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Item 7. Management’s Discussion and Analysis

2022-02-25 compared with 2021-02-26 · 434 added, 392 removed, 70 unchanged (92% of the section changed)

Management’s Discussion and Analysi s of Financial Condition and Results of Operations.

We are a leading provider of data-driven marketing, loyalty and payment solutions serving large, consumer-based industries.

We create and deploy customized solutions that measurably change consumer behavior while driving business growth and profitability for some of today’s most recognizable brands.

We help our partners create and increase customer loyalty across multiple touch points using traditional, digital, mobile and emerging technologies.

We operate under two segments—LoyaltyOne and Card Services.

Our LoyaltyOne business owns and operates the AIR MILES Reward Program, Canada’s most recognized loyalty program, and Netherlands-based BrandLoyalty, a global provider of tailor-made loyalty programs for grocers.

Our Card Services business is a comprehensive provider of market-leading private label, co-brand, general purpose and business credit card programs, digital payments, including Bread, and Comenity-branded financial services.

Effective March 31, 2019, our Epsilon segment was treated as a discontinued operation, and was subsequently sold on July 1, 2019.

Management’s Discussion and Analysi s of Financial Condition and Results of Operations (MD&A).

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our audited consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K.

Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties.

Actual results could differ materially from those discussed in these forward-looking statements.

Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and elsewhere in this Annual Report on Form 10-K particularly under “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements.” Unless otherwise specified, references to Notes to our Consolidated Financial Statements are to the Notes to our audited Consolidated Financial Statements as of December 31, 2021 and 2020 and for years ended December 31, 2021, 2020 and 2019.

We are a leading provider of tech-forward payment and lending solutions, serving customers and consumer-based industries in North America.

Through omnichannel touch points and a comprehensive product suite that includes credit products and Bread digital payment solutions, we help our partners drive loyalty and growth, while giving customers greater payment choices.

We also offer credit and savings products directly to consumers through our proprietary products, including our Comenity-branded financial services.

On November 5, 2021, our LoyaltyOne segment was spun off and therefore is reflected herein as Discontinued Operations.

YEAR IN REVIEW

● Effective January 1, 2020, we adopted Accounting Standards Codification, or ASC, 326, “Financial Instruments—Credit Losses,” and applied a current expected credit loss, or CECL, model to determine our allowance for loan loss, which is measured over the estimated life of the credit card and loan receivable.

Our adoption of CECL on January 1, 2020 resulted in an increase in our allowance for loan loss at adoption of $644.0 million, which was recorded through a cumulative-effect adjustment to retained earnings, net of taxes.

See Note 8, “Credit Card and Loan Receivables,” of the Notes to Consolidated Financial Statements for more information.

● In January 2020, we sold Precima, a provider of retail strategy and customer data applications and analytics, for total consideration of approximately $43.8 million.

Precima was included in our LoyaltyOne segment.

● During 2020, we paid dividends and dividend equivalent rights of $60.6 million.

● During 2020, we sold one credit card portfolio for cash consideration of $289.5 million.

● We launched our direct-to-consumer Comenity-branded general purpose credit card, the Comenity Card SM , which provides Alliance Data with an additional product to both attract and retain our cardholders.

● In October 2020, we entered into an agreement to transition hosting of our credit card processing services to Fiserv, a leading global provider of payments and financial services technology solutions.

● In December 2020, we completed the acquisition of Bread for aggregate consideration of approximately $491.0 million, net of cash and restricted cash acquired, subject to closing purchase price adjustments.

Bread provides technology solutions for merchants to provide digital purchase financing options to customers in the form of installment credit as well as credit and debit multi-pay solutions.

Bread is included in our Card Services segment.

COVID-19 Update

In the first quarter of 2020, the WHO declared the current coronavirus, or COVID-19, outbreak to be a global pandemic.

In response to this declaration and the rapid spread of COVID-19, international, provincial, federal, state and local government or other authorities have imposed varying degrees of restrictions on social and commercial activity in an effort to improve health and safety.

