Bread Financial Holdings, Inc.

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. At this time, all parties have been placed on listen-only mode. Following today's presentation, the floor will be open for your questions. To register a question, please press star followed by 1-1. It is now my pleasure to introduce Mr. Brian Vareb, 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 Bieberman, 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 but 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, and 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 increased 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 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 five 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 non-interest 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 23 cents 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 Raymar in Flanagan, 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 omni-channel 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 from 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 three 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 SACS 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 billed late fees resulting from lower delinquencies, higher retailer share arrangements, or RSAs, with partial offsets including lower interest expense and our ongoing implementation of pricing changes and paper statement fees. Total non-interest expenses decreased $98 million, attributed to the prior year impact from repurchase debt. Excluding the impacts from our repurchase debt, adjusted total non-interest 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 impacts 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 four, 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 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. Non-interest income was $7 million lower year over year, driven by higher retailer share arrangements, partially offset by paper statement fees. Looking at the total non-interest expense variances, which can be seen on slide 11 in the appendix, employee compensation and benefits cost 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 pre-tax, pre-provision earnings, or adjusted PPNR, which excludes gains on portfolio sales and impacts from repurchase debt, was nearly flat year over year. Turn to slide five. 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 as 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 costs 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 six. 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 a BA II 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 comprised 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, 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 reduction 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 and up 30 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 multi-year 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 significantly 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 eight 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 pre-tax 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 toward 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.

Ladies and gentlemen, if you would like to ask a question, please press star followed by one one on your telephone keypad now. If you change your mind, please press star followed by one one again. When preparing to ask your question, please ensure your phone is unmuted locally. We will pause for a moment while I compile our Q&A roster. Our first question comes from Sanjay Sahari with KBW. Your line is open.

Thank you. Good morning. 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. Thanks.

Yes, Sanjay. Thanks for the question. So I think it starts with a quick view of The macro environment that you mentioned everybody's 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 is just that consumers remain nervous about what the future might look like. And that's really showing up in both, you know, consumer confidence and consumer sentiment, which is down, you know, pretty meaningfully versus last year. So there's going to be more to come on it. But, you know, 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, you know, finances and their budgeting. And so that's been good, right? Wages have continued to outpace with, I think it was August 8th, it was around, you know, a little over three, 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 it 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, you know, we, as you know, we don't have a high concentration of subprime. We focus on, you know, 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, you know, the cracks in there at this point. You know, we're very cautious. We're watching it very carefully. I'll say the entry rates into delinquency are high. 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, the macro is going to be real important, but I think our credit strategies and the risk mix shifts that we've been seeing are starting to play through. Oh, and your question on reserve rate.

Please, I'd love an answer for that one.

Yeah, 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, you know, the government policies are going to play forward, I think you'll start to see us be able to, you know, shift back off of those, you know, 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, you know, 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.

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

Thank you. One moment for our next question.

Our next question comes from Moshe Orenbunch with TD Cowan. Your line is open.

Great. Thanks. Maybe to just follow up on that, uh, Ralph and Perry a little bit in terms of, you know, clearly there's things going on in terms of, uh, you know, kind of still temporary moves in payment rate. But if you think about the new mix, you know, of your card base, is there like a way to think about the, the, the ranges of, you know, if you had 5% growth, um, in spend volume, what that would mean in loan growth once that phenomenon is kind of fully 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.

Yeah, 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 mixed 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 mixed 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'll look like as we get into next year.

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

Yeah. Uh, again, another good question, of course. Um, The way to think about it is, you know, the build late fees are obviously going to follow delinquency trends. And, you know, that is, you know, what we're all eager to see is, you know, how quickly does delinquency, you know, get to its steady state or what gets us towards that through the cycle number. So that will be leading and then, you know, trailing within six months, I guess you then have the, you know, that improvement in, you know, the build, the reversal of build interest and fees. So those kind of will be some, you know, it's a headwind on the lower build late fees with delinquency. You do have the tailwind that goes with the gross loss improvement. Those two things come together. Then you also then have you know, a shifting risk mix, product mix within the business, which, you know, when you put on some more, you know, higher quality co-brand has a little bit lower APRs and yield versus private label. You know, so that comes through, but then you do have pricing changes that have been made that, you know, 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's that, you know, perfect inflection point? But with all those moving parts, you know, we'll obviously give more guidance as we get closer to January so that, you know, we have a better line of sight into 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. Thank you.

