Bread Finl Hldgs Q3 2026 Earnings Call Transcript

Bread Finl Hldgs (NYSE:BFH) reported third-quarter financial results on Thursday. The transcript from the company’s third-quarter earnings call has been provided below.

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Summary

Bread Financial Holdings reported a 7% year-over-year increase in PPNR, driven by responsible growth and expense management.

Net interest margin remained flat year-over-year but is expected to compress slightly in the fourth quarter due to seasonal factors and industry-wide deposit rate pressures.

The company’s liquidity position is strong, with liquid assets and undrawn credit facilities amounting to $7.1 billion, and deposits comprising 83% of total funding.

CET1 ratio ended the quarter at 13.1%, with capital return activities including stock repurchases and dividend increases.

Loan growth is expected to be approximately 4% for the year, with total revenue growth anticipated at 5%, supported by a stable partner base and new business launches.

The company revised its full-year net loss rate guidance to below 7%, reflecting improvements in credit metrics and consumer resilience.

Strategic initiatives include investments in AI and technology to enhance customer experience and risk management.

The consolidation of banks was completed without conditions, expected to enhance capital efficiency and funding capabilities.

Management emphasized continued consumer resilience despite macroeconomic uncertainties, with spending remaining intentional and focused.

Full Transcript

Perry Beberman (EVP, Chief Financial Officer)

And reduce 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 Finl Hldgs 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 POS trajectory we’re seeing in delinquency rates. Looking ahead, we expect fourth quarter 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’ve taken over the past several years to optimize our funding mixed as Ralph 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 for Moody’s. This marks our second upgrade for Moody’s in back to back years, a testament to the successful execution of our transformation and and underscores confidence in our long term strategy.

Additionally, we completed our bank merger on October 1st 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. At quarter end, deposits comprised 83% of total funding, with the majority being FDIC insured consumer deposits, underscoring the quality and stability of our funding base. Turning to capital, we ended the quarter with a CET1 ratio of 13.1%, down 90 basis points year over year, reflecting our deliberate capital stack optimization efforts. As shown in the upper right of the slide, core earnings contributed 310 basis points to CET1, offset by 340 basis points from common stock repurchases and preferred and common dividends. 70 basis points related to RWA growth, as well as approximately 20 basis points from costs associated with debt repurchases since the third quarter of 2025.

This included repurchasing $24 million in subordinated debt during the current quarter. During the quarter, we announced a 9% increase in the quarterly common stock dividend and returned capital to shareholders through repurchases of 700,000 shares for a total cost of $75 million, ending the quarter with $374 million remaining under our current stock repurchase authorization. Given our strong loan growth momentum and the anticipated seasonal increase in holiday spending, we expect minimal repurchase activity in the fourth quarter.

Absent a preferred stock offering, execution of an additional preferred issuance will be opportunistic and remain subject to 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, reflecting a substantial margin of safety against potential deterioration in economic conditions. We have a proven track record of building capital and generating strong cash flows, and we remain well positioned across capital liquidity and reserves.

This strong foundation provides the stability and financial flexibility needed to navigate an evolving economic environment while continuing to create value for shareholders. Our commitment to disciplined capital allocation remains unchanged. We manage it through three clear priorities. First and foremost, we support responsible, profitable growth at the right returns, the kind that regenerates capital for years to come. This should continue to represent a significant use of capital going forward.

Second, we continue to strategically increase in our investment in our core technology and proven AI capabilities to support existing and new partners, enhance the customer experience and strengthen risk management, keeping us competitive and more efficient over time. And finally, we return excess capital to shareholders through dividends and share repurchases while maintaining the appropriate capital levels. Moving to Credit on slide 7, our third quarter delinquency rate was 5.57%, down 47 basis points year over year and up 32 basis points sequentially outperforming normal seasonal trends. Our net credit loss rate of 6.40% improved 99 basis points year over year and 58 basis points sequentially. Together, these results reflect the compounding benefits of our disciplined credit risk management, sophisticated underwriting product mix shift, and the continued seasoning of higher quality new account vintages.

Consumers continued to demonstrate resilience throughout the quarter. Tax season provided a tailwind and generally healthy employment and wage growth helped mitigate persistent inflationary pressure, including elevated fuel prices contributing to strong sales and payment activity and continued improvement in our credit risk score mix. Our third quarter reserve rate improved 60 basis points year over year to 11.12% driven by our improving credit metrics, higher credit quality new vintages, and a more favorable credit risk distribution.

