area we'd like to focus on. Is there a digital vertical for us as we move forward. But we feel we can compete in any of those verticals. We have a sports vertical. If you think about the NFL, the Yankees and others [indiscernible]. For us, it's -- we have good expertise up and down the line. The furniture vertical now has really been expanded, home improvement. even on Bread Pay, we've just expanded into two telecom and home security with Cricket. Cricket now is a partner of ours as is Vivint, which is home security. So we're across the board. And I think the key for us is we can offer multiple products to all those verticals as we kind of talked about earlier, what -- the right product for the right consumer, wherever they are in that -- their lending maturity, we can offer a product.

Maybe we'll turn to funding for a couple of minutes. You refinanced some debt last year, I think you went from a pretty significant step down in the coupon there. You also did a preferred share issuance. So as we think about 2026, what are the funding targets that you're solving towards, working towards?

Yes. So we did make a lot of progress in 2025. To your point, we started the year at $900 million of senior notes at 9.75%, and we refinanced it and paid it down to $500 million of 6.75%. We issued $400 million of subordinated notes, which helped our risk-based capital as well as entered into the preferred stock arena with our first offering at $75 million. So as you look into this year, again, one of the things we really focused on last year is continue to build our direct-to-consumer deposits. We exited the year around $8.5 billion. Expect to continue to grow that this year and continue to increase that as a source of our funding, continue to increase that, hopefully achieving the target that Ralph set out there of getting to 50% of our total funding. We'll ring the bell in 2026, we'll see. And then really, we're pretty stable on the senior notes, not looking for any activity there. We will perhaps reduce the amount of sub debt in the market if it was the right time to do that and then enter some more preferred stock throughout the year, again, opportunistically when the market conditions permit.

Got it. Actually, just going back real quick, I thought of this one on. I think most of your partners are locked through 2028 in terms of renewal risk or partner risk, that's correct, right? So there's nothing -- no renewal, nothing...

For top 10.

Top 10. Got it. And then just wanted to go back to pricing a little bit. There's been -- you've been getting a benefit from the pricing changes that were implemented. I guess, what is the tail? Like how should we think about NIM this year. Is that going to continue to contribute to NIM? You have moving parts where potentially get some rate cuts? So how are you thinking about NIM for the year?

Yes. So when we gave some initial views or guidance on NIM for the year, it contemplated a couple of rate cuts in the year. It contemplated continued improvement in gross losses. So that's a benefit to reversal of interest and fees. It also contemplated improvement in delinquency, which means fewer build late fees in our yield. It contemplated continued credit risk mix from the different products and product diversification that we're putting in. And to your point, and all those things put together, would have probably had us guiding NIM slightly down. But due to the pricing changes that are still working their way through because it takes time for all the APR increases to churn through the portfolio due to the Card Act payment allocation rules, that's what guided us to flat to slightly up. It is a bit of a tailwind into this.

And correct me if I'm wrong, but higher tax refunds, if it's used to pay down that debt, might actually be a good guy for NIM because it burns through the...

That is true.

Okay. Got it. Maybe just -- Perry -- maybe Ralph and Perry, both of you can answer this, you both have been there a few years now. Like I guess what is the biggest -- when you sit back and look at it, like what is the area; one, like opportunity that you should be tackling that maybe has not been tackled as well as you would have expected? Or you feel there's more work to do to go after?

There's -- it's a good question. I am really proud of where we are, but we're not done yet, right? I think to me, it's responsible, repeatable, good growth, right? I think that's where -- that's the next horizon for us, just really good growth year after year, being responsible with that and managing the expenses to support that growth. Now we've launched operational excellence, and we've had really very good results where we are self-funding our investments. That's where we want to be. We promise positive operating leverage, right? So -- but that to me is that repeatable, good growth year after year. And that's at the right returns. That's where we want to be.

And I'll add on to that. I concur with everything Ralph just said. And I think where we still have work to do, we're in the middle innings is tech transformation. That's been -- tech is hard, and it's been a big lift to move our production platform off to Fiserv, and now we're in the middle of migrating things to cloud. And then the fun part is all the emerging technology that's coming into play is helping to accelerate that. So we have a great Chief Technology Officer team, that is doing a terrific job and reevaluating road maps on a pretty frequent basis because what you thought was the right road map a year ago or even six months ago gets a refresh because of new capabilities. So I think that's one of our greatest opportunities ahead of us.

And the road map is GPS, changes so quickly.

So on that topic, actually, the tech and the changes, AI, obviously, everyone has an AI strategy.

Yes.

What's...

Well, we have to say agentic three times a day, or we can't exist. I think like everything else we've done and everything else we'll do, we're taking a thoughtful sound approach to it. So the first thing we did was, okay, what's the right governance around AI? Because we have partner data, and we have customer data, and that's sacrosanct to us. And how do we protect that? And what do we have to -- what are we going to let into our environment. And I think that's the right approach. And so we have a good governance around it. Secondly is what challenges and use cases do we have that AI can solve for us. We are not going to chase the shiny object. We're going to look and say, okay, here are our challenges. How does this really new technology help us solve these challenges. And third, Perry's team does a great job on this, what's -- are we getting the right return on the investment for the investments we're making in AI. And so I think that's -- we approach it no different than we approach any kind of other investment, and it's changing, and it's dynamic. And we're looking at a lot of things, like everybody else, we set up a lab, so we could look at what's out there, and we don't want to be -- understand and experiment a little bit. But that's our approach. And it will evolve. And right now, for us, we view AI as something that enhances our associates' ability to service customers, enhances our ability to underwrite. It enhances our ability to prevent fraud. So it does a lot of good things for us, and it will evolve. And listen, it helps in terms of production and employees and all those types of things. But really, it enhances everything we do. It makes us smarter and better each day, and we seek the returns for that. So -- and we've been using it for years. We're using machine learning and all those things for a number of years. So it's a continuation of that. But -- and we're investing smartly. And we invest what we think is appropriate for us, and we get those appropriate returns.

One thing on AI that we -- from investors sometimes is, "Hey, if the world moves to agentic commerce and bots are buying things. What's the role of the private label card, the store card?" Like I guess, how are your retail partners talk? What are you all talking to your retail partners about this? Are you all doing things to make sure that something is happening on agentic, it's still going to be on the store card as the default card. Does it become easier or harder?

So in some ways, it becomes little bit easy, right? Because listen, we always want to be in a purchase path, right? That's where you want to be as a card issuer. We will be in that purchase. So if agentic is going to say, here are the things -- here's a suggestion. And by the way, here's how you should finance your suggestion. That's where we want to be. And we're working with partners to work through those types of things. So I think that's it. At the end of the day, you have to underwrite people, you have to give them the right line, you have to service them and sometimes you have to collect from them. So it's that whole process. And -- but it starts with, is this the right product for me, giving the consumer the choice. And here's how we would be there in the purchase path to say, here's the best financing for you and the best -- and that's the best financing for the partner, best financing for the customer, and you'll those marry those -- marry that together.

Yes. And I'll add on to what Ralph said. We were just with some partners this past weekend as well as our client partnership team. And they said, if they're not speaking daily and using the word agentic as Ralph jokes it three times a day because they want to make sure that their product is the one selected when the agent is out shopping, and then, they want to make sure that they are able to have repeat buyers, engagement, it all comes back to the fundamental business model that we have is loyalty that they have a good loyalty program that offers that customer the best value, inclusive of whether it's the points, the rewards and the financing opportunity, and where they'll have a chance of being underwritten more deeply like we do. So it's the same partnership. So we're in lockstep with our brand partners to take advantage of this opportunity in front of us.

So we have about 2, 3 minutes left. If there's any questions, happy to, anyone? I don't see any. So maybe we can just end with this for each both of you, just what is the 1 or 2 initiatives that you're really excited about working on in 2026 at Bread?

Well, aside from both our daughters are getting married in 2026, that's the issue we're both working on. Not to each other, but they're getting married. To me, it's, what we mentioned before, good responsible growth, managing our expense base, managing credit and servicing that consumer. I think that's what we're going to focus on. It sounds awfully boring. We'll continue to invest in technology and digital and AI. We'll continue to do those things. And again, to be able to have the capital to do all three, invest in the business, keep our balance sheet strong and return capital to shareholders is a good place to be, and that's going to be our focus. But that responsible growth at a positive operating leverage is our focus.

I've been resisting now, but like you really trained them well on this responsible growth thing, which you learned, I'm sure, in your time here, but because it's very familiar for all the Bank of America people. But anyway, Perry?

It's hard to add on to that. He covered the whole thing, but it's exactly that, right? It's basic blocking and tackling. Now there's nothing big we have to fix. So now we can run the company and really be opportunistic to deploy capital in the best way we can. So it's an exciting time in front of us. I think we really hit that inflection in third and fourth quarter of this past year, and we're excited for this 2026.

Great. Thank you. Thanks, everyone.

Thank you.

Good morning, and welcome to the Bread Financial Fourth Quarter 2025 Earnings Conference Call. My name is Kevin, and I'll be coordinating your call today. [Operator Instructions] It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations at Bread Financial, the floor is yours.

Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breatfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer; and Perry Beberman, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to risks and uncertainties described in the company's earnings release and other filings with the SEC. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website.

With that, I would like to turn the call over to Ralph Andretta.

Thank you, Brian, and good morning to everyone joining the call. Today, Bread Financial reported strong fourth quarter and full year 2025 results, in line with our expectations. Starting with our 2025 financial achievements on Slide 2. We are proud of the progress we have made executing on our focus areas during the year. Leveraging our experienced team of associates and full product suite, we delivered against our responsible growth objective with 7 major new brand signings in 2025 and and renewing multiple existing partners in a number of verticals.

Our home vertical expanded significantly in 2025 with the signings of Bed Bath & Beyond and e-commerce retailer with ownership interest in various retail brands. Furniture First, a national cooperative buying group that serves hundreds of independent home furnishings and bedding retailers across the U.S. and Raymour & Flanigan, the largest furniture and mattress retailer in the Northeast and seventh largest nationwide.

Additionally, we signed and launched Crypto.com, as well as Bread Pay installment lending relationship with Cricket Wireless and Vivint, reflecting our flexible payment options and seamless integrations and solutions. These relationships demonstrate how our product solutions span all generational segments and are supported by our digital-first approach, creating value for our brand partners through increased sales revenue and lifetime customer value.

Shifting to our renewals. We renewed multiple brand partners this year, including a multiyear extension with our long-term partner, Caesars Entertainment. All of our top 10 programs are now renewed into at least 2028. Additionally, in June, we launched a new enhanced fee-based Caesars Rewards credit card that gives members more ways to earn accelerated rewards and enjoy unique experiences. This is a clear example of how we continue to innovate and evolve our product set to fit our brand partner and customer needs and enhance value propositions to drive sales and loyalty.

Our vertical and product expansion efforts continue to have a positive impact on both risk management and income diversification across our portfolio, with co-brand comprising 52% of our credit sales in the fourth quarter up from 48% in the fourth quarter of 2024. Bread Financial continues to leverage our partner first culture and the experienced program management team to deliver full capabilities to brand partners and their customers. This includes providing a full suite of flexible payment options to unlock incremental sales and build loyalty through omnichannel delivery, seamless integrations and exceptional customer experience.

We are routinely chosen by industry-leading brands across a wide way of industry verticals to take their credit and loyalty programs to new heights. We continue to see success in our direct-to-consumer deposit program as it remains an important source of stable and lower cost funding for the company. Our direct-to-consumer deposit balances increased 11% year-over-year and have grown 20 consecutive quarters now representing 48% of our fourth quarter average total funding, up from 43% a year ago.

Regarding capital allocation in 2025, we returned $350 million in capital to shareholders. This includes $310 million in common share repurchases, resulting in the repurchase of 12% of our year-end 2024 outstanding shares. We also increased our quarterly common stock dividend by 10% and during the fourth quarter of 2025. At the same time, we meaningfully strengthened and optimized our balance sheet by reducing and refinancing our senior debt and issuing subordinated debt and preferred equity.

Lastly, we received a credit rating upgrade from Moody's and Fitch and positive outlooks from Moody's and S&P during the fourth quarter, acknowledging the actions we have taken to strengthen and improve our financial resilience and enhance our enterprise risk management. Our focus on operational excellence and technology advancements was evident this year as we achieved our goal of delivering positive operating leverage with over year-over-year adjusted expenses while continuing to invest in our business. During the year, we progressed our multiyear technology transformation, which included delivering new customer capabilities continued cloud migration and increased automation, including accelerating AI adoption.

From a credit management perspective, we underwrite for profitability and returns, creating value for our partners and providing purchasing power for consumers. The effective execution of the disciplined credit strategies and continued product diversification, coupled with a resilient consumer led to improving credit metrics throughout 2025. Our full year net loss rate of 7.7% was better than our outlook and meaningfully better than our initial expectations for 2025. We anticipate that a gradual improvement in our credit metrics will continue in 2026. Overall, we are pleased with our 2025 financial and operational results and remain confident in our ability to generate returns.

Moving to the fourth quarter key highlights on Slide 3. During the quarter, we generated net income available to common stockholders of $53 million excluding the $42 million post-tax impact from expenses related to debt repurchases in the quarter adjusted net income and earnings per diluted share were $95 million and $2.07, respectively. Our tangible book value per common share grew 23% year-over-year to $57.57 and and our return on average tangible common equity was 8% for the quarter and 20% for the full year. In the quarter, we repurchased $120 million or 1.9 million common shares with $240 million remaining on our current share repurchase authorization.

We also issued $75 million in preferred shares. Consumer finance health remained resilient during the quarter, driving a 2% year-over-year increase in credit sales as a result of higher transaction sizes and increased transaction frequency. We are seeing consumers continue to allocate a larger portion of their budget towards nondiscretionary spend. Within discretionary spend, we saw an increase in travel and entertainment spending compared to the fourth quarter of 2024. Additionally, our credit performance trends continue to improve. The fourth quarter net loss rate was 7.4%. The positive trajectory of our credit sales and credit metrics along with our new business additions and stable partner base give us confidence that we are nearing an inflection point for loan growth as we enter 2026.

Our solid sustainable results underscore our disciplined approach to growing responsibly, building financial resilience and advancing operational excellence supported by strong capital levels and cash flow generation, we entered 2026 with strong momentum, which positions us well to execute on our capital and growth priorities while delivering sustainable long-term value for our shareholders.

Now I will pass it over to Perry to review the financials in more detail.

Thanks, Ralph. Starting on Slide 4, I will highlight our full year 2025 financial performance. During the year, credit sales of $27.8 billion increased 3% year-over-year -- the increase was driven by new partner growth and higher general purpose spending. Average loans of $17.9 billion were down 1% and end-of-period credit card and other loans of $18.8 billion were nearly flat. Both were pressured by an increase in payment rate. Revenue increased $7 million, primarily due to the benefit of pricing changes and paper statement fees, partially offset by lower build late fees resulting from lower delinquencies.

Total noninterest expenses decreased $72 million or 3%, driven by a $43 million lower year-over-year net impact from debt repurchases. Excluding the impacts from our debt repurchases, adjusted total noninterest expenses decreased $29 million or 1%, driven by benefits from our continued focus on operational excellence initiatives. Income from continuing operations increased $242 million or 87% in 2025, benefiting from lower provision for credit losses and lower debt repurchase impacts. Excluding the impacts from our debt repurchases, adjusted income from continuing operations increased $188 million or 48%. And adjusted pretax pre-provision earnings or adjusted PPNR, which excludes any gain on portfolio sales and impacts from debt repurchases increased $44 million or 2%.

Moving to Slide 5. I will briefly highlight our fourth quarter performance. During the quarter, credit sales of $8.1 billion increased 2% year-over-year, while average loans of $18.0 billion decreased 1% and and end of period loans of $18.8 billion were nearly flat year-over-year. The various drivers for fourth quarter credit sales and loans were consistent with the full year drivers I previously mentioned. Revenue increased $49 million or 5%, primarily reflecting the implementation of pricing changes, partially offset by lower build late fees and higher retailer share arrangements.

Total noninterest expenses increased $19 million or 4%, primarily driven by a $44 million higher year-over-year net impact from debt repurchases. Excluding these impacts, adjusted total noninterest expenses decreased $25 million or 5% driven by benefits from our continued focus on operational excellence initiatives. Income from continuing operations increased $45 million, primarily driven by higher net interest income and lower provision for credit losses, partially offset by the impacts from our debt repurchases and -- excluding the impact from our debt repurchases, adjusted income from continuing operations increased $74 million.

Looking at the financials in more detail on Slide 6. Fourth quarter total net interest income increased 6% year-over-year, driven by the gradual build of our pricing changes and lower interest expense. Noninterest income was $10 million lower year-over-year in the fourth quarter, driven by higher retailer share arrangements, partially offset by paper statement fees.

Moving to total noninterest expense variances, which can be seen on Slide 13 in the appendix employee compensation and benefits costs decreased $10 million, primarily due to strategic staffing adjustments in the prior year. Card and processing expenses decreased $7 million due primarily to lower operating volumes, including letter and statement costs. Other expenses increased $46 million primarily due to the impact of debt repurchases that I previously mentioned. Adjusted PPNR for the quarter increased 19% year-over-year.

Turning to Slide 7. Net interest margin of 18.9% increased compared to the fourth quarter of last year due to the continued gradual build of pricing changes as well as lower funding costs resulting from our opportunistic debt actions and growth in direct-to-consumer deposits. We expect these tailwinds to continue into 2026, offset by pressure from an anticipated lower prime rate, the ongoing gradual improvement in our payment and delinquency rate trends, which will result in fewer build late fees and a continued shift in product and risk mix, which helps lower credit losses, but often comes with lower revenue yield.

On the funding side, we are seeing interest expense decrease as our cost of funds benefits from growing our direct-to-consumer deposits and reducing and refinancing our debt. with our rating agency upgrades in the fourth quarter of 2025, we opportunistically issued a $500 million senior note at 6.75% and and fully paid down our $900 million 9.75% senior note. With this refinancing, we reduced our rate by 300 basis points and reduced the size of the note by $400 million, resulting in continued overall improvement in our cost of funds.

Moving to Slide 8. Our liquidity position remains strong. The total liquid assets and undrawn credit facilities were $6.0 billion at the end of the quarter, representing 26.4% of total assets. At quarter end, deposits comprised 78% of our total funding, with the majority being FDIC insured direct-to-consumer deposits. Shifting to capital. We ended the quarter with a CET1 ratio of 13.0%, up 60 basis points compared to last year. As you can see in the upper right table, our CET1 ratio benefited by 300 basis points from core earnings -- the repurchase of $310 million in common shares and common stock dividends of $40 million over the past year reduced our capital ratios by 180 basis points.

The last CECL phase-in adjustment occurred in the first quarter of 2025, resulting in a 60 basis point reduction to our ratio. Additionally, the impact from debt repurchases accounted for approximately 40 basis points of impact to CET1 since the fourth quarter of 2024.

Finally, our total loss absorption capacity comprising total company tangible common equity plus credit reserves ended the quarter at 24.7% of total loans, demonstrating a strong margin of safety should more adverse economic conditions arise. We have a prudent track record of accreting capital and generating strong cash flow through challenging economic environment. We have demonstrated our commitment to optimizing our capital structure through the issuance of preferred equity and subordinated debt and appropriately returning capital to shareholders.

During the fourth quarter, we issued $75 million of preferred shares, adding to our Tier 1 capital, providing additional capital flexibility. We will continue to opportunistically optimize our capital structure, which may include issuing additional preferred shares in the future. Our commitment to prudently return excess capital to shareholders as evidenced by our share repurchase activity and the 10% increase in our common share dividend in the fourth quarter. In 2025, -- we repurchased 5.7 million common shares at an average price of $54, which was below our year-end tangible book value per share. We remain well positioned from a capital, liquidity and reserve perspective, providing stability and flexibility to successfully navigate in ever-changing economic environment while delivering value to our shareholders.

Moving to credit on Slide 9. Our delinquency rate for the fourth quarter was 5.8%, down 10 basis points from last year and down 20 basis points sequentially. Our net loss rate was 7.4%, down 60 basis points from last year and flat sequentially. Credit metrics continue to benefit from our multiyear credit actions, ongoing product mix shift and overall consumer resilience. The fourth quarter reserve rate improved 70 basis points year-over-year to 11.2% as a result of our improving credit metrics and higher quality new vintages. Compared to prior quarter, the reserve rate declined 50 basis points, impacted by higher seasonal transaction balances related to seasonal holiday spend and gradual credit quality improvements.

We continue to maintain prudent weightings on the economic scenarios in our credit reserve modeling, given the wide range of potential macroeconomic outcomes. Our weightings remained unchanged again this quarter. As a reminder, the reserve rate typically increases sequentially in the first quarter as holiday transactor balances pay down. We are pleased with our year-over-year improvement in credit metrics, driven by our disciplined credit risk management and product diversification. As you can see on the bottom right chart, the percentage of cardholders with a greater than 660 prime credit score of 59% remained fairly steady, both year-over-year and sequentially.

Turning to Slide 10 and our full year 2026 financial outlook. Our 2026 outlook is based on continued consumer resilience, inflation remaining above the Federal Reserve target rate of 2% and a generally stable labor market. Our outlook also anticipates interest rate decreases by the Federal Reserve, which will modestly pressure total net interest income. Note that we remain slightly asset sensitive, a lower recent and future Fed and prime rate will pressure NIM as our variable rate assets reprice faster than our liabilities. As Ralph mentioned, we believe we are nearing an inflection point for loan growth. we expect full year 2026 average credit card and other loan growth to be up low single digits compared to 2025.

Growth will be supported by our stable partner base and new business launches. -- building credit sales growth and continued credit loss rate improvement, partially offset by strong cardholder payment rates. Total revenue growth is anticipated to be up low single digits, largely in line with average loan growth. Net interest margin has a wide range of potential outcomes given that it is impacted by many variables. Our baseline estimates have full year net interest margin near to slightly above the full year 2025 rate as a result of continued benefits from implemented pricing changes and improving cost of funds offset by interest rate reductions by the Federal Reserve, lower billed fees from improving delinquencies and a continued shift in risk and product mix.

For noninterest income, we would expect higher retail share arrangements or RSAs, as a result of higher sales, implemented pricing changes and lower credit losses. We manage expense growth based on revenue generation and investment opportunities and expect to deliver positive operating leverage in 2026, excluding the pretax impacts from debt repurchases. We will continue to invest in technology monetization and product innovation, including AI, to drive growth and efficiencies. The degree of positive operating leverage will be macro dependent and related to credit improvement, loan growth and the pace and timing of further Fed interest cuts.

For the first quarter of 2026, we expect total expenses less cost associated with debt repurchases to be down slightly sequentially from the fourth quarter adjusted expense figure of $500 million. We anticipate a year-over-year net loss rate in the 7.2% to 7.4% range for 2026. This range contemplates stable to improving macroeconomic conditions continued risk and product mix shifts and a resilient consumer. We are seeing good momentum going into 2026, which is a positive sign for continued improvement in the early part of the year. Given the less predictable nature of how consumers will respond to changing macroeconomic conditions, sustaining this momentum and the degree of improvement through the entirety of the year is less certain at this time.

We expect our full year normalized effective tax rate to be in the range of 25% to 27%, with quarter-to-quarter variability due to the timing of certain discrete items. The progress we made in 2025, along with our 2026 financial outlook puts us on a path to achieve our longer-term mid-20% ROTCE target in the coming years. The key drivers of improvement include: first, generating responsible, sustainable growth while delivering on our efficiency initiatives, which will lead to higher PPNR. Second, gradual improvements in our credit metrics closer to our historical loss rate level, leading to a lower provision for credit losses and third, executing on our opportunities for additional capital optimization, including potentially issuing additional preferred shares.

We are proud of the results we achieved in 2025 and expect to build upon our momentum as we enter 2026.

Now I will turn it back over to Ralph to review our 2026 focus areas.

Thanks, Perry. Before we open it up for questions, I'm going to discuss a refreshed view of our focus areas as seen on Slide 11. Our focus areas for 2026 is designed to capitalize on our strengths while fortifying our business to help offset any potential external pressures. While our focus areas have remained fairly consistent over the last few years, they continue to evolve with our transformation and the ever-changing business environment. First, our commitment to responsible growth will not change. The work we have done to expand our product suite while enhancing our product capabilities along with improving consumer health gives us confidence we can accelerate sustainable, profitable growth.

