BFH - NYSE

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

Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer; and Perry Beberman, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Also on today's call, our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. Reconciliation of those measures to GAAP are included in our quarterly earnings materials posted on our Investor Relations website. With that, I would like to turn the call over to Ralph Andretta.

Thank you, Brian, and good morning to everyone joining the call. Today, Bread Financial reported strong third quarter 2025 results. we delivered net income of $188 million, adjusted net income and earnings per diluted share of $191 million and $4.02, excluding the $3 million post-tax impact from expenses related to repurchase debt in the quarter. Our tangible book value per common share grew by 19% year-over-year to $56.36 our return on average tangible common equity was 28.6% for the quarter. Consumer Financial health remained resilient in the third quarter as evidenced by strong credit sales a higher payment rate as well as lower delinquencies and losses. Credit sales increased 5% year-over-year in the face of ongoing inflationary concerns, a slowing yet stable job market and continuing weak consumer sentiment. The improvement was driven by strong back-to-school shopping early in the quarter with notable improvement in apparel and beauty. Additionally, purchase frequency increase and spending trends improved across all consumer segments amidst these favorable results, we continue to monitor changes in monetary and fiscal policies, including tariff and trade policies and their potential impacts on consumer spending and employment. Overall, a positive year-over-year credit sales trends and gradual improvement in our credit metrics gives us confidence in our outlook as we enter the final quarter of the year. Given current credit trends and slightly better-than-expected performance of our net loss rate year-to-date, we expect that we will be at the low end of our full year outlook range of 7.8% to 7.9%. While the net loss rate remains elevated compared to historic levels, the improving loss rate and delinquency rate trends are encouraging. As I mentioned earlier, we will continue to closely monitor consumer health purchasing and payment patterns and adjust our credit strategies accordingly to achieve industry-leading risk-adjusted returns. More broadly, we have remained consistent in our full year financial outlook as we continue to navigate market volatility. Our expectations around the health of the consumer have not materially changed. We have maintained our long-term focus on responsible growth and executing our business strategy. Given the actions we have taken over the past 5-plus years, we are well positioned to achieve our long-term financial targets and anticipate increasing shareholder value over time. Our focus on expense discipline and operational excellence continues to produce desired results as adjusted total noninterest expense was down 1% year-over-year despite continued technology-related investments, inflation and wage pressures. We will continue to invest in technology modernization, digital advancement, artificial intelligence solutions and product innovation that will drive future growth and efficiencies. Considering the progress we have made, we are confident in our ability to achieve full year positive operating leverage, excluding the impacts of repurchase debt and any portfolio sale gains. With our CET1 ratio at the top of our targeted range of 13% to 14%, we initiated the $200 million share repurchase program that the board approved in August, repurchasing $60 million during September and into October. This morning, we announced a board-approved $200 million increase to our share repurchase authorization. We also announced a 10% increase to our quarterly cash dividend, which is now $0.23 per common share with the goal of increasing our dividend annually as we see growth in our book value. These actions, along with our proven strong capital and cash flow generation underscore our ability to execute all of our capital and growth priorities concurrently, providing a solid runway to deliver additional value to our shareholders. Moving to our new business activity. During the quarter, we expanded our home vertical foothold by signing new brand partners, including Bed Bath & Beyond, an e-commerce retailer with ownership interest in various retail brands. Furniture First, a national cooperative buying group that serves hundreds of independent home furnishings and bed retailers across the U.S. and Raymour & Flanigan, the largest furniture and mattress retailer in the Northeast and the seventh largest nationwide. These new signings provide expanded opportunity for profitable growth going forward. We will continue to leverage our full product suite and omnichannel customer experience to extend category leadership in existing industry verticals, while expanding into new verticals. Strategically, our vertical and product expansion efforts continue to have positive impact on both risk management and income diversification across our portfolio. Finally, as released last week, we are pleased to have earned a credit ratings upgrade and positive outlook for Moody's recognizing the progress we have made in strengthening our financial resilience and enterprise risk management framework. In summary, we are pleased with our third quarter results. Our financial performance reflects steady progress in executing our strategic priorities and our ongoing commitment to return value to shareholders, including in the form of increased dividends and share repurchases. Now I will pass it over to Perry to review the financials in more detail.