With 64% of cardholders having a prime score above 650 sequentially, the reserve rate improved 11 basis points. Looking ahead, we expect the reserve rate to decline sequentially in the fourth quarter, impacted by higher seasonal transactor balances related to holiday spend. The reserve rate then typically increases sequentially in the first quarter as seasonal transactor balances are paid down. With respect to our credit reserve modeling, we continue to apply prudent weightings on downside economic scenarios and reflecting the wide range of potential macroeconomic outcomes, including ongoing uncertainty stemming from global conflicts and their downstream effects on inflation and consumer behavior. These weightings are consistent with those applied in the prior quarter.

Turning to slide 8 our revised 2026 outlook is grounded in the results we have delivered year to date and and a macroeconomic forecast that assumes continued consumer resilience, inflation remaining above the Federal Reserve’s 2% target and a generally stable labor market. We are pleased with the solid loan growth we produced in the third quarter with strong year to date results and only two months remaining in 2026. We are sharpening our full year 2026 guidance with average loan growth up approximately 4% year over year compared to our previous guidance of up low to mid single dig growth continues to be supported by our stable partner base, new business launches driving strong credit sales and continued improvement in gross credit losses. Total revenue growth is expected to be up approximately 5%, primarily driven by average loan growth. We anticipate full year net interest margin will be slightly higher than 2025, in part reflecting improved funding costs.

As discussed earlier, we expect fourth quarter net interchange revenue as a percent of credit sales to be consistent with third quarter results. We manage expense growth based on revenue generation and continued investment in our business and we remain on track to deliver positive operating leverage in 2026 excluding the pre tax impacts from debt repurchases. We anticipate expenses will be higher sequentially in the fourth quarter driven by seasonal volume related growth and continued investment in capabilities and efficiencies consistent with the trajectory we communicated earlier in the year.

Over the long term, we will continue investing to drive growth, build new capabilities for our partners and customers and deliver meaningful operating efficiencies. Reflecting the continued improvement in our credit metrics, we have improved our full year net loss rate guidance to be below 7% with an expected range of between 6.9% and 7.0% compared to our prior guidance of 7.0% to 7.1%. This updated guidance incorporates our visibility into the current delinquency pipeline, stable macroeconomic conditions, continued risk and product mix shifts, and an overall resilient customer. We expect our full year normalized effective tax rate to be in the range of 25% to 27% with quarter to quarter variability due to the timing of certain discrete tax items.

This quarter’s results reinforce the quality and resilience of our earnings model and the underlying financial discipline. We enter the final stretch of 2026 with strong momentum and a robust strengthened balance sheet, well positioned to support continued responsible growth and the achievement of our long term financial targets.

OPERATOR

We are now ready to open the lines for questions. Thank you ladies and gentlemen. If you’d like to ask a question, please press star 11 on your telephone keypad. If you change your mind, please press star 11 again. When preparing to ask your question, please ensure your phone is unmuted locally. Please stand by while we compile the Q and A roster. Now, first question coming from the line of Sanjay Sakhani with kbw. Your line is now open.

Sanjay Sakhani (Analyst at KBW)

Thank you. Good morning. Nice results I guess. First question is on the health of the consumer and just the path of credit quality. Maybe. Ralph like obviously lots of things happening in the macro and geopolitical backdrop. Just maybe. Any frontline commentary on how the consumer is doing? It sounds like they’re doing quite well based on your credit but just any other context there and then Perry, you know, good solid performance on credit. But as we look out to next year, obviously the growth has accelerated as we think about further improvements to credit.

Thinking about the portfolio mix and obviously the growth, you know, what’s the direction of travel on losses and such. Thank you.

Ralph Andretta (President and CEO)

Yes, Ralph, I said in my prepared remarks, the consumer is resilient. If you look at the consumers kind of bifurcated, the high-end consumer continues to spend, but their spend is intentional. They’re focused on, you know, spending, spending thoughtfully and correctly. And so they’ll continue to spend. It’s been robust. And the consumer at the, you know, maybe the lower FICO advantage scores are very focused on bargain hunting and non-discretionary spend.