Second, the proactive strategic execution of a disciplined credit management framework has been a key to the gradual improvement of our credit performance metrics. We proactively adopt our sophisticated models to effectively balance risk and reward and manage changes in the macroeconomic environment. In addition, we will continue to maintain strong risk and control effectiveness while reinforcing regulatory vigilance. Third, our operational excellence efforts have become part of our culture and are embedded across our business. This year, our initiatives will deliver AI capabilities, technology advancements, improved customer satisfaction, reduced risk exposure and enterprise-wide efficiency.

Finally, supported by strong capital levels and cash flow generation -- we are well positioned to execute on our capital and growth priorities while delivering sustainable long-term value for our shareholders. Our ongoing commitment to effectively manage capital will ensure appropriate returns on investments and help us achieve our long-term financial targets.

In summary, our experienced leadership team remains focused on generating strong returns through prudent capital and risk management. This reflects our unwavering commitment to drive sustainable, profitable growth and build long-term value for our shareholders and other stakeholders throughout dynamic, economic and regulatory environments.

Operator, we are now ready to open up the lines for questions.

[Operator Instructions]

Our first question comes from Sanjay Sakhrani with KBW.

Congratulations on navigating through a challenging year for you guys. Maybe just first, a 2-part question on loan growth. One, obviously, very encouraging that we're starting to see a pickup in loan growth into 2026. I'm just curious, as we think about what's driving that growth? I know you guys mentioned sort of the stability of the partnership base and continuing to grow with them. But is there any sort of loosening of underwriting standards? I'm just curious what kind of appetite you're seeing from consumers out there? And then secondly, I was just looking at Slide 14 and in your deck. And I see Bread Pay still kind of a small piece of the total. I'm just curious with Buy Now Pay Later growing. Do you anticipate growing that a little bit more in 2026? .

Sanjay, it's Ralph. I think you answered part of my question. I think if you look at the tenets of loan growth, it's really the resilient consumer sales momentum we're seeing as we go into the year, you mentioned a new partner stability and new partners that we're adding and improving credit. And we're not doing anything out of the ordinary. We are underwriting the way we've always underwrite it. We underwrite some profit. We make sure that it's thoughtful underwriting. So there's not a general loosening. It's a gradual look as credit improves and that's how we've underwritten in the past. That's how we'll underwrite in the future.

So nothing unusual there. In terms of Bread Pay, I expect Bread Pay volume to pick up. We've added some really good partners. I mentioned Cricket and Vivint, which is home security, those are really good popular partners. We have partners to Bread Pay platform on a pretty regular basis. We've got a good handle around underwriting on that platform as well. So we expect that to also improve in 2026. .

Great. And then just a follow-up on credit quality. -- understood. You guys are seeing the improvement in sort of the fruits of tightening on underwriting. I know the labor market seems pretty stable, but underneath it all, every day, you're hearing about layoffs and such. I mean are you guys seeing anything in your data that sort of leads you to believe that there might be stuff happening underneath the surface that might be choppier? Or do you feel like your customers and your ability to underwrite generally in a good place. .

Thanks, Sanjay. This is Perry. So I think when we look at it overall, we are encouraged by what we're seeing in our underlying data. When we look at our roll rates, while they're still elevated versus where we'd like to have them. We're pleased with the improvements that we continue to see across all our Vantage risk bands. -- and now to start to follow more normal seasonal trends. And the key here, though, our early entry rate that we see is now below the pre-pandemic levels. And to your point, that's a lot of due to the strategic actions we've taken, the product mix shifts and things of that nature, but we're also observing improvement in our late-stage roll rates.

And that's what we called out early on in order for our losses to continue to improve, we need to see that improve. So we're we're seeing that improvement. So for lots of the reasons you mentioned, we feel pretty encouraged that the consumer has been resilient. And while there could be pressures out there in the economy overall, I think we're net constructive on it.

our Our next question comes from Moshe Orenbuch with TD Cowen.

Great. One of the things in terms of -- Ralph, you talked a little bit about kind of a new T&E product. And if you look actually in the -- in your Slide 14, you've got that's 1 of the categories that's been a big contributor both to volume and balance growth. Can you just talk a little bit about kind of where you sit in there, both in terms of partners and proprietary products?

Yes. So we have an array of products. Obviously, Caesars has been a longtime partner, and we've been able to introduce new products over time with Caesars and the 1 we've just introduced is the fee-based product to give their customers both our customers access to better rewards and experiences, and that's really consistent in the marketplace with high-end co-brand cards. AAA is a partner of ours, and that's a really T&E card, and we're seeing good spend in AAA, particularly, we saw that in the fourth quarter of 2025.

And one of our proprietary cards is really focused around rewards and redemption around rewards for travel. So we're able to offer our customers and our partners, customers that array of travel rewards, and it's become really a good vertical for us. in terms of volume. And like I said, it's -- in the fourth quarter, it was up substantially from the fourth quarter of 2024. And we continue to focus on good partners that give us good returns in that category.

Got it. And maybe for the issue, you mentioned that net interest income should grow kind of around the same -- around the same rate as you see in loan growth. Perry, could you just drill into that a little more and maybe talk about the puts and takes of things? Because obviously, you are expecting better credit, so that will have an impact on late fees, you've got your pricing still rolling in. And obviously, at the same time, you've also got a gradually lower interest rates. Can you just talk about all of that and how it kind of fits into that dynamic .

You happy to do so, right? So as you think about NIM, you've laid out a number of the elements -- so as we look into next year, we said right now, we expect it to be pretty stable to slightly up versus 2025 on a full year basis. And some of it's going to be dependent upon the timing and the number of prime rate reductions. -- as we are is currently asset sensitive, we'll get a little bit of a compression on that. We do expect to see continued lower build late fees as delinquency improves and the product mix improves.

And then as you kind of hit on this a little bit around whether it's co-brand or more proprietary or installment lending, the shift in new account production and that results in overall product mix shift, while it lowers risk, it also means often having a lower APR because we need risk-based price, and that also means lower late fees associated with those accounts. as well, we'll have a little bit higher average cash mix in the year, and some of it is resulting in the timing of when loan growth happens and some other things that we're caring for.

And then the tailwinds, you also know, we've got the continued, I'll say, working through the pricing changes that have been made from -- in 2024 and 2025. And -- and then as gross losses do improve, we do have then some slower or better reversal of interest and fees, but it's also a catch-up period where the lower build fees, then you actually do end up with less of that benefit out there in the later quarter. So a lot of this is going to be variable by quarter, the timing of gross losses, the building of those pricing changes and then as I mentioned, the prime rate.

And then I would note though, as well on the revenue side, as originations start to pick up and profitability improves, the RSA, meaning the retail share arrangements that we have with the brand partners or customer awards, those will also become elevated as there's more profit to share and then the originations drive more compensation to them as well.

Our next question comes from John Hecht with Jefferies. .

Congratulations on a productive year. The direct-to-consumer deposits, you guys mentioned it's almost 50% of funding at this point. do you guys have objectives? Where can that go? And then what's the pricing on that versus the non-DTC deposits? .

Yes. So we're very pleased with what we've achieved on our deposits. When you think about this Ralph put out there, a goal of being at 50%, and that was under our current contract. Our longer-term goal is more in line with larger peers, which would say that our direct-to-consumer deposits would be probably 70% plus of our portfolio, however, our total funding, and that will just happen gradually over time. And you should expect our pricing to remain competitive, again, not having brick-and-mortar branches. We're in to be very competitive and have some online with the online presence. And it is still a better funding rate than we have in other things like our brokered CDs of like tenor. .

Okay. And then second question is on the reserve rate, there's -- it's down from the peak. -- then -- and it's coming down a little bit because your credit is improving. What do you -- where -- what -- does it go back to day 1 levels or -- is there any way to think about the direction of travel of the ALL given that credit is stable and improving.

Yes. So reserve rates are always 1 of my favorite questions every quarter. But to your point, with the fourth quarter reserve rate at 11.2%, that's down 70 basis points versus the prior year and down 50 basis points linked quarter. And the reserve rate so far has improved solely as a function of improving credit metrics. So as I noted, we have maintained a, we'll call it prudent credit risk overlay. We didn't change any of our risk weightings. And if there's still a lot of uncertainty of how the tariffs will unfold. And even the Fed yesterday mentioned that they expect those impacts to peak kind of midway through this year.

So we're watching that and what that means to our consumer. So we're going to continue to watch that. But candidly, pretty optimistic that as these play out in the coming months that we'll be able to gradually move our weightings of the adverse and severely adverse scenarios and move our ways more to call a neutral position over time. We'll continue to see the first quarter reserve rate increase seasonally as holiday transactors roll off. But the way I think about the reserve rate as you think about how it's going to traverse through the rest of this year and into next year, it will follow the trajectory largely of the credit quality.

So as credit quality delinquency improves, this -- the reserve rate should come down accordingly. And then as we're able to move that -- those risk weights back to neutral. -- we'll get somewhere around what we said around that 10% area over time. I'm not sure we get all the way back to day 1 because it's a different portfolio, and we have a different philosophy on how to look at some of the risk weighting of different scenarios.

Our next question comes from Mihir Bhatia with Bank of America. .

First, I just want to talk about credit. -- you're clearly making progress. You've tightened credit and you're making progress getting back to your 6%, I think, target. I guess the question is, is this really a priority for you in the near term? Or are you just comfortable being here in the 7% range and you're back to growth? Just trying to understand the balance between how much you'd lean in on growth versus get back to your longer-term target, if you will, on credit? .

Yes that bridges the question. I'd say it's a priority to get back to 6% over time, but not force it there. And you -- we've talked about this previously that we could choke off credit and really do things that would be detrimental to our brand partners and our customers. And we have been very disciplined that, again, our underwriting philosophy, first talk about this -- we underwrite for profit. We have industry-leading ROTCEs on this, and we're trying to get down towards that 6%, we underwrite vintage with that in mind, but we have an existing portfolio that is in the condition is in because of the macro environment.

We're paid for the risk we take. Again, we didn't swing the pension overly hard on credit tightening to the existing portfolio by dramatically reducing lines. I think you've seen Others in the industry have swung 1 way now they're doing is loose anything like you heard Ralph talk about, we're gradually dynamically underwriting every day. And so when the credit quality is better, you underwrite deeper and your circuit line increases and when it doesn't -- there a little risk, you tighten. So it's a dynamic thing. So we're not forcing our way down. It will happen naturally with the newer vintages coming in and the existing corporate the back book healing. And so it's going to take time. .

Got it. that makes sense. And then maybe just going to the 2026 outlook. You grew revenues 5% this quarter. is obviously helped probably like just an easier comp here. Is that like the main driver of the slowdown from 5% to low singles in your guidance? Or is there something else also going on that we should keep in mind? Maybe just walk through some of the puts and takes on that line on the revenue line item. .

Yes. I think when you look at the comparable period to fourth quarter of 2024, we had done some accommodations through fee waivers, interest waivers as it related to the hurricanes in that season. So those modifications were in that comp. So that's a piece of why the quarter comp being a little higher than what ordinarily it should be. So I'll look more at the rate of NIM that we have this quarter and then how does that then extrapolate forward into the coming year. And as we said, with all the puts and takes, we think that we should be able to deliver a stable to slightly up net interest margin.

Our next question comes from Jeff Adelson with Morgan Stanley. .

Ralph and Perry. Perry, maybe just to dig a little bit on the NIM further -- appreciate all the color on the puts and the takes, NIM expected to be slightly higher this year. If I look at where you exited '25 and if we put aside some of the benefit you've gotten on funding costs, your loan yield was really strong in the fourth quarter in light of what is typically a weaker seasonal quarter as you see more of those transactors come into the mix.

So could you maybe just unpack a little further what drove some of that underlying strength. Was there maybe a little bit more of a step-up in the pricing changes? Or is it more just that underlying reversal rate improving? And as we think about those pricing changes continuing to build their way in, how much of the book -- or is now reflecting that? And how long can that tail last for you? Do you expect that might slow as we exit 2026? Or how should we be thinking about that benefit from here? .

Yes. So again, I'm not going to reiterate all the puts and takes because I think you've got those. But you're right on the way to think about this is that we do have some tailwinds that are building through slowly and gradually as it relates to the pricing changes. -- largely the pricing changes are complete for what has been pulled through the portfolio. Now it's just a matter of the payment allocation working its way through. But largely, you'll continue to see a little bit of that gradual benefit from that, but that could be offset by product mix and how the new vintage looks when it's the final construction of the year comes through.

So the end of 2026 will look different than right now just in terms of portfolio mix, -- but on a static basis, I'd say, yes, you've got some of the tailwind from those pricing changes that will continue to ease into the book. But again, a lot -- some of that will be offset in the RSA line as more of that is shared with the brand partners through the profit share. .

Got it. That's helpful. And just going back to credit. Maybe just focusing on the delinquencies a bit. I appreciate the commentary on NCOs and the roll rates improving. I think we've started to see your delinquency rate come a little bit more in line with seasonality, still improving, obviously, year-over-year, but maybe at a bit of a slower pace. Just what's the path from here on delinquencies as you look at the end of '26 from here? Is that something you think will continue to improve? Or will it start to flatten out a little bit? And how are you factoring in the benefit larger tax refunds this year and your outlook for credit? .

Yes. So we -- that's a good one. I'll start with the last piece of that is the tax refund is a little bit of the unknown in terms of how will customers use it. Like I'd tell you, we're optimistic that the 2026 tax refund season is going to be a positive. We're not exactly sure how that's going to play out. In any year, it's always a guess in terms of how consumers are going to use it, whether they're going to use it to pay down debt, which obviously improve our delinquency a little bit. are they going to spend it? Are they going to save it? But net, we believe it to be a positive with the tax refund plus the fact that they probably didn't -- everybody can adjust their tax withholdings.

So overall, we have -- even despite I say, lower consumer confidence out there, -- we think that we're going to see some improvement on that front. We -- I'd say our guide carries for a modest bit of improvement. But let's hold for something better. Now the government shutdown, we put a little bit of a twist into that, so we'll have to monitor that. When we look at it, I think overall, we're thinking that we're going to get back to what we call BAU delinquency rate where it's going to flatten out some, again, slow gradual improvements. Some of it will be product mix dependent. Again, the thing that we're most watchful of is continued improvement in those late-stage roll rates because that's going to manifest itself really into the better loss outcomes.

Our next question comes from John Pancari with Evercore. .

On the operating leverage standpoint, you're guiding to positive operating leverage in '26 on top of what was a solid expense beat for the fourth quarter, can you maybe help us think about the magnitude that you think is likely in terms of the operating leverage you achieved 100 basis points or so in '25. Fair to assume we can remain at that pace as we look at '26.

Thank you for the question. We're really pleased with the products that were made in 2025 as Ralph has talked about and I have as well that our organization is really focused on operational excellence. And you think about what that means for us is driving continuous improvement savings. We're executing across a whole spectrum of transformation is around technology, servicing, collections, marketing looking for new revenue opportunities. So all of this enabled us to accelerate and figure out how to do things better. And when you think about the use and deployment of AI, that's going to unlock even greater value.

Again, there's some investment that goes along with that. but we're very use case focused. So that's going to evolve. So I think overall, the degree of operating leverage is going to end up being largely dependent on macro conditions impacting the revenue side of it. So loan growth higher or lower in the range? What does it mean? The Fed cuts, the delinquency improvement resulting in lower late fees. So the op leverage, I think, is more on the -- as I said, the revenue side, on the expense side, we've got that well in hand. [indiscernible] positive operating. .

Got it. Okay. And then separately on the buyback front, you bought back $120 million in the fourth quarter. You see Q1 solid at around 13%. Could you maybe help us think about the reasonable pace of buybacks as you look at this year in terms of factoring in the loan growth expectations, but also the capital generation outlook? .

Yes. I think as you look at the year, as Ralph said, we can generate a lot of capital, and we're very proud of where we've landed with our capital ratios and targets. You heard me talk about the last phase in of CECL. This last first quarter, that was 60 basis points. RWA will come down in the first quarter seasonally. So again, we'll focus on the capital targets that we set. And as we work through this coming year, we do have $240 million of remaining share repurchases available. The pace will be dependent on loan growth and capital in excess of those stated capital targets. .

Our next question comes from Regi Smith with JPMorgan.

I see you guys or advertising or offering personal loans on your website. I was curious, I guess, your appetite for that channel in that business. And how large that business is today and maybe talk a little bit about the economics of that versus your core private label brand business then I have a follow-up? .

Yes. We have many products in the marketplace and private label is just 1 of them. I think if you look at us over the last 5 years, we've evolved to all these products co-brand and Buy Now Pay Later and obviously, personal loans. And the macroeconomic environment is going to dictate how we how we wait into installed personal loans, so we're going to support growth first. And personal loans is just a part of our growth equation.

Got it

And then it's a good way for us to acquire new customers. .

Yes. Is there any way to kind of size frame that? And do you hold those loans on balance sheet? Like where does that show up in your volume? .

Yes. It's part of our loans. And personal ones have different tenders, obviously, -- it's a small portion of what we're doing. It's currently small, and it will grow gradually over time, and we'll like every other product we enter into, we'll enter into it responsibly and manage it and be thoughtful about how we grow personal loans, but it's on our balance sheet. .

Okay. Cool. And then I guess, 1 kind of bigger picture question about AI and thinking about like how it may transform the business operationally or underwriting. If I look out 5 years or so, like how do you think you think AI impacts the card issuing business. Like where should we look for the most progress? And I would imagine it probably impacts like your variable head count meat. But I don't know, maybe talk a little bit about that and how those tools to help you get more out of what you -- your employee base today. .

Regi thank you for the question on AI. It's certainly 1 that we think a lot about. We have our team of leaders and their people figuring out how to deploy it. But I'll tell you, for our company, we continue to deploy AI responsibly across the enterprise to accelerate operational excellence, which includes increasing productivity, efficiency, driving innovation, strengthening our risk management -- and so recall, for our company, we've leaned in on emerging technology, including for years. And in doing so, we've established a solid governance model early on to ensure responsible use and oversight of AI. We have over 200 machine learning models embedded in our business. We've deployed thousands of bots to save over 1 million hours of manual work efforts that goes to your point around what does it mean for people, deployed call center, agent-assisted tools. And that's just sitting with you.

So when we look at our enterprise AI road map, -- we now have more than 60 initiatives in motion with early wins contributing to improved fraud protection, better underwriting performance, enhanced call center effectiveness, and increased automation in our workflow. So I'd say we're continuing to build on that solid foundation of risk management. to automated controls and leveraging our tools for what we call always-on monitoring. So you think about that, that's already permeating throughout the or how we could be more effective.

So our go-forward areas of focus are on 3 basic things. You think about it as first AI tools to improve call it, personal productivity and efficiency. And that means like content summarization, like for contract and document reviews, content generation for personalized marketing collateral, customer communications, intelligent search capabilities, where it helps the associate or folks or customers streamline how they can get an information and knowledge retrieval.

Turning on controlled use of AI in our SaaS applications that we have, which further enhances platform function output. So -- that's the first part. And second, we're going to accelerate development and advancement of our core technology and data platform, specifically leveraging AI tools to modernize code and accelerate moving to the cloud. And then the third 1 is I think maybe where your goal is where is commerce going in, so making sure that we are developing intelligent and agentic applications, and that will expand the reach of our products, automate full processes and unlock new and improved customer experiences. And that will ensure that we have a foundation of strategic select applications for agentic-driven commerce and personalized service, among others.

So overall, what I want you to take away, though, is that -- there's a lot of investments being made, but they're backed by disciplined value tracking, and we have a strong ROI that we're going to make sure we can deliver more table stake capability. So we're moving with pace, rigor, governance and confidence that you would expect for us as a regulatory regulated institution. -- but we feel real good about how we're being positioned for this. .

That sounds very exciting. I hope that we can continue to get little updates and [ nuggets ] as you guys progress through even if they're small, just to hear how you're using AI and the impact it is having that stat about the man hours was fantastic. So good luck -- congrats on the quarter.

Our last question comes from Vincent Caintic with BTIG. .

A lot of detail already given. So just few follow-ups. So first, on credit sales. And I actually wanted to specifically focus on the better 2026 tax benefits that you were talking about earlier. -- it does seem like this earnings season so far that there's been some enthusiasm from many of the merchants reporting earnings so far on the sales potential from the tax refund season and the lower tax withholdings -- so I'm wondering if you're seeing more merchant engagement on driving sales, this tax refund season and then how you're expecting credit sales to do in 2026? .

Yes. I mean I think we talked about -- we'll see credit sales in up low single digits, and it remains to be seen about how people will use that tax refund. I'm sure some people use that tax refund probably savings and investments, you'll see some of that. So some people pay down their debt, and you'll see some people increase their spend. So I think it's going to be across the board. But the guidance we put out in terms of single-digit growth, we feel very comfortable with that, particularly since credit is is trending in the right direction. We have a stable partner base and the consumer has some resiliency. So we feel good about what we put out there in the marketplace. .

Okay. Great. And then the second follow-up on NIM and specifically, I wanted to get your thoughts on deposit betas. So it does seem like industry-wide expectations are for lower deposit betas this time, I think, around 60%. So I wanted to get your take, your thoughts on your deposit beta and I guess, for the industry, are we seeing just higher competition for deposits? Or are consumers more sensitive than historically to deposit rates? Just want to get .

I think that's -- you kind of hit it right on the head there, right? I think previously, we were thinking the deposit beta is probably close to high 70s, right around 80%. Now I probably widened that range a bit to 60% to 80% -- 80 betas, but that will be market dependent, as you said. So that's what I think we're going to watch for. But over time, I would expect to probably get back.

And I'd now like to pass the call back over to Ralph Andretta for any closing remarks. .

Sure. Well, thank you all for joining our call today and for your continued interest in Bread Financial, and we look forward to speaking with you in the next quarter. Everyone, have a terrific day, and thanks again.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day.

Up next, we're pleased to have Bread Financial joining us once again. Bread has continued to execute on its strategy of being a leading provider in the credit card space through responsible growth and disciplined risk management. In addition, after significantly improving its financial position, it's become a capital return story, which should be a solid EPS lever for the company looking ahead.

Joining us from Bread is CEO, Ralph Andretta; and Chief Financial Officer, Perry Beberman.

Today's discussion is going to be a fireside chat. So maybe I'll kick it off with you, Ralph. You've done a ton to transform the company over the past few years. Maybe just talk a little bit about what are your -- what have you done? And what are your current areas of focus as we move into 2026?

Brian, thank you, and thank you for recognizing what we've done. And I think it's going to be more of the same. It's -- I've got a very boring answer for you. It's going to be continue to have responsible growth and be very prudent about that. Navigate the macroeconomic environment, come with May. We're going to navigate that environment with good prudent underwriting, doing the right thing. We'll continue to manage our capital.

For the first time in a very long time or ever, we can execute on all our 3 capital priorities. We can invest in the business. We can maintain our strong balance sheet metrics, and we return value to shareholders. We're going to continue to do that. And we're going to lean on operational excellence to really transform -- continue to transform the business because that fuels the business. That's how we invest in the business. So that's our recipe. That's been our recipe for the last few years. That's how we got where we are, and we're not changing our focus.

Great. Maybe let's talk a little bit about the state of the consumer, how the macroeconomic environment is influencing them, their spending patterns and maybe any differential you see across different risk bands.

Yes. So the consumer overall, we've been pleasantly surprised over the past number of quarters that they've remained pretty resilient and stable to slightly improving in terms of their metrics with us. Spending overall has been solid, meaning that you're seeing the higher risk bands spend a little bit more on things like travel, entertainment. And then those that are a little bit on the lower end are spending a little bit more on nondiscretionary items, as you would expect to at this time of the year. But overall, I think the benefit of what we're seeing with our consumers is they've been dealing with this high inflation environment now for the past 4 years.

So whilst inflation is still a little higher than it's target rate, it's not compounding at the same rate it had been. And so their wages have outpaced a little bit. It's giving them a little more flexibility. They're budgeting well and what I think we would say is resilient and choiceful, meaning customers are making choice in terms of what they're -- how they're going to spend. And I think you're going to see that manifest itself into -- and what we've seen so far in terms of holiday spend, looking for deals, meaning a little bit more activity on Black Friday, Cyber Monday, a little bit less on the Saturday, Sunday in between when you're looking at comps versus prior year. So I think that's a demonstration that they're kind of reverting to the way they used to be pre-pandemic because they're looking for deals.