Thanks, Ralph. Slide 3 highlights our third quarter performance. During the quarter, credit sales of $6.8 billion increased 5% year-over-year even with the anniversary of the Saks portfolio addition in late August 2024. The increase was driven by new partner growth and higher general purpose spending. As Ralph mentioned, we saw strong back-to-school shopping in the early part of the quarter with sales growth moderating in the latter part of the quarter. Average loans of $17.6 billion decreased 1% year-over-year. Higher payment rates, coupled with the ongoing effect of elevated gross credit losses, pressured loan growth. In line with lower average loans, revenue was down 1% year-over-year to $971 million. Our revenue growth was also impacted by lower build late fees resulting from lower delinquencies, higher retailer share arrangements, RSA with partial offsets, including lower interest expense and our ongoing implementation of pricing changes and paper statement fees. Total noninterest expenses decreased $98 million attributed to the prior year impact from repurchase debt. Excluding the impacts from our repurchase debt, adjusted total noninterest expenses decreased $5 million or 1% driven by our continued operational excellence efforts. Income from continuing operations increased $185 million, reflecting the prior year post-tax impact from a repurchase debt of $91 million and the current year impact from a lower provision for credit losses, and a $38 million favorable discrete tax item. Excluding the impacts from our repurchase debt, adjusted income from continuing operations increased $97 million or 104%. Looking at the financials in more detail on Slide 4. Total Net interest income for the quarter decreased 1% year-over-year, resulting from a combination of a decrease in billed late fees due to lower delinquencies as well as a gradual shift in risk and product mix leading to a declining proportion of private label accounts, which generally have higher interest rates and more frequently fee assessments. These headwinds were partially offset by lower interest expense the gradual build of pricing changes and an improvement in reversal of interest and fees related to improving gross credit losses. Noninterest income was $7 million lower year-over-year, driven by higher retailer share arrangements, partially offset by paper statement fees. Looking at the total noninterest expense variances, which can be seen on Slide 11 in the appendix, employee compensation and benefits costs decreased $6 million as a result of our continued focus on operational excellence. Card and processing expenses increased $4 million, primarily due to higher network fees driven by our gradual shift in product mix. Other expenses decreased $93 million, primarily due to the prior year impact of repurchase debt. Looking ahead, we anticipate a typical seasonal increase in fourth quarter expenses sequentially from the adjusted third quarter expenses due to increased holiday-driven transaction volume higher planned marketing expenses and higher expected employee compensation and benefits costs. Adjusted pretax preprovision earnings or adjusted PPNR, which excludes gains on portfolio sales and impacts from repurchase debt was nearly flat year-over-year. Turning to Slide 5. Both loan yield of 27.0% and net interest margin of 18.8% were higher sequentially following seasonal trends. Net interest margin was flat year-over-year. A number of variables continue to impact our NIM, including the drivers I noted on the prior slide, as well an elevated cash position and changes in Fed rates. Given continued improvement in payment rate and delinquency rate trends, we anticipate lower billed late fees for the remainder of the year to pressure NIM, while the gradual benefit from pricing changes will continue to be realized over time. On the funding side, we are seeing cost decrease as savings accounts and new term CD rates decline. During the quarter, we completed a $31 million tender offer for our senior and subordinated notes using excess cash on hand to reduce higher cost debt, which also improved our cost of funds. Direct-to-consumer deposit growth remained steady year-over-year, ending the quarter with $8.2 billion in direct-to-consumer deposits, further improving our funding mix Direct-to-consumer deposits accounted for 47% of our average funding up from 41% a year ago. Moving to Slide 6. Optimizing our funding, capital and liquidity levels continues to be a key strategic initiative. As history shows, we will be opportunistic in evaluating and executing plans to continue to enhance our structure. Along those lines, as Ralph mentioned, we are proud to have earned a credit ratings upgrade from Moody's to Ba2 while maintaining a positive outlook. This was a result of the actions we have taken to improve our capital and funding profiles along with our improved enterprise risk management framework and strong financial performance. Our liquidity position remains strong. Total liquid assets and undrawn credit facilities were $7.8 billion at the end of the quarter, representing 36% of total assets. At quarter end, deposits comprise 77% of our total funding with the majority being direct-to-consumer deposits. Shifting to capital. We ended the quarter with a CET1 ratio of 14.0%, up 100 