And that’s what we’ve seen. But they are spending as well. You know, we’ve seen spend, you know, in different categories. Sporting goods has been strong. Sporting goods has been strong. Home improvement has been strong. Beauty continues to be strong. So we’re seeing good spend across the board. But like I said, the spend is intentional, thoughtful, and some are bargain hunting at this point.

Perry Beberman (EVP, Chief Financial Officer)

Yeah. And so to tag on to what Ralph said, I think when you ask about the direction of travel for next year on credit, one thing is going to be contingent, as always, is the macroeconomic backdrop. And so for all the good things Ralph said there, we’re still pretty cautious, and appropriately, about what things might look like. So while the consumer has been very resilient up to this point, there are things out there that give you some of that pause and something that could influence their behavior in the coming quarters.

Right. So you’ve got persistently weak consumer confidence, and that could, it hasn’t yet, but it could translate into softer spending, borrowing, or payment trends. There is the cumulative impact of having higher interest rates. So if interest rates continue to go higher throughout next year, what might that do to create, we’ll say, tighter financial conditions on a particular household, on their budgets. Obviously the geopolitical and energy stuff going on that could put further upward pressure on inflation and limit some of their discretionary spend.

And then you have just the overall political environment and what might shift with policy. So all these things are going to have impacts in the next year. So, you know, I’d say we’re very encouraged by what we’ve seen with the consumer so far. And we haven’t seen any meaningful signs of deterioration because they’re navigating and managing their personal budgets. But that will influence our view of what next year might be. So as you talk about credit, I think that the path of travel will be a lower loss rate into next year, probably will not improve at the same degree of basis points as we observed this year.

Now, we’ve got some tailwinds in that. You can see that you’ve got really good delinquency bucket performance. Right now we’re seeing continued improving product mix that is a changing product mix that influences the loss rate. And so we’re going to continue to see good, good growth, price stable to what we saw this year. So everything’s trending in a positive direction and payments are holding up real well. Well, you know, as we think about NIM going forward, you know what I would tell you is we’ll talk about lots of moving parts. I expect fourth quarter to be lower than third quarter seasonally, and that’s typical. Right? You have a rise in the transactor balances, and so the moving parts that have influenced this year’s NIM and will probably even more so influence next year. And I’ll just put this out there. I expect NIM for next year. I’d say this year we probably have peaked in full-year net interest margin.

Next year I would expect net interest margin to be flat to slightly down, in part because you have a continued improving credit environment that you’re going to have less billed late fees. We continue to see a shift in our new account product mix more to co-brand, proprietary card, and installment loans, and those come with less risk but also mean lower assigned APRs and fewer billed late fees with the type of credit they are, you know. So I expect that to be—we’ll still see some improvement of gross losses, which means you have less reversal of interest and fees.

So that’s a net good guy. But that’s the direction I’d say in that. So the product mix is going to shift. But also with that you do get, you know, the betterment in loss rate. So if you look at your risk-adjusted net interest margin, feel pretty confident that’s going to look pretty good for next year. As you think about efficiency ratio, I mean net interest margin is kind of in the, I’ll say, in the soup with everything else. But the scale is where we’re seeing benefit by delivering positive operating leverage year in, year out. That’s going to continue to help us improve efficiency ratios. And I’d say some years you’re going to see a better improvement in efficiency rate than other years because we’re continuing to make the right types of investments in the company and everything for technology, service, you know, AI investment.

So, you know, we’re managing it tight, and through our operational excellence program we feel very good about being able to continue to drive the efficiency ratio lower over the coming years. And that’s one of the key elements along with, you know, improved credit that will help us hit those ROTC targets.

OPERATOR

Thank you. Our next question in queue coming from the line of Moshe Orenbuch with TD Cowen. Your line is now open.

Richard

Great, thanks. Maybe just to focus a little bit on the RSA. Could you talk a little bit—I know you talked about what it should be looking like in Q4—but any sort of, you know, how we should think about that in the context of, you know, kind of relatively, you know, higher level of growth that you’re seeing, the recent renewals, you know, as to whether that has any impact over time, and any other factors we should think about that on a longer-term basis?

Perry Beberman (EVP, Chief Financial Officer)

Thanks, Richard. Yeah, so, you know, longer term, you know, more and more of our programs are having, you know, more of a profit share component in there, which we like because it definitely aligns interests in the program. The way we continue to speak to it is that expect, you know, if you look at the RSA as a percent of credit sales, that’s the way to look at it. And I would expect that that percent will rise somewhat over the course of time in years, and that’s a good thing.

