BFH - NYSE

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 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 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 tariffs 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 Mihir Bhatia from Bank of America.

I wanted to start maybe with just health of the customer, particularly with an eye on credit sales and loan growth. I guess it sounds like you said they are -- 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 that's a 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'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 indicators 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 for 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 at 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 at 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 just -- 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 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, an 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 is being funded through operational excellence efforts to contain expenses and reinvest that. And then we're ably hit the capital targets that we've stated and then return capital when appropriate. And again, we'll continue against that capital plan, but we'll 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 Sakhrani 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 lower 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 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's, 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'll 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 -- the billed late fees this recent quarter.

Okay. Maybe this is a question for both you and Ralph. Obviously, credits 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 3. 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 shoots 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 at 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 -- 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 for the partner works for us and that it's delivering the right type of capital returns. 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. 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?

Yes. 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 be able 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 extend 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. If I heard your question right, you're asking what would it take for us to consider unwinding more credit?

Yes.

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've 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 approve 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 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 will 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 what you expect to be normalized?

Yes. Our roll rates have been improving, and that's the thing that we've talked about. It's one of the most important aspects for us to get comfortable in improving our loss guide. I mean we're benefiting 2 things right now. Our roll rates have improved. So the mid- to late-stage roll rates, they're 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, which using more of the refunds to pay down their debt. So times like this, these months, you 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 and 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 if we're 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? How they're 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.

It was a lot of questions in that question. Obviously, it depends by partner, right? So if you look at it by partner 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, to 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.

Got it. I appreciate it, and 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 relationships 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. We'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 had 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 you 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 in a product set, right? So we absolutely can accommodate BNPL. We can accommodate installment loan. We can accommodate 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.

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 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, in 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 easy 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 you 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 the 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're 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 prices is likely you wait until then and see exactly how this tender goes or it's 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 Caintic 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 had 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 -- if 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.