Maybe just to expand on that, Perry, in terms of how the holiday season is shaping up. I know that you had said October and early November is strong, but there was some tricky comps maybe from the election. What are you hearing or seeing from your brand partners? Any verticals in particular that you're more bullish on heading into next year? And just any spend updates relative to expectations?

Yes. I think overall, the consumer is, again, resilient. I expect that in fourth quarter, we'll probably end up in the low single-digit, 1% to 2% growth year-over-year. And that's in terms of the spend. As you said, there's some comp issues. When you look back at the third quarter, we lapsed the Saks acquisition. So that was a tailwind. But overall, I think we're just going into next year, we have some good new brands coming out. I mean Ralph will talk about some of that pipeline. And so we're very optimistic that we're going to inflect to growth.

So maybe just to build on that a little bit. So in terms of loan growth, you've guided to flat to slightly down for average loans in '25. And we all know the reasons why given the strategic tightening that you've done. I know you'll provide a specific guidance when we get to earnings, but just talk directionally about loan growth given the macro environment, do you see a path back to low to mid-single digits? And what do you expect to be some of the key drivers behind it?

Yes. We definitely expect to inflect, right? I mean, so while this year is coming out to be kind of exactly where we thought it would be, slightly down, I expect next year to be slightly up. And that inflection is a result of continuing credit performance, less gross losses, continued good build of new partners coming in that will create new growth and then just a continued healing of the existing portfolio.

Yes, that makes sense. I mean you've been in, I'll say, restrictive underwriting stance for a period of time here, just given all the things you talked about for the cumulative inflation. Can you maybe talk about what underwriting curtailments still remain in place? And what do you want to see to remove inevitably what you still have that has kept loan growth at bay?

So the restrictive underwriting standards, if I look back over the past few years, I'd say the degree of decrease year-over-year in the amount of line increases we gave, so the changeover-year has continued to be less and less. You got less benefit from line increases. At the same time, we were putting in place more line decreases, call it risk detection program. So if somebody looks like they have a little challenge, we do more of that. So over the past couple of years, I'd say the year-over-year is getting tighter and tighter in terms of the net impact. I'd say right now, it's kind of neutral, where the risk detection is being offset by the line increase.

So we are doing line increases for those customers coming in the door. And I think next year, it will be a net positive situation. But what I would really want you to walk away with is that regardless of which way it goes, it's not material to growth. So that's not going to be a material driver next year. But it's going to be data-driven. We've got a very sophisticated credit underwriting team. We've been doing this for 30 years. And so it's going to be a customer-by-customer decision.

There's not going to be some watershed moment where the gates are going to open and all of a sudden, you're going to see us lean in on credit because that would be a fool's game. We know what we're doing. It's going to be a data-driven decision-based point we make sure we're getting paid for the risk we take.

Got you. Ralph, I wanted to talk about partners for a minute. I know in past years, you've even announced new partners at the conference. Maybe just talk about what your pipeline for new customers looks like. And I know you had a couple of wins in the home vertical space. I think Perry alluded that there's more to come. Maybe just talk about how does it compare to prior years? And are you seeing any differences in the type of partners that are emerging?

Yes. So our partner -- our pipeline continues to be robust. And one of the things I really love about our business development team is we're being asked now to bid instead of trying to push our way in, people are pulling us in. So that's a really good place to be. Just 3 recent announcements, Bed Bath & Beyond, Furniture First and Raymour & Flanigan are 3 new partners that we think will give us some momentum going into 2026. And those partners are what we call de novo partners, right? And there's 2 type of de novo partners. There's a de novo partner where they've never had a card program before. We launched it together and we -- they learn from us and we move forward, and that would be like a crypto.com.

And then you have these 3 partners that have a proven track record that build receivables quickly and we work with them, and that's a good place to be. So either one of those are really good. We're not laying out a lot of capital, and we're just off and running, and I feel really good about those types of partners. There are partners in our pipeline with portfolios, and we evaluate those and those have a little bit of a longer tail, but we feel good. We have some announcements to make next year. I'd love to make an announcement now, but my GC won't let me, but I'd love to make a couple. But we continue to have momentum. Partnerships are good.

And I think aside from the new partners we're adding, the focus on keeping existing partners is equally as important. If you think about our book, our top 10 partners, our top 10 partners are with us to 2028 and beyond, most of them beyond the end of the decade. That's a good place to be because what we focus on is how do we grow the pie, not how do we renegotiate the pie, but how do we grow the pie. And so that's a really solid focus on driving spend and introducing new products for our top 10 partners. And that's equally as important as adding partners.

And I'll come back to your top partners in a second. But just curious, when you guys have talked historically, you've talked about $100 million to $500 million sort of portfolios as being sort of your sweet spot. And obviously, we know we all have a good sense of who the top 10 partners are. But when you think about some of those recent announcements, Bed Bath & Beyond, Furniture First, Raymour & Flanigan, like any context in terms of are these the type of partners are going to be top 10 partners over time?

Yes. I mean not to pick out one, but I think Raymour & Flanigan, because of its expansive footprint could be really one of our bigger partners. They have over 100 stores. They have discount stores, they have showrooms. And it's -- and right off the bat, it's a really engaged partner. Furniture First is #1 in mattresses, which is a big selling item. So that could -- yes, got to have them. I think there'll be a partner that will be on the come. But Raymour & Flanigan, I think, is the biggest furniture dealer in North East probably one of the top 5 or 6 in the country. And I think there's really opportunity there for that type of partner.

Got you. So you mentioned that the top 10 partners are locked up well into 2028, some through the end of the decade. Obviously, that means a lot of them have been renewed over the last period of time. Maybe just talk about any emerging trends with the renewal, whether it's sharing economics or trends in value propositions that you've seen?

Yes. What we've noticed about the partners, they're getting smarter, right? I think maybe because each of them maybe uses a consultant, that threaded consultant that gets out there. But they're getting smarter on the business. They know that this -- what we do is not just a bolt-on, it really can drive their economic value. So they're really interested.

And when they come to the table again, it's not all about price. It's not all about another bug. It's about, hey, what data analytics do you have? What kind of technology do you have? How -- can we have a new product that expands our reach. So in a lot of our -- those top 10 partners, we have -- private label partners, we now have introduced a co-brand. So we have partner upgrades. And that matters to the partner. Our data and analytics in terms of how do we find -- how do we penetrate your base deeper and how do we think about that? How do we redo the value proposition so it's more appealing. All those matter when you're doing a renewal, quite frankly.

No, that makes a ton of sense. Perry, let's shift gears a little bit and talk about credit. You guys have had very successful credit performance throughout the year. We've seen improving trends. You released your 8-K this morning that showed continued improvement in charge-offs. Delinquencies, I think, were in line to slightly mixed. I think you noted that you expect to come in on the lower end of your 7.8% to 7.9% loss rate guidance. Maybe just talk about what you're seeing in credit in the near term and what gives you confidence that you'll be on the low end?

Yes. I mean we're already 2 months in the quarter. [indiscernible] I'd say 11 months out of the 12. So I'm pretty confident that we can all do the math, and I think that's all an analyst report today that did some math that looked pretty accurate. So the math is basically there where we're going to come in on the low end. And I think that's a good testament that when we lowered the range at the beginning -- from what we thought at the beginning of the year to where we are, things are improving faster than what we thought. And so that gives us high confidence of where we are. Obviously, the credit quality, delinquency came in very much in line with what we were expecting.

And so when you look at that, the delinquency formation right now and what that sets us up for the beginning of next year, I think if I would say as a starting position, I'd say we should be able to improve 30 to 40 basis points off of where things may come in this year because this year is coming in a little better than we thought. That's probably a good launch point for next year. But as we go into our planning cycles, we do things on a partner-by-partner basis. We'll have updated macroeconomic outlooks. And so when we formulate and we come back to you in January with our guidance, obviously, we'll tighten that up. But I think we expect continued improvement through next year.

And by that point, we should have all 12 months.

Yes. By then, we'll have all 12 months...

And that will be extremely accurate.

I guess while we're talking about near-term stuff, Perry, I mean, we talked about spend being up 1% to 2%. We talked about the credit. Anything else that you wanted to highlight for the fourth quarter, given that we're more than 2 months in, whether it's top line growth reserves, anything else you wanted to touch upon in your remarks?

Probably the one thing I want to make sure that folks don't lose sight of is that we did a big debt refinancing and paid off $719 million of our senior notes that we were paying 9.75% interest on. And now we have a $500 million senior note at 6.75%, so a good 300 basis point improvement there. But with that, you'll see about $60 million of debt extinguishment costs in the quarter. So while we're doing a great job managing expenses, fourth quarter expenses are typically seasonally a little higher because of benefits costs in the quarter, marketing and just transaction costs because of the higher transactions. But beyond that, that $60 million is something I don't want people to lose sight of.

Yes, but that's obviously because the termination of debt. That makes total sense. So you mentioned in your remarks just before that you expect losses could improve 30 to 40, which is sort of consistent with what you've been saying, particularly now that you're -- we're confirming we're going to be on the low end of the guidance. Maybe just dig a little bit deeper on your early expectations for '26. First, what's driving the improvement? And then secondly, what's giving you the confidence in the improvement?

Yes. I mean confidence is what we just talked about. I mean you look at the quality of the portfolio that we're going to enter next year with versus where we were this time last year, that gives us a high degree of confidence that the credit quality is already better. As well, we've continued to see resiliency in the consumer in terms of consumer behavior and the expectation that I think we'll continue to see the consumer, hopefully, if inflation continues to moderate, is in a better position going into next year.

And then the growth that Ralph commented on some of the new partner signings that we've had, that's going to be good new clean quality growth that we're going to put in place. And then we also talked about a little bit of the improving credit actions that we can take. So I think all these things together give us a high degree of confidence that next year should continue to improve. Now that's based on a stable macro outlook to slightly improving. If things go a little sideways or get worse from unemployment, if labor, a lot of this stuff has to unfold in terms of what the policies are, but I think we all believe that the policies that are in place are intended to help the American consumer. It just has to take a little time to play out.

Absolutely. And look, your consumer more than most has been impacted by the cumulative inflation you and I have talked about a lot, and that set loss rates above 8%. Now we're working our way back down. And you've had this sort of long-term historical average of around 6%. Can you talk about what gets you back there over what period of time? And can -- given the upward pressure that it puts on losses, can you resume growing at sort of mid-single-digit levels and continue to make progress on credit over time?

Absolutely. So a couple of things. One, as we put on newer business with good growth, that's going to help just because of the credit risk mix that's in flight. So that will help drive down the loss rate. Then you're also putting on new loans that are -- I'll say, I call them clean loans that are good credit quality, that's going to help average in. So the newer vintages may get a little larger and help average down that rate. And then the existing portfolio is going to slowly cure over time as the consumer continues to manage their own personal balance sheet.

So that gives us high confidence that we'll get there. It's just not going to happen next year, right? It's going to happen gradually over time. Kind of the way you're seeing it unfold is how I expect to over the next few years. But we are remaining focused on underwriting for profitability. We could drive that rate down faster if we wanted to put on an even smaller new vintage, if we said, hey, let's put on a vintage that achieves 4% loss rate instead of the 6% loss rate, we could drive it down faster. But that would do damage to our partnership business that we're in. And our goal is not to, I'll say, unduly harm our partners just to make our loss rate look good, and that will also be detrimental to profitability.

Sure. Maybe to round out the discussion on credit. So the reserve rate has been declining a little bit over the past few quarters. We're in the high 11s now. I guess, first, do you think the trajectory, assuming the macro holds, can continue? And how much more room is that and over what time to get back to sort of that 10% level that I think that you have talked about as a more steady-state reserve?

Yes. There's definitely room for that to improve. As you just said, I mean, my expectation is it gets back down to around 10% over the next couple of years. The pace at which it gets there will be highly dependent on predominantly the credit quality of the portfolio. So if you think about where we're going, I would expect the fourth quarter reserve to seasonally drop down. It's possible it does a little better than that if the delinquency ends the year in an improved position.

But then as you go into next year, again, I expect it to continue to improve. But again, largely based on the credit quality of the portfolio and the macro inputs as well as we have more confidence in the macro environment. Today, we're very heavily weighted into the adverse and severely adverse scenarios for our credit risk weighting because that was prudent. Again, right now, we're in this bit of uncertainty. So I would have liked to have unwound that a little bit. Again, that's not going to be the big driver of what drives 170 basis points improvement but it will make a difference. And that we should be able to start to move back towards a little bit more neutral position over the next year.

Ralph, since you've taken over as CEO, probably a little over 5 years now, 5.5 years, give or take, you've made tons of investments in the business, repositioned the technology, done tons of things to upgrade the standing of the company. Maybe just talk about the investments that -- what is on your agenda for right now? And how do you balance that with an improving yet not like great revenue environment? Obviously, we've seen you guys have taken a lot of actions across the board on the revenue side. But just talk to us how you think about the overall investment picture.

Yes. Our investment thesis hasn't changed at all. Maybe it's changed a little bit from -- because we've improved it. But we'll continue to invest in our partnerships and our products, particularly around digital and technology. We'll continue to make those investments. I was up here a few years ago, I said we're going to pay off our debt. They're done, right? We paid off our debt. So we're going to continue to make that -- make sure our balance sheet metrics are strong, and we're doing the right thing and making sure that we're there with competitors. And returning value to shareholders is a really good thing to do. We've been able to do that. We've increased our dividend a couple of cents, and we have some buybacks. So those are our priorities. They continue to be our priorities. But the real -- what really makes it gratifying for me is we don't have to choose, right? We can do all 3 because we have adequate capital and a strong balance sheet. So that's a really good place to be.

And when I think about -- and again, I know we'll get guidance in January, and this is a question for either of you. As you think about balancing investments in an improving revenue environment with positive operating leverage, how do you think about the balance? I mean you've continued to post year in and year out positive operating leverage even in more challenging revenue environments. How are you thinking about it into '26?

No, I think one of the things we do have, operational excellence has played a pretty big role in our efficiency and our operating leverage. We focus on doing things better, smarter, reinventing the way we do things. And that has helped us manage our cost base, drive a little bit of revenue. But we have a really good handle on expenses. So as we add revenue, you don't get that add of expenses, commensurate expenses to that. That's really due to all the things we do with operating leverage. Some of it is common sense, some of it comes from the people, some of it's focused on new and different technologies, some of it's common sense to get these things done. So we're -- that's been our focus to help us drive that positive operating leverage as we move forward.

And one of the things that a lot of companies have been talking about at the conference has been AI and just the heightened focus on how it's being utilized in businesses. Maybe just talk to us about how you guys evaluate opportunities to use it, how you're currently leveraging it and what your plans are to deploy new technology and capabilities in '26.

Listen, I think I could go back and say we've been using some form of AI for a number of years, whether it's machine learning, robotics, we've been using it, and we've been in the market. But when it comes to this emerging AI, whether it's Agentic or AI in general, we're a fast follower. We're going to focus on what's out there and how does it solve our problems. We're not going to chase the shiny object and say, here are our use cases. And what's out there that can help us -- help with these use cases? And do we get the payback for the expense that we're going to get out there. And I think that's our focus. We're working with partners on point-of-sale Agentic AI, how do you think about getting in the purchase path when somebody is making a recommendation.

So we're there, but our focus is to be very thoughtful like with everything else. We've got partner data. We've got customer data. We're not going to risk that. But we're going to focus on where AI can help us from a customer service perspective, driving down first call resolution, getting that done, making sure that our reps have knowledge at their fingertips using collections, how do we think about it from a collection perspective. Fraud is a big area in terms of AI, how we manage our fraud and manage down our fraud. [indiscernible] fraud is at their own game, quite frankly. But it's across and pervasive across the network, 100% monitoring on risk, on regulation. Those are areas that really makes sense for us as a regulated industry, and that's where we're going to invest.

And I guess just sort of building on that, obviously, there's a ton of technological change that's happened. We talked about AI. There's things like digital wallets, a host of other things. Like what is Bread doing to assure that you guys remain top of mind for your partners and don't get lost in the mix given new players in the space and like I said, all these things that are...

Well, part of it comes down to relationships, right? We have relationships with these partners. Some of these partners have been with us for 20 years. They started and we were their first partner and continue to be their first partner. The constant curiosity about how we can make the partnership better really resonates with the partners. That's important. Being -- feeling you're part of their business. So our -- we continuously meet with them. And a lot of our renewals are far in advance of the -- never go to RFP because we're with them and we renew based on mutual goals and how we move forward.

So we're always with them on a pretty regular basis. There's a quarterly meetings and all those types of things, but we're very much focused on their success, and they feel that. It's not a transaction. It's a relationship where sometimes the new entrants, particularly around buy now, pay later, that's a transaction. We build relationships, and that's what's important to the partners. It's not that one transaction. It's those 5 other transactions that come behind it and how do we make that work? And how do we drive deeper into their base? How do we help them be successful and grow the pie. And it resonates with partners. Nothing is better than an engaged partner.

Yes, absolutely. And maybe we'll come back to buy now, pay later. So I wanted to talk a little bit about capital. I like your acronym Ralph, is it grow, maintain, distribute. But I think with the 3 things that you highlighted, you could phrase that if you want. You've spoken about the progress that you've made building capital, paying down debt. I think you recently issued preferred. Maybe just talk about, Perry, what are the next steps on capital from here in terms of just overall capital structure?

Yes. So again, really proud of the work that the team has done and where we've come over the past few years. I think when you and I first met, the capital structure looked a lot different. And this quarter was really an inflection point in that we hit our capital targets that we set out there being mid 13% to 14% with our CET1 ratio. The next step, I mean, we've already cleaned up our debt structure. So we've paid down, as we talked about earlier, a big chunk of our parent debt. So now we have $500 million of senior notes out there at a rate that we think is pretty attractive compared to what it was.

So really not a lot more to do on that front. I don't see any new issuance. The preferreds, we just came into the market with the first tranche of preferreds at $75 million. We do have an opportunity to put preferreds on the balance sheet of up to about 1.5% of RWA. So that would be about $300 million in total. So you can think that we're going to look to issue another $225 million over the coming year or so. But again, opportunistically. You can tell from the size of the deal that we just did, we could have chased a larger deal if we wanted to pay more of a rate. So we'll look at the market and figure out the right time to introduce that, but that would be the next step because by doing so, we'll reduce our binding constraint on capital targets down to 12% to 13%.

I remember when you guys -- I've been around long enough to remember when you guys barely had any capital. So you guys have done a great job rebuilding it.

Or a balance sheet.

So I guess, Perry, maybe to build on that, you have -- I think you put out 2 different buyback authorizations. You got like over -- almost $350 million outstanding. How should we think about the pace of utilization? And then that transition that you just talked about from the 13% to 14% to 12% to 13%, we have to get all the way there on the preferred issuance to be able to formally do that? Or can we start legging into that over the next couple of quarters?

Yes. I would look to -- look, we'll continue to deploy that authorization over time. So first and foremost, we've got to continue to make sure we maintain that, I'll call it, 13.5% and make sure we're caring for growth that's right in front of us. But with the capital accretion that this company is able to generate, I would expect that we'll continue to revise the authorization in time as we're able to consume it. And then as we're able to issue more preferreds, that obviously unlocks that as well as you go.

So you mentioned returns, and I know you've talked about wanting to get to mid-20s returns, and you've had some successful quarters where credit has been strong. You've been in that range. Maybe just talk about the 2 to 3 main drivers to achieving that goal and over what time frame? Obviously, getting the credit losses down is a big piece of it. But maybe just spend a minute just talking about the key components of that.

Yes. I would say there's really 3 components for us to get there. I mean you're going to see a meaningful step-up in our returns next year. But the 3 key requirements, as you mentioned, credit getting back towards that 6%, the capital optimization, so us getting that full $300 million of preferreds on the balance sheet and then driving down our efficiency ratio, which is basically as Ralph talked about earlier, operational excellence is going to drive us towards that.

Is there any sort of formalized efficiency level you guys are hoping to get to? Or is it more just broad strokes continuing to make?

Every year continues...

Better than it was this year.

Because if every year, we deliver positive operating leverage, the inverse of that is your efficiency ratio continues to come down.

No, that's fair enough. Just a couple of other areas I wanted to hit on. Ralph, when you talk about repeat partners, obviously, you brought up BNPL. Maybe just talk about how this fits into your ecosystem and what the competitive landscape looks like. And obviously, these companies are growing at a fast pace, but -- and people are constantly asking me, are they taking share from the incumbents? Or are these more parts of the market that you guys really don't play in? Just help us contextualize.

Yes. First of all, we do have the BNPL products, right? So we have pay in 4, we have installment loan. We prefer installment loan because that's where the profitability is, right? Pay in 4, there's really not a lot of profitability there. And if you think about the pay in 4 customer, they're usually skewed towards debit, right? They're the debit customer. And some of them may not even qualify for a credit card or a private label card.

So from that perspective, they're not really taking our share. And maybe we couldn't underwrite those. And if they're debit users, so from that perspective, we don't see it. That said, we have this basket of products from private label to buy now, pay later to installment loan to a proprietary card to deposits. We've really expanded our -- the co-brands. We've really expanded our base. So we are able to accommodate both the partner and the customer on any type of lending they would like in any particular time in their lending journey. So we feel good about our partner product set. But -- and buy now, pay later is a member of that product set, but not our only one. and I feel good about that.

Got you. Perry, maybe I want to spend a minute or 2 just talking about margins. And I know that there's lots of moving pieces, late fees, revenue suppression, movements in rates, payment rates, APR repricing, a handful of other things. But when you put all of those together and you think about the rate backdrop, how do you think about the trend in your base case expectation? Can we see expansion? Or do the negatives outweigh the positives?

You definitely hit on all the moving parts. And -- but that's right. Yes. So think about the rate backdrop as an example, right? So the pace at which rates come down, we're slightly asset sensitive, so that could put a little near-term squeeze on us. We do have pricing actions in flight that are continuing to accrete and drive, I'll say, increased loan yield. We have an improving delinquency environment.

So that would mean you're going to have lower late fees, which go into yields, that would be a headwind against that. You've got product mix changing and credit risk mix improving. You have higher payment rates, so that could be -- put a little pressure on. So it all kind of comes together. But I'd say right now, I go stable-ish, but it depends macro is going to move it one way or another. And obviously, as I mentioned earlier, look, we're doing the whole bottoms-up partner by partner. We'll give better guidance in January, maybe that we're going to give more revenue guidance and net interest margin because there's so many moving parts in there.

No, that's super helpful. And one thing that's helped the margin over time is you've been on a journey to improve the overall funding base. We just talked about and debt and we talked about preferred. But maybe let's spend a minute just talking about the deposit side. Where are you on the journey? Where would you like to take this to over the medium term and over what time frame?

Yes. So one, we're really pleased with the deposit program, around $8.2 billion at the end of last quarter. It's continued to grow throughout this quarter, and I expect to continue to see that to grow. I mean Ralph put out a target of getting to 50%. I think that was almost 5 years ago of our total funding being direct-to-consumer, 47% at the end of last quarter and growing. We're going to look at things around our bank structure. And is there things that we can do that would allow us then to fund more of our assets using deposits.

So we have a simplified structure, think about merging the bank some point down the road, then we could bring that -- yes, because in one of our banks today, we can't offer direct-to-consumer deposits. So that will be helpful. But overall, we're very pleased with the direct-to-consumer deposit program and expect to see that continue to grow probably up to 70% over a long period of time. But again, that's going to be because we can be towards the top of the league table given our expansive margins that we have.

Two last questions I want to hit on now that we're under the 2-minute warning. I don't want to talk about football Perry.

No time. No football.

No football.

It's a soft subject for both Perry and I, much more so than me. But we've spoken about the impact of APR repricing. Some others have made some tweaks or roll back. Maybe just talk a little bit about the partner response you've seen. I know that there's still more to go as it layers in. And are there any other changes you're expecting over the next 12 to 18 months?

Yes. I think we've had very constructive relationships with our brand partners and some moved quickly with a very strong revenue share in there. So again, that remains in place, not having to see a lot of rollbacks. Some were a little bit more, I'll say, middle innings coming to agree on some of the repricing. One of the things with all the partners, it's a partner-by-partner decision, and they're looking at competitive peer set. And I'd say there has not been a lot of pushback to roll things back. We're in a good place. We're underwriting as deeply as we normally will for them. So it's been constructive. And a lot of this also gets reinvested back into their program. So there's trade-offs when you do certain things. And right now, I'd say we're kind of more of a BAU mode of those types of partnerships.