In response to the COVID-19 pandemic, first and foremost, we have prioritized the health and safety of our associates.

Effective teleworking protocols are in place for approximately 95% of our associates.

COVID-19 restrictions have adversely impacted and continue to adversely impact our associates, our business partners, and our customers, which has negatively impacted our financial performance, as revenue and adjusted EBITDA, net significantly declined from the prior year.

In response to the COVID-19 pandemic, the Company offered forbearance programs, which provide for short-term modifications in the form of payment deferrals and late fee waivers to borrowers who were current with their payments prior to any relief.

However, in the third and fourth quarter of 2020, we began to experience a gradual recovery in the economy coupled with the holiday season.

Credit sales and AIR

MILES reward miles issued and redeemed all increased sequentially in the third and fourth quarter of 2020.

Further, credit metrics remained resilient, reflecting strong payment trends across our consumer borrower base, which may have benefitted from government economic stimulus programs, and delinquency rates improved in the second half of the year.

Nonetheless, we continue to monitor the evolving situation and guidance from international, provincial, federal, state and local government and public health authorities.

Despite the emergence of vaccines, surges in COVID-19 cases, including variants of the strain, such as those recently experienced in Europe and the United States, may cause people to self-quarantine or governments to shut down nonessential businesses again.

Given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our future results of operations or cash flows at this time.

Spinoff of our LoyaltyOne Segment

On November 5, 2021 (the Distribution Date), the separation of Loyalty Ventures Inc.

(Loyalty Ventures) from ADS was completed (the Closing) after market close (the Separation).

The Separation of Loyalty Ventures, which comprised our former LoyaltyOne segment and has been classified as Discontinued Operations, was achieved through ADS’ distribution (the Distribution) of 81% of the shares of Loyalty Ventures common stock to holders of ADS common stock as of the close of business on the record date of October 27, 2021.

ADS stockholders of record received one share of Loyalty Ventures common stock for every two and one-half shares of ADS common stock.

Following the Distribution, Loyalty Ventures became an independent, publicly-traded company, in which we have retained a 19% ownership interest.

As part of the plan regarding the Separation, we received distributions from Loyalty Ventures prior to the effectiveness of the Separation in the aggregate amount of $750 million, of which $725 million was used by us to repay certain term loans as required under our credit agreement and $25 million was used by us to make scheduled amortization payments for the fourth quarter of 2021 with respect to such term loans.

Financial Statement Presentation

As a result of the Separation and consequential classification of LoyaltyOne as Discontinued Operations, we have adjusted the presentation of our Consolidated Financial Statements from our historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.” While neither we nor our any of our subsidiaries are considered a “bank” within the meaning of the Bank Holding Company Act, the changes from our historical presentation to the bank holding company presentation are intended to reflect our operations going forward and better align us with our peers for comparability purposes, which we believe will improve investor understanding of our Company.

Prior to the Separation and associated reporting changes applied herein, we had two reportable operating segments (Card Services and LoyaltyOne);

we now operate as a single segment that includes all of our continuing operations.

Business Environment

This Business Environment section provides high-level commentary regarding our results of operations and financial position for 2021, as well as our related outlook for 2022 and the uncertainties associated with achieving that outlook.

This section should be read in conjunction with the other information appearing in this Form 10-K, including “Consolidated Results of Operations” below, which provides further commentary around variances in our results of operations over the years of comparison.

The ongoing effects of the global COVID-19 pandemic remain difficult to predict due to numerous uncertainties, including the transmissibility, severity, duration and resurgence of the virus;

the emergence of new variants of the virus;

the uptake and effectiveness of health and safety measures or actions that are voluntarily adopted by the public or required by governments or public health authorities;

the effectiveness of vaccines and treatments;

the speed and strength of an economic recovery, including the reopening of borders and the resumption of international travel;

increased logistics costs;

an increasingly competitive labor market;

and the impact of the global COVID-19 pandemic on our employees, our operations, and the business of our partners and suppliers.

As the global COVID-19 pandemic has continued to evolve, our priority has been and continues to be, the health and safety of our employees, with the vast majority of our employees continuing to work from home.

