Bread Financial Holdings, Inc. 2026 Q3 Earnings Call

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. 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.

Thank you, Brian, and good morning to everyone joining us today. Bread Financial delivered another strong quarter through disciplined execution across our core priorities, including responsible growth, a focus on operational excellence, prudent credit underwriting, and thoughtful capital allocation. We produced meaningful results in the quarter. End-of-period loans grew 7% to $18.9 billion, driven by momentum in our new partnerships and strong credit sales. That performance translated to revenue growth of 5% and net income of $156 million. These results underscore the continued success of our business model and our ability to generate sustainable, profitable growth for our shareholders. Additionally, credit sales grew 9% year over year, driven by contribution from both new and existing brand partners, alongside continued strength in general purpose spending. On the macroeconomic front, consumer behaviors remained resilient, though spending was increasingly intentional.

Higher credit quality cardholders remained a consistent source of strength, while consumers with lower credit risk scores showed greater selectivity in their purchasing patterns. We also saw consumers adapt to higher fuel costs and persistent inflation by focusing on value and managing discretionary spend. Partners offering multiple Bread Financial financing products such as Academy Sports + Outdoors, and those focused on essential spending and gas, like AAA, are performing particularly well. Our new home furnishing partners, including Furniture First and Raymour & Flanigan, continue to gain traction, as did our Bread Pay relationship with Vivint, a leading home security and smart home company. Again, this quarter, we made measurable progress in our credit risk management. Both the delinquency rate and the net loss rate improved year-over-year, reflecting the sustained effectiveness of our underwriting discipline, portfolio management, and shifting product mix.

Notwithstanding the broader macroeconomic backdrop, our improving credit metric trends reinforce our confidence in the quality and the resilience of our customer base. Based on year-to-date results and our ongoing favorable trajectory, we are improving our full year 2026 net loss rate guidance for the second consecutive quarter, now expecting a full-year net loss rate below 7%. During the quarter, we renewed and extended long-term agreements with two of our top 10 partners, Signet Jewelers and Sephora. Important proof points for the resilience of our relationships and the value of our business model. With Signet, we are building on a long-standing relationship across KAY, Zales, and the Jared brands through enhanced technology and data-driven marketing capabilities. We also expanded our card programs with Signet to include launching a new credit card program for the Blue Nile brand ahead of the holiday season.

Together, we are supporting Signet's evolving businesses and delivering seamless credit experiences around meaningful purchases. Our long-term renewal agreement with Sephora positions us to deepen brand loyalty through our card offerings. We will continue advancing personalization, relevant marketing, and seamless in-store, online, and mobile experiences through analytics and digital capabilities. Both of these renewals reflect the trust, collaboration, and partnership mindset that defines our strongest brand partner relationships. We are pleased to announce that on October 1, we successfully merged our two banks. The milestone, along with last week's credit rating upgrade from Moody's, provides further evidence of our ongoing transformation progress and the strength of our enhanced enterprise risk funding and capital management. Consumer deposits grew 21% to $9.9 billion at quarter end. This trajectory reflects our sustained focus on improving our funding profile and confidence in our deposit offerings.

Our strong capital position and consistent cash flow generation provides flexibility to invest in growth while returning capital to shareholders. Tangible book value per share grew 19% year-over-year, reflecting the compounding benefits of our earnings power. During the quarter, we repurchased $75 million of common stock and increased our quarterly common stock dividend by 9%. Both of these actions reflect our board's confidence and our positive long-term financial outlook. Looking ahead, we remain focused on disciplined investments that support long-term growth and strengthening our competitive positioning with priority on technology, data and analytics, and product innovation. These investments also include the responsible use of AI to improve productivity, enhance risk management, enable greater personalization, and simplify the customer experience. We are collaborating with our retail brand partners and technology industry leaders to advance opportunities in agentic search, commerce, and servicing.