So maybe one last question. I think I've asked you for a handful of years, Ralph. So might not -- why stock now, although maybe a little nuance. So the stock is now trading above tangible book value. I think last year, it was below. So good for you guys. Obviously, there's still uncertainty around the macro landscape. But what are you telling investors to get them excited about owning shares of Bread right now?

I might have to go into overtime. So a couple of things. I tell them, judge us by what we've done and not by what we said we were going to do, judge us by our acts, our outcomes. I think our outcomes have been consistent with what we said we would deliver. And I think that's important. We've got -- I think we've gained back integrity with our shareholders. Our balance sheet is strong. I mean our balance sheet is as strong as it's ever been. We no longer have to choose. It is -- we can accrete cash capital and we can use it the right way for our shareholders and our customers and our partners and our employees. I think that's critically important. Credit is getting better. It's not where it needs to be. It's moving in the right direction. We're signing partners. We've got some good momentum going into 2026. And we have our handle on expenses. So that, to me, are all really good signs of a very stable company. So buy now and buy often.

I get a topic next door that means we're out of time. So please join me in thanking the team.

Good morning, and welcome to the Bread Financial's Third Quarter 2025 Earnings Conference Call. My name is Kevin, and I'll be coordinating your call today.

[Operator Instructions]

It is now my pleasure to introduce Mr. Brian Vereb, Head of Investor Relations for Bread Financial, the floor is yours.

Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer; and Perry Beberman, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC.

Also on today's call, our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta.

Thank you, Brian, and good morning to everyone joining the call. Today, Bread Financial reported strong third quarter 2025 results. we delivered net income of $188 million, adjusted net income and earnings per diluted share of $191 million and $4.02, excluding the $3 million post-tax impact from expenses related to repurchase debt in the quarter. Our tangible book value per common share grew by 19% year-over-year to $56.36 our return on average tangible common equity was 28.6% for the quarter. Consumer Financial health remained resilient in the third quarter as evidenced by strong credit sales a higher payment rate as well as lower delinquencies and losses.

Credit sales increased 5% year-over-year in the face of ongoing inflationary concerns, a slowing yet stable job market and continuing weak consumer sentiment. The improvement was driven by strong back-to-school shopping early in the quarter with notable improvement in apparel and beauty. Additionally, purchase frequency increase and spending trends improved across all consumer segments amidst these favorable results, we continue to monitor changes in monetary and fiscal policies, including tariff and trade policies and their potential impacts on consumer spending and employment. Overall, a positive year-over-year credit sales trends and gradual improvement in our credit metrics gives us confidence in our outlook as we enter the final quarter of the year. Given current credit trends and slightly better-than-expected performance of our net loss rate year-to-date, we expect that we will be at the low end of our full year outlook range of 7.8% to 7.9%. While the net loss rate remains elevated compared to historic levels, the improving loss rate and delinquency rate trends are encouraging.

As I mentioned earlier, we will continue to closely monitor consumer health purchasing and payment patterns and adjust our credit strategies accordingly to achieve industry-leading risk-adjusted returns. More broadly, we have remained consistent in our full year financial outlook as we continue to navigate market volatility. Our expectations around the health of the consumer have not materially changed. We have maintained our long-term focus on responsible growth and executing our business strategy. Given the actions we have taken over the past 5-plus years, we are well positioned to achieve our long-term financial targets and anticipate increasing shareholder value over time. Our focus on expense discipline and operational excellence continues to produce desired results as adjusted total noninterest expense was down 1% year-over-year despite continued technology-related investments, inflation and wage pressures. We will continue to invest in technology modernization, digital advancement, artificial intelligence solutions and product innovation that will drive future growth and efficiencies. Considering the progress we have made, we are confident in our ability to achieve full year positive operating leverage, excluding the impacts of repurchase debt and any portfolio sale gains.

With our CET1 ratio at the top of our targeted range of 13% to 14%, we initiated the $200 million share repurchase program that the board approved in August, repurchasing $60 million during September and into October. This morning, we announced a board-approved $200 million increase to our share repurchase authorization. We also announced a 10% increase to our quarterly cash dividend, which is now $0.23 per common share with the goal of increasing our dividend annually as we see growth in our book value. These actions, along with our proven strong capital and cash flow generation underscore our ability to execute all of our capital and growth priorities concurrently, providing a solid runway to deliver additional value to our shareholders. Moving to our new business activity. During the quarter, we expanded our home vertical foothold by signing new brand partners, including Bed Bath & Beyond, an e-commerce retailer with ownership interest in various retail brands. Furniture First, a national cooperative buying group that serves hundreds of independent home furnishings and bed retailers across the U.S. and Raymour & Flanigan, the largest furniture and mattress retailer in the Northeast and the seventh largest nationwide. These new signings provide expanded opportunity for profitable growth going forward.

We will continue to leverage our full product suite and omnichannel customer experience to extend category leadership in existing industry verticals, while expanding into new verticals. Strategically, our vertical and product expansion efforts continue to have positive impact on both risk management and income diversification across our portfolio. Finally, as released last week, we are pleased to have earned a credit ratings upgrade and positive outlook for Moody's recognizing the progress we have made in strengthening our financial resilience and enterprise risk management framework. In summary, we are pleased with our third quarter results. Our financial performance reflects steady progress in executing our strategic priorities and our ongoing commitment to return value to shareholders, including in the form of increased dividends and share repurchases. Now I will pass it over to Perry to review the financials in more detail.

Thanks, Ralph. Slide 3 highlights our third quarter performance. During the quarter, credit sales of $6.8 billion increased 5% year-over-year even with the anniversary of the Saks portfolio addition in late August 2024. The increase was driven by new partner growth and higher general purpose spending. As Ralph mentioned, we saw strong back-to-school shopping in the early part of the quarter with sales growth moderating in the latter part of the quarter. Average loans of $17.6 billion decreased 1% year-over-year. Higher payment rates, coupled with the ongoing effect of elevated gross credit losses, pressured loan growth. In line with lower average loans, revenue was down 1% year-over-year to $971 million. Our revenue growth was also impacted by lower build late fees resulting from lower delinquencies, higher retailer share arrangements, RSA with partial offsets, including lower interest expense and our ongoing implementation of pricing changes and paper statement fees.

Total noninterest expenses decreased $98 million attributed to the prior year impact from repurchase debt. Excluding the impacts from our repurchase debt, adjusted total noninterest expenses decreased $5 million or 1% driven by our continued operational excellence efforts. Income from continuing operations increased $185 million, reflecting the prior year post-tax impact from a repurchase debt of $91 million and the current year impact from a lower provision for credit losses, and a $38 million favorable discrete tax item. Excluding the impacts from our repurchase debt, adjusted income from continuing operations increased $97 million or 104%. Looking at the financials in more detail on Slide 4. Total Net interest income for the quarter decreased 1% year-over-year, resulting from a combination of a decrease in billed late fees due to lower delinquencies as well as a gradual shift in risk and product mix leading to a declining proportion of private label accounts, which generally have higher interest rates and more frequently fee assessments. These headwinds were partially offset by lower interest expense the gradual build of pricing changes and an improvement in reversal of interest and fees related to improving gross credit losses. Noninterest income was $7 million lower year-over-year, driven by higher retailer share arrangements, partially offset by paper statement fees.

Looking at the total noninterest expense variances, which can be seen on Slide 11 in the appendix, employee compensation and benefits costs decreased $6 million as a result of our continued focus on operational excellence. Card and processing expenses increased $4 million, primarily due to higher network fees driven by our gradual shift in product mix. Other expenses decreased $93 million, primarily due to the prior year impact of repurchase debt. Looking ahead, we anticipate a typical seasonal increase in fourth quarter expenses sequentially from the adjusted third quarter expenses due to increased holiday-driven transaction volume higher planned marketing expenses and higher expected employee compensation and benefits costs. Adjusted pretax preprovision earnings or adjusted PPNR, which excludes gains on portfolio sales and impacts from repurchase debt was nearly flat year-over-year. Turning to Slide 5. Both loan yield of 27.0% and net interest margin of 18.8% were higher sequentially following seasonal trends. Net interest margin was flat year-over-year. A number of variables continue to impact our NIM, including the drivers I noted on the prior slide, as well an elevated cash position and changes in Fed rates.

Given continued improvement in payment rate and delinquency rate trends, we anticipate lower billed late fees for the remainder of the year to pressure NIM, while the gradual benefit from pricing changes will continue to be realized over time. On the funding side, we are seeing cost decrease as savings accounts and new term CD rates decline. During the quarter, we completed a $31 million tender offer for our senior and subordinated notes using excess cash on hand to reduce higher cost debt, which also improved our cost of funds. Direct-to-consumer deposit growth remained steady year-over-year, ending the quarter with $8.2 billion in direct-to-consumer deposits, further improving our funding mix Direct-to-consumer deposits accounted for 47% of our average funding up from 41% a year ago.

Moving to Slide 6. Optimizing our funding, capital and liquidity levels continues to be a key strategic initiative. As history shows, we will be opportunistic in evaluating and executing plans to continue to enhance our structure. Along those lines, as Ralph mentioned, we are proud to have earned a credit ratings upgrade from Moody's to Ba2 while maintaining a positive outlook. This was a result of the actions we have taken to improve our capital and funding profiles along with our improved enterprise risk management framework and strong financial performance. Our liquidity position remains strong. Total liquid assets and undrawn credit facilities were $7.8 billion at the end of the quarter, representing 36% of total assets. At quarter end, deposits comprise 77% of our total funding with the majority being direct-to-consumer deposits. Shifting to capital. We ended the quarter with a CET1 ratio of 14.0%, up 100 basis points sequentially and up 70 basis points compared to last year.

As you can see in the upper right table, our CET1 ratio has benefited by 260 basis points from core earnings. Common dividends and the repurchases of $234 million in common shares over the past year impacted our capital ratios by 146 basis points. Additionally, the last CECL phase-in adjustment occurred in the first quarter of 2025 and resulting in a 73 basis point reduction to our ratios and the impact from repurchase debt accounted for approximately 30 basis points of adjustment to CET1 since the third quarter of 2024. Finally, our total loss absorption capacity comprising total company tangible common equity plus credit reserves ended the quarter at 26.4% of total loans, a 70 basis point increase compared to last quarter, demonstrating a strong margin of safety should more adverse economic conditions arise. We have a proven track record of accreting capital and generating strong cash flow through challenging economic environments. We have demonstrated our commitment to optimizing our capital structure through the issuance of subordinated debt and the return of capital to shareholders. We will continue to opportunistically optimize our capital structure, which includes potentially issuing preferred shares in the future.

Our commitment to prudently returning capital to shareholders is evidenced by today's Board authorized announcements of both a 10% increase in our common share dividend and an additional $200 million share repurchase authorization. This $200 million increase to our existing repurchase authorization in combination with unused capacity under the previous authorization means we have approximately $340 million available for share repurchases at this time. We are well positioned from a capital, liquidity and reserve perspective. providing stability and flexibility to successfully navigate an ever-changing economic environment while delivering value to our shareholders. Moving to credit on Slide 7. Our delinquency rate for the third quarter was 6.0%, down 40 basis points from last year [indiscernible] basis points sequentially, which was slightly better than normal seasonal trends. Our net loss rate was 7.4%, down 40 basis points from last year and down 50 basis points sequentially. Credit metrics continue to benefit from our multiyear credit tightening actions ongoing product mix shift and general stability in the macroeconomic environment.

We anticipate the October and fourth quarter net loss rates will increase sequentially following typical seasonal trends. The third quarter reserve rate of 11.7% at quarter end, a 50 basis point improvement year-over-year and 20 basis points sequentially was a result of our improving credit metrics and higher quality, new vintages. We continue to maintain prudent weightings on the economic scenarios in our credit reserve model and given the wide range of potential economic outcomes. We expect the reserve rate to decline at year-end before increasing again in the first quarter of 2026 following normal seasonality. As mentioned, our disciplined credit risk management and ongoing product diversification has continued to benefit our credit metrics. As you can see on the bottom right chart, our percentage of cardholders with a 660-plus prime score increased 100 basis points year-over-year to 58%, in line with our expectations. However, macroeconomic uncertainty persists with inflation above the Fed's target rate, evolving trade and government policy impacts to both inflation and labor and continued low consumer sentiment.

As a result, we continue to actively monitor these trends while remaining vigilant with our credit strategies. But at this point, we do anticipate a continued gradual improvement in the macroeconomic environment. Turning to Slide 8 and our full year 2025 financial outlook. Overall, our results have trended in line with our expectations and our outlook remains unchanged from the previous quarter. We continue to expect average loans to be flat to slightly down. Our outlook for total revenue, excluding gains on portfolio sales is anticipated to be roughly flat versus 2024. We continue to expect to generate full year positive operating leverage in 2025, excluding portfolio sale gains and the pretax impact from our repurchase debt. Our results underscore our ability to deliver operational excellence and maintain expense discipline while investing in the business. Given the continued gradual improvement in our credit metrics, we are confident that we can deliver a full year net loss rate in our guided range of 7.8% to 7.9%. As Ralph mentioned, based on current trends, we expect to come in towards the lower end of that range.

Finally, with the $38 million favorable discrete tax item in the quarter, we have adjusted our full year effective tax rate guidance to 19% to 20%. While there is variability we would anticipate future years to align more closely with our historical target effective tax rate range of 25% to 26%. Overall, our third quarter results underscore the financial resilience and strong return profile of our business model. We remain confident in our ability to achieve our 2025 financial targets and to deliver strong long-term returns. Operator, we are now ready to open up the lines for questions.

[Operator Instructions]

Our first question comes from Sanjay Sakhari with KBW.

It sounds like you're seeing constructive trends across the portfolio. And I'm sure you've heard of some of the concerns on some cracks we've seen in consumer credit across some lenders and subprime. I'm just curious, as you've looked across your portfolio, have you seen any signs of weakness? Obviously, it seems like things are trending in the right direction. And then maybe, Perry, just related to that, maybe just the progression of the reserve rate and the loss rate as we go forward if things are stable?

Yes, Sanjay, thanks for the question. So I think it starts with a quick view of the macro environment that I think you mentioned everybody is kind of seeing is that at least through Q3, the consumers and macro metrics have been, I'll say, surprisingly resilient, meaning unemployment and inflation are only slightly different than the prior quarter, which means we've got a pretty stable macro environment. So I think some of the concerns that are out there to set consumers remain nervous about what the future might look like. And that's really showing up in both consumer confidence and consumer sentiment, which is down pretty meaningfully versus last year. So there's going to be more to come on it.

But for our consumers, as we've talked about, something that was very important is that wages need to outpace inflation for them to get a handle on their finances and their budgeting. And so that's been good, right? Wages have continued to outpace with -- I think it was August date, it was around a little over 3 -- close to 3.5% like 3.4% growth and inflation only being 2.9%. So that's good for our customers. So again, what does it mean going forward is going to be dependent on what happens around the Fed policy and what that then means to inflation is the tariffs unfold and what happens with labor. So more to come on that. But then within our own portfolio, we are seeing stable gradual improvement. And I'd say that's across all vantage bands. So we -- as you know, we don't have a high concentration of subprime. We focus on pretty much the prime customer, maybe some near prime. But we are seeing across the board really good stability. And that, for us, means we're not seeing the cracks in there at this point. We're very cautious. We're watching it, watching it very carefully. I'll say the entry rates in the delinquency are better than what they were pre-pandemic. So that's a good sign for us, and we're starting to see some improvement in the later stage roll rates. Again, that I think the macro is going to be real important, but I think our credit strategies and the risk mix shift that we've been seeing are starting to play through. On your question on reserve rate. Sorry...

Please, I'd love to advance for that.

Yes. So as it relates to the reserve rate, the only thing that drove the change this quarter was credit quality improving. So as the credit quality improves, that's the core input into it. So the loans we have on the books, similar to last quarter, that's all it was. The macro inputs quarter-to-quarter, very similar. That didn't really drive any change in the reserve rate. And we kept our credit risk mix the overlays exactly as it was last quarter. So that, as you look forward, as we have more confidence in how the current policies the government are going to play forward, I think you'll start to see us be able to shift back off of those adverse and severely adverse scenarios to get into more of a balanced weighting and that will be a tailwind to the reserve rate, coupled with continued improvement that we expect to see in our overall credit metrics as it pushes through into next year.

Okay. That's great. That's encouraging. And I guess, like as a follow-up to that, I know there's this push and pull between loan growth and credit quality. But I'm just curious, as we think ahead, knowing what we know right now, do you envision loan growth picking up as we move into next year? And maybe you could just talk about the portfolio acquisition opportunities to the extent there are any?

I'll ask Ralph to take that one.

Sanjay. Good to hear your voice. So if I think about it, if I take a step back, we've seen credit sales move in the right direction, 5% for the quarter. We've seen credit is moving in the right direction, more work to do, and we're signing new partners. We announced 3 new partners today, and we have a really robust pipeline and a consumer that is resilient. So payment rates are higher, obviously, and fees are lower. I'll take a healthy consumer any day of the week in terms of payment and credit -- but given the fact that we're seeing growth, we're seeing the macroeconomic environment kind of be steady and new partners, I think you will see some loan growth going forward. Thank you.

Our next question comes from Moshe Orenbuch with TD Cowen.

Great. Maybe to just follow up on that and Perry a little bit. In terms of clearly, there's things going on in terms of kind of still temporary moves in payment rate. But if you think about the new mix of your card base, is there like a way to think about the ranges of if you had 5% growth in spend volume, what that would mean in loan growth once that phenomenon is kind of fully kind of played out or what those normal gaps would be given we've got now a different kind of base, more of it being co-brand spending and the like.

Yes. I think you're asking a question that's really relevant. It depends on the mix of the business that comes on. I mean you heard Ralph mention the new brand partners coming on in the home space. Those would typically be larger ticket probably a little bit lower payment rate, so that would have a mix effect. But then if you have more of a top-of-wallet co-brand card, that have a higher payment rate. So it's really going to be mix dependent on what we have on. So I don't think it's very easy to say that if you had 5% sales growth all through next year, that 80% of that translates into loan growth. But certainly, there's a factor on that, but it is going to be dependent on mix, and some of that is yet to be seen what that will look like as we get into next year.

Okay. And maybe in terms of some of the commentary on the margin and the impacts of the pricing changes versus kind of lower billed late fees. Just given the way you think about the kind of the credit improvement, I guess, is there a way to kind of dimensionalize how long it's going to take for until you no longer have that or that build length fee kind of bottoms out? And so that the pricing changes actually will start to increase faster and outweigh that? Kind of any way to kind of dimensionalize that thing.

Yes. Again, another good question. Of course, the way to think about it is the build late fees are obviously going to follow delinquency trends. And that is what we're all eager to see is how quickly does delinquency get to a steady state, we'll get to sort of that through-the-cycle number. So that will be leading and then trailing within 6 months, I guess, you then have the -- that improvement in the build. The reversal of build interest and fees. So those kind of will be some headwind on the lower build late fees with delinquency, you do have the tailwind that goes with the gross loss improvement. Those 2 things come together. Then you also then have a shift in risk mix -- product mix within the business, which when you put on some more higher-quality co-brand has a little bit lower APRs and yield versus private label.

So that comes through, but then you do have pricing changes that have been made that continue to build. So there's a lot of moving parts in there, coupled with prime rate reductions, when we're slightly asset sensitive. So I wish there was something to say, "Hey, where is that perfect inflection point. But with all those moving parts, we'll obviously give more guidance as we get closer to January so that we have a better line of sight to exactly what our view is of mix and tie that into what the macro improvement will be as well as the credit improvement within the portfolio.

Our next question comes from Mihir Bhatia with Bank of America.

I did want to just continuing this conversation around credit sales and loan growth. Maybe just -- how are you thinking about credit sales in 4Q and into 2026. I think you mentioned there was a little bit of moderation as you move through the quarter after a strong back-to-school season. So just trying to understand, do you think we're in a little bit of an air pocket right now before you get to holiday shopping? Or just how are you thinking about holiday shopping? What are you hearing from your retail partners?

Yes. So credit sales, again, we're seeing some pretty good growth in credit sales right now. As mentioned, it was early in the quarter with back-to-school, was stronger. September moderated a little bit, still positive. And we're seeing a similar trend in October, still being up year-over-year. I think we're seeing different reports, but expectation is retailers are going to be pretty aggressive trying to draw the customers in, possibly early. So consumers are looking for discounts. They're looking for promotions and reward programs are going to be really important to make that happen. I mean consumers -- and I think we've said this for a while now, we've been very impressed with how consumers have been responsible with their budgets. And in this period of time, they're going to be looking for deals and ways to make that budget stretch or go further. So if retailers come out early in the holiday season with good deals, I expect consumers will spend on that. But then maybe it could be somewhat like some, I'll say, old historical days when I go to the day before Christmas, I go look for that great deal when we didn't have the money to get things in painful price early.

So it really is going to depend on how that looks and what the inventory situation and how motivated retailers are to take care of their inventory.

Got it. That's helpful. When I think about the interchange revenues, a pretty big step up in that one -- in that line item this quarter. I think even if you look at it as a percent of credit sales. Could you maybe just talk about how you expect that line to trend? What are you expecting to happen? I suspect it's got to do with the RSAs and some of the big ticket items. But just how should we be thinking about that line item from here going forward? What do you expect?

Yes. Again, it's one of the -- I say NIM is hard to forecast. RSAs is another one that's pretty hard to forecast because of the netting that goes on in there. So that the RSA is going to be pressured as we see increased sales and so increased sales, there's some compensation to partners or in the rewards and loyalty funding as well as some compensation. And then also when you have revenue shares, when you have losses coming down, it leads to a higher revenue share, profit share with partners.

So you've got sales-based rebates, you've got the revenue share in there, you got the profit share and everything I just mentioned around the rewards funding. In addition, when you -- we've been seeing some lower big ticket purchases, then MDFs are pressured because of that softness. So as the big ticket bounces back, if that happens in some of the verticals, that could be a tailwind. But as the spend grows, you also have some more partner share and revenue share. So there's a lot going on in there.

Our next question comes from Jeff Adelson with Morgan Stanley.

Just wanted to focus a little bit more on the pipeline and the signings you announced this quarter. It seems like the home vertical was more of a focus for you this quarter. Is that something you're looking to focus on here, maybe creating a little bit more of a network effect around the home area and launching a joint card like one of your competitor has? And then are there any other verticals you'd call out as areas of focus for you going forward? I mean you mentioned the healthy or the robust pipeline. So maybe just sort of focus on what's in the pipeline.

Yes. Thanks for the question. The home vertical is a good one for us, right? Because it's discretionary, nondiscretionary. There's home repairs and there's other discretionary furniture. So we view that as a very active vertical for us and very strong vertical. And we'll most likely add to that as we move forward, which I think is positive for us. So we'll, again, be one of the leading contenders in that vertical as we are in beauty and a couple of others. So there's a -- we look across our portfolio. It's diversified now.

It's -- we've derisked it in terms not only of product but also of industry. So we feel really good about that. The pipeline is robust across all those verticals. So we're looking forward to adding new partners within this vertical, establishing new ones. We've got a travel vertical that's doing very well. Beauty is still a big contender. And now with this home improvement and home furnishing vertical, we feel that also will move forward. So we are kind of insulating ourselves from any one vertical that there'd be an issue with. Usually, it was if the mall went bad and apparel was a bad vertical, that would throw us off. Now we're kind of insulated from those type of one-off verticals that tend to -- that may be impacted by the economy.

Okay. Great. And maybe just a follow-up on capital return. You've been on a little bit of a roll here with the buyback authorizations. I guess just maybe any sort of way to think about like what needs to happen for you to move past this medium-term 13% to 14%? Is it just settling the preferred, maybe getting your credit rating up to investment grade. I think you're now a couple of notches away. And have you thought about maybe establishing a larger repurchase authorization? Or do you prefer to be a little bit more on the quarterly cadence or half year cadence here?

Yes. Real good question. So as we think about capital, one, let me start with -- we've not changed our capital priorities, right? We have always said we're going to fund responsible, profitable growth. So some of what will inform our capital authorizations or share repurchase automations in the future will be based on the growth that we have in front of us. We'll continue to invest in technology and our capability to serve our brand partners and customers. And we'll make sure we maintain those strong capital ratios and obviously return capital as appropriate. And to your point, though, on right now, our binding constraint is CET1 around that 13% to 14%, which we said was our medium-term target.