basis points sequentially and up 70 basis points compared to last year. As you can see in the upper right table, our CET1 ratio has benefited by 260 basis points from core earnings. Common dividends and the repurchases of $234 million in common shares over the past year impacted our capital ratios by 146 basis points. Additionally, the last CECL phase-in adjustment occurred in the first quarter of 2025 and resulting in a 73 basis point reduction to our ratios and the impact from repurchase debt accounted for approximately 30 basis points of adjustment to CET1 since the third quarter of 2024. Finally, our total loss absorption capacity comprising total company tangible common equity plus credit reserves ended the quarter at 26.4% of total loans, a 70 basis point increase compared to last quarter, demonstrating a strong margin of safety should more adverse economic conditions arise. We have a proven track record of accreting capital and generating strong cash flow through challenging economic environments. We have demonstrated our commitment to optimizing our capital structure through the issuance of subordinated debt and the return of capital to shareholders. We will continue to opportunistically optimize our capital structure, which includes potentially issuing preferred shares in the future. Our commitment to prudently returning capital to shareholders is evidenced by today's Board authorized announcements of both a 10% increase in our common share dividend and an additional $200 million share repurchase authorization. This $200 million increase to our existing repurchase authorization in combination with unused capacity under the previous authorization means we have approximately $340 million available for share repurchases at this time. We are well positioned from a capital, liquidity and reserve perspective. providing stability and flexibility to successfully navigate an ever-changing economic environment while delivering value to our shareholders. Moving to credit on Slide 7. Our delinquency rate for the third quarter was 6.0%, down 40 basis points from last year [indiscernible] basis points sequentially, which was slightly better than normal seasonal trends. Our net loss rate was 7.4%, down 40 basis points from last year and down 50 basis points sequentially. Credit metrics continue to benefit from our multiyear credit tightening actions ongoing product mix shift and general stability in the macroeconomic environment. We anticipate the October and fourth quarter net loss rates will increase sequentially following typical seasonal trends. The third quarter reserve rate of 11.7% at quarter end, a 50 basis point improvement year-over-year and 20 basis points sequentially was a result of our improving credit metrics and higher quality, new vintages. We continue to maintain prudent weightings on the economic scenarios in our credit reserve model and given the wide range of potential economic outcomes. We expect the reserve rate to decline at year-end before increasing again in the first quarter of 2026 following normal seasonality. As mentioned, our disciplined credit risk management and ongoing product diversification has continued to benefit our credit metrics. As you can see on the bottom right chart, our percentage of cardholders with a 660-plus prime score increased 100 basis points year-over-year to 58%, in line with our expectations. However, macroeconomic uncertainty persists with inflation above the Fed's target rate, evolving trade and government policy impacts to both inflation and labor and continued low consumer sentiment. As a result, we continue to actively monitor these trends while remaining vigilant with our credit strategies. But at this point, we do anticipate a continued gradual improvement in the macroeconomic environment. Turning to Slide 8 and our full year 2025 financial outlook. Overall, our results have trended in line with our expectations and our outlook remains unchanged from the previous quarter. We continue to expect average loans to be flat to slightly down. Our outlook for total revenue, excluding gains on portfolio sales is anticipated to be roughly flat versus 2024. We continue to expect to generate full year positive operating leverage in 2025, excluding portfolio sale gains and the pretax impact from our repurchase debt. Our results underscore our ability to deliver operational excellence and maintain expense discipline while investing in the business. Given the continued gradual improvement in our credit metrics, we are confident that we can deliver a full year net loss rate in our guided range of 7.8% to 7.9%. As Ralph mentioned, based on current trends, we expect to come in towards the lower end of that range. Finally, with the $38 million favorable discrete tax item in the quarter, we have adjusted our full year effective tax rate guidance to 19% to 20%. While there is variability we would anticipate future years to align more closely with our historical target effective tax rate range of 25% to 26%. Overall, our third quarter results underscore the financial resilience and strong return profile of our business model. We remain confident in our ability to achieve our 2025 financial targets and to deliver strong long-term returns. Operator, we are now ready to open up the lines for questions.