As a result of the pandemic and its impacts on the operations of our brand partners, and consumer behavior and spending patterns, our financial performance as described in “Consolidated Results of Operations” below varies significantly over the periods of comparison.

As the global COVID-19 pandemic continues to evolve and new variants emerge, our results of operations, financial condition and liquidity could be impacted.

We will continue to evaluate the nature and extent of the impact on our business.

However, our performance in 2021 reflected the strength and resilience of our business model, as we had stronger than expected credit card loan growth, disciplined expense management, and positive credit performance.

In addition, the Separation allowed us to strengthen our balance sheet by improving our Bank capital ratios and reducing our leverage ratio, sequentially.

For the year ended December 31, 2021, Credit sales were up year-over-year as consumers resumed in-store shopping as impacts from COVID-19 moderated while consumer financial health remained strong.

Net interest income was flat for the periods of comparison, while Interchange revenue, net of retailer share arrangements increased in correlation with Credit sales, and Other non-interest income decreased due to a decline in ancillary revenues and portfolio sale gains.

We expect a continued return to more normalized economic activity and consumer behavior in our outlook for 2022, which we also expect will positively affect Credit sales and our revenues;

however, we remain vigilant in monitoring COVID-19 conditions and the impact on consumers and our brand partners.

Our outlook assumes Total net interest and non-interest income growth for 2022 will be closely aligned with growth in average Total credit card and other loans, with net interest margin expected to remain relatively steady on a full year basis as compared to 2021.

We have also included four Federal Reserve Bank interest rate increases in our 2022 outlook;

our expectation is the rate increases will result in a nominal benefit to Total net interest income for the year.

Provision for credit losses decreased year-over-year due to lower net charge-offs and a lower overall reserve rate reflective of improving macroeconomic variables and shifting product mix.

Credit metrics remained strong in 2021 with a delinquency rate of 3.9% and a net loss rate of 4.6% for the year.

These low rates continue to be the result of our disciplined risk management, as well as elevated consumer payment rates.

Our outlook assumes a moderation in the consumer payment rate throughout 2022, and we expect a net loss rate in the low-to-mid 5% range for 2022 as credit metrics begin to normalize from historically low rates due in part to federal stimulus and assistance programs largely expiring.

Related to our Provision for credit losses, full year 2021 average Total credit card and other loans of $15.7 billion were down 4% year-over-year, with the end-of-period balance being up 4%.

Our Allowance for credit losses decreased year-over-year, with a reserve rate of 10.5% in 2021, relative to 12.0% in 2020;

and our outlook for 2022 assumes the reserve rate will stay in the range of 10.5% until greater economic certainty emerges.

Our outlook for growth in average Total credit card and other loans in 2022, based on our new business expectations, visibility into our pipeline, and the current economic outlook, is in the high-single- to low-double-digit range relative to 2021.

This outlook contemplates both the non-renewal of certain brand partners, including the previously announced non-renewal of our contract with BJ’s Wholesale Club (BJ’s), as well as the addition of certain new brand partners, with the forecasted high-single- to low-double-digit ends of the range reflecting payment rate variability as a key determinant.

Specifically related to BJ’s, for the year ended December 31, 2021, BJ’s branded co-brand accounts generated approximately 8% of Total net interest and non-interest income.

As of December 31, 2021, BJ’s branded co-brand accounts were responsible for approximately 11% of Total credit card and other loans.

BJ’s filed a lawsuit against us in January 2022 in connection with the non-renewal of its contract and related transition to another service provider.

We have subsequently settled the lawsuit on satisfactory terms with neither party admitting fault.

With regard to our expenses, Total non-interest expenses for 2021 were down moderately year-over-year.

In 2022, as a result of continued investment, including the planned incremental strategic investment of more than $125 million in digital and product innovation, marketing, and technology enhancements during the year, along with strong growth in

Total credit card and other loans, our outlook anticipates Total non-interest expenses will increase in 2022, while also reflecting modest positive operating leverage for the full year.

