Bread Finl Hldgs (NYSE:BFH) held its second-quarter earnings conference call on Thursday. Below is the complete transcript from the call.

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Summary

Bread Financial Holdings Inc reported strong second-quarter 2026 results with net income of $146 million and a 22% year-over-year increase in tangible book value per share to $63.66.

The company achieved 11% growth in adjusted PPNR and 7% revenue growth, driven by a combination of accelerating credit sales, loan growth, and disciplined expense management.

Strategic expansions included partnerships with Ford, Raymour & Flanigan, and Ethan Allen, along with a significant rise in Bread Pay transactions, emphasizing flexible payment solutions.

Direct-to-consumer deposits grew 16% year over year, now comprising 50% of the company's funding mix, marking a significant milestone.

Management highlighted improving credit performance, a lower net loss rate, and a decrease in the delinquency rate, reflecting effective credit risk management.

The company issued $135 million in preferred stock and repurchased 7% of its common shares, demonstrating disciplined capital allocation and optimization of its capital stack.

Future guidance indicates low to mid-single-digit loan growth for 2026 and expectations of a continued stable macroeconomic environment.

The company continues to invest in digital and technology enhancements, including AI integration, to drive operational excellence and innovation.

Management expressed confidence in achieving long-term targets, including mid-20s% ROTC, driven by responsible loan growth and operating efficiency improvements.

Full Transcript

OPERATOR

Good morning, and welcome to Bread Financial Holdings Inc's second-quarter 2026 earnings conference call. My name is Shannon, and I will be coordinating your call today. At this time, all participants are in a listen-only mode. Following today's presentation, the floor will be open for your questions. To register a question, please press star followed by 1-1. It is now my pleasure to introduce Mr. Brian Verub, Head of Investor Relations at Bread Financial Holdings Inc. The floor is yours.

Brian Verub, Head of Investor Relations

Thank you. A copy 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. Reconciliations 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.

Ralph Andretta, President and CEO

Thank you, Brian, and good morning to everyone joining us today. We are pleased with the strong financial results Bread Financial delivered in the second quarter. We saw accelerating credit sales, continued loan and deposit growth, increased revenue and PPNR, and improving credit performance. These results demonstrate the strength of our business model and the benefits of our continued emphasis on responsible growth and operational excellence, positioning Bread Financial for sustained, positive long-term performance.

For the quarter, net income was $146 million and tangible book value per common share increased 22% year over year to $63.66. Adjusted PPNR grew 11% year over year, supported by 7% revenue growth and ongoing disciplined expense management. Our strong execution across product mix and industry verticals is reflected in our second-quarter credit sales growth of 11% year over year and 5% end-of-period loan growth. Our growth in the quarter was broad.

Our existing co-brand partnerships, especially in travel and sporting goods, continue to see healthy growth. In addition, we continue to expand our reach through a full-year Ford program launch, new home partnerships with Raymour & Flanigan, Furniture First, and Ethan Allen, and our Bread Pay partnership with Vivint. These relationships reinforce the value we deliver through flexible payment solutions, disciplined underwriting, and a strong partner focus.

End-of-period direct-to-consumer deposits grew 16% year over year to $9.4 billion. This marks our second strongest quarter of growth since the program began in 2019. Our direct-to-consumer deposits now comprise 50% of our funding mix, achieving an important milestone for the company and a target we set during our initial investor day. I am pleased with the growth and see further opportunity to build on this success. Also during the second quarter, we continue to optimize our capital stack, issuing a second round of preferred stock and repurchasing 7% of our outstanding common shares.

We will remain disciplined in our capital allocation strategy, prioritizing responsible, profitable loan growth and strategic investments in our business. Our results underscore our success in executing our priorities. Despite ongoing macroeconomic uncertainty, persistent inflation continues to influence household decision-making. Even so, our consumers' financial health remains resilient, as evidenced by continued sales growth, a stable payment rate, and improving credit performance.

We saw improvement in both our net loss rate and delinquency rate, reflecting the benefits of proactive credit risk management, disciplined underwriting, and the quality of our customer base. We will remain appropriately cautious given the broader macroeconomic environment. These trends reinforce our confidence in our business outlook and the effectiveness of the actions we have taken. Finally, turning to our investment priorities, we continue to make targeted investments that support growth for Bread Financial and our partners.

These efforts span digital and technology enhancements across the enterprise, including the responsible use of AI. We are strategically integrating AI in ways that advance operational excellence by improving productivity and efficiency, enabling innovation, and enhancing risk management. Additionally, we are collaborating with our partners to develop use cases in agentic commerce and servicing, further advancing innovation across the customer experience.