As, you know, again the profit margins expand and we will share more of that with the partners over time. But again, that’s aligned interest and all of that is built into our expectations as we’re going to drive towards those mid-20 ROTC.

Ralph Andretta (President and CEO)

Yeah, I think a couple of things. One is we are really pleased with the renewals of Signet and Sephora. They’re our long-term partners, and they renewed early because we have this trust and this confidence in the leadership team, and we feel really good about that, our mutual view on that we can grow profitability for both of them and us, and our continued investment in technology and using AI as we move forward. So really good about those renewals.

And as we look at the, you know, the broader pipeline, it’s really across the board. There is, you know, so we see a lot of de novos out there where there’s opportunities to, you know, just with startups like we have with a couple of ours where we can build programs together. We really like those, but they’re really quite across the board. Across the board, to be honest. There’s no one industry that stands out at this point.

OPERATOR

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

Terry Ma (Analyst at Barclays)

Hey, thank you. Good morning. Can you maybe just help us think about the building blocks for loan growth into 2027? How much should come from existing partners versus recently signed, renewed programs? And then, like, when should those newer programs become more meaningful contributors? Got it. And can you give some color on what conversations are like with kind of merchant partners for renewals or any kind of de novo programs? Like what are retailers kind of focused on in this environment? Is it just economics, value prop, usage of AI? Any more color on that?

Ralph Andretta (President and CEO)

Thanks, Derek. Look, obviously we’re experiencing very nice growth in 2026 because of the foundations that have been built in 25 and before that. So some of the things which you just spoke about is the building blocks. So one is we’re going to continue to see gross loss improvement. That means more of the new vintages that we put on are going to be able to contribute to growth versus going out the back door through gross losses. So that’s a nice bit of tailwind that will continue into next year.

The programs that we signed late last year, early this year will continue to roll through. But because of the significant growth they provided to us this year, you kind of lap some of that and you’ll see that in the fourth quarter the growth will not continue to accelerate versus what you saw in the third quarter as a result of those programs that started last year. You think about the furniture vert—some new signings that will come on will help contribute as well, as well as the existing partners that we have that are reinvesting in their programs, revising their value propositions.

When we get partners who understand and truly value that loyalty program and reinvent that, we see really nice growth in those. And what I’ll tell you is we look at Academy Sports as a good example of that, where they now offer all of our products, whether it’s an installment loan product, the private label product, or a retail co-brand. So, you know, that’s an example of somebody who really took that. And when partners do that, they can see some nice growth.

So those are existing partners, and then installment loans are the other piece that you’re seeing some nice growth with us, and I think that’ll continue into next year.

OPERATOR

Thank you.

Ralph Andretta (President and CEO)

Yeah, really all of the above. You’ve mentioned three, but I think one of them is, you know, the trust and experience of the team we’re putting in front of the partners. And when we go to a partner, it’s not just a sales call. It’s a call about our capabilities, our customer service capabilities, our technology capabilities, our data and analytic capabilities. And we talk about all those with the partners and demonstrate to the partners that, hey, we can help you grow your business as we move forward.

And here are the opportunities. So it’s really that conversation across the board. You know, the history of our success, how we built, you know, we’ve gone from some of our partners that started with us de novo, now with some of our biggest partners in our top 10. So our history, our legacy is really very important to us. And, you know, we get and we use our top 10 partners’ feedback as part of the selling point. So we go in with a full product set as well.

So those are all important as we move forward.

Terry Ma (Analyst at Barclays)

Got it. Thank you.

OPERATOR

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

Mihir Bhatia (Analyst at Bank of America)

Morning. Thanks for taking my question. I wanted to start with, you know, just the returns on the incremental programs. Maybe you could talk a little bit about just the risk-adjusted return hurdle that new programs must clear. How do recent programs compare to the prior relationship or the existing portfolio, just given, you know, some of these programs are changing? You talked about RSAs going up, maybe moving to a little bit more of a profit share model. Are the new programs as profitable as the old ones, or are you having to give up a little bit of the economics as the programs perform well?

Perry Beberman (EVP, Chief Financial Officer)

Yeah, Mihir, that’s a really good question. Thank you for that. You know, every program has different economics, and you can think about it, every program has a different degree of volatility in different economic conditions, which require, I’ll say, maybe they provide better returns in benign situations and the returns get a little more compressed in times of higher unemployment. Other situations where other programs perform more steady. So it depends.