One moment for our next question. Our next question comes from with Bank of America. Your line is open.

Hi, thank you for taking my question. 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 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?

Thanks. Yeah, so credit sales, again, we're seeing some pretty good growth in credit sales right now. As mentioned, it was early in the quarter. It was back to school. It 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. Expectation is retailers are going to be pretty aggressive. trying to draw the customers in, possibly early, so consumers are looking for discounts or looking for promotions. And reward programs are going to be real 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, you know, 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, you know, I'll say old historical days when I go to the day before Christmas to go look for that great deal when, you know, didn't have the money to get things and pay full 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 inventories.

Got it. Thanks for that. That's helpful. When I think about the interchange revenues, you know, 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?

Yeah, again, it's one of the – I say NIM's hard to forecast. RSA's is another one that's pretty hard to forecast because of the netting that goes on in there. So 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, you know, 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, you know, profit share with partners. So you've got sales-based rebates, you've got the revenue share in there, you've got the profit share, and everything I just mentioned around the rewards funding. In addition... When 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. Understood. Thank you.

One moment for our next question. Our next question comes from Jeff Adelson with the Morgan Stanley. Your line is open.

Hey, good morning, guys. 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? 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.

Yeah, thanks for the question. You know, the home vertical is a good one for us, right? Because it's discretionary, non-discretionary. There's home repairs and there's other discretionary furniture. So we view that as 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, you know, 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, you know, we look across our portfolio, you know, it's diversified now. It's, you know, we've deristed in terms not only of product, but also of, you know, 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 would move forward. So we are kind of insulating ourselves from any one vertical that there'd be an issue with. Usually it was if You know, 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, you know, one-off verticals that tend to, you know, that may be impacted by the economy.

Okay, great. And maybe just to follow up on capital return, you know, 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 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 your cadence here?

Yeah, real good question. So, you know, 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, you know, fund responsible, profitable growth. So some of what will inform our capital authorizations or shareholder purchase authorizations 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 capabilities of our, you know, 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, you know, right now our, you know, binding constraint is to, you know, CET1 around that 13% to 14%, which we said was our medium-term target. And so, you know, 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 wanted 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, you know, when you talked about, you know, 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, you know, what happens with senior debt or, you know, you know, financings that are keyed off of those ratings. Okay, great. Thank you. But we don't need to get to an investment grade to take capital actions.

One moment for our next question. Our next question comes from Reggie Smith with J.P. Morgan. Your line is open.

Hey, good morning, guys. I was looking through your slide deck and my rough math as like your BNPL sales volume up, you know, 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, you know, kind of blended dual-purpose cards? And I have one follow-up. Thank you.

Yeah, so I think you have to look at our full product offerings, right? So I think it's the way you look at it. So we have co-brand cards, and that's, you know, I think co-brand cards right now are probably the majority of our spend in terms of going forward, discretionary, non-discretionary. Private label credit cards, absolutely have private label credit cards, and we see, you know, spend continuing on those cards. And then we have buy now, pay later. Now, buy now, pay later is a paying for an installment loan, right? So you have two types of buy now, pay later cards. out there as well. And then lastly, we have our prop card. 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 kind of credit, establishing credit where they are in that journey, we have a product for them. We have a product for them, you know, through a partner or directly to them. So we feel very, very good about, you know, 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, you know, I look at, you know, companies like Klarna and Affirm, like they're really leveraging that point of sale to bring, you know, customers into their ecosystem. I guess what I'm asking is, you know, what are your thoughts around, you know, I know Bread 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 to the platform?

Yeah, you know, unlike the two you mentioned, we are focused on partnerships. That's where we're focused. You know, we're focused on not just bringing people into our ecosystem but making sure people are in that partner ecosystem. We can provide the right services. right 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, you know, even on BreadPay, we're on certain sites where 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, you know, multi triple digit kind of basis point impact on efficiency ratios. in the credit card and banking space. How are you guys thinking about that longer term? I would imagine there's an opportunity there, but just maybe can you frame that out longer term for us? Thank you.