We prioritize AI outcomes that remove friction and drive results so ideas can turn into measurable progress for our brand partners and customers. As I highlighted, this was another strong quarter for our company. Our success is a result of the efforts of our associates and leadership team. As we transformed Bread Financial over the past six years, we focused on building a resilient business through strengthening our balance sheet, investing in areas that drive responsible, profitable growth and efficiencies.

The transformation of our company is now evident in our results. Investors are increasingly recognizing the value our business model creates and the remaining catalysts to drive further improvement in our financial results. We are proud of the progress and remain focused on delivering sustainable shareholder returns over the long term. Now I will pass it over to

Perry Beberman, EVP, Chief Financial Officer

Thank you, Ralph. Slide 3 highlights our second quarter performance. We delivered a solid quarter. Average loans increased 3% to $18.2 billion while end-of-period loans increased 5% to $18.5 billion, reflecting the new partner and credit sales momentum that Ralph mentioned as well as improving credit performance. Revenue increased $64 million, or 7%, year over year. The increase was primarily driven by average loan growth, impacts from previously implemented pricing changes, lower interest expense, and higher interchange and merchant discount fees related to higher credit sales.

These benefits were partially offset by higher retailer share arrangements and lower billed late fees. We generated net income of $146 million and a diluted EPS of $3. Net income increased $7 million, or 5%, primarily due to loan growth resulting in higher revenue, partially offset by higher provisions for credit losses and income taxes. The higher provision for credit losses reflects a reserve release of $3 million this year compared to a release of $74 million last year, with the variance primarily driven by the strong sequential period-end loan growth in the second quarter of this year.

Looking at the financials in more detail on slide 4, second quarter net interest income increased 7% year over year, driven by the gradual build of our pricing changes and lower interest expense. Non-interest income was lower year over year by $1 million, or 4%, driven by higher retailer share arrangements, or RSAs, which includes both higher credit sales-related partner pay and increased profit share driven by improved loan yields and credit losses sequentially.

While payments under our retailer share arrangements were higher, the impact was offset by stronger-than-expected interchange revenue, merchant discount, and other fees. We expect the RSA payments to increase in the third quarter as a result of our continued expected growth as well as timing. To be clear, these higher payments are a positive indicator reflecting stronger credit sales, growing loan balances, and the benefits of our pricing actions, all of which have driven revenue growth.

Additionally, these payments are impacted by an improving net loss rate, stronger partner retention, and new partner additions. Total non-interest expenses were nearly flat year over year as higher employee compensation and benefit costs were offset by the prior-year impacts from debt purchases. Excluding the impacts from debt repurchases, expenses were up $15 million, or 3%. Looking at the expense line item variances, which can be seen in the appendix, employee compensation and benefits costs increased primarily due to higher wages related to annual merit increases and incentive compensation, as well as increased medical claims, partially offset by operational excellence initiatives. Given our expectation for continued loan growth and strong seasonal sales activity in the second half of the year, we anticipate expenses will increase sequentially in the third and fourth quarters. These increases reflect higher growth-related variable expenses as well as continued investments in growth efficiencies and new capabilities. Finally, PPNR was strong, increasing $62 million, or 14%, year over year, while adjusted PPNR, which excludes impacts from debt repurchases, increased $49 million, or 11%.

These results were driven by growth in our loan portfolio and ongoing pricing and expense discipline. Turning to slide 5, net interest margin of 18.5% increased year over year, while sequential movement reflected normal seasonal trends. Billed late fees continued to move lower sequentially and pressured NIM as delinquency rates improved. We are also seeing interest expense decrease as our cost of funds benefits from the funding actions we have taken over the past year.

As Ralph highlighted, our Direct-to-Consumer deposit platform continues to grow, reinforcing a cost-effective and steady, reliable funding source. Average Direct-to-Consumer deposits represented 50% of total funding, up from 45% a year ago. We continue to see value in this program with the goal of increasing our DTC deposits as a percent of our overall funding mix. Moving to slide 6, our liquidity position remains strong. Total liquid assets and undrawn credit facilities were $6.7 billion at the end of the quarter, representing nearly 30% of total assets.

At quarter end, deposits comprised 80% of our total funding, with the majority being FDIC-insured Direct-to-Consumer deposits. Shifting to capital, we ended the quarter with a CET1 ratio of 12.9%, down 10 basis points compared to last year. As shown in the upper right table, our CET1 ratio benefited by 340 basis points from core earnings, common stock repurchases and preferred and common stock dividends reduced our capital ratios by 320 basis points, while the impact from costs related to debt repurchases accounted for approximately 30 basis points impact to CET1 since the second quarter of 2025.