As with all of our innovation efforts, we are focused on practical use cases with clear business value, delivering better outcomes for our partners, customers, and shareholders. I am pleased with another strong quarter for Bread Financial as our associates continue to execute with focus and discipline. Our transformation is increasingly evident in our solid financial performance, balance sheet strength, and partner momentum. We enter the final quarter of 2026 confident in our strategy, encouraged by an improving credit trajectory, and focused on achieving our long-term financial objectives. Now I will pass it over to Perry.

Thank you, Ralph. Turning to slide 3, which highlights our third-quarter financials. As you just heard from Ralph, our third-quarter results demonstrated another period of strong financial performance and disciplined execution. Average loans increased 6% to $18.6 billion, while end-of-period loans increased 7% to $18.9 billion. Benefiting from growth in our new partnerships, increased general purpose sales, as well as a lower gross loss rate. Revenue increased $46 million, or 5% year-over-year, driven primarily by loan growth, lower interest expense, and higher merchant and interchange fees. These gains were partially offset by higher retailer share arrangements and lower billed late fees. We generated net income of $156 million in diluted EPS of $3.82. Net income decreased $32 million, or 17%, year-over-year as the prior year included a $38 million favorable discrete tax item. Excluding taxes, pre-tax income increased $13 million, or 6%.

Moving to slide 4 for more detail on the financials. Net interest income increased 6% year-over-year, driven by strong loan growth, resulting in higher finance charge revenue, as well as lower interest expense. Non-interest income was negative $78 million, lower by $17 million year-over-year, and $32 million sequentially in line with guidance we provided during the quarter. As we generated increased credit sales, improved loan yields, and reduced credit losses, we are able to share more value with our partners, resulting in higher retailer share arrangements or RSAs. Additionally, our new partner programs and recent partner renewals incorporate more of a profit share component, which further share program economics. This further aligns interest between Bread Financial and our partners. Looking ahead, we expect net interchange revenue in the fourth quarter to be similar to the third quarter as a percent of credit sales.

The higher provision for credit losses in the third quarter reflects a reserve build of $21 million this year compared to a release of $28 million in the prior year period. As loan balances continue to grow, we expect the allowance to build accordingly to support that growth. Total non-interest expenses increased $11 million, or 2%, driven by higher information processing and communication costs and employee compensation and benefits costs, partially offset by lower depreciation and marketing expenses. Specifically, information processing and communication costs increased primarily due to new software investments and increased technology-related service contract costs. Employee compensation and benefits costs increased primarily due to higher wages related to annual merit increases and incentive compensation. Finally, PPNR increased $35 million, or 7% year-over-year, a reflection of our focus on responsible profitable growth and ongoing expense discipline.

Turning to slide 5, net interest margin of 18.9% was essentially flat year-over-year, but expanded sequentially, consistent with our typical seasonal patterns. This was partially offset by lower billed late fees, which continued to decline versus the prior year, reflecting the positive trajectory we are seeing in delinquency rates. Looking ahead, we expect 4Q net interest margin to compress modestly on a sequential basis, driven by normal seasonality, the ongoing decline in billed late fees, and broader upward pressure on deposit rates across the industry. On a year-over-year basis, funding costs declined, reflecting the deliberate steps we have taken over the past several years to optimize our funding mix. As Ralph Andretta noted, our consumer deposit platform continues to maintain momentum. Average consumer deposits represented 53% of total funding in the quarter, up from 47% a year ago.

The ongoing improvement in our funding mix was recognized in our recent credit ratings upgrade from Moody's. This marks our second upgrade from Moody's in back-to-back years, a testament to the successful execution of our transformation and underscores confidence in our long-term strategy. Additionally, we completed our bank merger on October 1, which provides greater flexibility to continue to grow consumer deposits as a core funding source. We are monitoring the competitive deposit rate environment, including increased pressure from higher CD rates and shifts in the yield curve, and remain confident in our funding position. Our near-neutral asset sensitivity profile supports our ability to navigate these dynamics effectively. Moving to slide 6, our liquidity position remains strong. Total liquid assets and undrawn credit facilities were $7.1 billion at the end of the quarter, representing more than 30% of total assets.