And so we got to the top end of that this quarter. We have confidence in what we see going forward. And the important part was that we want to make sure we had enough authorization out there to provide us capital flexibility should we choose to do something to further optimize our capital stack. And when you talked about what would it take to lower our binding constraint to CET1 down to that 12% to 13%, which is what we said in our Investor Day would be our longer-term target. It does mean introducing some Tier 1 capital in the form of preferreds over time. But really, the rating upgrade is less relevant to that. That's more around what happens with senior debt. Senior notes in the future and other financings that are keyed off of those ratings. we don't need to get to an investment grade to take capital actions.

Our next question comes from Reggie Smith with JPMorgan.

I was looking through your slide deck and my rough math has like your BNPL sales volume up maybe 100%. That's probably a dirty calculation. But I guess there's a lot of investor interest in the BNPL space, certainly over the last couple of months. I was just curious, do you guys offer or have like a dual BNPL proprietary card today? And is there an opportunity there to kind of do more on that kind of blended dual-purpose cards? And I have one follow-up.

Yes. So I think you have to look at our full product offering, right? So I think you have a way to look at it. And so we have co-brand cards. And that's -- I think co-brand cards right now are probably the majority of our spend in terms of going forward, discretionary and nondiscretionary private label credit cards to absolutely have private label credit cards, and we see spend continuing on those cards. And then we have Buy Now, Pay Later. Now, Buy Now,Pay later is a pay in for an installment loan. You have 2 types of buy now pay later out there as well. And then lastly, we have our prop card, right? Our prop card is a small but growing portfolio. So it becomes a basket of products we have, and it's kind of a uniform process that we go through, and we can offer a consumer wherever they are in their in their kind of credit establishing credit where they are in their -- in that journey, we have a product for them. We have a product for them through a partner or directly to them. So we feel very, very good about our diverse portfolio in terms of product and our diverse portfolio in terms of different industry verticals.

Got it. I guess what I'm getting at is I look at companies like Quanta and Affirm like they're really leveraging that point of sale to bring customers into the ecosystem. I guess what I'm asking is -- what are your thoughts around I know Brett historically has been kind of a white label solution for retailers. But is there an opportunity to be a little more aggressive on the front foot there to kind of bring more customers in into the platform?

Yes. Unlike the 2 you mentioned, we are focused on partnerships. That's where we're focused. We're focused on not just bringing people into our ecosystem. We're making sure people are in our partner ecosystem. We can provide the credit products for them for our partners. So that's what's important to us. We have some direct-to-consumer. As you know, we have direct-to-consumer in terms of our credit card. We have direct-to-consumer. Even on breadth on certain sites where you'll see our you'll see our button. But our main focus is ensuring that we provide our partners with the right products for their for their customers to drive loyalty no matter where they are in their credit journey, and we have that basket of products to do it.

That actually makes sense. Okay. Real quick for me, last one. Thinking about like AI and automation and the potential there, like I've seen some reports that like AI and automation could have a multi triple-digit kind of basis point impact on efficiency ratios in the credit card, the banking space, like how are you guys thinking about that longer term? I guess the I would imagine there's like an opportunity there, but just maybe can you frame that out longer time for us?

Yes, Reggie, thank you. So we agree there's definitely opportunity with AI, and we've been engaged with it for a while. So for us, we look at AI as an opportunity to accelerate our operational excellence objectives. We've talked about that, right, simplifying and streamlining and automating their business processes driving increased efficiency, allows us to deploy new capabilities that reduces risk and improve controls while enhancing the customer and employee experiences. And it also allows us to accelerate innovation and move things through the tech pipeline faster, and we were able to do that, you're able to drive growth.

So it's beyond just efficiency. And as it relates to AI, one thing I'd tell you is our approach is to be a fast follower. So we're learning from the early adopters. We spent a lot of money on both what worked and what didn't work. And so we're very thoughtful in identifying and focusing on those use cases that have the highest likelihood of being impactful to our business. That means we look for immediate business value. We want long-term platform scalability as well being regulated. We've got to make sure it's regulator confidence in what we're doing. And all of this should continue to drive positive operating leverage over time. So the one thing also around Bread Financial and with our terrific technology team that we have, we're nimble in how we can deploy things across the company. And but AI is not new to us. And that's the thing that I think I want to be clear on as well is we have over 200 machine learning models out there across many functions, including credit, collections, marketing and fraud.

We have enhanced over 100 processes to date with leveraging robotic process automation. So look, there's a lot of opportunity ahead of us, right, like generative and Agentic AI are exciting developments, and we're going to be ready to go with some of those. And -- but we're excited about what the future holds with this, and there are opportunities but I would look at it as continuing to help contribute to driving growth and driving positive operating leverage and helping with efficiency ratios over time.

Yes. I think our approach is very prudent. As Perry said, we're a fast follower. But listen, at the end of the day, we're a regulated industry. So we're going to protect our customers' data. We're going to act all our information. We're going to make sure nothing enters our environment that is harmful in this world of ever-changing technology. But our focus on AI is to enhance the customer experience, make sure our employees have the tools in their hands and better serve our customers and partners. And make sure that we are -- we gain efficiencies across the patch, and that we're using it for better decision-making and better revenue generation.

Our next question comes from Dominick Gabriele with Compass Point.

I don't know what to say. Congrats on the buyback and the execution here. It's many years in the making. At some point, though, when do you think the industry stops using the terminology resilient consumer? Because at the end of the day, we mentioned that across the credit spectrum, all the vintage scores improving. You said that -- actually, it sounds like there's acceleration in the improvement of your delinquencies at quarter end. I mean when do we get to the point when we just say the consumer is solid across the spectrum and credit looks pretty good and it's trending back down. I guess, what are you guys seeing as far as that and then I just have a follow-up.

Yes, I think I'd go on record saying I think the consumer is stable and credit is improving. Now again, we're still seeing elevated delinquencies and elevated losses. So we're not where we need to be. But I think the caution in there that you're hearing from most folks is they've been resilient in dealing with this prolonged period of inflation, which is compounded. They're getting the handle on it. But it's more what I said earlier. It's caution with sentiment being down everybody is all nervous with the uncertainty that's out there, what's to come. And I think as soon as this certainty comes forward with what the tariff implications would be and other policy things, what it means to labor and businesses can start to invest confidently in jobs I think you're going to see the narrative flip. It's just -- I think it's the uncertainty component right now. That is why you're hearing some a little bit of cautiousness.

Yes, yes. And there's always cracks, right? There's always something that in credit land where there's some sort of issue, but it feels like generally the consumer, I mean, is improving. And I guess when you, Mastercard came out actually with their holiday spend and it looks like they expect some deceleration and year-over-year versus our last estimate, about a 1% deceleration. And so if you think about what you guys are seeing at the end of the quarter, you mentioned that spending has actually decelerated a little bit. That's pretty much in line with what we're seeing on an inter-quarter basis. So do you think that retailers seeing that potential forecast within their own models would trigger more discounts? And how does those discounts kind of affect Bread in a period where maybe versus a period where less discounts were given? Thanks so much guys and great results.

Yes. I mean I think you will see the retail is probably push discounts and reward opportunities probably forward more forward in the buying cycle for the Christmas holiday. So pull that forward. But I think consumers are savvy. They're going to look for those discounts. They're going to look for those, how do we monetize and optimize my reward programs out there. So I think that's I don't think that's changed from any year. I think you'll see that. You've seen that in the past, and I think you'll see that in the future. You may see it a bit earlier and maybe a bit steeper by sort of consumers, there are certain verticals, but I think you'll end up seeing that.

Our next question comes from Vincent Caintic with BTIG.

And actually, so 2 of them and they're kind of follow-ups to some earlier questions. So kind of to the point about your good credit trends and where you're underwriting. I mean, you're talking about a positive consumer late fees are coming down, but that's an output of the better credit that you're experiencing. And then you're expecting a gradual improvement to the macroeconomic environment. So I'm wondering if you still consider your underwriting to still be tight? And if so, at what point do you lean into growth.

Yes. So one thing, Vince, thanks for the question. One, we just -- as we said for a long time, we're running the business for a long-term focus. So we've been making targeted adjustments to our underwriting segments as we go, looking at risk and reward, make sure we get paid for the risk we take. And so that's been dynamic as customer behavior to improve both on us as well as office, what you see in the bureaus and as well as macro considerations are all factors into our decision. So we've been executing a gradual unwind of -- that was just there for the macro tightening. But it's been deliberately improving the mix of accounts that's been moving us more towards Prime Plus.

But again, it's not this wholesale change. But at the same time, you have tightening happen in other places where you might see a little bit of weakness in certain cohorts. But our underwriting philosophy has remained profit focused. We're looking to deliver some industry-leading ROEs and return on equity and can get our losses down to 6%. But as we think about the improvement that we're looking to see in our loss rate over time. It's not going to be fast and furious getting down to 6%. We're not doing things that would be overly detrimental to our brand partners. So when we talk about trying to get to 6%, we're trying to get each vintage to perform in line with expectations. And we could have taken a more, I'll say, draconian approach and really driven, I'd say, a new vintage down to, say, 4% losses, which get our overall loss rate faster, but that would be detrimental to our brand partners. If we were just mainly a branded business, we could probably do something like that to ourselves. But this isn't the business we're in. So we're very thoughtful about that.

And I think you're going to see that consumer health and macro considerations will help drive what we do with underwriting. But we're really pleased with the new accounts that we're seeing coming in, with the average Vantage scores, around 720, with over 72% being prime. And so we're very thoughtful on how we manage line assignments. So obviously, customers that come in the door that are more near prime, are getting a much lower line assignment. But all those things factor in, and that helps with that low and grow strategy we have with credit. So we are a very seasoned credit team and we've been very thoughtful behind this goes. But all this together, as Ross said, we're going to get this inflection point of growth as credit improves, meaning we have less losses, macro improves, the book we're putting on, this is going to start to translate into growth as we start to march into next year.

Yes. I think if I had to put a sentence on our philosophy is our underwriting is prudent with a focus on profitability. That's why -- if I had to put a sound bite on our -- how we think about credit.

Okay. Great. And then, Perry, just kind of a follow-up, and it's great to see the additional share repurchases and your execution of that. You mentioned that it would take issuing preferreds to get down to the 12% to 13% CET1. And I'm just wondering what you need to see to feel comfortable kind of executing on maybe issuing those preferreds?

Yes. It's just consistent with what we've said for -- I think since last Investor Day, it's just being opportunistic and making sure that it's the right time and our company is in the right position to do so. It's market dependent.

And I'm not showing any further questions at this time. I'll now pass it back to Ralph Andretta for closing remarks.

Well, thank you all for joining the call today and for your continued interest in Bread Financial. We look forward to speaking to you next quarter. And everyone, have a terrific day. Thank you.

Ladies and gentlemen, this does conclude today's presentation. You may now disconnect, and have a wonderful day. Thank you.

So thank you for joining, everyone. My name is Terry Ma. I cover consumer finance at Barclays. I'm very pleased to have on stage Ralph Andretta, CEO of Bread Financial; and also Perry Beberman, CFO of Bread Financial. So thank you for joining.

Thank you.

Yes. So let's jump right into it. Maybe let's begin with a quick update on third quarter. First, how our spend trends shaping up in the third quarter, last update. We had during earnings, you mentioned July trends had been positive. So has that continued?

Yes. So as it relates to the third quarter, let me just hit a couple of things. First, we're really pleased when we were able to announce the $200 million share authorization. I think that's an important step in where we are as a company that the confidence of the executive leadership team in tandem with our Board that now we were able to -- at the point where we can return some value back to shareholders in the form of share repurchases. And that should be the beginning of the maturation of our capital plan as it relates to some of that return to shareholders. And Ralph will talk more about our capital priorities later.

The second thing is in the quarter, we are going to have a discrete tax item, which will be beneficial to the quarter. And so we'll give more guidance on what that means to the full year tax rate during third quarter earnings. And the last thing I want to point out for the quarter is that in this quarter, we'll have an increase in revenue share. So that will impact noninterest income. It will be a little bit lower than what you would have seen in the second quarter.

And then so specific to your question on sales, sales momentum did continue but a little bit at a slower pace. So as you mentioned, July sales were good. And I can almost look at the tail 2 halves of August. The first part of August had a little bit more of an acceleration in it, and then it slowed down a little bit in the second half of August, but still seeing positive growth year-over-year.

One thing I would caution because we get this question a little bit on loan growth. With the comp versus last year, I think some folks might be forgetting that we had purchased a portfolio from Saks which came through midway through August of last year. So when you look at the comp, when you look at our stats, that was a $300 million to $400 million portfolio. So you can translate that into 1.5% to 2% loan growth. So that's now lapsed.

Okay. That's helpful. And just the increase in revenue share you just called out, any color on kind of what's driving that? And how persistent will that be kind of go forward?

Some of it's timing. Some of it is -- some of it you pay on a little bit of a lag basis. So some of that should be more seasonal. But again, expect that to largely follow originations. In this case, there's also some renewals that happen and other things that cause some onetime impacts within it.

Got it. Okay. Helpful. So maybe turning to credit. Charge-offs were 7.9% in the second quarter. So improved quite dramatically from last year, largely a function of credit tightening. Obviously, you put out the monthly update this morning. Maybe just talk about kind of credit as you're seeing it in the third quarter and going forward.

Yes. So you saw what we posted today, again, stable versus the prior month, continue that good improvement year-over-year. We still feel very confident with the guide that we gave that the third quarter will land in that 7.4% to 7.5% range and the full year in the 7.8% to 7.9% range. We remain pleased with the improvement that we're seeing in delinquency. And when we say credit tightening, it's a function of a few things. One, I think the general consumer is healing who's in our portfolio. We have taken credit actions early, and those have bear fruit in terms of seeing improvement as well as the continued product mix shift as we put a more co-brand product, which has a little different spend criteria.

And one thing I'd also point out is that when you're seeing this improvement, we are seeing the improved delinquency that comes with higher payment rates, which is another thing that does suppress our loan growth a little bit. It also manifests itself into some lower late fees. So all that we'll talk about more and we probably go through some NIM conversation and the like down the road.

Got it. And just maybe touching or following up on the guide for the full year, 7.8% to 7.9%. That was revised lower from your initial guide of 8% to 8.2%. Kind of maybe just talk about what drove this revision? Is it just kind of outperformance? Or like what is it?

Yes. It's largely outperformance in terms of the pace of the credit quality improvement. The delinquencies came down in the beginning part of the year. You saw that through the numbers that we posted. Once you get to July, you have a really good handle on what does that mean then for the balance of the year. So right now, we're seeing really good stability in that early entry rate, and we're seeing some slight improvements in the back-end roll rates, meaning when customers roll from one stage of delinquency to the next stage, we've said that along that we needed to start to see some improvement of that once customers get into delinquency, they're starting to see some ability to pay throughout the delinquency bucket, so less result in ending charge-offs. So all these things are culminating in a better credit quality outlook for us.

Got it. That's helpful. And can you maybe just provide any updates on how borrowers with student loans are behaving?

Sure. We've still seen no material impact for customers with student loans. We have about 20% of our portfolio has student loans. So we -- and we know that at the time of underwriting. We can see the customers who have student loans, who don't have student loans, how they perform, they're basically on top of each other from a delinquency standpoint.

Now what we have seen are some customers who have student loans who have not made payments on their student loans are continuing to pay on their credit cards. And what that means is what we saw in the great financial crisis, where you saw consumers do so called making payment hierarchy decisions, meaning they prioritize paying credit cards, which has utility over mortgages, over auto loans, over home equity loans, over student loans because they want to free up some of their credit lines so they can reuse it to buy everyday goods.

You're starting to see that now with student loans. So what we are seeing, though, are consumers who have student loans who have not paid, we see on the bureaus, their credit scores are starting to decline. So they're starting to have more delinquency on their bureaus getting reported, and that will impact them from a credit strategy standpoint at card issuers like us, meaning that they might have been eligible for a credit line increase, well, now they won't be if their scores drop a certain amount or may actually get to a point where the credit score declines to a point where we have to contract their credit lines or freeze their accounts.

So we do take that into contemplation. But in terms of delinquency, payment behavior on us, there's no difference between those that have and don't have student loans at this point.

Okay. That's helpful color. And then longer term, you previously guided to 6% charge-offs. How do you feel about that guide and your pace to returning to that kind of target?

We still feel very good about the guide. The pace of how long it takes to get there is largely going to be a function of the churn in the portfolio over time, the credit risk mix distribution that we have for the new vintages coming on and just the general healing of the consumer. I think we've said all along, it's going to be a slow, steady, gradual improvement. I still think that's the case. And the one thing that's unique about us, I think, compared to some of the other big issuers is that we don't -- we say there's a through-the-cycle view that we should get to around that 6%. But we're not driving the portfolio there through contractions that would limit profitable growth.

So for us, we talk about underwrite for profit, meaning that think about every customer, every vintage we put on, should deliver a certain return and get us to that, I'll say, that 6% view. So when we look at month on book vintages, is the new vintage tracking to deliver both the return, but also that loss trajectory we're expecting. So the new vintages are aligning to, say, the 6%. Well, if you were running at 8% losses, you're putting on 6% new vintage, you're gradually going to bring down the overall portfolio loss rate as it blends in. We could have taken a more dramatic approach if we were maniacally focused on getting to 6% and say, okay, we're going to put on new vintages at 4% loss rate and you would accelerate that pace of improvement, but we'd be foregoing the profit and the return that we like for that vintage.

So again, we've maintained, we underwrite for profit. And so it just means we're going to see a slower gradual improvement over time.

Okay. Got it. So maybe turning to loan growth. You touched on that a little bit. You're currently guiding for growth to be flat to slightly down year-over-year by year-end 2025. How are you kind of tracking to that guide? And then maybe digging in a little bit deeper, is there any interesting behavior you can kind of call out with the cohorts?

So I think we'll be -- we're tracking to our growth of slightly down. I think our loans will be slightly down. I think the primary reason is, and I think Perry mentioned earlier, we're seeing payment rates improve. So we're seeing payment rates improve across all VantageScores, which is a good thing. But while payment rates improve, so does our loss rate. So that's a nice trade-off. We'll get a little less loan growth, but we'll see improvement in the loss rate. And again, it's across all VantageScores, not any particular segment.

Anything in particular that you think is kind of driving that improved payment rate?

It could be a whole host of things, right? So we're seeing people pay -- the 0 pays go to do, and we're seeing -- so we're seeing that happen. The decline in gas prices is helpful to us. So if you think about when energy prices come down, that really affects the -- our customers in our portfolio. So we see that, and they have more disposable income and they tend to pay down a bit more.

Okay. And then obviously, you, like many other lenders have tightened underwriting over the last few years. When would you start to feel comfortable kind of unwinding or loosening those tightening actions again?

Yes. So we tightened underwriting responsibly, right? Because I think that's the right thing to do when you've got a macro environment that's turbulent, you really focus on tightening and being very focused on where you will loosen. So what I think will happen going forward, I think credit is getting better. It's not where it needs to be yet. It continues to get better, but more work to do.

We'll look at the macroeconomic environment. We'll look at interest rates, we'll look at inflation. We'll look at payment behaviors of our current base. And then we'll decide where and when and how we actually either loosen, keep or tighten in some degree, some of our strategies. It's going to be gradual. It's going to be an evolution, not a revolution. We're not going to just open up the buy a box. It will be over time and gradual. As the economy improves and things get better, we will continue to be -- to open up as appropriate.

Got it. And I guess, looking out longer term, are you still expecting mid- to high single digits kind of loan growth? And kind of where do you see additional opportunities in terms of kind of verticals I know products?

Yes, I do. I mean we talked about in Investor Day, our mid- and long-term targets. Our mid targets were mid-single digits and longer to higher single digits. I still see that as we go forward. We have a good product mix. We have private label. We have co-brand. We have our proprietary products. We have installment loan. We have buy now, pay later. So we have a basket of really good products out there that help us with our installed base. That's a really good thing.

Our 10 largest partners are booked to the end of -- almost the end of the decade, at least 2028. So having those is behind us really focus on how do we grow with those partners going forward. New partners come on like crypto on recently. It's a partner that really accelerate as we go through the next couple of years. And as credit abates will give us a nice tailwind. So as we see that. So all those combinations of things really give me confidence that the mid-single digits in the midterm and higher single digits on the long term is there for us.

Great. Maybe just switching gears, turning to NIM. It's been lower this year, a function of several different things, credit tightening, lower late fees, improved credit and just overall product mix. How should we think about the NIM in the medium and longer term? And particularly as you kind of mitigant start rolling through the portfolio?

Yes. So I think you called out a lot of the moving parts within net interest margin. And that is one of the hardest things for our teams to forecast and certainly as analysts and investors alike, just starting with the fact that there's going to be a little bit of a headwind as interest rates start coming down. We're still slightly asset sensitive. So you can think about some of that pulling through offsetting some of the, we'll call it, the tailwind of some of the pricing actions we've taken to put increased APRs in market what used to be the late fee mitigation.

But even on that one, I think there's a little bit of a misnomer out there that we did a wholesale pricing change across the entire portfolio. We've been saying all along, we work with our partners. We are very deliberate in how those pricing changes were rolling out. Some partners adopted that early with an agreement on the revenue share or investment back in the program. Some came along a little later in the cycle. And some were never agreeing to changes in advance of the actual late fee change. So they didn't participate in that. So -- and then any time you do an APR change, we've talked about it years before it fully builds in for the ones that we did change. But we'll continue to work with the partners on that and how that influences NIM.

It will be slightly accretive over time. But the tailwind that you talk about -- I mean, the headwind of delinquency improves is great for payment rate, great for charge-offs down the road. But near term, there's fewer incidences of late fees. So that's a drag on yield. But you also do have a tailwind of improving losses. So you have less reversal of interest and fees. So you're going to get that normalized inflection point at some point, I would think next year or the year after, where the NIM has stabilized from all these counter forces. And at the same time, as you improve the credit mix of the portfolio, I'll say, better credit risk scores have lower interest rates. And so your top line yields are lower, but also has lower reversal of interest and fees from charge-offs.

So lots of moving parts. But I expect overall, it's going to be pretty stable. We'll give obviously guide as we get to each new year, try to say, here's what we think is going to happen for the year and adjust as we go.

Yes, it sounds like there's a lot of moving pieces. But at least in terms of the tailwind from, I guess, higher APR any sense or color you can kind of give on kind of what inning you're in, in terms of kind of that pricing kind of rolling through and benefiting portfolio.

Can you say it one more time?

In terms of the APR increases, like what inning are you kind of in...

I think we are probably in the 7th inning of the pricing changes. But in terms of the impact, it just takes time. And then there's discussions with partners even now, like some partners are good with it as it is. Working on the revenue share component. So we give more back. Some want a better value prop for the customer as we've talked about all along, what we would do. It's like I don't see you as business as usual. And then with some -- they don't love say the paper statement fee. We love it because it gets people digital, and that's the new breed of customer is very digitally inclined, but if there's some that they're concerned to getting too many calls coming in, okay, so we roll that back in that place. Others are very good with it, and they understand it gets a lower servicing costs, if they improved their revenue share.

Got it. I guess on that point, like what percentage of your partners have kind of thought about or have you talked to about kind of rolling back some of the mitigants?

I don't even put a sign of percentage to it. I think it's just business as usual, how do we grow the relationship? How do we grow the economic value of the partnership for us, for them and for the customer.

I think that's right. It's an ongoing conversation with partners. Pricing, it's not a onetime or twice a year. It's an ongoing conversation. And it's about being competitive, right? So they have a competitive set. So we want to be right in the sweet spot in that competitive set. They don't want to be on the high end. They want to be on the low end. They want to be right in the sweet spot. And so that's how we think about it, not as we're going to raise rates to make profits. Will we be competitive? Are we going to be able to acquire cards? Are people going to spend on these cards because it's a competitive rate.

Okay. Got it. That's helpful. And then maybe just on the allowance coverage ratio, it's lower year-over-year. A lot of that due to positive credit performance and also a mix of products. What's the outlook for that?

Yes. I think we've talked about this that you could see where we were going to see some towards peaking in loss rate, as you saw in the second quarter, could still have a lower reserve rate, and we lowered our reserve rate in the second quarter despite having elevated losses because the delinquency is one of the most important feeds into the CECL reserve model. I would expect as credit improves going forward, you're going to continue to see that rate come down. I expect it to be probably pretty stable in the third quarter, but then seasonally drop in the fourth quarter. And does it drop in line with seasonality or a little better than seasonality will be more so dependent on how credit quality is performing as well as what are the economic outlooks that we put into the model.