Adding some detail to the capital items Ralph mentioned, in the quarter we further optimized our capital structure by issuing $135 million of 8.875% preferred stock. This successful issuance combined with continued strong earnings positioned Bread Financial Holdings Inc to return value to shareholders through share repurchases, buying back 2.8 million shares, or $241 million of common stock. We ended the second quarter with $449 million remaining under our current stock repurchase authorization.

The pace of our share repurchase activity will slow in the third quarter compared to the second quarter as loan growth is anticipated to increase for the remainder of the year. For context, in the month of July we plan to repurchase $25 million of common stock. Additionally, the timing of a potential additional preferred share issuance will likely occur no sooner than the fourth quarter of this year, depending on market conditions. Finally, looking at the bottom right of the slide, our total loss absorption capacity, comprising total company tangible common equity plus credit reserves, ended the quarter at 24.6% of total loans, demonstrating a strong margin of safety should economic conditions deteriorate. We have a proven track record of building capital and generating strong cash flow, and we remain well positioned across capital, liquidity, and reserves. This foundation provides the stability and financial flexibility needed to navigate an ever-evolving economic environment while continuing to create value for our shareholders. We continue to maintain our commitment to disciplined capital allocation: first and foremost, support responsible, profitable loan growth with the right returns that will regenerate capital for years to come.

As we are experiencing faster loan growth this year, it will become more important and prevalent use of capital—invest in core technology and AI capabilities to support existing and new partners, improve customer experience, and increase risk management, allowing us to remain competitive and more efficient over time. Lastly, return unused capital back to shareholders in the form of dividends and share buybacks while maintaining appropriate capital levels.

Moving to credit on slide 7, our delinquency rate for the second quarter was 5.25%, down 48 basis points from last year and down 34 basis points sequentially. Our net loss rate was 6.98%, down 90 basis points from last year and down 35 basis points sequentially. These results reflect the benefits of our disciplined credit risk management, sophisticated underwriting, and the continued maturation of higher-quality new accounts. We anticipate that the third quarter net loss rate will be approximately 30 basis points better than the second quarter.

Overall, consumers managed well throughout the quarter. The tailwind of tax season, along with generally healthy employment and wage growth, helped blunt inflationary pressure inclusive of elevated fuel prices, resulting in strong sales and payments. With an improving credit risk score mix, the second quarter reserve rate improved 66 basis points year over year to 11.23%, driven by our improving credit metrics, higher credit quality new vintages, and stronger credit risk distribution, with 65% of cardholders having a prime score above 650.

Regarding our credit reserve modeling, we continue to apply prudent weightings on downside economic scenarios. Given the wide range of potential macroeconomic dynamics, including ongoing uncertainty related to global conflicts and their downstream impacts, including on inflation, these weightings remained unchanged from the prior quarter. Turning to slide 8, our revised 2026 outlook is based on the strong results we delivered in the first half of the year and a macroeconomic forecast that assumes continued consumer resilience, inflation remaining above the Federal Reserve's target rate of 2%, and a generally stable labor market.

We are pleased with the solid loan growth we produced in the second quarter. Given our results to date, we now expect full year 2026 average credit card and other loan growth to be up low to mid-single digits compared to 2025 versus our prior guidance of low single digits. Growth will continue to be supported by our stable partner base and new business launches, resulting in strong credit sales coupled with continued gross credit loss improvement.

Total revenue growth is now also anticipated to be up low to mid-single digits, primarily driven by average loan growth. We anticipate full-year net interest margin to be flat to slightly higher than 2025 as a result of ongoing benefits, albeit slowing, from previously implemented pricing changes and improved funding costs. These NIM tailwinds will be partially offset by lower billed late fees from improving delinquency trends and continued product mix shift with better credit risk.

As I mentioned previously, for non-interest income, we expect higher retailer share arrangements going forward as a result of both higher credit sales-related partner payments and increased profit share driven by improved loan yields and credit losses. We manage expense growth based on revenue generation and ongoing investment in our business, and we anticipate delivering positive operating leverage in 2026 excluding the pretax impacts from debt repurchases.

As I mentioned, we will continue to invest in our business to drive growth, build new capabilities for our partners and customers, and deliver future efficiencies. Given the continued improvement in our credit metrics, we have improved our full-year net loss rate guidance to an expected range of 7.0% to 7.1% versus our prior guidance of the low end of 7.2% to 7.4%. This updated guidance contemplates our visibility into the current delinquency pipeline combined with stable macroeconomic conditions, continued risk and product mix shifts, and a resilient consumer.