[Operator Instructions] Our first question comes from Sanjay Sakhari with KBW.

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

Yes, Sanjay, thanks for the question. So I think it starts with a quick view of the macro environment that I think you mentioned everybody is kind of seeing is that at least through Q3, the consumers and macro metrics have been, I'll say, surprisingly resilient, meaning unemployment and inflation are only slightly different than the prior quarter, which means we've got a pretty stable macro environment. So I think some of the concerns that are out there to set consumers remain nervous about what the future might look like. And that's really showing up in both consumer confidence and consumer sentiment, which is down pretty meaningfully versus last year. So there's going to be more to come on it. But for our consumers, as we've talked about, something that was very important is that wages need to outpace inflation for them to get a handle on their finances and their budgeting. And so that's been good, right? Wages have continued to outpace with -- I think it was August date, it was around a little over 3 -- close to 3.5% like 3.4% growth and inflation only being 2.9%. So that's good for our customers. So again, what does it mean going forward is going to be dependent on what happens around the Fed policy and what that then means to inflation is the tariffs unfold and what happens with labor. So more to come on that. But then within our own portfolio, we are seeing stable gradual improvement. And I'd say that's across all vantage bands. So we -- as you know, we don't have a high concentration of subprime. We focus on pretty much the prime customer, maybe some near prime. But we are seeing across the board really good stability. And that, for us, means we're not seeing the cracks in there at this point. We're very cautious. We're watching it, watching it very carefully. I'll say the entry rates in the delinquency are better than what they were pre-pandemic. So that's a good sign for us, and we're starting to see some improvement in the later stage roll rates. Again, that I think the macro is going to be real important, but I think our credit strategies and the risk mix shift that we've been seeing are starting to play through. On your question on reserve rate. Sorry...

Please, I'd love to advance for that.

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

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

I'll ask Ralph to take that one.

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

Our next question comes from Moshe Orenbuch with TD Cowen.

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

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

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

Yes. Again, another good question. Of course, the way to think about it is the build late fees are obviously going to follow delinquency trends. And that is what we're all eager to see is how quickly does delinquency get to a steady state, we'll get to sort of that through-the-cycle number. So that will be leading and then trailing within 6 months, I guess, you then have the -- that improvement in the build. The reversal of build interest and fees. So those kind of will be some headwind on the lower build late fees with delinquency, you do have the tailwind that goes with the gross loss improvement. Those 2 things come together. Then you also then have a shift in risk mix -- product mix within the business, which when you put on some more higher-quality co-brand has a little bit lower APRs and yield versus private label. So that comes through, but then you do have pricing changes that have been made that continue to build. So there's a lot of moving parts in there, coupled with prime rate reductions, when we're slightly asset sensitive. So I wish there was something to say, "Hey, where is that perfect inflection point. But with all those moving parts, we'll obviously give more guidance as we get closer to January so that we have a better line of sight to exactly what our view is of mix and tie that into what the macro improvement will be as well as the credit improvement within the portfolio.

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

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

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

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

Yes. Again, it's one of the -- I say NIM is hard to forecast. RSAs is another one that's pretty hard to forecast because of the netting that goes on in there. So that the RSA is going to be pressured as we see increased sales and so increased sales, there's some compensation to partners or in the rewards and loyalty funding as well as some compensation. And then also when you have revenue shares, when you have losses coming down, it leads to a higher revenue share, profit share with partners. So you've got sales-based rebates, you've got the revenue share in there, you got the profit share and everything I just mentioned around the rewards funding. In addition, when you -- we've been seeing some lower big ticket purchases, then MDFs are pressured because of that softness. So as the big ticket bounces back, if that happens in some of the verticals, that could be a tailwind. But as the spend grows, you also have some more partner share and revenue share. So there's a lot going on in there.

Our next question comes from Jeff Adelson with Morgan Stanley.

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

Yes. Thanks for the question. The home vertical is a good one for us, right? Because it's discretionary, nondiscretionary. There's home repairs and there's other discretionary furniture. So we view that as a very active vertical for us and very strong vertical. And we'll most likely add to that as we move forward, which I think is positive for us. So we'll, again, be one of the leading contenders in that vertical as we are in beauty and a couple of others. So there's a -- we look across our portfolio. It's diversified now. It's -- we've derisked it in terms not only of product but also of industry. So we feel really good about that. The pipeline is robust across all those verticals. So we're looking forward to adding new partners within this vertical, establishing new ones. We've got a travel vertical that's doing very well. Beauty is still a big contender. And now with this home improvement and home furnishing vertical, we feel that also will move forward. So we are kind of insulating ourselves from any one vertical that there'd be an issue with. Usually, it was if the mall went bad and apparel was a bad vertical, that would throw us off. Now we're kind of insulated from those type of one-off verticals that tend to -- that may be impacted by the economy.