Yeah, Reggie, thank you. So we agree there's definitely an opportunity with AI, and we've been engaged with it for a while. So for us, You know, we look at AI as an opportunity to accelerate our operational excellence objectives. We've talked about that, right? Simplifying and streamlining, automating our business processes. You're driving increased efficiency. It allows us to deploy new capabilities. It 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 when we're able to do that, you're able to drive growth. So it's beyond just efficiency. And, you know, as it relates to AI, you know, one thing I tell you is our approach is to be a fast follower. So we're learning from the early adopters who 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 are the highest likelihood of being impactful to our business. That means we're looking for immediate business value. We want long-term, you know, platform scalability as well, you know, being regulated. We've got to make sure there's regulator confidence in what we're doing. And all this should continue to drive, you know, positive operating leverage over time. You know, so, you know, the one thing also around, you know, Bread Financial and with our, you know, our terrific technology team that we have, We're nimble in how we can deploy things across the company. 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've 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 you know, ready to go with some of those. 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, you know, driving positive operating leverage and helping with efficiency ratios over time.

Yeah, I think our approach is very prudent, as Perry said. We're a fast follower. But, you know, 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 protect all their information. We're going to make sure nothing enters our environment that is harmful in this 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 to better serve our customers and partners, and make sure that we gain efficiencies across the patch and that we're using it for better decision-making and better revenue generation. Perfect. Thank you, guys.

One moment for our next question.

Our next question comes from Dominic Gabriel with compass points. Your line is open. Hey guys.

Uh, thanks so much for the call and, uh, I don't know what else to say. Congrats on the, the, uh, the buyback and the execution hurts. It's many years in the making. Um, you know, 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, you know, 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's solid across the spectrum and, you know, 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.

Yeah, I think I'd go on record as saying, you know, I think the consumer is stable and credit is improving. Now, again, you know, 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's a little nervous with the uncertainty that's out there of what's to come. And I think as soon as, you know, 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, 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.

Yep. Yep. 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, it is improving. And yeah, I guess when you, you know, MasterCard came out actually with their holiday spend and it looks like, you know, they expect some deceleration and year over year versus their last estimate, about a 1% deceleration. And so if you think about, you know, what you guys are seeing at the end of the quarter, you mentioned that spending is actually decelerated a little bit. That's pretty much in line with what we're seeing on an inter-quarter basis. So, you know, do you think that Retailers seeing that potential forecast within their own models would trigger more discounts, and how do 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.

Yeah, I mean, I think you will see the retailers probably – which discounts and reward opportunities probably more forward in the buying cycle for the Christmas holidays to 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 I monetize and optimize my reward programs out there? So 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. It may be a bit steeper by certain consumers or certain verticals. But I think you'll end up seeing that.

Thank you. One moment for our next question. Our next question comes from Vincent Cantik with BTIG. Your line is open.

Hey, good morning. Thanks for taking my questions. And actually, so two of them, and they're kind of false to some earlier questions. 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? Thank you.

Yeah, so, you know, one thing, Vince, thanks for the question. You know, one, we just, as we said for a long time, we're running this, you know, this business for a long-term focus. So, you know, we've been making targeted adjustments to, you know, our underwriting segments as we go looking at, you know, risk and reward, make sure we get paid for the risk we take. And so that's been dynamic. As customer behavior improves both on us as well as off us, what you see in the bureaus, and as well as macro considerations are all factors into our decision. So, you know, we've been executing a gradual unwind of, you know, that was just there for the macro tightening, but, you know, 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 consistent profit-focused. We're looking to deliver some industry-leading ROEs, return on equity, and 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. When we talk about trying to get to 6%, we're trying to get each vintage to perform in line with expectations. We could have taken a more, I'll say, draconian approach and really driven, say, a new vintage down to, say, 4% losses, which would 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. 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're a very seasoned credit team and we're very thoughtful about how this goes. But all this together is we're also 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.

I think if I had to put a sentence on our philosophy is our underwriting is prudent with a focus on profitability. That's how I would put a... you know, if I had to put a, you know, a soundbite on how we think about credit.

Okay, great. Thank you both. 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. Thank you.

Yeah, it's just consistent with what we've said for, you know, I think since, you know, last investor day. It's, you know, just being opportunistic and, you know, making sure that it's the right time and our company's in the right position to do so. And it's market dependent. Okay. Okay, great. Thank you both.

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

Well, I 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 concludes today's presentation. You may now disconnect and have a wonderful day.