Good morning, and welcome to Bread Financial's third quarter 2026 earnings conference call. My name is Livian. I will be coordinating your call today. At this time, all parties have been placed on a listen-only mode. Following today's presentation, the floor will be open for your questions. To register a question, please press star one one. It is now my pleasure to introduce Mr. Brian Vereb, Head Investor Relations at Bread Financial. The floor is yours.
Thank you. Copies of the slides we will be reviewing and the earnings release can be found on the Investor Relations section of our website at breadfinancial.com. On the call today, we have Ralph Andretta, President and Chief Executive Officer, and Perry Beberman, Executive Vice President and Chief Financial Officer. Before we begin, I would like to remind you that some of the comments made on today's call and some of the responses to your questions may contain forward-looking statements. These statements are based on management's current expectations and assumptions and are subject to the risks and uncertainties described in the company's earnings release and other filings with the SEC. Also on today's call, our speakers will reference certain non-GAAP financial measures which we believe will provide useful information for investors. 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 1st, 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 three, 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 four 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 - $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 five, 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 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 have taken over the past several years to optimize our funding mix. 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 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 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 six, 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 4Q, 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 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.
Finally, we return excess capital to shareholders through dividends and share repurchases while maintaining the appropriate capital levels. Moving to credit on slide seven. 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, 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 eight.
Our revised 2026 outlook is grounded in the results we have delivered year- to- date 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 digits. 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 pretax 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 7.0%, with an expected range of between 6.9% and 7.0%, compared to our prior guidance of 7.0%-7.1%. This updated guidance incorporates our visibility into the current delinquency pipeline, stable macroeconomic conditions, continued credit 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%-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 would like to ask a question, please press star one one on your telephone keypad. If you change your mind, please press star one one again. When preparing to ask your question, please ensure your phone is unmuted locally. Please stand by while we compile the Q&A roster. Our first question coming from the line of Sanjay Sakhrani with KBW. Your line is now open.
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, 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. Perry, 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, what's the direction of travel on losses and such? Thank you.
Yes, this is Ralph. I said in my prepared remarks, the consumer is resilient. If you look at the consumers, kind of bifurcated, the high-end consumer continue to spend, but their spend's intentional. They're focused on spending thoughtfully and correctly. They'll continue to spend. It's been robust. The consumer at maybe the lower FICO or VantageScores are very focused on bargain hunting and non-discretionary spend. That's what we've seen, but they are spending as well. We've seen spend in different categories. Sporting goods has been strong. Sporting goods has been strong. Home improvement has been strong. Beauty continues to be strong. We're seeing good spend across the board. Like I said, the spend is intentional, thoughtful, and some are bargain hunting at this point. Yeah.
Yeah. 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. For all the good things Ralph said there, we're still pretty cautious and appropriately about what things might look like. While the consumer's 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? 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.
If interest rates continue to go higher throughout next year, what might that do to create, I will 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. Then you have just the overall political environment and what might shift with policy. All these things are going to have impacts into next year. I'd say we're very encouraged by what we've seen with the consumer so far. We haven't seen any meaningful signs of deterioration because they're navigating and managing their personal budgets. That will influence our view of what next year might be. 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. We've got some tailwinds, in that you can see that you've got really good delinquency bucket performance right now. We see continued improving product mix that is a changing product mix that influences the loss rate. We're going to continue to see good growth, probably stable to what we saw this year. Everything's trending in a positive direction, and payments are holding up real well.
Okay. That's great. Then maybe just, Perry, on the NIM. As we think about just the path for next year with the rate environment as such, how should we think about the movement of the NIM and maybe just the associated impact on the efficiency ratio? Because you guys have obviously seen efficiency gains as NIM has done well. Maybe you could just talk about that a little bit, and that's it. Thank you.
Sure. As we think about NIM going forward, what I would tell you is, as we'll talk about lots of moving parts, I expect fourth quarter to be lower than third quarter seasonally. That's typical, right? As you have the rise in the transactor balances. 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.
Those come with less risk, but also means lower assigned APRs and fewer billed late fees with the type of credit they are. 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 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, net interest margin's 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. I'd say some years you're going to see a better improvement in efficiency rate than other years. We're continuing to make the right types of investments in the company, in everything for technology, service, AI investments. We're managing it tight. Through our operational excellence program, feel very good about being able to continue to drive the efficiency ratio lower over the coming years. That's one of the key elements, along with improved credit that will help us hit those ROTCE targets.
Thank you. Our next question in queue coming from the line of Moshe Orenbuch with TD Cowen. Your line is open.