If you’re looking at a private label program, typically those will have some higher margins, whereas if you’re looking at, say, some of the programs out there—even ones that we pass on—could be very thin margins but have much lower losses, very high rewards. So everything has different returns. But the programs that we’re putting on, we make sure that they hurdle our internal return requirements, all of which has to drive us towards those mid-20s ROTC that we’ve committed to.

Mihir Bhatia (Analyst at Bank of America)

And then maybe just turning to capital deployment after 4Q, obviously you said you expect minimal buybacks in 4Q absent a preferred issuance. So maybe a two-part question here: once the seasonal loan growth reverses, what CET1 level are you managing towards, and what should we be looking for in terms of timing and pace of repurchases in 2027? And to the extent you can comment on any of the preferred issuance economics that you would be looking to achieve, how do you evaluate the preferred dividend versus the accretion from a buyback and the CET1 benefit?

Perry Beberman (EVP, Chief Financial Officer)

Thanks. Yeah, so, yeah, a lot to unpack in there. So we have said, and we haven’t, I don’t think, deviated from that, our goal is to provide a CET1 ratio—about 12% to 13% is our target. And so you could think about that, and that’s optimized. So once we are fully optimized, which would mean issuing, I’ll say, a full amount of about 1.5% of our RWA in the form of preferreds, which means we have about another hundred billion or so to go before we’re in that sweet spot of the CET1 target.

And then as it relates to preferreds, it will be market dependent in terms of when and if we can do that. Now an open window begins, I want to say next Monday, but again, who knows what the markets will look like in terms of the opportunity. We believe our shares are still a good value and, by optimizing our capital stack, it provides the opportunity to put excess capital to use. And obviously the first thing we do is fund that profitable growth, and you’re going to see the use of that capital in the fourth quarter.

That’s why we say expect very minimal buybacks in the fourth quarter short of preferred issuance, because we’re deploying capital to fund the loan growth. And then seasonally, the first quarter, that frees up as the customer starts to pay down balances. But overall our capital priorities have remained really unchanged. We’re going to support profitable growth, fund innovation, maintain our capital ratios, and we’ll return to shareholders what’s left over.

Mihir Bhatia (Analyst at Bank of America)

Thank you.

OPERATOR

Thank you. Our next question coming from the line of John with Evercore ISI.

Gerard Sweeney (Analyst at Evercore ISI)

Hey, good morning, this is Gerard Sweeney on for John. Just going back to the NIM trajectory and deposit cost comments, can you just contrast maybe the rising deposit cost pressure versus funding cost optimization? And with consumer deposits at 53% of funding, are you expecting any further benefit to the funding mix as well, especially post bank conversion?

OPERATOR

Thank you.

Perry Beberman (EVP, Chief Financial Officer)

Yeah, I think I heard the question. It was around deposit funding and, you know, the upward pressure it could put. If we think about net interest margin, we are as close to neutral as you can get. So if we had a rising rate environment, I expect to have a little bit of benefit from it, but it’s a temporary benefit now. That said, you could see a situation where spreads start to widen a little bit ahead of an actual Fed funds rate increase. So that could affect things, and you think about the turnover of CDs, and we are a growing business.

So as you have your loan growth, you’re going to fund it with more deposits. Those deposits are going to come in at current market rates. So overall I would expect that the cost of deposits will rise over time, particularly if you’re entering into a rising rate environment here. But our net interest margin should not be getting compressed as a result of the deposit pricing. And I expect that we’ll continue to grow deposits. As I say, we like this form of funding. Merging the two banks together into one larger scale bank allows us to continue to grow that as a percent of our overall funding over time. We’ll do it responsibly, but we’re very comfortable with where we are in the league table—competitive pricing.

Gerard Sweeney (Analyst at Evercore ISI)

Great, thank you. And then going back to overall deposit mix, is there some sort of target level or where you expect to, you know, cap out in terms of deposit mix—consumer deposits as a percent in total—from the 53% in this quarter?

Perry Beberman (EVP, Chief Financial Officer)

Yeah, so again we’re around 53% or so of total funding. We’re up from 47% a year ago. I expect that the long-term target will match peer funding in that 60% to 70%, but that’ll take, you know, a number of years to get there.

Gerard Sweeney (Analyst at Evercore ISI)

Thank you very much.