Again, the last reduction that we had in the rate was solely driven because of the credit outlook, not because we started to adjust back towards more of, I'll call it, neutral position on the credit risk overlay that we have in there. And so that's still an opportunity as we have more confidence in what the outlook will be for the economic views that we still expect to move back towards a more neutral position versus right now, we're very heavily weighted into those what we call adverse and severely adverse scenarios for that credit risk component.

Got it. Got it. So maybe we'll switch gears. How are you seeing competition in the partnership space shaping up? You recently renewed your Caesars partnership. Can you just expand a little bit on your thoughts on that as well as how you look at the partnership pipeline?

Yes. So not to date myself, but I've been doing this for about 30 years. So I've seen partners and it's as competitive now as it was when I first doing this. Entrants may be different. Products may be a little bit different, but the competition is there. We are absolutely uniquely positioned to compete well. So as I mentioned earlier, our renewal rate, our biggest 10 are renewed almost the end of the decade. That's a really good stat to have. We have a full product suite. So even when we're competing, we're not competing just on a PLCC card or buy now, pay later. We go with a basket of products, right? We can give you buy now, pay later, pay in 4, installment loan, private label, co-brand. We can even do deposit raising if we had to with some partners that we do.

So it's a complete set. And that really bodes well with the industry. We have a very seasoned team that's respected in the industry. That bodes well. So our -- we've had a really good hit rate. We've had really good response to our offers. As you mentioned, crypto, there's other things we're seeing that will come down the pipe, but we feel really good that we can compete up and down the spectrum. So -- but our sweet spot is probably that $100 million to $500 million portfolio. You get those de novo. They're easy to integrate. There's not a lot of custom to do. You get them at a really good price. You grow them and you don't have to put up a lot of capital in the beginning because you're starting from scratch.

So those are the ones that we've really grown. And we've had ones that have grown into terrific portfolios like Ulta. That was a de novo, and it's now become one of our bigger portfolios. So we feel good about it. Competition is always going to be there. We're always going to be competing. It's not just on price, but it's about experience and product, and we feel good when it's about experience and product because we've got them both.

Got it. Maybe staying on the point of de novo partnerships. What are you seeing in the pipeline for that? And where are some opportunities that Bread tap into?

It's across the board. We see it in a number of different industries, and we're pretty happy about that. We'll see it in furniture. We'll see it in home goods. We'll see it in travel and automotive. So across the board, we see a lot of de novo partnerships. And again, that's right in our sweet spot because we can get them up and on board pretty quickly. But right across the board, we see a lot of those. And again, they're good for us. They're not capital intensive in the beginning, and they're easy to integrate. And it's just a -- again, growing with them is really the right way to approach.

Got it. And what's the, I guess, level of competition like for those de novo partnerships? Like what is it about Bread that allows you to kind of keep winning those?

It's the -- I'm going to go back to the experienced team and the reputation the team has. Pricing always comes into it, right? Pricing is always an issue. But our team is really respected in the marketplace. We're known and we're -- we joke about it. We sit on the table it's 200 years of experience on one side of the table. But not everybody has 200, but pretty close. But it's the experienced team, it's the reputation that we have in the marketplace and the products that we offer. So we have a really diverse set of products. So a partner can say, you know what, I want to co-brand and I want to have installment loan, and we can give them both. So I think that helps us really bodes well for us in terms of the competition.

And some of the traditional partners just aren't there anymore, right? So you think they're off doing different things, particularly the larger ones in terms of acquisitions and mergers. And it gives us the opportunity to kind of focus on what we do best, which is these de novo partnerships.

Great. And then in terms of products, comparing private label to co-brand partnerships, what's more attractive for Bread and why? It certainly seems there's been an increasing shift in mix to co-brand compared to private label. So maybe just walk us through your thought process between.

Yes. So I'll start with -- every portfolio has a job and a greater portfolio, right? Every portfolio doesn't do the same job. So if you think about private label, private label is high returns, but a higher risk, right, a higher loss rate. And you think about our co-brand portfolios, they're good returns, but the loss rate is lower. So it helps you balance to that 6%, right? It helps you balance your loss rate. And with co-brands, which we didn't have, if you rewind us 5 years ago, we didn't have outside spend. We now have general purpose spend. So if you think about where people are spending money if they're spending money on nondiscretionary, years ago, we wouldn't have been able to catch that spend. We have that spend now. About a little over 50% of our portfolio spend is on that general purpose co-brand spend, which I think is a really good spend.

And most of our partners have offer both cards, right? So we have a private label card and a co-brand offering. And the co-brand is -- sometimes it's not the top of wallet card. It's a card that they'll spend on to get points at that particular partner. But we find that the returns are very acceptable and the loss rates are acceptable, and it balances the higher loss rate, but the higher returns in the PLCC. And then you throw in installment loan and pay in 4, which are also really good products for us. And we even have 2 proprietary products out there in the marketplace. So like I said, a full suite of products that we can offer any partner.

Got it. I guess when you look at your full suite of products, what do you think is most exciting for you? And where do you see the most growth potential?

I think there's growth in installment loan, quite frankly. I think there's a lot of growth in installment loans as we move forward. I think we'll continue to see growth in co-brands as people use these products because they want to -- they're engaged with the brand, but they also need to buy nondiscretionary items. We'll continue to see growth there. I think private label will always be a part of our portfolio. It's not going to be the biggest -- highest growing part of our portfolio, but I think we'll always be there.

So I'm bullish on what I like about our portfolio makes me excited is we have a lending instrument for no matter where you are in your credit journey, we have an instrument for you from pay in 4, private label, co-brand, proprietary card. And again, we can raise deposits as well. So we have a full suite of products. That's what makes me excited.

Got it. So crypto has been highly topical this year, particularly in the card space. You recently partnered with Crypto.com yourself to launch a new card. Can you expand on the opportunities you see in that space? And also maybe just talk about the risks that you're kind of mindful for?

So just to be clear, we're not exposed to crypto. So just to be clear, it's a natural native currency card. But what it has done for us is when you partner with a tech-forward company like crypto and they say, well, Red Financial has the technology know-how to meet our needs. So we've integrated to -- with their native app and for acquisition. That's given us a halo effect. So as we go to the marketplace, people see that we are tech forward and we're kind of state-of-the-art in our technology. That has helped us a great deal as we go to the marketplace and look for -- and work with other partners.

And quite frankly, working with crypto has taught us what it's going to -- showed us what it takes now to be competitive in the marketplace and things that we have to do. So early days, a really good product, high spending engaged base, but early days on the product, but we were really pleased to be chosen by Crypto.com.

Got it. Maybe we'll switch gears and turn to capital. You touched on it a little bit at the beginning of the presentation, but you recently announced a new share buyback program of $200 million. Your CET1 ratio is about 13% and at the lower end of your medium-term guide. How are you thinking about the uses of kind of capital? And also, how do we reconcile your buyback authorization with the commentary last quarter that you're going to treat capital in the third quarter?

Yes. So I think what the demonstration of the authorization was that we hit the marker in the quarter on the low end. And it also demonstrates the confidence we have in continual capital generation capital accretion in the third, fourth through the first quarter of next year. So we look at -- we're doing an authorization, like any company is doing authorization, you're looking at maybe the next 12 to 18 months out to see how much available capital will you have, what capital generation will be there, what uses will you have? For us, Ralph has said from the early days, we're going to stay focused on our capital priorities, which is to grow the company responsibly, invest in technology and the things we have to do internally, pay down our debt and then return capital to shareholders.

This is the first step in hitting that fourth leg of the stool with returning capital to shareholders, and it's just the beginning. So what that says is we have confidence that in the third quarter, we will be above the mark where we said we were going to be in that 13% to 14% range, I think about the midpoint, right, and that we will have some capital return. I mean the $200 million carries us into next year. It's not all expected to be used this year. But I think it's a statement of where we have matured to and now we can do all these things. And I would expect at some point next year, we'll obviously then have another authorization in market for -- that will carry us into '27.

So I think this is the time now we're starting to see the maturity of our capital priorities and us delivering on what we said we were going to do. And when we manage the company as we are, again, Ralph talked about that mid-single-digit growth in the near term or midterm and where we go. Again, if we're focused on doing the right thing, make sure we get the right returns and driving ourselves towards that mid-20s% ROTCE, which remains in focus as well.

So I mean, I feel very good about the capital, the capital ratios and the other thing that's going to happen next year, hopefully, is if we enter the preferred market, we'll further optimize our capital stack. So the binding constraint within our capital ratios have been 13% to 14%. Maybe we can get it optimized to 12% to 13% over time. That won't happen probably next year alone. But it just, again, is a continued maturation of our capital stack and the strengthening of this company.

I couldn't be more pleased. When Perry and I joined, it wasn't -- our aspirations were just what we said, invest in the business, pay down our debt, keep our metrics high and return value to shareholders. Now we don't have to choose. We have capital to do all 3. And I think that's a really good position for us to be in. It's been over the last few years to get there. But I'm pleased about the progression we've made.

Great. We have a little less than 10 minutes left. I'm going to pause here and opening it up to the audience and see if there's any questions. Questions, anyone?

They're not this quiet in the roundtable that we do in the one-on-one meeting.

No. Everyone's shy in the audience usually. So maybe I'll have one more. Like with the late fee rule out of the way, are there kind of any concerns you see on the horizon on the regulatory front for cards?

This administration has been more business-friendly, which I think is a really sigh of relief as we move forward. But it's not to say there's state regulations that are out there that we have to address. And those are more difficult to address because it's like a house-to-house battle. One state has -- talks about interchange and other state talks about an interest rate cap, and you've got to address those one-on-one. So to me, that's where I probably see regulation as a concern for us as we move forward. Settling on tariffs will be very welcome as we're seeing -- it's kind of fluid. So getting that settled will be a good thing as well. But to me, it's -- as we look out, we have our eye on state regulation.

Okay. Got it. One more time. Any more questions from the audience? Okay. So one more for me. Maybe just talk about tech. AI has been quite a catch phrase recently. Maybe just talk about that. Anything you're looking at in that area that could potentially benefit?

Yes. So I'll start. I want Perry to chime in, too. So our approach has been to be a fast follower, right? Not to be on the cutting edge, but to be a fast follower because we want to invest thoughtfully and wisely. So what we did is we took a step back and said, where are our use cases? What challenges do we have as an organization? And then how could AI solve those problems? Instead of going out and say, I want to invest in AI, now I'm going to go look for a problem to solve, right?

So -- and I'll give you a couple of examples. So one is a requirement, we have to listen to all our phone calls, right? So we have to list all our calls, right? And we would do that. And then you would sample a portion of those calls to look for complaints and trends. We used a whole bunch of people to do that, only listen to 2% or 3% of the calls. Now with AI, we can listen to the calls and then get trends based on what we're learning from those calls. That's a big change. I can go to the regulators now and say, hey, we listen to 100% of our calls. Here are the trends, here's what we're seeing. And by the way, the next step is we're going to take those trends and we're going to train our reps. So those complaints, we can abate those complaints. That's a really practical use of AI.

We have reps in the field, and we have this technology where AI is learning what the customer is asking and how the customer is asking and the reps could pull down on that to solve the customer's issue faster and more satisfactory to the customer. That's continuous learning. So those are practical uses for us for AI that make good sense for the business that we're in. And we'll continue to find those across the organization.

Okay. There are no more questions, I think we'll wrap it up there. I'll let everyone off for lunch.

Great. Thank you.

Right. Thank you.

Thank you.

Good morning, and welcome to Bread Financial's Second Quarter 2025 Earnings Conference Call. [Operator Instructions]. It is now my pleasure to introduce Mr. Brian Verb, Head of Investor Relations at Bread Financial. The floor is yours.

Thank you. Copies of the slides we will be reviewing and the earnings release can be found on our Investor Relations section of our website at breadfinancial.com.

On the call today, we have Ralph Andretta, President and Chief Executive Officer; and Perry Beberman, Executive Vice President and Chief Financial Officer.

Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Also on today's call, our speakers will reference certain non-GAAP financial measures, which we believe will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta.

Thank you, Brian, and good morning to everyone joining the call. Today, Bread Financial reported strong second quarter 2025 results. We delivered adjusted net income of $149 million and adjusted earnings per diluted share of $3.15, which excludes the $10 million post-tax impact from expenses related to the debt we repurchased in the quarter.

Return on average tangible common equity was 22.7% for the quarter. Our results reflect notable progress in advancing operational excellence while at the same time achieving responsible growth and practicing disciplined capital allocation, which enabled us to deliver strong returns.

Credit sales grew 4% year-over-year for the second quarter. Spending continues to be more heavily weighted towards nondiscretionary purchases, enabled by our expanded co-brand and proprietary products. These product offerings represent more than 50% of our credit sales.

Additionally, lower gas prices have positively influenced retail spending, particularly for prime and near-prime customers. We are encouraged by these spending trends as well as a gradual improvement in our credit metrics as a result of prudent risk management.

Given the outperformance of our net loss rate in the first half of the year, we updated our full year outlook to an improved range of 7.8% to 7.9%. While the net loss rate remains elevated compared to historic levels, the improving trend is encouraging. We will continue to closely monitor consumer health, purchasing and payment patterns and adjust our credit strategies accordingly to achieve industry-leading risk-adjusted returns.

Our focus on expense discipline and operational excellence is producing the desired result. As adjusted total noninterest expense were essentially flat year-over-year despite continued technology-related investments, inflation and wage pressures. We will continue to invest in technology modernization, digital advancement, artificial intelligence solutions and product innovation that will drive future growth and efficiencies.

We continue to make progress on our ongoing initiatives to optimize our balance sheet with the completion of our $150 million share repurchase program in April and a successful $150 million tender offer for our senior notes in the second quarter. These actions and the strong capital and cash flow generation of our business offered enhanced opportunities to deliver additional value to our shareholders.

Additionally, our direct-to-consumer deposits continue to grow steadily, increasing to $8.1 billion at quarter end, up 12% year-over-year. We are pleased to announce the multiyear extension of our long-term relationship with Caesars Entertainment, a leading travel and entertainment partner. With this renewal, our top 10 programs are secured into at least 2028. Furthermore, we recently launched an additional new fee-based Caesars Rewards Prestige Visa Signature credit card that gives members more ways to earn rewards and enjoy unique experiences.

Also during the quarter, we launched the crypto.com co-brand credit card program offering up to 5% in crypto rewards delivered through a frictionless user experience that is natively integrated into the crypto.com app. This new program is another example of Bread Financial's leadership in loyalty innovation and flexible tech-forward payment solutions.

We are proud of the progress we have made in strengthening our balance sheet while providing increased value to our brand partners. Our strong results reflect the continued commitment and hard work of our dedicated associates. We remain confident in our ability to successfully execute our strategic objectives and operational excellence initiatives.

In summary, we are well positioned to deliver strong returns, which we expect to translate into sustainable long-term value for our shareholders. Now I'll pass it over to Perry to review the financials in more detail.

Thanks, Ralph. Slide 3 highlights our second quarter performance. During the quarter, credit sales of $6.8 billion increased 4% year-over-year, driven by new partner growth and higher general purpose spending. Average loans of $17.7 billion decreased 1% as compared with historical trends, continued macroeconomic challenges drove softer consumer spending and the cumulative effect of elevated gross credit losses over the past 12 months adversely impacted loan growth. More recent improved payment behaviors as evidenced by higher payments also pressured loan growth.

Revenue was $929 million in the quarter, down 1% year-over-year, primarily due to lower finance charges and late fees, partially offset by lower interest expense. As Ralph mentioned in June, we completed a $150 million tender offer for our 9.75% senior notes due 2029 using excess cash on hand to reduce higher cost debt. The repurchase increased our total noninterest expenses by $13 million, which is the primary driver of the $12 million or 3% year-over-year increase in total noninterest expenses in the quarter.

On an adjusted basis, expenses were nearly flat year-over-year. Income from continuing operations increased $6 million, primarily due to a lower provision for credit losses and lower income taxes.

Looking at the financials in more detail on Slide 4. Total net interest income for the quarter decreased 1% year-over-year, resulting from a combination of a decrease in billed late fees resulting from lower delinquencies and a gradual shift in risk and product mix, leading to a smaller proportion of private label accounts, which generally have higher interest rates and more frequent late fee assessments. These headwinds were partially offset by lower interest expense, the gradual build of pricing changes and an improvement in reversal of interest and fees related to improving gross credit losses.

Noninterest income was up $3 million, primarily as a result of the recent paper statement pricing changes, partially offset by lower net interchange revenue driven by higher profit share.

Looking at the total noninterest expense variances, which can be seen on Slide 11 in the appendix, employee compensation and benefits decreased $2 million despite merit increases and other inflationary pressures as a result of our increased focus on operational excellence. Card and processing expenses increased $4 million, primarily due to higher network fees driven by a gradual shift in product mix and information processing and communication expenses increased $4 million, driven by elevated software license renewal pricing.

Other expenses increased $8 million, primarily due to the $13 million of debt extinguishment costs. Looking ahead, we anticipate higher marketing and employee-related costs in the second half of 2025 versus the first half following typical seasonality.

Adjusted pretax pre-provision earnings or adjusted PPNR, which excludes gains on portfolio sales and impacts from repurchased debt decreased $7 million or 1%, primarily due to lower net interest income.

Turning to Slide 5. Both loan yield of 26.0% and net interest margin of 17.7% were lower sequentially following seasonal trends. Net interest margin, which decreased 30 basis points year-over-year was impacted by the net interest income drivers I noted earlier as well as an elevated cash mix position in the quarter.

On the funding side, we are seeing funding costs decrease as savings accounts and new term CD rates decline. Additionally, our cost of funds should continue to improve as we opportunistically repurchased $150 million of our highest cost 9.75% senior notes during the quarter. We are pleased with our ongoing direct-to-consumer deposit growth represented in the chart on the bottom right of the slide, which increased to $8.1 billion at quarter end, further improving our funding mix.

Direct-to-consumer deposits accounted for 45% of our average total funding, up from 40% a year ago. Conversely, wholesale deposits decreased from 34% to 29% year-over-year.

Moving to Slide 6. We continue to optimize our funding, capital and liquidity levels, which is a key strategic initiative. Our liquidity position remains strong. Total liquid assets and undrawn credit facilities were $7.7 billion at the end of the second quarter of 2025, representing 35% of total assets.

At quarter end, deposits made up 74% of our total funding with the majority resulting from direct-to-consumer deposits. Given the success of our oversubscribed second quarter senior note tender offer, we announced an additional tender offer this morning, which is expected to be completed in the third quarter.

Shifting to capital. We ended the quarter with CET1 and Tier 1 ratios at 13.0% and total risk-based capital at 16.5%. Over the past 12 months, in addition to the more than 200 basis point positive impact on our total risk-based capital ratio from our subordinated debt issuance in March, our capital ratios were impacted by the repurchase of $194 million in common shares as well as the repurchase of 99% of our original $316 million convertible notes outstanding.

As a reminder, the last CECL phase-in adjustment occurred in the first quarter of 2025, resulting in a 74 basis point reduction to our ratios. The impact from the last CECL phase-in adjustment, along with the repurchase convertible and senior notes accounted for more than 180 basis points of adjustment to CET1 since the second quarter of 2024. Our CET1 ratio increased 100 basis points sequentially from the first quarter.

Looking ahead, we expect to build capital further in the third quarter, placing us within our medium-term CET1 ratio target of 13% to 14%. As a result, we are well positioned to strategically focus our capital and sustainable cash flow generation on supporting responsible, profitable growth and generating additional value for our shareholders.

Finally, our total loss absorption capacity comprising total company tangible common equity plus credit reserves ended the quarter at 25.7% of total loans, a 40 basis point increase compared to last quarter, demonstrating a strong margin of safety should more adverse economic conditions arise. We have a proven track record of accreting capital and generating strong cash flow through challenging economic environments. We are well positioned from a capital, liquidity and reserve perspective, providing stability and flexibility to successfully navigate an ever-changing economic environment while delivering value to our shareholders.

Moving to credit on Slide 7. Our delinquency rate for the second quarter was 5.7%, down 30 basis points from last year and 20 basis points sequentially. Our net loss rate was 7.9%, down 70 basis points from last year and down 30 basis points sequentially despite the approximately $13 million or 30 basis point negative impact from the customer-friendly hurricane actions taken in the fourth quarter of 2024.

There will be no further impact to our credit metrics as a result of those actions. Credit metrics continue to benefit from our multiyear credit tightening actions product mix shift and general stability in the macroeconomic environment. We anticipate the July net loss rate will be in line to slightly better than the reported June net loss rate of 7.8%, with third quarter in the 7.4% to 7.5% range and then increasing sequentially in the fourth quarter following typical seasonality.

The second quarter reserve rate of 11.9% at quarter end, a 30 basis point improvement year-over-year and sequentially was a result of our improving credit metrics and higher quality new vintages. We continue to maintain prudent weightings on the economic scenarios in our credit reserve model and given the wide range of potential macroeconomic outcomes. We expect the reserve rate to remain relatively steady in the third quarter before dropping at year-end following normal seasonality.

On the bottom right chart, our percentage of cardholders with a 660-plus prime score improved by 100 basis points sequentially to 58%, in line with our expectations. Our credit risk strategy remains unchanged, managing risk while delivering industry-leading risk-adjusted returns. Our segmented underwriting models incorporate recent performance data, baseline macroeconomic variables and various stress scenarios, ensuring appropriate returns for us and value for our partners.

At this time, we remain balanced in our consumer outlook and related credit actions given uncertainty regarding the potential downstream impacts on consumer spending and employment from recent monetary and fiscal policies, particularly tariff and trade policies.

Turning to Slide 8 and our full year 2025 financial outlook. We continue to expect average loans to be flat to slightly down. Our outlook for total revenue, excluding gains on portfolio sales is anticipated to be flat versus 2024 as a result of our implemented pricing changes, offset by interest rate reductions by the Federal Reserve, flat to lower average loan balances and continued shift in risk and product mix.

Given improving delinquency trends and payment behaviors, we are projecting lower billed late fees for the remainder of the year, modestly pressuring our full year revenue outlook. We continue to expect to generate nominal full year positive operating leverage in 2025, excluding portfolio sales and the pretax impact from our repurchase debt, which includes both convertible and senior note repurchases. We are confident in our ability to deliver on our operational excellence initiatives by investing in the business while maintaining expense discipline.

Given the better-than-expected improvements in our credit metrics in the first half of the year, we adjusted our 2025 net loss rate guidance to a range of 7.8% to 7.9% from the previous range of 8.0% to 8.2%. Current consumer resiliency despite concerns on how the macroeconomic environment may evolve in the future, provided us with confidence in our revised net loss rate guidance for this year.

Finally, our full year normalized effective tax rate is expected to be in the range of 25% to 26%, with quarter-over-quarter variability due to the timing of certain discrete items. In closing, our second quarter results and capital actions underscore our confidence in our ability to achieve solid financial results in 2025 and deliver strong long-term returns. Operator, we are now ready to open up the lines for questions.

[Operator Instructions] our first question comes from the line of Mihar Bahatia from Bank of America.

I wanted to start maybe with just the health of the customer, particularly with an eye on credit sales and loan growth. I guess it sounds like you said the credit -- the health of the consumer is pretty stable, and you're seeing -- you saw 4% growth in credit sales. But maybe just talk a little bit about the monthly trends that you're seeing. Was that steady throughout the quarter? Any update on July? And then how does that 4% credit sales growth translate down to loan growth?

Yes. So Mihir, I'll start. And to your point, I'd like to start just framing a little bit on the economy because I think that's the key driver of credit sales and what we are thinking for the rest of the year. And to your point, I think the consumers overall have remained -- I think we think they're in a pretty stable spot and pretty resilient, which is really encouraging. With that said, the overall economic environment is a little mixed in terms of what's coming in from the economic data, right? I mean some of the hard data is showing that resilience where, on the other hand, sentiment and confidence indicator has been more volatile. So we think there's going to still be -- there's still a lot of uncertainty out there and what the impacts of trade, immigration, tax policy may end up but the tax policy is resolved.