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 how we should think about that in the context of the relatively higher level of growth that you're seeing, the recent renewals, as to whether that has any impact over time and any other factors we should think about that on a longer-term basis? Thanks.
Thanks, Moshe. Yeah. Longer- term, more and more of our programs are having 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, 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 and years. That's a good thing. As 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 ROTCEs.
Got it. Thanks. Maybe at a high level, you have had very good success extending, renewing, and new partners as well. I think if you look at the private label and partner industry broadly, there are definitely pockets where there are players who are pulling back or not emphasizing as much. As you kind of look out at the landscape, what do you see as the biggest areas of opportunities for you for potential new, either new programs or acquisitions?
Moshe, I think a couple of things. One is, we are really pleased with the renewals of Signet and Sephora. They are our long-term partners, and they renewed early because there is trust and there is confidence in the leadership team, and we feel really good about that. A 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 I feel really good about those renewals. As we look at the broader pipeline, it is really across the board. So we see a lot of de novos out there where there are opportunities to, with startups like we have with a couple of ours, where we can build programs together. We really like those, but they are really quite across the board, to be honest. There is no one industry that stands out at this point.
Thanks, Ralph.
Thank you. Our next question in queue coming from the line of Terry Ma with Barclays. Your line is now open.
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 renew programs? When should those newer programs become more meaningful contributors?
Yeah. Thanks, Terry. Look, obviously we're experiencing very nice growth in 2026 because of the foundations that have been built in 2025 and before that. 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, say, going out the back door through gross losses. So that's a nice bit of tailwind that'll continue into next year. The programs that we signed, say, 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. Think about the furniture vertical. 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. 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 that's an example of somebody who really took that. When partners do that, they can see some nice growth. So those are existing partners.
Installment loans are the other piece that you're seeing some nice growth with us, and I think that'll continue into next year.
Got it. Can you give some color on what conversations are like with merchant partners for renewals or any kind of de novos programs? What are retailers focused on in this environment? Is it just economics, value prop, usage of AI? Any more color around that? Thank you.
Yeah, really all of the above. You mentioned three, but I think one of them is the trust and experience of the team we're putting in front of the partners. 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. When 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. The history of our success, how we've built, 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.
We use our top 10 partners' feedback as part of the selling point. So we go in and a full product set as well. So those are all important as we move forward.
Got it. Thank you.
Thank you. Our next question coming from the line of Mihir Bhatia with Bank of America. Your line is now open.
Morning. Thanks for taking my questions. I wanted to start with 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 are seeing 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?
Mihir, that's a really good question. Thank you for that. 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 and other situations where other programs perform more steady. So depends on 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 that even ones that we pass on could be very thin margins but have much lower losses, very high rewards. So everything has different returns.
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 ROTCEs that we've committed to.
Got it. Then maybe just turning to capital deployment after 4Q. You said you expect minimal buybacks in 4Q absent preferred issuance. So maybe a two-part question here. Just 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? To the extent you can comment on any of the preferred issuance economics that you would be looking to achieve, just how do you evaluate the preferred dividend versus the accretion from a buyback and the CET1 benefit? Thanks.
Yeah. So there's 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%-13% is our target. 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 $100 million or so to go before we're right 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 at a 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. Then in the season, the first quarter, that frees up as the customer starts to pay down balances. But overall, our capital priorities have remained really unchanged. We want to support profitable growth, fund innovation, maintain our capital ratios, and we'll return to shareholders what's left over.
Thank you.
Thank you. Our next question coming from the line of John Simony with Evercore ISI. Your line is now open.
Hey, good morning. This is Girard Sweeney on for John. Going back to the NIM trajectory and deposit cost comments. Can you contrast maybe the rising deposit cost pressure versus the funding cost optimization? With consumer deposits at 53% of funding, are you expecting any further benefit to the funding mix as well especially post bank conversion? Thank you.
Yeah, I think I heard the question. It was around deposit funding and the upward pressure it could put. When you think about net interest margin, we are as close to neutral as you can get. If we had a rising rate environment, I expect to have a little bit of benefit from it, but it's a temporary benefit. That said, you could see a situation where spreads start to widen a little bit ahead of an actual Fed funds rate increase. That could affect things. You think about the turnover of CDs. 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.
Overall, I would expect that the cost of deposits will rise over time, particularly if you're going to enter into a rising rate environment here. But our net interest margin should not be getting compressed as a result of the deposit pricing. I expect it will continue to grow deposits as 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, I'll say, in the league table on competitive pricing.