We continue to expect our full-year normalized effective tax rate to be in the range of 25% to 27% with quarter-to-quarter variability due to timing of certain discrete items. Overall, we delivered impressive financial performance in the second quarter, continued to generate capital, and demonstrated our ability to manage effectively through an uncertain operating environment. As we move to the second half of the year, we remain confident in our ability to deliver on our revised 2026 financial targets.

Finally, slide 9 highlights the financial targets initially discussed during our Investor Day in June of 2024. Given the progress we have made executing on our initiatives over the past few years, we are well positioned to deliver on our updated near-term targets. With continued PPNR growth momentum and driven by responsible loan growth and operating efficiency, along with progress optimizing our capital stack and achieving our targeted credit metrics, we have a clear path to achieving our long-term mid-20s% ROTC target in the coming years.

Delivering these returns combined with business growth should provide significant value to Bread Financial Holdings Inc shareholders. Operator, we are now ready to open the lines for questions.

OPERATOR

Thank you, ladies and gentlemen. If you would like to ask a question, please press star followed by 11 on your telephone keypad. If you change your mind, please press star followed by 11 again. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question comes from the line of Moshe Orenbuch with TD Cowen. Your line is now open.

Moshe Orenbuch, Analyst at TD Cowen

Great, thanks. Thanks very much. Maybe, Ralph and Perry, the period-end loan growth already is kind of in the mid-single digits as of this quarter. As you look at both credit sales growth and its impact on loan growth and everything else that's out there, how do you think about the possibility of that accelerating during the second half of the year?

Perry Beberman, EVP, Chief Financial Officer

Thanks, Moshe. Appreciate the question. Yes, we're really pleased with the performance of loan growth and credit sales growth so far this year. I think as you look towards the back half of the year, there is a little bit of uncertainty across the industry. The month of June in and of itself was a stronger-than-usual month, and I think already July is showing signs of pulling back, and that's industry-wide, not just unique to us. And then for us particularly as you look in the back part of the year, we're going to start comping and growing over some product launches or new partner launch that we had in our furniture vertical that was in the fourth quarter particularly, and that will slow the growth comparison considering those programs were ramping up throughout the end of last year and obviously through the first half of this year. And then for us overall, when you look at the guide, it's an average loan guide. To your point, you'd expect the end-of-period loans to be higher than that, probably more than that mid-singles. But holiday spend has a lot to do with the variability of the end-of-period loans.

Moshe Orenbuch, Analyst at TD Cowen

Got it. Makes a lot of sense. Thanks, Perry. And maybe just talk in a little more detail—I know you spoke about it a little bit in your prepared remarks—but in terms of how to think about your relationship with the retailers and the RSA as you go forward in what is a better growth environment and potentially better profitability as well.

Perry Beberman, EVP, Chief Financial Officer

I appreciate that question. RSA, as non-interest income in total too, is a challenging line because of all the things that net in it. So you have higher credit sales—that's great because it's driving more interchange, more merchant discount fees, more activity through there. And then conversely it means you're paying more back to in-customer rewards, you're paying more to retailers in terms of the share agreements. And that's in the form of basis points on spend, it's on revenue share or profit share.

And that can have different elements depending on the partner and the mix of how much they want to be compensated based on credit sales alone, or more robust, sophisticated ones want more of that revenue share arrangement. So as we continue to improve our overall performance, as noted, the revenue RSA is going to increase over time. And that's why we say that's a good thing overall. And then as you bring in newer partners, they have different types of constructs.

Renewals are always happening. So all these things together, you should expect the RSA payments to increase.

Moshe Orenbuch, Analyst at TD Cowen

Thank you very much.

OPERATOR

Thank you. Our next question comes from the line of Sanjay Sakrani with KBW. Your line is now open.

Sanjay Sakrani, Analyst at KBW

Thank you. I kind of want to follow up on Moshe's question on the credit sales specifically, Perry. So I understand the comp does get a little bit more difficult for credit sales, but it still seems like it's relatively low a year ago. We shouldn't see a significant step-down in the growth in sales unless there's seasonality, correct? And then as we think about how to factor in the RSAs, we tend to look at that revenue line relative to sales. Is that the way to think about it?

And obviously that compressed sequentially. So should we assume it stabilizes here? Maybe you could just give us a little bit of color as to how we model that line given the higher RSAs. Thanks.

Perry Beberman, EVP, Chief Financial Officer

Yeah, thank you for the question, Sanjay. Look, on the credit sales, I think we're now hitting that inflection where we've got good momentum. We're really encouraged that this development team and our client partnership team are making great progress with our partners and the new additions we've had. And as I mentioned, some of that sales growth is comping off a lower first half of 2025. And then back towards the back end of 2025, we started to ramp up those new partners so the comps will start to look a little less.