Perry Beberman (EVP, Chief Financial Officer)

You’re welcome.

OPERATOR

Thank you. Thank you. Our next question coming from the line of Don Pendenni with Wells Fargo. Your line is now open.

Don Pendenni (Analyst at Wells Fargo)

Hi, good morning. I was wondering if you could just talk a little bit, as we head towards the midterms, is there anything on the regulatory front that you’re keeping an eye on, or do you see sort of a steady-state type situation?

Ralph Andretta (President and CEO)

You know, we’re always watching Washington, but right now we see a steady state. We’ll see what the midterms bring. And, you know, like I always say, whatever the administration is empowered, we work with the administration we need to work with. That doesn’t sway how we run our business.

Don Pendenni (Analyst at Wells Fargo)

And on expenses, the growth has been pretty kept in check. How are you thinking as you go into next year with tech and AI spend? Obviously you think you can have continued operating leverage, but do you feel like expense growth can continue to be pretty modest?

Ralph Andretta (President and CEO)

Yeah, I mean, on expenses, we’ll go into the fourth quarter with higher—expenses will be higher sequentially—driven by seasonal, volume-related growth and continued investment in our capabilities that also then drives further efficiencies going forward. We do remain really focused on operational excellence, and that—I know it may sound like a tagline of some sort—but it really is a culture and mindset at our company. We’re driving continuous improvement.

Those savings kick off tens of millions of dollars in efficiencies per year that we’re able to deploy back into the business to fund different initiatives for technology, service and collections, marketing, and also drive further revenue opportunities and optimization. So all of this has also enabled us to invest more into AI. Now, as we look into next year, we are committed to delivering positive operating leverage. The investments in things like AI are accelerating and important from a competitive standpoint, but that’s going to unlock even greater opportunities in the future. So, you know, it could be a thin year in positive operating leverage next year because this year is coming in pretty strong. But every year will be a little different.

But our commitment does not change in what we’re going to do to invest in the business to make sure we’re supporting our brand partners and our customers alike with the best tools and capabilities possible.

Don Pendenni (Analyst at Wells Fargo)

Got it. Thanks.

OPERATOR

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

Jeff Adelson (Analyst at Morgan Stanley)

Hey, good morning, Ralph and Perry. I know you just talked a bit about the deposit, but if I could just follow up there. I appreciate the color and commentary. You’re continuing to kind of emphasize growth there. You think you can continue to grow that above the prior target of 50% in terms of your direct-to-consumer deposit mix. But if I can make an observation, it does seem like your savings rate, you have kept that a little bit higher relative to what rates have done over the past few years.

As you continue to remix into these deposit costs away from wholesale going forward, is there maybe some room for your overall deposit cost to maybe perform a little better this time around? I know you sort of widened the deposit beta range out last quarter to 60% to 80%, but it just seems like there’s potential opportunity there for your deposit costs to rise a little bit more slowly this time around. Is that an appropriate way to be thinking about it from here, or just any sort of thoughts there?

Perry Beberman (EVP, Chief Financial Officer)

Yeah. So Jeff, there’s a couple things. I appreciate the question. Look, I think in time we will be able to pull levers a little differently on pricing. As we continue to have scale and more brand recognition, you get more stickiness and you maybe be able to shave a few basis points. But for now, what I’d say is it is competitive out there. With our loan growth needs to get funded, and we want to increase the percent of our funding being direct-to-consumer deposits, it means our deposit growth has to outpace the loan growth.

So we need to continue to grow at a decent pace, and we are very pleased with our competitive position. Our price optimization will continue to happen, and we look at the mix of where we want that to be. But it is something that we very actively manage. And I think it’s a fair point and something that, in time, of course from my seat I’d love to see some basis points of benefit coming through that. But right now, you know, this is where we’re at.

Jeff Adelson (Analyst at Morgan Stanley)

Okay, great. And again, appreciate all the color on the interchange and RSA line. I guess as we think about the go-forward in our models, your interchange as a percent of credit sales was up 30 basis points year over year. Looks like it’ll be similar next quarter. Is that the right trajectory to be thinking about in our models, or is this a little bit more accelerated these two quarters given the renewals, and it will depend on the pace of renewals going forward more than just kind of a consistent upward trajectory?