But -- so when we look at it, we're still feeling very encouraged with the hard data with the unemployment steady that 4.1%. So we don't think there's going to be pressure on jobs. Wages have been growing at above 3%, which is outpacing inflation. That's 7 out of the last 9 quarters. And for us and our consumers who we serve, that's really important. That's the thing we said in order for things to turn for us, we needed that to occur.

So when we look at it, we think about the back part of the year and the -- I'll say, the better improvement or continued improvement in sales that we've seen, that's going to be important. And that's why when we think about -- we look ahead, the things that are happening with trade policy is so important because if this turns out to be inflationary, that's going to probably slow down the progress that we've seen with our consumers where they've been increasing spend, payments have been improving. And it would just slow the improvement. I don't think it would reverse it, but that's what we're watching real carefully. These trade deals -- we don't know the outcomes. We're seeing some things every day. I think some of them, if they're the good outcomes would be you get more jobs. that come in investment into the U.S., that could be a good thing.

On the other hand, if countries disinvest in us and it goes the other way, that could be bad. So there's a lot of moving parts, but our expectation is continued gradual improvement with the consumer, and I think that's going to happen, and it's going to take over a prolonged period of time.

Now to your question on what we're seeing so far in July, it's been a real positive trend. So there's momentum building from what we saw in this last quarter, and it's continuing on so far into July. So we're optimistic. I can't really tell if it's a pull forward of purchases because of what could be consumers' concern about pending inflation, but that's a positive as well as we're seeing some good strength in our co-brand and higher-quality customers. So right now, I'd say we're in a very optimistic point, but being very watchful of what's going to unfold with the macro environment.

Got it. Just to be clear, sorry, on July, are you seeing an acceleration from the 4%? Is that -- I mean you said -- I just want to be clear on exactly what you said there.

Yes. We continue to see a positive trend.

Okay. Maybe just turning then to capital plans and buybacks. Look, you have a healthy ROE. It doesn't sound like you're anticipating much loan growth, at least for the next couple of quarters. CET is in a good place. I understand you're doing stuff on the debt side, but maybe just talk a little bit about buybacks, how you're thinking about those? Any thoughts to go get authorization and do stuff there?

Yes. Excellent question. I'm not surprised we're getting that question. As you know, we set those targets for our capital ratios, particularly CET1, which is currently our binding constraint. We stated that the medium-term target for that was in the 13% to 14% range. And as noted, when we hit 13.0%, we just hit the bottom end of that range. I would expect in the third quarter to continue to accrete capital. And so we will continue to execute against our capital plan. We'll have discussions with our Board. around what's appropriate, looking at our pipeline as well as we do stress scenarios. And again, we'll follow the discipline, and we'll determine what's appropriate. But first and foremost, we'll continue with our capital priorities that remain unchanged, which is to fund responsible, profitable growth that meets the return hurdles because that'll generate more capital in the future.

We're going to continue to invest in our business. And again, a lot of that's being funded through operational excellence efforts to contain expenses and reinvest that. And then we're obviously to hit the capital targets that we've stated and then return capital when appropriate. And again, we'll continue against that capital plan. We will optimize the balance sheet and capital stack into next year. We might start to introduce preferreds at some point next year, but still more opportunity and -- but we are very excited to be in the position that we're in right now.

Our next question comes from the line of Sanjay Sakhatrani from KBW.

Perry, maybe you could talk a little bit more about that slightly tempered top line view. I know you've got some cross wins here with better credit and that affects late fees, but you also have some of the mitigation impacts that would be rolling through over time. Could you just help us think about the progression of the top line, specifically NII over the next, whatever, 6 to 12 months?

Yes. Thanks for the question. You're right. So what's occurred that drove us to tighten up our guide on revenue was really the improvement that we're seeing in delinquency and having lowered billed late fees. that happening faster than what we had expected is what's putting pressure on the top line NII.

And to your point, there are other tailwinds in there, but if we go down the list of things that I talked about in the past, right, we've got headwinds in there from prime rate reductions that are still -- we're pulling through this year. There could be more if the Fed actually starts to act sooner on some of the following prime rate reductions because, again, we're slightly asset sensitive. The lower billed late fees coming through that we're now seeing that, again, related to delinquency, I'll take that all day for now. It just means we're going to move towards a more normalized environment.

The shift in the product mix that we have, we have a little bit more co-brand and proprietary card. They have lower risk, which means you have a lower assigned APR at the time of underwriting them, and I also come with some lower late fees. And right now, we're running with a little bit higher cash mix. And that's honestly a result of a little bit lower loan growth. So we're taking that cash and trying to action it in a prudent way, which is why we announced another tender this morning.

So those are the headwinds and the tailwinds are some of the pricing changes that we put in place, and they continue to slowly build, but those will reach a certain point because, obviously, the late fee rule change didn't go into effect, so we don't have to go as aggressive on some of those things. And another tailwind as the gross losses improve, there will be less reversal of interest and fees. And so the fact that we're having lower billed fees now means a few quarters out, say, 6 months from now, that will have less reversals related to those accounts. So then as you think about what's happening with each quarter, there's going to be a lot of variability in terms of the seasonality, the timing of these things, and that's where it makes it really hard to give direct, I'll say quarterly because it is fluid. And I think that's evidenced by what we just saw with late fees -- build late fees this recent quarter.

Okay. Maybe this is a question for both you and Ralph. Obviously, credit now, I think, going the right direction. You guys seem to have some control over it. The macro tariffs withstanding seems to be stable, if not improving some. Now that those factors, which have been headwinds are not the headwinds, how do you guys play offense from here? You talked a little bit about the excess capital position you have. Maybe a little bit if you could talk about the growth prospects, et cetera. How do we build -- how do we lean in and grow from here?

Sanjay, it's Ralph. I think a couple of things. When you talk about capital, our priorities haven't changed. We're going to continue to invest in the business, strengthen the balance sheet. and return value to shareholders. And now we have the ability to do all three. So it's a nice balance. That's a nice position to be in.

In terms of growth, I am pleased with the progress we've made on credit. We're not there yet entirely. We need to make more progress, and we'll continue to do that, continue to manage it. I'm pleased with the sales growth in the second quarter and what July is looking like. That's a real positive green shoot for us as we move forward. If you take a step back and think about our 10 largest partners, they are secured to the end of the decade. So we have our 10 largest partners where we could continue to drive value for them and for our customers. That's our focus to invest in that.

We have an extremely robust pipeline, and we win more than our fair share, and there's a lot of de novo opportunities in that pipeline that we can grow opportunities and move forward. So if you look about -- all of that, I remain optimistic about our growth opportunities as we move forward.

Our next question comes from the line of Moshe Orenbuch from TD Cowen.

Perry, maybe you could put a little finer point on kind of the mix shift that you've been seeing with respect to kind of higher-end consumers and more general purpose spend. Has that had an impact on balance growth in addition to yield? Like what should we think about in terms of that? And are those consumers revolving on their balances?

Yes. Thanks for the question. So when we talk about mix shift, it's slow and gradual. I mean you can see it in our Vantage risk scores. When we talk about co-brand mix, I think people think about that super prime customer, those airline programs, hotels, our co-brands are different. We underwrite those deeper than others. We certainly follow our mantra of underwriting for profitability. We look for programs that have good revolve behaviors. And that's -- so when we think about retail partner co-brands, they perform like high-end private label in a way. And then you have other ones that are top of wallet co-brands like AAA, Caesars that maybe perform somewhere in between what you'd think of those traditional big co-brands.

So it's not a tectonic shift in the portfolio. It's a slow gradual shift and one that is giving us a little different type of behavior over time. And it will, as we said, it can influence loan yield somewhat, but not to the point where it's going to be dramatically different because we do make sure that we're being disciplined in the value propositions that we have that works with the partner works for us and that it's delivering the right type of capital return. But we do get more sales from that and the sales, to your point, they do have a little higher payment rate in there, but often they do turn to revolve and they lead to loans.

Got you. And maybe you talked a little bit about the effects of the late fee mitigants and the pricing. Could you maybe flesh that out a little more? Like where do you see yourselves in that? And how is that going to impact the margins kind of over the coming quarters? And any discussions with retail partners about either pulling them back or reinvesting them elsewhere, thoughts like that?

It's -- honestly, it's exactly what you kind of just said, right? I mean we are working with all the partners as we normally do. That's what we call business as usual type activity. We have a very engaged commercial team, a client partnership team that is meeting with them almost daily and trying to make sure that our shared interests are aligned and that we're trying to grow the program, create the best value propositions we can for those customers and then for us to be able to underwrite as deep as we do. And some of the pricing that's in place is what was important in order for us to continue to support the program the way we do.

Now I'd expect much of the industry pricing to remain in place as everybody is dealing with the ever-changing macro environment and regulatory changes. And for us, it comes down to continue to underwrite and provide access to credit while ensuring the competitive value. I think you're going to see continued accretion into the yield over the next year or so, but it's going to be slow and gradual. And as there's other things happening that will offset some of that, we talked about this earlier, as delinquency improves materially, that will have pressure on the yield on that front. So it may not be as evident as it was a steady state and just pure revenue accretion.

Our next question comes from Terry Ma of Barclays.

Can you maybe just expand a little bit more in terms of what you need to see before you kind of unwind some of those tightening actions? Is it kind of more on the performance side or just more kind of macro driven?

Yes. I think if I heard your question right, you're asking what would it take for us to consider unwinding more credit. So it's very dynamic. And I don't want to have an impression out there that we haven't been giving customers line increases who are worthy. We have. It's just as you think about a posture when it's been a tighter posture because of the environment and being cautious about what is ahead. So our team has been really disciplined in managing our credit strategies.

We balance the goal of achieving our long-term loss rates and achieving our profitability goals. So we continue to make targeted strategy adjustments on segments in our new account and existing account where we have some areas we've loosened a little bit, meaning we put more lines out there or new accounts, we realize, hey, there's better performing pockets, so we're going to give them higher line assignments when they're coming in the door. Others, you tighten up. So we've been dynamic. We've actually started to reintroduce some of that, but it's going to be very gradual.

And if you think about -- I think there's an idea out there in the industry that when you think about loosening, it means you're going to prove a lot more accounts. Well, I can tell you on the margins, we're approving accounts that have a much higher loss rate than the average that we have today because that's margin, which also means you have customers in pockets that are 2% loss rates, you're going to have those that are much higher. So to go deeper means you're going to go really out there.

And for us, the reason, one of the reasons why you're going to see a slow, steady, gradual improvement in our loss rate is because the new account vintages that we put on are trying to get something that's close to the target that we stated our long-term target around 6%. If we really wanted to drive our loss rate lower, we could put on even smaller new account vintages and target of 4% and some others do something like that. So we're being very disciplined in how we approach this. But I expect that our team will continue to offer credit line increases, approvals as appropriate and help continue to aid growth.

The biggest thing is seeing better consumers come in the top of the funnel with improved credit. And as they perform better, it's going to naturally the corresponding credit actions will follow.

Got it. That's helpful. And then maybe just a follow-up on credit. You called out last quarter improving roll rates. I think you mentioned it was kind of broad-based across FICO cohorts. Has that continued? And then can you maybe just quantify how elevated those roll rates are relative to kind of what you expect to be kind of normalized?

Yes. Our roll rates have been improving, and that's the thing that we talked about is one of the most important aspects for us to get comfortable in improving our loss guide. I mean we're benefiting two things right now. Our roll rates have improved. So the mid- to late-stage roll rates are still elevated above pre-pandemic but improving. But another encouraging part, though, is that our entry rate into collections is now well below pre-pandemic levels due to the strategic actions that we have and the changing mix of the portfolio.

So we still want to see improving back-end -- mid- to back-end roll rates, and I think there's still room for that to happen, but a lot of that's going to be macro dependent. So I'd say we're encouraged there. And again, some of what -- it's hard to put a fine point on what's happening, but there's been a little bit of a shift in how customers are using their tax refunds. So that's also -- as we look at roll rates throughout the months and quarters, that has shifted.

I'll give you a factoid on that. I mean when you think about pre-pandemic levels, people talked about using 20% of their tax refund on everyday purchases or more of the refunds to pay down their debt. So times like this, these months, you'd get more debt paydown, and that would improve your roll rates. Well, now, more consumers, 35% to 37% is what I've read recently, are using their tax refunds for everyday purchases, almost 2x, which means there's less being used to put against their existing debt, which means you're getting a little different payment dynamic as in these months that you typically would have seen it. So I think that's some of what's also going to affect some of the seasonality and month-to-month movement when people are going back to compare to prior years.

Our next question comes from Reginald Smith from JPMorgan.

It's funny, we're all kind of asking about growth and my question is related as well. I was curious on what you guys can share in terms of the trends you're seeing in just the volume of gross applications that come through for -- specifically for both the co-brand and the private label, if you could kind of segment that out, that would be great. I know one of you guys mentioned your approval rate. And I'm not asking for an exact number, but can you kind of contextualize where you are today and maybe what that approval rate would have looked like in a more bullish environment. So I'm just trying to figure out like what the slack potential is in there.

And then finally, as you think about new accounts that come on, what can you tell us in terms of like engagement? Are they using the card versus maybe previous cohorts? Any type of metric or color you could give there would be great. And I have one follow-up.

A lot of questions in that question. Obviously, it depends by partner, right? So if you look at it by partner, we're seeing application flows at the top of the funnel, and we're going to see those. We still see in-store applications, we still see online applications as we move forward. It's a strong flow. And I think our approval rate is appropriate given the economic and macro conditions, and we continue to see that.

Once we do approve an applicant, we're very focused on their early time on book to make sure they're engaged, make sure they understand what the opportunities are for the spend on the card, the benefits they get, how to use the card appropriately. If it's a co-brand card, make sure they understand the opportunities for outside spend from -- as opposed to in partner spend. All that is kind of normal business as usual, and we continue to do that.

We just have a partnership with Crypto.com. That's our latest partnership. It is one where their customers could apply for the card in a native app. It's state-of-the-art. It really works well. And once they apply for that app, there's really -- it's an opportunity for them to use the card appropriately and to redeem for currencies that they like. And we are actually getting a halo effect with that because it is kind of state-of-the-art technology, and we're able to meet the needs of their customers and meet the needs of the partners. So we feel really good about all of that.

But again, it depends -- we see a good application flow. We see our approval rates based on we're on the economy well. Once we do issue a card, we're very focused on engagement and ensuring that the customer and they understand the opportunities that they get to spend on that card.

I appreciate the anecdote. It sounds like there's nothing like -- nothing hard you can tell us about those trends, which I guess is fine. I guess my next question, you mentioned your top 10 partners earlier, I think, in response to Sanjay's question. And is there a way to kind of frame your wallet share today with those partners and maybe what your longer-term stretch goal could be there? Like just to give us a sense of your penetration there and what you guys are driving to or how you would think about that longer term?

Yes. So I mentioned our top 10 partners. And that was -- and just to be clear, that's based on loans and receivables. So what's -- that's how we view our top 10 partners. And they're secured and I say to the end of the decade, but at least to 2028, obviously, it varies going back and forth. The opportunity there is to focus on deepening our relationship with their customers. Instead of negotiating new deals and stuff like that, that's behind us. Now we're focused on how do we execute well on the partnership, drive new incentives, new technologies to make it easier for the partner to interact with the customer to interact with the partner and interact with us. So that's the beauty of having these big relationships locked up to the end of the decade. You're focused on growing the business, not renewing the business.

Our next question comes from Jeff Adelson from Morgan Stanley.

I wanted to just circle back on credit a bit. I know you'd called out the hurricane impacts for the quarter, about 30 basis points, I believe. And I think previously, you'd mentioned that June would be seeing the bulk of the impact. So if I kind of think about stripping that out, it seems like your charge-off trend for June was actually down quite a bit, maybe 100 basis points nearly year-over-year. So I guess why shouldn't that trend continue as we think about the back half of the year? It seems like maybe you're guiding to a little bit more of a moderate decline. Is that just conservatism on the macro? Or maybe what are you seeing that would change versus the third quarter or the second quarter here?

Thanks for the question. As we did make sure we called out that we do anticipate the July net loss rate to be in line to slightly better than the reported June net loss rate of 7.8%. And that's then we gave the guidance for the third quarter, and that's 7.4% to 7.5%. And then fourth quarter is generally seasonally sequentially higher. So I think that's the point we're trying to say. And we did share, I mean, we're still cautious with what's happening with the consumer. Those back-end roll rates, while there's been some near-term improvement that we've seen recently, that could reverse.

So I think we're giving a view, which is, hey, if things hold steady, this is how we think the second half of the year could materialize. There's certainly -- I think as we talked about in the economic outlook, there's things that could go against us a little bit, but there's definitely positive momentum and things that could go to the favorable side. So again, we are encouraged by the trends. And for right now, where we are at, this is our view for the second half of the year. And I don't know if I want to say it's cautious, but it's some of our best thinking, but probably more on the cautious side than it is aggressive, if that makes sense.

Yes, that makes sense. And if I could ask a question, Ralph, you mentioned partners focused on growth, not renewing, technologies, customer engagement. I'm curious, as BNPL come up more in the conversations lately? I know one of your peers has been introducing more of their pay later product. You've obviously had that acquisition several years ago. Is that coming up more? Or are there any sort of key features and focal points your partners are looking at? And then as a follow-up to that, I know you just highlighted the crypto win you had last quarter. Any other areas of focus you're having in new prospective client conversations by industry vertical?

Yes. The beauty of Bread is that BNPL is a product and a product set, right? So we absolutely can accommodate BNPL. We can accommodate installment loan. We can dominate co-brand, private label, direct-to-consumer deposits, direct-to-consumer credit cards. We have a basket of products and BNPL is one of them. So we can lean forward on whatever is popular in the marketplace, we can lean forward with our partners and fulfill the need of the customer and the partner. So we feel really good about that.

If you think about our pipeline, it is robust. And as I said earlier, we win more than our fair share. We win more than our fair share because we have the right technology, we have the right offers, and we have the right team. that's a nice combination to have. And a lot of the things we're winning are de novo. So we get -- they get to grow with us. We get to grow as we move forward. And we've had great examples of that in the past, particularly with down in one of the verticals that we grew in beauty. We've grown beauty from a de novo to a really industry-leading vertical for us. There are verticals out there that we're yet to conquer, and we're excited about those. They're in the pipeline. You'll probably hear about them soon as time and contracts will allow, but we're excited about our pipeline in the future and what that will do for our growth.

Our next question comes from Bill Carcache from Wolfe Research Securities.

Following up on the Caesars renewal and I guess, any perspective that could offer on future renewals. Can you give some color on whether it was a competitive process? How did the pricing actions that you've taken impact the renewal discussions? Are there any changes to your risk-adjusted returns that you anticipate under the new terms?

Yes. The market is competitive. It always has been competitive. The beauty of what we do in our team is we're very proactive with our partners. So to the extent that we can interact with our partners early and sign a renewal that avoids us going to RFP, that's always a good process to take. And we tend to lean forward on there and do that in a number of occasions. If something does go to RFP, we certainly feel that as the incumbent, we have a really good shot to get it. We don't become irrational. We focus on what's important, which is growing the business and ensuring that we can meet the requirements of the partner.

So as I said, our renewal rate is exceptional. And that renewal rate stands from being proactive with the partner and resigning early to meeting -- looking at an RFP and deciding how we will move forward together. So either way, there is always some compression in the marketplace. It's just that's what competition does. But as long as they meet our hurdle rates, we're very focused on continuing to invest in those partners and moving their business and our business forward for the benefit of our mutual customer.

And then separately, can you discuss what you're seeing when it comes to penetration of retail partner sales? Any trends you're seeing across different categories that stand out and sort of any notable efforts to drive that higher, particularly to the extent that we see you guys maybe expand your credit box, if macro conditions sort of support that, how does that look in terms of that penetration?

What I would say there is that if you think about where we were and where we are, we have multiple different verticals now. We've got verticals in beauty. We have verticals in sports and travel and entertainment. And we have products that support all of those, whether it's a private label product, a co-brand product or BNPL. Academy Sports, I'll give you as an example. They have private label, they have co-brand and BNPL, a full suite of products. That's in the sports area.

So we're pretty much consistent across our top 10 partners and what we offer and how we offer it. Data and analytics plays a big part for us. We're able to use data and analytics with our partners to identify opportunities to increase penetration. We continue to do that across all channels, whether that's in-store, whether it's digital or any other channel that might be out there. So the most important thing is we're giving products that our customers want with the right value proposition and make it easier for them to apply and acquire and be acquired. And that partner becomes a lifetime partner for us because we have products that meet their needs no matter where they are in the spending in the credit cycle.

Our next question comes from the line of Ryan Shelley with Bank of America Securities.

Mine is around the capital structure in today's debt tender. So offer out there for both the unsecured and the subnotes. The subnotes are relatively new issuance. I guess, could you give any color for the reasoning on going after the subnotes? And just general thoughts around the capital structure as we move forward here would be much appreciated. I know you mentioned potentially doing some preferreds before. So just how should debt investors specifically be thinking about this capital structure going forward?

Yes. Thanks for the question. Yes. So right now, as we talked about, as I mentioned earlier, we were in an excess cash position, well above a buffer that we want to maintain. So we were opportunistically looking at our debt structure. And to your point, the subordinated notes are a newer issue. When we initially issued that, we issued what we call more of a benchmark size deal. For our balance sheet optimization, it was well above what it needed to be. But we have optionality on this particular tender, right? If you think about the senior notes, the ones that are 9.75%, we have an option to call those in February at a defined price. So right now, we're in a live offering, and we are going to be appropriate with how we end up balancing the outcome.

Got it. Is it likely -- you mentioned the February call price is likely -- you wait until then to see exactly how this tender goes or just up in the air?

Yes. Look, we have optionality, right? I think that's the point of when you have a call option, there's optionality. There's no decision definitively a lot is going to happen between now and then.

Our next question comes from Vincent Katani from BTIG.

Just some follow-ups. So actually, going back to credit. Just wanted to understand maybe a bit further what's baked into the loss expectations for the second half of the year and also what's assumed in your credit reserve rate. You already provided a lot of helpful detail for the third quarter and the fourth quarter. But I guess when I look at the second quarter, if you strip out that 30 basis points of hurricane impact, you had a 60 basis points quarter-over-quarter improvement to like 7.6%. And I guess the second half of the year kind of assumes that, that 7.6% stays there in that range. So I'm kind of just wondering what -- maybe what's baked into that because it does seem conservative. And maybe putting it another way, if we had the same kind of environment as we have today or as we had in the second quarter, could your net charge-offs be better than what you're guiding to?

Thanks for the question. Look, when we're looking at things right now, what we're seeing is we're trying to guide -- I think we got a good handle on the third quarter and gave you our best thinking there. We gave a range. So let's all hope it comes in on the lower end, but we'll see how things play out. And then again, seasonally, things go -- you typically increase in the fourth quarter. So we're trying to give you our best thinking. I mean, look, there's -- we continue to see momentum in back end -- mid- to back-end roll rates, okay, it could come in a little better. Stay stable, we've kind of given you our view. So -- and some of it is going to be dependent on what type of seasonal loan growth we have in the fourth quarter.

And then on top of that, as I stated earlier, we've seen a little bit softer tax refund season. So that's changing some of the seasonal views and what our thoughts are on third quarter at this point. So that's influencing it. And so that's a key point on the loss side.

As it relates to your question on CECL, I'm surprised it's the first time I'm getting a question on CECL, so that's pretty good. Pleased with the progress there that we were able to lower the CECL rate by 30 basis points linked quarter and year-over-year. And what I'd share with you insight on that is that improvement in rate was solely due to credit quality.

So in this environment, I would have liked to have been in a position where we could start to ease back on some of our weightings on the adverse and severely adverse scenarios. But given the uncertainty that still is out there around tariffs and the downstream impacts to inflation, we've got to wait another quarter or 2 to see how that pulls through. But really, if we can continue to see momentum, I expect a stable reserve in the third quarter and then seasonally come down in the fourth. And we'll see if credit continues to improve, maybe it's a little better than that, but don't know until that plays out because you run the models at the end of a quarter based on where things are at. But certainly more encouraged right now, and I just hope we get a fast resolution on the macro pieces because, again, the consumer is performing well, the portfolio is performing well, and we just need for macro to resolve itself.

Okay. Great. That's helpful. And then a follow-up kind of on the merchant discussions we had earlier. I mean, if you could talk about from the merchant engagement perspective, the environment, the pipeline? And also, how are the economics of new business you're putting on doing versus prior business?