So I'm not suggesting that we won't have really strong credit sales growth, but it won't look like necessarily 11% the rest of the way because June was an exceptionally strong month across the industry. And then as you think about your question on RSA, we've always said you can look at that as a percent of credit sales and that's probably the best way to look at it. But over time I would expect that percent to most likely increase through competitive markets, better performance in the P&L—so more revenue is getting shared, true profit share.

If credit losses go down and the risk-adjusted margins widen, there's more to share back to the partners, as well as some of the pricing changes that are working through. We did say the idea was that that was going to result in more sharing back to partners, and that's going to play through as well.

Sanjay Sakrani, Analyst at KBW

Okay, maybe I'll follow up with Brian after the call. And then just credit quality—you mentioned very strong. The delinquency rate dropped below sort of the five-year average. Seems like the mix shift is moving towards higher-credit-quality loans as well. So should we expect that to continue to track down or inflect at some point because you do have this growth coming on and the seasoning related to that? Because I think that's something we need to start thinking about a little bit.

And then how should we also think about that reserve rate on a go-forward basis relative to whatever the new normal of CECL Day 1 could be? Thank you.

Perry Beberman, EVP, Chief Financial Officer

Sure, so I'll take those two questions. Look, on credit, we're really pleased with the performance. I would tell you the improvement is across the board. Whether it's the existing portfolio or the new vintages that we're booking, everything is moving in the right direction. Front-end entry rates are looking better, performance through the different buckets of the roll rates are improving. Everything we said we were looking for to improve our outlook is playing through.

Some of it is, as you noted, a little bit of that growth benefit that we're getting, but it's not the material amount of that. And we're very pleased with the new vintages that are coming in. And again, we've talked about trying to book new vintages that are around that 6% we underwrite for profit. So the seasoning is less of what I'd say is a worry. And as you think about the guide that we just gave where we reaffirmed that our near-term growth outlook should be low- to mid-single-digit average loan growth—and that's striving to get more towards that mid- to high-single-digit—I think we've got plenty of runway in front of us before you start thinking that the seasoning of the portfolio is going to slow the improvement that we should see as we glide our way to a 6% loss rate. And then as it relates to CECL, I'll say also that's largely macro dependent. Right now we're assuming things remain pretty stable. In order for us to do that, we don't need a significantly improving macroeconomic environment to get there. But certainly if things go sideways the other way, that would put pressure on the pace at which we can improve.

And related to CECL, kind of in tandem, the CECL can move down largely in line with credit quality improvements. I've said before we should find a path to get closer to 10% over time. And as we get closer to that 6% target, you can expect that the CECL rate will get down around that 10% target.

Sanjay Sakrani, Analyst at KBW

Thank you.

OPERATOR

Thank you. Our next question comes from the line of Terry Ma with Barclays. Your line is now open.

Terry Ma, Analyst at Barclays

Hi. Thank you. Good morning. Maybe just to start off with credit sales, it did accelerate pretty meaningfully this quarter. Any color on how much of that acceleration was from new partners versus existing partners? And then I think you called out a slowdown in July thus far. Maybe just talk about what verticals you're seeing those slowdowns.

Ralph Andretta, President and CEO

Yeah. Terry, it's Ralph. How are you? I think the growth was broad, but if I had to isolate it, it was T&E, sporting goods, and from new partners—Raymour & Flanigan, Ethan Allen, Furniture First—really drove a lot of that growth. But also Bread Pay had a really good quarter, particularly around a new partner called Vivint. So it was broad, but that's where the growth came from.

Terry Ma, Analyst at Barclays

Got it. And then on the deceleration thus far in July, where are you seeing that again?

Ralph Andretta, President and CEO

I think it's broad. Quite frankly, I think Perry said we still expect spending growth but it may not be as robust as the second quarter. But we've seen it across the board.

Terry Ma, Analyst at Barclays

Got it. That's helpful. And then maybe just on the NIM, you guys touched on it a little bit. NIM was pretty strong first half. Your full-year guide is for flat to slightly up. Maybe just kind of talk through the moving pieces in the second half. Does that kind of imply lower year-over-year NIM?

Perry Beberman, EVP, Chief Financial Officer

No, not necessarily. I mean it's going to move around seasonally. We've got the third quarter—the second quarter is obviously down from the first quarter—then it goes back up, and the third quarter comes back down in the fourth quarter. So there's a lot of moving parts in there. And as Ralph just talked about, where the credit sales are coming from, that results in a different product mix. Also, different product mix has different yields. A private label has a much higher loan yield than some of the other things like maybe in some Bread Pay or big ticket.