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

Yes. Real good question. So as we think about capital, one, let me start with -- we've not changed our capital priorities, right? We have always said we're going to fund responsible, profitable growth. So some of what will inform our capital authorizations or share repurchase automations in the future will be based on the growth that we have in front of us. We'll continue to invest in technology and our capability to serve our brand partners and customers. And we'll make sure we maintain those strong capital ratios and obviously return capital as appropriate. And to your point, though, on right now, our binding constraint is CET1 around that 13% to 14%, which we said was our medium-term target. And so we got to the top end of that this quarter. We have confidence in what we see going forward. And the important part was that we want to make sure we had enough authorization out there to provide us capital flexibility should we choose to do something to further optimize our capital stack. And when you talked about what would it take to lower our binding constraint to CET1 down to that 12% to 13%, which is what we said in our Investor Day would be our longer-term target. It does mean introducing some Tier 1 capital in the form of preferreds over time. But really, the rating upgrade is less relevant to that. That's more around what happens with senior debt. Senior notes in the future and other financings that are keyed off of those ratings. we don't need to get to an investment grade to take capital actions.

Our next question comes from Reggie Smith with JPMorgan.

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

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

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

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

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

Yes, Reggie, thank you. So we agree there's definitely opportunity with AI, and we've been engaged with it for a while. So for us, we look at AI as an opportunity to accelerate our operational excellence objectives. We've talked about that, right, simplifying and streamlining and automating their business processes driving increased efficiency, allows us to deploy new capabilities that reduces risk and improve controls while enhancing the customer and employee experiences. And it also allows us to accelerate innovation and move things through the tech pipeline faster, and we were able to do that, you're able to drive growth. So it's beyond just efficiency. And as it relates to AI, one thing I'd tell you is our approach is to be a fast follower. So we're learning from the early adopters. We spent a lot of money on both what worked and what didn't work. And so we're very thoughtful in identifying and focusing on those use cases that have the highest likelihood of being impactful to our business. That means we look for immediate business value. We want long-term platform scalability as well being regulated. We've got to make sure it's regulator confidence in what we're doing. And all of this should continue to drive positive operating leverage over time. So the one thing also around Bread Financial and with our terrific technology team that we have, we're nimble in how we can deploy things across the company. And but AI is not new to us. And that's the thing that I think I want to be clear on as well is we have over 200 machine learning models out there across many functions, including credit, collections, marketing and fraud. We have enhanced over 100 processes to date with leveraging robotic process automation. So look, there's a lot of opportunity ahead of us, right, like generative and Agentic AI are exciting developments, and we're going to be ready to go with some of those. And -- but we're excited about what the future holds with this, and there are opportunities but I would look at it as continuing to help contribute to driving growth and driving positive operating leverage and helping with efficiency ratios over time.

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

Our next question comes from Dominick Gabriele with Compass Point.

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

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

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

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

Our next question comes from Vincent Caintic with BTIG.

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

Yes. So one thing, Vince, thanks for the question. One, we just -- as we said for a long time, we're running the business for a long-term focus. So we've been making targeted adjustments to our underwriting segments as we go, looking at risk and reward, make sure we get paid for the risk we take. And so that's been dynamic as customer behavior to improve both on us as well as office, what you see in the bureaus and as well as macro considerations are all factors into our decision. So we've been executing a gradual unwind of -- that was just there for the macro tightening. But it's been deliberately improving the mix of accounts that's been moving us more towards Prime Plus. But again, it's not this wholesale change. But at the same time, you have tightening happen in other places where you might see a little bit of weakness in certain cohorts. But our underwriting philosophy has remained profit focused. We're looking to deliver some industry-leading ROEs and return on equity and can get our losses down to 6%. But as we think about the improvement that we're looking to see in our loss rate over time. It's not going to be fast and furious getting down to 6%. We're not doing things that would be overly detrimental to our brand partners. So when we talk about trying to get to 6%, we're trying to get each vintage to perform in line with expectations. And we could have taken a more, I'll say, draconian approach and really driven, I'd say, a new vintage down to, say, 4% losses, which get our overall loss rate faster, but that would be detrimental to our brand partners. If we were just mainly a branded business, we could probably do something like that to ourselves. But this isn't the business we're in. So we're very thoughtful about that. And I think you're going to see that consumer health and macro considerations will help drive what we do with underwriting. But we're really pleased with the new accounts that we're seeing coming in, with the average Vantage scores, around 720, with over 72% being prime. And so we're very thoughtful on how we manage line assignments. So obviously, customers that come in the door that are more near prime, are getting a much lower line assignment. But all those things factor in, and that helps with that low and grow strategy we have with credit. So we are a very seasoned credit team and we've been very thoughtful behind this goes. But all this together, as Ross said, we're going to get this inflection point of growth as credit improves, meaning we have less losses, macro improves, the book we're putting on, this is going to start to translate into growth as we start to march into next year.

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

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

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

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

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