Perry Beberman (EVP, Chief Financial Officer)

You know, I would say that perhaps it’s a little faster because of renewals, you know, linked quarter and going into 4Q. But as you bring on different partners and you’re growing business, and different partners come on with different value propositions, I would expect that it will continue to steadily ramp up in the future.

Jeff Adelson (Analyst at Morgan Stanley)

Okay, great. Thanks, Barbara.

OPERATOR

Thank you. Our next question coming from the line of Dominic Gabriel with Loop Capital, your line is now open.

Perry Beberman (EVP, Chief Financial Officer)

Yeah. And thanks, Tomit. See what I talked about earlier. With the year-over-year growth, it becomes a harder comp in the fourth quarter because the fourth quarter of last year we launched some of those new furniture vertical brands like Raymour & Flanigan and Furniture First that put on some nice growth in the fourth quarter of last year. I think those deliver more steady growth. So this year it’s already in the fourth quarter. It was already in the comp from 2024 where it was not in the comp for third quarter because it hadn’t launched yet.

That’s why that math’s a little different there. And then the holiday spend will obviously be the wild card in terms of what the fourth quarter really turns out to be.

Ralph Andretta (President and CEO)

Yeah, listen, it’s Ralph. We’re really proud of the bank consolidation and, you know, we did it from a position of strength. You know, we have a professional team, we’re focused on it. And there were no conditions in this bank consolidation that was critical to us as we move forward. So, you know, we can fund more assets with direct-to-consumer deposits as we’ve just talked about. You know, we gain capital efficiencies by creating a single bank with large scale and stronger, more diversified combined balance sheets. And I think it’s just a reflection of our enhanced capital position, our enhanced strong balance sheet and really our enterprise risk management that we’re able to do it now with no conditions, a position of strength with a, you know, first-rate team in place.

OPERATOR

Thank you. Our next question in the lineup, John Hecht with Jefferies, your line is now open.

John Hecht (Analyst at Jefferies)

Morning, guys. Thanks very much for taking my question. You guys talked about I think some of the proprietary products, proprietary cards, installment loans. It sounds like there’s an increased portion of the overall mix tied to those products and services. I’m wondering, are these cross-sell, or maybe can you talk about the channel of customer acquisition in those products? And then how do we—you mentioned higher credit quality, higher spend overall with that group—how do we think about that mix over time and how that impacts, call it, the metrics of the business like margins and so forth.

Perry Beberman (EVP, Chief Financial Officer)

Yeah, John, thank you for the question. It’s something that, you know, as a finance team I get to enjoy trying to reforecast that every quarter or every month based on the new signings, customer behavior, where new accounts are coming from, and really what you’ve seen us talk about is an evolving portfolio. I mean if you think about back, you know, before Ralph joined it was a lot more private-label card soft goods concentration. And then over time we’ve introduced more co-brand, including retail co-brand, which is effectively supporting the partner that maybe only had private label before.

Now they’ve got a retail co-brand card, bringing more top-of-wallet type of co-brands like NFL, AAA, those types of programs, and then some more of those bigger-ticket, the furniture vertical. And now you’re seeing some good growth in installment lending. All of which, to your point, have very different metrics, whether from the top-line loan yields to risk-adjusted margins because they have different types of losses, different expense costs associated with them.

So all that fits together. So over time, that’s why I commented earlier on, I’ll say, the path of travel for both net interest margin and then pair that with credit losses. Net interest margin is going to feel a little pressure from that changing product mix, but credit should benefit from that. So everything fits together. And some of these things that have larger loan size also benefits your efficiency ratio because the cost of servicing an account with a larger balance doesn’t really cost you that much more.

So all these things are fitting together. But at the end of the day we will be able to get to those return targets that we set. And then in terms of the channel question, every partner has different strengths of their channels. Some are stronger in online digital channels—I’d say everybody has that—and some of them are much more in-store. So it really depends on the brand partner.

John Hecht (Analyst at Jefferies)

Okay, that’s super helpful. Thank you very much.

OPERATOR

Thank you. And there are no further questions in the Q&A queue at this time. I will now pass the call back to Mr. Ralph Andretta for any closing comments.

Ralph Andretta (President and CEO)

Thank you. And thank you all for joining our call today and for your continued interest in Bread Finl Hldgs. And we look forward to speaking to you next quarter. Everyone, have a terrific day. And thank you again.

OPERATOR

Ladies and gentlemen, that is our conference for today. Thank you for your participation, and you may now disconnect.

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