So you've got to look at the total of that. We have pricing actions moving through. You have funding costs doing their thing. So I'd say there's a lot of impacts in there, which is why it's going to have a little more seasonal movement, maybe to a lesser degree than what it was last year, but all the way around we've got things like better credit—that's going to reduce late fees. That also puts pressure on that interest margin, a little bit of an offset with slightly improving gross losses the rest of the year—that is a little bit of a benefit; there's less reversal of interest and fees. So a lot of moving parts we've talked about lots of times, and that's where we try to kind of give the overarching view of this. But when you think about if NIM were to slightly come down, that would still be an okay thing because that means we're getting better credit performance too.

Terry Ma, Analyst at Barclays

Got it. Helpful. Thank you.

OPERATOR

Thank you. Our next question comes from the line of Jeff Adelson with Morgan Stanley. Your line is now open.

Jeff Adelson, Analyst at Morgan Stanley

Hey guys, good morning. Thanks for taking my questions. Maybe just to follow up on the long-term targets you put in the slides. It seems clear that you said you have a path to get there. Now I guess I was just curious on the ROTCE—you've been in this low 20% range already. You've stepped up pretty meaningfully recently to get there. What are the chances we actually overshoot the mid-20s here in the near term as the credit metrics continue to improve and you continue to execute?

Maybe just help us understand the moving pieces there to getting to the mid-20s and why maybe it couldn't overshoot in the near to medium term.

Perry Beberman, EVP, Chief Financial Officer

Yeah, thanks, Jeff. Look, ROTCE is going to move around a bit, and what I would say is if you strip out the CECL build release, that gives you a good view of the underlying core ROTCE. So when you think about the long term being at mid-20% excluding mid- to high-single-digit loan growth, where you have a, and you say you already were at the target of a 10% CECL rate, you would expect, again removing the CECL build, that would require a higher-than-mid-20% core ROTCE.

So every year is going to look different depending on the degree to which we're growing in that year, like ending loan growth in a particular year. So in a year where, like right now, to your point, the ROTCE looks pretty good, it looks ahead of schedule. But we're also not being taxed with, I'll say, a CECL growth tax because the rate's getting reduced and we're in that, you know, low- to mid-single-digit, call it mid-single-digit, end-of-period loan growth.

So I think as the end-of-period loan growth accelerates and you are then having provision build, that's going to drag a little bit on that what you would have called an overshoot possibility on ROTCE. Now, the path to getting the mid-20s, there's three elements, right? One is continued improvement in credit losses. That's important. Two is us further optimizing our capital stack. And we've made great progress there. So we have a little bit of preferred stock left to go to really get the binding constraint down to that 12% to 13% CET1.

And the third piece is continuing to scale and drive operating efficiency.

Jeff Adelson, Analyst at Morgan Stanley

Okay, great, that's clear. And just to follow up on the non-interest income line and the RSA. I know you already talked about the performance of interchange this quarter and it's always difficult to pin that down. But maybe just what specifically — I guess why didn't that interchange flow through maybe a higher RSA payment this quarter, or what specifically led to the RSA maybe staying a little bit more muted than you would have thought this quarter?

And I know you talked about the step-up happening next quarter in the RSA, but just maybe help us pin down the non-interest income line as well.

Perry Beberman, EVP, Chief Financial Officer

Broadly, yeah, probably the non-interest income line. We had a little bit better benefit in other fees. Merchant discount fees came in stronger as originations came in much higher for the quarter, and then the interchange came through. So then in terms of the RSA, some of that is a little bit of timing. And we expect that if the profits, the margins continue to improve and the partner payments, partner programs come on, you're going to see more payments, which is why we tried to give a little more detail to the earlier question that you should start to see that RSA as a percent of credit sales, percent of revenue, is going to continue to increase a bit over time.

Jeff Adelson, Analyst at Morgan Stanley

Okay, great. Thanks for taking my questions.

OPERATOR

Thank you. Our next question comes from the line of John Hecht with Jefferies. Your line is now open.

John Hecht, Analyst at Jefferies

Morning, guys. Thanks very much for taking my questions. Maybe just in terms of the increase in the growth guide, and I know you're kind of running at this pace already, but if you can break it down by new customers and how they contribute to growth versus increasing spend and borrow from the current book.

Perry Beberman, EVP, Chief Financial Officer

Yeah, thanks, John. I'd say a couple things. One is the existing partner base is very strong and we're seeing some improvement on existing partners. So that's important. As we said before, as gross losses improve, that means you don't have as much going out the back door as you're bringing in the front door. So the existing programs that we have stabilized and are showing some nice growth, and as Ralph mentioned, from the new programs that we launched in the back half of last year and continue to ramp up this year, they're contributing to growth.

