Bread Financial Holdings, Inc. (BFH) Earnings

Management highlights

- Overall Financial and Strategic Progress * Delivered strong Q2 2026 results with accelerating credit sales (11% year-over-year growth), continued loan and deposit growth, rising revenue and PPNR, and improving credit performance * Tangible book value per common share increased 22% year-over-year to $63.66 * Achieved the key milestone of 50% DTC deposits in total funding, hitting the target set at the 2024 initial investor day * Optimized the capital stack in Q2: issued $135 million of 8.875% preferred stock, and repurchased 2.8 million common shares ($241 million, equal to 7% of outstanding common shares) * 65% of cardholders now hold a prime credit score above 650, reflecting ongoing successful mix shift to higher quality credit - New Partnership Growth * Launched new co-brand partnerships with Raymoor & Flanagan, Furniture First, and Ethan Allen, and a new Bread Pay partnership with Vivint * Strong existing co-brand growth in travel & entertainment (T&E) and sporting goods verticals; new furniture partnerships and the Bread Pay platform also contributed meaningfully to Q2 growth - Capital Allocation Priorities * Maintains a disciplined capital allocation framework: first prioritizes responsible, profitable loan growth, then invests in core technology and AI capabilities, and finally returns excess capital to shareholders via dividends and buybacks while maintaining appropriate capital buffers * After the Q2 repurchase program, $449 million remains under the current share repurchase authorization; repurchase pace will slow in Q3 relative to Q2 due to expected stronger loan growth in H2 2026, with $25 million of planned repurchases in July - Technology and AI Investment * Continues targeted enterprise-wide digital and technology investment, including strategic integration of AI to improve operational productivity and efficiency, enable innovation, and enhance risk management * Developing new AI-powered use cases for agentic commerce and customer servicing to reduce friction and improve outcomes for both partners and end customers - Credit Risk Management * Proactive credit risk management and disciplined underwriting have driven improving credit metrics, with resilient consumer financial health demonstrated by stable payment rates and improving loss and delinquency trends despite persistent inflation and macro uncertainty * Maintains prudent downside scenario weightings in credit reserve modeling to account for ongoing macro uncertainty from global conflicts and other risks

Guidance

- Full-year 2026 average credit card and other loan growth guidance is revised upward to low to mid single digits from the prior guidance of low single digits, driven by stronger-than-expected H1 2026 performance - Full-year 2026 total revenue growth guidance is also revised upward to low to mid single digits, primarily driven by stronger average loan growth - Full-year 2026 net interest margin is expected to be flat to slightly higher versus 2025; tailwinds from prior pricing changes and improved funding costs will be partially offset by lower late fees from improving delinquency and a continued shift to higher credit quality product mix - Full-year 2026 net loss rate guidance is improved to 7.0% to 7.1%, from the prior guidance range of 7.2% to 7.4%, reflecting stronger-than-expected credit performance, stable macro conditions, and ongoing mix shift - Management expects positive operating leverage for full-year 2026 (excluding pre-tax impacts from debt repurchases), despite sequential expense increases in Q3 and Q4 tied to higher variable growth costs and continued strategic investments - Q3 2026 net loss rate is expected to be approximately 30 bps better than Q2 2026 - Full-year 2026 normalized effective tax rate is expected to remain in the 25% to 27% range, with expected quarter-to-quarter variability from discrete item timing - The company confirms it remains on a clear path to hit its long-term target of mid-20s percent return on tangible capital (ROTC) in the coming years, after delivering strong progress on capital stack optimization and credit metric improvement