Great, thank you. Going back to overall deposit mix, is there some sort of target level or where you expect to cap out in terms of deposit mix and consumer deposits as a percent of total from the 53% in this quarter?
Yeah. 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%-70%, but that'll take a number of years to get there.
Thank you very much.
You're welcome. Thank you.
Thank you. Our next question coming from the line of Don Fandetti with Wells Fargo. Your line is now open.
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 like a steady state type situation?
We're always watching Washington, but right now we see a steady state. We'll see what the midterms bring and like I always say, whatever the administration is in power, we work with whatever with the administration we need to work with. That doesn't sway how we run our business.
Got it. 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?
Yeah. I mean, on expenses, look, we'll go into the fourth quarter with higher expenses. It'll 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. All of this has also enabled us to invest more into AI. As we look into next year, we are committed to delivering positive operating leverage.
Look, 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. It could be a thin year in positive operating leverage next year because this year's 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.
Got it. Thanks.
Thank you. Our next question coming from the line of Jeff Adelson with Morgan Stanley. Your line is now open.
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 could 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. And as you kind of 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%-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?
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'd maybe be able to shave a few basis points. But for now, what I'd say is, it is competitive out there. I'll say our loan growth needs to get funded, and we want to increase the percent of our funding being direct to consumer deposits 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, this is where we're at.
Okay, great. 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 will 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 a consistent upward trajectory?
I would say that perhaps it is a little faster because of renewals, late in the quarter and going into 4Q. But as you bring on different partners and you are a growing business and there are different partners come on with different value propositions, I would expect that it will continue to steadily ramp- up in the future.
Okay, great. Thanks, Perry.
Thank you. Our next question coming from the line of Dominick Gabriele with Loop Capital. Your line is now open.
Hey, great. Thanks so much. Good results. I am just wondering, guys, in the fourth quarter, you are calling for average loans to be up approximately 4%, excuse me, for the year. I am just curious if that means that you expect spending to decelerate from the third quarter's level, or if your assumption is that paydowns actually step up year-over-year, even though it seems like the paydowns in the third quarter were actually a little bit less of a headwind from my calculation. I am just curious if you guys could unpack those two factors. Thanks.
Yeah. Thanks, Dominick. 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 this new furniture vertical brands, like Raymour & Flanigan, Furniture First, that put on some nice growth in the fourth quarter of last year. I think with those delivering more steady growth. This year, in the fourth quarter, it was already in the comp from 2025, where it was not in the comp for third quarter because it had not launched yet. That is why that math is a little different there. The holiday spend will obviously be the wild card in terms of what the fourth quarter really turns out to be.
Yeah, great. Thank you. Just a little bit more on the consolidation of the banks. People have asked for that for, I have no idea, 10 years or something along that line, and you guys got it done, I guess. What synergies from a cost perspective as well, or any items that you could not do before that you can do now that the banks are combined? If you can talk through that would be great. Thank you so much.
Yeah, listen, it is Ralph. We are really proud of the bank consolidation and we did it from a position of strength. We have a professional team, we are focused on it, and there were no conditions in this bank consolidation. That was critical to us as we move forward. So, we can fund more assets with direct-to-consumer deposits, as we have just talked about. We will gain capital efficiencies by creating a single bank with large scale and stronger, more diversified combined balance sheets. I think it is just a reflection of our enhanced capital position, our enhanced strong balance sheet, and really our enterprise risk management, that we are able to do it now with no conditions, a position of strength with a first-rate team in place.
Thank you. Our next question in queue coming from the line of John Hecht with Jefferies. The line is now open.
Morning, guys. Thanks very much for taking my questions. 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 am wondering, are these cross-sell or maybe can you talk about the channel of customer acquisition in those products? Then 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?
John, thank you for that question. It's something that, 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. Really what you've seen us talk about is an evolving portfolio. If you think about back before Ralph joined, it was a lot more private label card, soft goods concentration. 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. 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. All that fits together. Over time, that's why I commented earlier on the, 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. Everything fits together, and some of these things that have larger loan size also benefits your efficiency ratio because the cost of servicing account with a larger balance doesn't really cost you that much more. 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.
Okay. That's super helpful. Thank you very much.
Thank you. 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.
Thank you. Thank you all for joining our call today and for your continued interest in Bread Financial, and we look forward to speaking to you next quarter. Everyone have a terrific day, and thank you again.
Ladies and gentlemen, that concludes our conference for today. Thank you for your participation, and you may now disconnect.