And then Bread Pay was a nice bit of growth that we're experiencing from some of those new partners on the platform. So we expect that to continue to experience good growth and we see adding more partners later in the year, and we'll talk about that over time.

John Hecht, Analyst at Jefferies

And then I guess it's sort of a related question: where are you guys seeing momentum in spend? Is it the more, call it, traditional retail counterparties or is it more of the platform kind of programs like the NFL? Or is there a specific product category that you're seeing green shoots and momentum build?

Ralph Andretta, President and CEO

We've seen spend really across the board, particularly on our co-brand products that we have in the marketplace where we have general purpose spend. As I said earlier, T&E has been a really good area for spend growth. We've seen spend in sporting goods and those new partners. The furniture vertical has really performed very well. And Bread Pay also has performed very well, particularly around two or three of the partners, one of them being Vivid.

John Hecht, Analyst at Jefferies

Great. Thanks very much, guys.

OPERATOR

Thank you. Our next question comes from the line of Mehir Bhatia with Bank of America. Your line is now open.

Mehir Bhatia, Analyst at Bank of America

Good morning. Thank you for taking my questions. I wanted to start maybe on expenses. I think, if I heard correctly, you said expenses will increase sequentially in both 3Q and 4Q as you invest in growth-related expenses and investments in AI technology capabilities. Can you just help us distinguish a little bit between the variable growth expenses from discretionary and most of the discretionary spend? And just with that cadence, should we still expect positive operating leverage for the full year, or is that a little bit more dependent now on revenue getting closer to the high end of the guide?

Perry Beberman, EVP, Chief Financial Officer

Thanks, Mehir, for the question. Yeah, I think as we think about as the volumes increase, meaning that you have more counts, more accounts lead to more customer service calls, more reps, the volumes going through — again, there's variable costs associated with that on everything from technology costs, card processing costs that go along with that. And that's just normal and that's fine. So we also have maintained, ever since Ralph took over, our focus on transforming the company.

Investing in technology and AI is obviously ramping up as if we haven't been investing in AI over the past couple of years. But there's an opportunity to lean in more as the agentic opportunities are presenting themselves, as well as tools and things we can use with our associates that make us better. And all that is under the umbrella of operational excellence. So that helps drive efficiencies, that helps self-fund a lot of the investments that we make.

And so when we talk about expenses ramping up over the back half of the year, it's not that there's going to be these major step functions, but we're just trying to share that we're committed to positive operating leverage for the year. And that is not, I'd say, at risk at this point. If there was something different, then we would say that we're very confident in our ability to deliver positive operating leverage because of the start we got off to this year and what we see for the rest of the year at this point.

We'll continue to manage expenses responsibly. Now, that doesn't mean that we would forego making an important investment if it had to be done. But we are able to fund these investments appropriately because of those operational excellence efficiencies that we've been driving. That creates tens of millions of dollars for us to reinvest into the company. So for us, with the loan growth driving revenue, that's a good thing. That then allows us to put some of that money back into the company to set us up with our brand partners to deliver capabilities for them, for the customers to service them in the way they want to be serviced and the features and things, and then also obviously robust risk management that we have to have in place.

Mehir Bhatia, Analyst at Bank of America

Got it. That's helpful. Thank you. Maybe just turning to credit for a second. You've talked — I think you laid out the target again for, you know, 6% net loss rate, but I think you've also said you don't want to force it there just from overly tightening. Just given the improvement you're seeing, the new vintages you're putting on, you look at delinquency and loss trends — just any thoughts on the timing to get to that target and what do you need to see happening from a macro?

Is the current macro good enough or do you need to see more improvement there? Thank you.

Ralph Andretta, President and CEO

Yeah, Mehir, I think I'd say there's probably some debate. If I had our credit strategy team in front of me right now, I think we would say that if the current macro environment stayed where it is with unemployment below 5%, call it inflation continues to drift back towards 2% over time, even with the current interest rate environment — it may be this way for a while — I think we've got a path to get towards that 6% over the next couple years. The pace at which we get there will be dependent on, obviously, the macro environment. It always is. Then the new vintages we're putting on, to your point, are good quality. We like what we put on. We have a very, very experienced credit team that looks at the customers coming in, understands how to price them appropriately to make sure we get the right returns. And you said it well. We're not forcing our way to 6% by over-tightening because we're in the business of enabling sales for our brand partners.