Segment performance

Bread Financial does not break out formal product segment financials with separate revenue contribution percentages. Overall consolidated performance for Q2 2026: net income of $146 million, up 5% year-over-year; diluted EPS of $3.55; revenue increased 7% year-over-year to $978 million ($64 million increase); end-of-period total loans grew 5% year-over-year to $18.5 billion, while average loans increased 3% to $18.2 billion; net interest income grew 7% year-over-year driven by pricing changes and lower interest expense; non-interest income decreased 4% ($1 million) year-over-year as higher retailer share arrangement (RSA) payments offset strength in interchange and merchant discount fees; total non-interest expenses were nearly flat year-over-year; PPNR increased 14% ($62 million) year-over-year, and adjusted PPNR (excluding debt repurchase impacts) increased 11% year-over-year; net interest margin (NIM) was 18.5% year-over-year; direct-to-consumer (DTC) deposits grew 16% year-over-year to $9.4 billion, comprising 50% of total funding, hitting the company's long-term target; CET1 ratio was 12.9% at quarter end, and total loss absorption capacity was 24.6% of total loans; delinquency rate was 5.25% (down 48 bps year-over-year, down 34 bps sequentially) and net loss rate was 6.98% (down 90 bps year-over-year, down 35 bps sequentially).

Risks & headwinds

- Persistent inflation above the Federal Reserve's 2% target continues to pressure household decision-making and consumer disposable income, particularly from elevated and volatile fuel prices that can shift consumer spending and payment behavior - Ongoing macroeconomic uncertainty remains, including downstream risks from global conflicts that could further impact inflation and economic stability - The timing and pace of reaching the 6% long-term net loss rate target is dependent on macroeconomic conditions; a material weakening of the economy or labor market could delay achievement of the target - Seasonal variability in holiday spending creates uncertainty around end-of-period loan growth levels in H2 2026 - Market conditions may delay a planned additional preferred share issuance, currently expected no sooner than Q4 2026, which could impact share repurchase capacity

Analyst Q&A

• Q: Can loan growth accelerate further in H2 2026 after the strong mid-single digit end-of-period growth in Q2, and how should we think about comps? /

  A: June 2026 was an unusually strong month industry-wide, and July growth has already pulled back moderately. Comps become more challenging in H2 2026 because the company lapped large new partner furniture launches that occurred in Q4 2025, which will slow year-over-year growth comparisons modestly. End-of-period loan growth is still expected to remain above the full-year average guided low-to-mid single digits, with the ultimate outcome heavily dependent on holiday spending levels.

• Q: How should we model retailer share arrangement (RSA) payments going forward, and why were they more muted than expected in Q2? /

  A: RSA payments increase as credit sales, loan yields, and credit performance improve, since most agreements include revenue or profit sharing terms that give partners a cut of improved profitability. The RSA as a percentage of credit sales is the best way to model this line, and this percentage is expected to trend gradually higher over time due to competitive dynamics, improved portfolio performance, and new/renewed partner contracts with more robust sharing terms. The muted Q2 RSA was driven largely by timing, with the expected step-up in payments now set to occur in Q3, alongside stronger than expected Q2 interchange and merchant discount revenue that offset the RSA impact on non-interest income.

• Q: Credit quality has improved significantly, with delinquency below its 5-year average and a mix shift to higher quality loans. Will improvements continue, and how will the CECL reserve rate trend? /

  A: Credit quality improvements are broad-based across both the existing portfolio and new vintages, with entry and roll rates all moving in a positive direction. The company continues to target a 6% full-year net loss rate, and there is plenty of runway for further improvement even with low-to-mid single digit loan growth, with seasoning of new vintages not expected to reverse current improvement trends if macro conditions hold. The CECL reserve rate is expected to trend gradually down toward a 10% long-term target as net losses approach the 6% target, with changes largely dependent on macroeconomic conditions.

• Q: What factors will drive ROTC to the long-term mid-20s target, and is there a chance the company overshoots this target in the near term? /

  A: Three core drivers will deliver the mid-20s ROTC target: continued net loss improvement, further optimization of the capital stack (including additional preferred stock issuance to bring CET1 into the 12% to 13% target range), and continued operating efficiency gains from scale and technology investment. While current ROTC looks ahead of schedule due to ongoing reserve reductions from improving credit and slower current loan growth provision requirements, accelerating end-of-period loan growth will require additional CECL provision builds that will moderate ROTC over time, making an overshoot unlikely on a sustained basis.