Yes. I'll go back to what I said previously. The pipeline is robust. We have a lot of terrific opportunity. We always win more than our fair share. We look at it on a partner-by-partner basis and the economics have to be right for us and the partner, and we remain very disciplined in our economics and our returns and our pricing, and we'll continue to do that.

That concludes the question-and-answer session. I will now pass it back to Ralph Andretta for closing remarks.

Thank you, and thank you all for joining our call today and your continued interest in Bread Financial. We look forward to speaking to you again in next quarter. And everyone, have a terrific day. Thank you all.

Thank you for your participation in today's conference. This does conclude the program. You may now disconnect.

All right. Good afternoon, everybody. We have Bread Financial with us here today. Before we get started, I'm going to read some quick disclosures for important disclosures, please see Morgan Stanley's research disclosure website at morgansilly.com, research disclosures, the taking of photographs and use of recording devices is also not allowed. If you have any questions, please reach out to your Morgan Stanley sales representative. I think I get faster every time I do that.

So with us today, we have Perry Beberman, CFO of Bread Financial. Perry, welcome back. I think this is now your fourth year seasoned vet of the conference.

I think that sounds all right.

So welcome. Why don't we get right into it? So before we dive into some of the bigger picture questions, could we get a quick update on what you're seeing on the consumer quarter-to-date -- last quarter, you did note some evidence of a pull forward, you think and spend ahead of tariffs. Are you seeing that continue? Has your view shifted? Can you also talk about what you've seen in your credit sales and how that's evolved so far this quarter?

Yes. So speaking of the quarter, a few things. One, on the credit stats that came out this morning that came in pretty good. Pleased with the progress we're making and you think about where we are now through May, the trends are coming a little better than we expected when we set up the outlook to start the year. So encouraging signs there.

I do want to remind everyone that we still anticipate a $13 million impact in the quarter or about 30 basis points of impact in the quarter for the NCL rate for second quarter. And that is related to the hurricane-related accommodations that we have put in place for consumers, who are impacted by these storms late in 2024, and that will be the end of it. As you get through June. June's impact will be a little higher than what it was in May. But in aggregate, $13 million or 30 basis points of the loss rate.

As it relates to credit sales, credit sales continue to be pretty good. We're seeing some improvement year-over-year comp wise and expect to see an increase in second quarter versus first quarter. And to remind folks that when that occurs, you're going to have a little more drag on the RSA in the second quarter, so impacting noninterest income accordingly.

And so the best correlation is to look at origination trends and then make sure that there's -- you factor in that RSA drag. And it's really -- you pay that upfront, but then the loans are on the books that roll in your interest on going forward.

Any sort of way to think about that impact sizing wise? Or...

No.

Okay. And just on the Meta June dynamic, so lots of an impact in May, but even with that impact, still a pretty good outcome for the month in the credit data, but more to come in June for the hurricane impact?

More impact will be in June. So I would expect a slight tick up in the NCL loss rate in June compared to May as a result of that. But other than that, you look at year-over-year comp for May being down 83 basis points, even with the hurricane impact in there. So I think we're encouraged by the trends that we're seeing.

Okay. And since we're on the topic, does that have any impact on how you're thinking about the full year guide 8% to 8.2%?

It does in that where we are right now, it had you told me at the beginning of the year, that liberation day wouldn't have occurred and there wasn't pressure on tariffs and what that might mean to consumer payment behavior in the second half of the year, I would have told you that we're probably going to be maybe below that low end of the guide.

Right now, I'd say I feel very confident in the low end of the guide at the 8% level. I want to see June come in. I want to see a little bit more in terms of this tariff resolution. Today was an encouraging day, right, where it sounds like the high end, the top end of tariffs is starting to pull down. The question is how does it play through the economy, consumer sentiment, spend, payment, any uptick in unemployment.

The back half of the year is not necessarily playing out as optimistically as what I think we thought at the beginning of the year, where you're going to have that soft landing with continuing improvement in inflation, lower interest rates. It feels like the improvement is slowing. But again, I think we'll be able to guide a little tighter on that after we see the June data because then you have your delinquency formation that will play through the rest of the year.

And then really what you're talking about, do you continue to see the improvement in roll rates that ultimately manifests itself into the ultimate losses for the year. But as of right now, things are -- I'm encouraged by the trends that we've seen stability, and that's been a good thing.

Okay. So it sounds like near term shaping up positively, but maybe a little bit more uncertainty in the back half of the year, more to come there. Another near-term item to address the bond tender you recently did. May you announced a cash tender to purchase up to $150 million of your 9.75% senior notes maturing in 2029. It looks like we got the results last week, some good demand there. Can you talk about why you pursue this, what your plans are from here?

Yes. So thank you for bringing that up. So we did have good demand. We had over $500 million in opportunity to -- through the tender offer. And we only took $150 million of it, right? We're looking at the cash position we had and when we have excess cash, keeping a solid liquidity buffer, putting into the Fed at 4% to 5% interest rate when you can take out some bonds that were at 9.75%, which is good interest rate management there. So we did that.

Going forward, we're going to continue to see what kind of growth is in front of us. And we'll -- maybe if there's time to be opportunistic. Again, to remind you on those -- those bonds that were -- senior notes, $900 million were outstanding down to $750 million. We have a first call option that is in, I think, May 15 of next year, [ 104.78% ], so we were able to do it at [ 107.8% ], a little bit of premium. That premium will hit in the quarter to the amount of $13 million as a onetime nonrecurring item. I don't know if it will end up in nonrecurring or not, but bottom line is it was $13 million onetime hit. That will become into NIM positive for us going forward.

So it's a pretty quick payback on that. The spread between treasuries and taking down the 9.75%. As we look into next year, you -- and for the rest of this year, you have the interplay between making sure we get to our capital levels. And then do you -- how to use that cash, make sure you keep the right amount of liquidity buffers hitting capital levels, supporting growth. And so the interplay of all those will come to play into what we do with the remaining senior notes. And -- but knowing that March of next year, we have the option to do some refinancing of it.

Okay. Great. Now that we've gotten some of the near-term items out of the way. I think -- are we good on the near term? Anything else...

I am good on the near term.

Okay. Great. Let's maybe shift back to the big picture for a bit, Perry. You're coming up on 4 years with Bread. The company has gone through quite a transformation in that time. Talk about how Bread changed and why investors should care about that. And what maybe don't they appreciate about Bread now?

Well, I hope folks appreciate what we've done. I mean we have been on this journey. And when you say 4 years, it's crazy that it's already been 4 years. The amount of transformation that this company has gone through has been pretty remarkable. When it started with the board having the vision, I'll say, almost 5 years ago to simplify this company, right, to shed all non-related businesses that -- and really focus on the 2 banks and the financial services component of this, brought in a CEO in Ralph Andretta, seasoned financial services executive, who then formed the management team of the likes of Val Greer, who came in with a lot of financial service experience, myself and others and then elevating people from within the company, who were in a lot of those bank roles, the financial services.

So we are really trying to operate with the financial discipline, capital discipline, and you can see it in the results. I mean this doesn't -- didn't happen overnight, but 4 years seems like a short period of time, but it's been budgeted by a maniacal focus on being disciplined and building out better enterprise risk management processes, which takes years to get that type of the uplift in that.

The focus on -- you've seen it through the financial results, the capital levels the capital discipline, the capital policy, liquidity risk management, things that matter to regulators with the FDIC matter to rating agencies where we were able to get our -- the first time we had a rated bond back in the end of last year.

So all the things that we've been working towards is starting to play out, and you're starting to see that inflection point. And what matters is we're hitting the markers, right? You saw the first material buyback, stock buyback in the first quarter as a result of that when we introduce subordinated debt, and we're really close to hitting the targets that we've laid out there.

So the discipline, the capabilities, hiring the new Chief Technology Officer, who's upskilling the team and modernizing how we deliver tech, all these things are helping us hit our stride. So for us, the economy is what it is, you got to navigate it and we have a seasoned team to do that. But the transformation of this company from what it was 4 to 5 years ago to where it is today is pretty remarkable.

And you've also shifted the business mix towards quality, co-brand. Talk about how you've been able to win deals or -- win the deals that are actually driving this outcome and the continued path there. What strategic goals and KPIs are your partners most focused on as you engage with them in those conversations, sorry?

Yes. I mean in the business of partnerships, it's a partnership business, we have a retail partner or a co-brand partner, a lot of it comes down to relationships. When you're pursuing a new partner, you're meeting with them many times, and we meet with them at all different levels and across different functions.

So before it might have just been the person, who is the relationship or the business development person out there. Now our CEO will go meet with them. I'll meet with them. We'll bring our Chief Technology meet with their Chief Technology Officer for how can we integrate.

So you're having multiple functions come to the table to bring the capabilities, to have and understand and to build the report relationship. Again, it's a partnership model, which means you are partnering together for the greater good of both entities. And so when it comes to what they're looking for, they will look you in the eye and believe that you're going to be able to deliver on the promise of helping them better understand their data, analytics, marketing opportunities, helping them construct a value proposition that will resonate with their customer to, again, unlock more sales or more engagement, more loyalty and then have an appropriate set of economics.

It's very easy for 2 finance guys in the room we can hash out what economics might look like. But it's way more than that. And that's what they're looking for. Is who can help them unlock the sales, but also retain loyalty and engagement with their customers.

Okay. Makes sense. And one other question I get is whether the retail card industry faces some secular growth challenges as Buy Now Pay Later and other fintechs are competing with you. What's your pushback there? What do you think folks are getting wrong with that assumption?

I think there's always going to be competition for lending. And when I think about Buy Now Pay Later, and I've said this before, they're probably only about 30% of the people, who get Buy Now Pay Later would qualify for private label cards or the low-end credit cards.

A lot of people are displacing debit card usage with Buy Now Pay Later. Before they would swipe their debit card now, okay, they maybe can't afford it right away. They want to get it paid out of the next paycheck, so they're doing some more of that split pay, Buy Now Pay Later. And that's just a different cohort.

Buy Now Pay Later tilts a little more subprime than prime where credit card, there we can be near, prime and up. So there is some crossover. There could be some pressure on the lower end, but I don't think it's something that's pressuring your prime plus customer, maybe put some more pressure on the near prime.

And we talked about the Bread's evolution on shifting to quality in co-brand, but another key aspect of that evolution is your credit and your underwriting. So you've improved that subprime mix from about half of the book in 2020, now down to the low 40% today. Considering that ship, is there maybe a case for you to outperform your through-the-cycle loss target of about 6%? And how do you think about the risk return for your business as that mix shift continues on from here?

Yes, so -- yes, I think it's a really good question. And I'd like to say, yes, we could outperform it, if the risk mix continues and the overall credit environment improves. The challenge is, you mentioned we're close to that 43% of subprime.

And -- but given where we are with the macro and how we got here in that very large portion of Americans are feeling the pressure from what's been the past 4-plus years of elevated inflation, that persistent impact to their, I'll say, the average basket of goods they're purchasing, wage growth has started to improve there, but it's going to take a while to get back down to that 6% through the cycle just because it needs to work its way through.

It's not like typical unemployment-driven credit cycles where a stripe of customers go bad up and down the risk score and then everyone is left, the 98% that are left are the call good, meaning they have good credit and it actually end up with a cleaner portfolio. Here, everybody is still working their way through it.

But as you go through the cycle and you get out there, it's possible that with the different types of partners that come online, a little bit higher credit scores, it's possible to come below that the 6%, but it's really going to, as you said, be dependent on risk mix.

At the same time, because of our underwriting approach, we don't target a loss rate, when we are underwriting a particular customer cohort, we are targeting a return on capital, and we assign a different type of -- different economic capital depending on your 2% loss, its expectation cohort or you might be 15% loss cohort, which can still be very profitable if you have 35% interest rate and 15% losses. And lately, as you can imagine, there's still money made there.

So it's -- when you underwrite deeper how does it -- how do you end up? No matter whether it's co-brand or not, it's -- we're underwriting for return less than rate less than loss rate, if that makes sense.

Partner dependent, their goals and everything else, right?

Yes.

So what about the credit action stance? You've taken some tightening actions in recent years. Where are you on that today? Are you continuing to tighten? Are you largely done -- are you thinking about lifting? What would you need to do to start lifting your foot off the pedal. You don't target a loss rate, but is there maybe like a loss rate you want to get down to before you think about doing that? Or...

I wouldn't say there's a loss rate that we have to get down to -- to consider some unwind of the credit actions. In fact, I'd almost argue that if the time we're right and you can unwind some credit actions by increasing credit lines on customers are performing really well. That can bring in some new balances, better balances with better risk profile that could help your loss rate eventually. So it could actually help you work the loss rate down.

In terms of credit posture, we've been in a pretty restrictive posture, expecting that summertime, we could have started to unwind some of these things based on what the original hypothesis was or thesis was on macro. Right now, I mean anybody has seen the latest Moody's outlook looks like it's softening now in the second half of the year, makes us a little more cautious as the macro inputs are a variable into the decisioning on expected losses and is now the time to do some of that unwind.

So I think we're -- and I think I know we just need to be cautious, prudent. And when I say that, there's still always been little pockets that you're doing some unwind to while you're doing other restrictions in other areas.

It's never been binary. It's all for it's all on. It's -- and it's always going to be, as we unwind, it's going to be slow, gradual as you see the credit improvement as you see the on us behaviors look better. It will give us confidence that, coupled with the macro outlook to then strategically do some things to do some more line increase programs, maybe a little higher initial line assignment.

But in terms of approval rates, that will still end up being kind of where it's at because we underwrite as deep as it makes sense for the profit that we expect.

Makes sense. I think that was quite clear. So it could have done summer, but maybe that's on positive now until you learn more. Let's talk about one aspect of credit or credit quality, just the recent focus on student borrowers. We've -- you've been quite clear that there's been pressure on the low-income consumer in this key economy.

What are you seeing today from this consumer? Is any of this spreading to middle income, particularly student loan payments have started? I mean the middle-income consumer is quite impacted by student loans probably. So anything you're noticing there?

Yes. We have gotten a lot of questions on student lending is something that we've been trying to be transparent about for a while that we do monitor our consumers that have student loans, about 20% of our -- our population has a student loan on their credit bureau.

What we've observed is they perform pretty much in line with the rest of the population, whether you had a student loan or not. Again, they were benefiting from not having to make payments on those student loans. Now when we underwrote those customers, we underwrote them with the expectation when you look at their discretionary income that they were going to have to make that payment at a cash flow at the time of underwriting as if they were going to make that -- make the payment.

So what we've seen since, now we're able to see customers are you making -- are they making payments on those student loans or not? And what we can see is a bifurcation of customers, who have made payments on their student loans, their delinquency on the credit cards with us have remained stable, consistent with the rest of the portfolio. There's been no material uptick.

For those -- and what we've actually seen with those customers is their risk scores have gone up. They're improving. So customers who are resuming payments on their student loans are seeing an improvement in their risk score, which would tell us down the road, that's going to make them more eligible for a future line increase, right? That's shown good payment behavior strength of the customer.

We've other customers who have chosen not to make their student loan payment. And they're showing increased delinquency on their student loan on the bureau, we're seeing very stable delinquency with them as well. No separation from those who are making payments on student loans versus those who weren't.

But what you're seeing with them, so they've prioritized, continue to make payments on their mortgage, auto, credit cards, because credit cards have utility, so we do a payment hierarchy, they're choosing that credit card payments have more value to them near term than paying on the student loan. But what's happening is now this report on the credit bureau, their risk scores are going down. And so that will make it more -- them more likely to be subject to a future risk action if necessary.

Makes sense. And who knows, if these consumers even know they were supposed to pay in their loans either, right?

That's a good point. And then the other question we get and I'm sure you get it as well is, well, geez, what happens if the government decides to do garnish wages and do those types of things. Look, I don't know the probability of that. There's certainly -- it's out there as a possibility.

But when you think about populism or populous type administration, that's pretty punitive to say you're going to put your student loan payment as the first thing the customer has to pay out of every paycheck or social security check before making a mortgage payment or rent payment or anything else, I don't think there's a high probability of that.

But that is something that would -- could change delinquency or payment patterns on credit cards, if that were to happen for those cohort of customers who today choosing not to pay.

Yes. Yes. Makes sense. Let's shift gears again. So regulatory side. You've got 2 rules in your favor lately. Late fees and I think the tush-push staying in place last [ Saturday]?

Yes. We'd like to call it the Philly Show, but, yes.

Okay. Well, I think only you call it that. But, alright. Keeping into the business side of things, you said you believe higher pricing changes across the industry can stay in place. Can this provide more of a tailwind to NIM in revenues for you over the next few years? Or do you think your partners want to reinvest this into rewards and other value props?

Yes. Back some question on -- we're obviously pleased that we -- the regulatory environment regulatory but the -- the environment change on the CFB late fee rule. As it relates to pricing, I think I've been pretty clear on this over time that my expectation is long term, it gets competed away.

Near term, it can provide a little bit of a tailwind or it at least can help buffer the impact of what we're seeing right now, where we have elevated losses. It creates the appropriate margin to care for this period of elevated losses.

In time, you expect that some of this will get reinvested into a value or value proposition for the customer. Some of it gets shared with a partner. And then in time, 5 years out or more, these things tend to work themselves out through different economic sharing when renewals or RFPs come to market. There's always somebody in newer entrants that wants to -- is willing to have a certain return.

But again, it goes back to just rational pricing. There could be some rolling back. Some of the things in place are surprisingly not having any, I'll say, statistical impact to credit sales. So that's a good thing, which means we can work with the partner to maintain some of that's a positive.

And what about the promo fees ad? I mean, we heard from someone else that they're planning to probably take those off. So is that something on the...

I think it's probably a partner-by-partner decision. I mean if they're sharing in that, both parties are impacted. And if you can demonstrate and show them the statistical data that says sales are not being suppressed from that. I mean somebody can get a 12-month financing, same as cash 0% interest. And if you pay upfront 2% fee, that's a pretty good deal.

So again, we're not seeing suppression. I think some of it might be psychological for the partner, not looking at the data. So I think it depends on the motivation often of the partner.

And how many of these conversations have you had? Like I'm assuming you've not yet unwound anything or reinvested yet, but like what's the cadence of conversations looking like at this point? Is it still too early? Or...

We have an amazing client partnership team. They're talking to partners every day. So some may become more front and center, if they're feeling sales pressure, maybe they want to believe that it's because of the higher APR on new accounts or a promotional fee and you try to show them data.

A lot of times, if you're a private label card, -- and the pricing is at 33% or 34%, 35% or even 30%. Is the customer really going to make a different choice about whether it take the card to make the purchase. It's still somebody who's newer to credit, maybe a little damage credit, and it's still a square pricing value proposition for them.

Okay. Is there any way to maybe think about the benefits of route to your ROE from all these pricing changes? Or...

I think the best way to maybe articulate is probably what the impact has been to net interest margin for the year and let that translate a little. So for this year, when you think about the effects of the interest rate, the prime reductions, the Fed funds reductions from the back part of last year, a couple more maybe expected this year.

For us being asset sensitive, that would have given us some net interest margin compression. We have had elevated losses in the first part of the year. Again, there's higher reversal of interest and fees, which is a drag. You continue to have a risk mix improving, which better risk mix, lower APRs that's a little bit of a drag. And then you also have lower build late fees, because delinquency is improving.

So as delinquency improves, you get less late fees built. These things would have actually all else being equal. We would have said net interest margin would likely be down year-over-year. Our guide is now that net interest margin will be slightly up, like nominally up. So the pricing actions that we put in place are helping to maintain or slightly increase net interest margin in the near term.

Got it. Makes sense. And shifting to capital. You established medium-term capital targets of 16%, total risk based last year, 14% CET1 and then a longer-term CET1 of 12% to 13%. You've talked about being more opportunistic on the buybacks. It looks like you did that more recently. You did the $150 million buyback authorization, execute on the full amount last quarter or also through April, I believe. You also did the sub-debt issuance. We touched on the bond tender, so a lot happening, obviously.

But with your CET1 now at 12%, what do you think about the trade-off of buybacks versus dividends versus growth from here? Is there a valuation framework you would employ. So first...

Look, we are really pleased with the way we executed on the supporting a debt deal and then swiftly being able to execute the stock buyback below tangible book value. That was, again, being opportunistic -- we struck, we got agreement with the Board to do so.

And to your point, we ended the quarter at 12.0% CET1. Our target is probably closer to 13% to 13.5% is where we should be living right now with CET1. So we need to get to those spot rates. And again, we do look at a 4 quarter forward role. But we are mindful of the relationship we have with the FDIC, our regulators, rating agencies. We want to make sure we hit these numbers.

So the first thing in terms of priority is supporting our business growth. The second thing is hitting those capital ratios. That was more of an opportunistic thing that we did. And then as you roll forward, I mean, you could tell the amount of cash and capital accretion that we're able to generate, I think, to get down to the 12% target we're going to need to better optimize our balance sheet, which include introducing preferreds into the capital stack.

And that's something that I would hope to execute against some time into next year and build that over time. And that will drive down the binding constraint to closer to that 12% that you mentioned long term.

In terms of priorities, look, the priorities that we've had haven't changed. They really haven't like support growth, it's got good growth, it's got to meet the right capital returns that we're all happy with the expected return on capital. Keep funding the things we need to fund on technology and capabilities, and that helps fund the operational excellence that will continue to drive down our efficiency ratio over time.

And then as you mentioned, between dividends and share buybacks, we definitely have more of a bias towards buybacks, particularly while we're trading well below what we believe is an appropriate multiple for us.

Okay. Great. A couple more from me. Any potential thoughts strategically -- strategic question here, any thoughts on potentially expanding outside of other areas -- into other areas outside of retail card? Any ways you can lean more into things like embedded finance, BMPO with the Bread offering or look at some more capital light ways to do lending in your business?

No, that's -- so we do -- we do evaluate different strategic options. And for all the things we just talked about of how to deploy capital, we got to make sure we're doing a way that is the next best use of capital in a place, where we have, I'll say, the right to win, meaning we have the skill set, we have the capability within technology and that we're not putting other technology priorities at risk of not delivering on things we have for our current partners, to go play in a field that maybe we won't be as successful.

But you mentioned a number of things where we do believe we can be successful. We've announced a couple of enterprise deals that will come through on our Buy Now Pay Later platform on Bread Pay, where we'll do more of the installment lending. I expect that can grow. We can grow in some personal loans. Again, very much in the wheelhouse of what we do and leveraging the capabilities that we have.

There are some capital-light opportunities of some sponsor bank type things we could explore. Again, if that's more about make sure the enterprise risk management framework in place. But again, leaning on core capability. I think that's the important thing.

Where it gets a little looser is if you were to say, and I think where we evaluate all different opportunities for adjacent products is not to get into things that are not within that meaning. You start doing small business lending, very different than consumer lending. And we go to auto loans, there's a different type of capital-intensive businesses or mortgage, not so much of interest to us.

Okay. Great. And maybe in the last few minutes, we can wrap up here, Perry, with the strategic question for you. So you talked about Bread's evolution at the beginning. What's the next phase of Bread's evolution? What are your top 3 strategic priorities as we look out the next few years? And maybe you could layer on, on how you think Bread can sustainably reach this medium-term ROCE target of 20% plus.

Yes. I am really excited about the next few years. I mean I was excited about the past for what we've accomplished, and those were in some really challenging times.

When I think about the team that's been built and the environment and hitting our stride in terms of generating capital and how we deploy capital, we cleaned up our balance sheet. We took up more than half our debt or hitting the capital ratios, we're going to have lots of options of how to deploy capital, and again, doing it smart.

The fact that we are uplifting our technology organization to really be able to deliver things faster for the customer, faster for our brand partners. There's opportunity there. I've been very excited about operational excellence.

And I know that's just a term, but the amount of engagement we've had from our employee base, we've taken thousands of ideas on how to improve processes, end-to-end processes, small and big and some transformational work that we have going on and what we are delivering even in year that manifests itself into multiples of values over the coming years.

I have a lot of confidence in driving down efficiency ratio, which is an important way to achieving that ROTCE and then further optimizing our balance sheet, which we talked about earlier, I think we've demonstrated the strength of our team in executing against things that we said we were going to do and doing it faster than we believe could be done.

And so I think as we look forward to the next year or 2, I expect to have an optimized balance sheet and then really be able to generate those returns that we talked about and then return available capital as appropriate to shareholders.

All right. Great, Perry. I think that's a nice place to end it. So with that, thanks for coming to our conference. Appreciate it, Perry.

Thank you very much for having me.