I think we've done this really well. We've demonstrated this through this recent — I call it a cycle, but period of time. And so that's going to be important for us to keep doing that. But these newer vintages are coming on a little larger, having more impact. Their product mix and risk mix is a little better. So I think we're going to continue to see good improvement. As I mentioned earlier with the glide path that we're on into '27 and hopefully in '28 we're able to achieve that target.

But again, that will all be dependent on macro, and if macro weakens, that could push the target out a little. But I wouldn't expect us to, you know, get there for a full year next year.

Mehir Bhatia, Analyst at Bank of America

Understood. Thank you. Thank you for taking the questions.

OPERATOR

Thank you. Our next question comes from the line of John Pancari with Evercore. Your line is now open.

Russ Anderson, Analyst at Evercore

Hi, good morning, this is Russ Anderson on for John Pancari. Thanks for taking my question. Just on the buyback cadence, CET1 fell to 12.9 from solid buybacks. Your near-term target is 13% to 14%. I know you mentioned the slowdown into the second half as loan growth accelerates and the July repurchases of $25 million. Is that 25 per month a good way to think about the second half, or how should we think about that cadence?

Perry Beberman, EVP, Chief Financial Officer

Hey Russ, and thanks for stepping in for John. You know we're not going to give specific guidance on a particular month or quarter. Loan growth is going to dictate, candidly, how much available capital we have. I mean, that's going to be our primary driver right now. And if you think about fourth quarter where there's a significant seasonal uplift in loans, that means it requires a decent amount of capital to capitalize those loans as well as you have a CECL.

Build typically in that quarter. That also puts pressure on EBITDA, earnings before tax, or net income in that period. So it's usually going to slow down anyway most fourth quarters. And then for us the pace may also be a little bit dependent. As I said in the prepared remarks, the next tranche of preferred stock issuance that we would want to do, if the fourth quarter is opportunistic or not, and if it's not because, say, market conditions aren't there, then it'll push itself into the first part of the first half of next year.

So that would be the other component. Remember we had that availability of slower loan growth in the first quarter and beginning of the year, but it ramps towards the back part, particularly seasonally on an end-of-period loan growth, and that will slow things down. And in the first half we did have that preferred issuance. So keep that in mind as you're thinking about modeling this.

Ralph Andretta, President and CEO

Yeah, as you look at it, I think you always get this put on the news. There's still a lot of uncertainty out there and variability based on what's happening with fuel prices. So we try to take more of a, I'll say, a down-the-middle view of this. We're caring for a little bit of uncertainty that's out there. I mean, if fuel prices go back up, consumers are going to have to take some of their available cash to put it towards dealing with things at the fuel pump and maybe pay a little less. So it's something that we're watchful of and we're still remaining cautious. I mean, if fuel prices come back down, snap back down fast, I'd tell you we have more optimism. But if things continue to worsen a little bit or weaken on that front, it'll put pressure, and that's where you got the range.

And it's kind of where we are with our current view.

OPERATOR

Thank you. Our last question comes from the line of Dominic Gabrieli with Loop Capital. Your line is now open.

Dominic Gabrieli, Analyst at Loop Capital

Hey, guys. Obviously good results. I guess if you, Ralph, if you look at this medium-term, long-term guidance and you look at how you've kind of transformed this business over the last number of years, I guess tell us why Bread Financial Holdings Inc is not a low double-digit EPS growth engine.

Ralph Andretta, President and CEO

You know, a lot of this is macro dependent. I think we are a low double-digit growth engine. So I'm confident we will be. But, you know, listen, it's macro dependent. We're dependent on, you know, the macroeconomic environment, how consumers are feeling. So we are, you know, cautiously optimistic as we move forward.

Dominic Gabrieli, Analyst at Loop Capital

Great. I agree. And so, you know, if, Perry, if you look at the, you know, you talked about the NIM being flattish to slightly better, you've been growing your cash and investment securities as a percentage of average earning assets over the last number of years. And so I'm just curious if you can talk to us about what your expectations are for that bucket so I can get a better handle on kind of what really matters, which is the yield on the loans versus the funding costs.

Thanks so much, guys.

Perry Beberman, EVP, Chief Financial Officer

Yeah, that's fair. Yeah. I'll tell you that the cash that we have on hand will normalize over time. We may have a little more cash at different periods, but we'll make sure that we're not holding more than we need to. But hopefully we have good loan growth or we put that cash to use to fund those incoming loans.

Dominic Gabrieli, Analyst at Loop Capital

Okay, thanks so much.

OPERATOR

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

Ralph Andretta, President and CEO

Thank you very much. As I said, we were very pleased with the quarter and we want to thank you all for your continued interest in Bread Financial. And everybody have a terrific day.

OPERATOR

This concludes today's conference. Thank you for your participation. You may now disconnect.

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