Overall, we remain optimistic that the strength of our business model will continue, and we are committed to ensuring our strategic investments deliver long-term stockholder value.

See “Risk Factors” and “Cautionary Note Regarding Forward Looking Statements” for information on additional risks and uncertainties impacting our business, including potential impacts of the global COVID-19 pandemic and other strategic, business and competitive conditions that could affect our business, and see “Business–Supervision and Regulation” for information on legislative and regulatory matters that could have a material adverse effect on our results of operations and financial condition.

NON-GAAP FINANCIAL MEASURES

We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP).

However, certain information included within this Form 10-K constitutes non-GAAP financial measures.

Our calculations of non-GAAP financial measures may differ from the calculations of similarly titled measures by other companies.

In particular, Pre-tax pre-provision earnings is calculated by increasing Income from continuing operations before income taxes by Provision for credit losses.

We believe the use of this non-GAAP financial measure provides additional clarity in understanding our results of operations and trends.

For a reconciliation of this non-GAAP financial measure to the most directly comparable GAAP measure, please see the financial tables and information that follows.

CONSOLIDATED RESULTS OF OPERATIONS

The following provides commentary on the variances in our financial performance when comparing the results of operations for the year ended December 31, 2021, with those of the year ended December 31, 2020, as well as the variances between the years ended December 31, 2020 and December 31, 2019, as presented in the accompanying Tables.

This variance commentary should be read in conjunction with the discussion in “Business Environment” above, which highlights the impacts of the global COVID-19 pandemic on us and our results of operations.

Effective January 1, 2020, we adopted the new credit reserving methodology referred to as Current Expected Credit Loss (CECL).

Under the CECL methodology, the Company utilizes a financial instrument impairment model to establish an allowance based on expected losses over the estimated life of the exposure, not only based on historical experience and current conditions, but also by including reasonable and supportable forecasts incorporating forward-looking information.

This approach differs from the Company’s historic model prior to January 1, 2020, which was based on an incurred loss approach.

As a result of the adoption, there is a lack of comparability in both our Allowance for credit losses and the Provision for credit losses for the periods presented.

Results for the years ended December 31, 2021 and 2020, are reported following the CECL methodology, while results for the year ended December 31, 2019, are reported under the previously prescribed incurred loss methodology.

Refer to Note 4, “Allowance for Credit Losses,” to the Consolidated Financial Statements for further information.

Summary of Our Financial Performance

Years Ended December 31,

(in millions, except percentages)

Redemption, net

Finance charges, net

Total revenue

Operating expenses

Cost of operations (exclusive of depreciation and amortization disclosed separately below)

Provision for loan loss

General and administrative

Depreciation and other amortization

Amortization of purchased intangibles

Loss on extinguishment of debt

Total operating expenses

Operating income

Interest expense

Securitization funding costs

Interest expense on deposits

Interest expense on long-term and other debt, net

Total interest expense, net

(in millions, except per share amounts and percentages)

Total net interest and non-interest income

Provision for credit losses

Total non-interest expenses

Income from continuing operations before income taxes

1 unchanged sentence

Income from continuing operations

(Loss) income from discontinued operations, net of taxes

Key Operating Metrics:

Credit card statements generated

Average credit card and loan receivables

Normalized average credit card and loan receivables

AIR MILES reward miles issued

AIR MILES reward miles redeemed

Income (loss) from discontinued operations, net of taxes

Net income per diluted share

Income from continuing operations per diluted share

Net interest margin (1)

Return on average equity (2)

Effective income tax rate - continuing operations

(1) Net interest margin represents Net interest income divided by average Total interest-earning assets.

See also Table 5:

Net Interest Margin.

(2) Return on average equity represents Income from continuing operations divided by average Total stockholders’ equity.

not meaningful

Year ended December 31, 2020 compared to the year ended December 31, 2019

Total revenue decreased $1,059.9 million, or 19%, to $4,521.4 million for the year ended December 31, 2020 from $5,581.3 million for the year ended December 31, 2019.

The net decrease was due to the following:

Revenue decreased $98.6 million, or 46%, to $116.9 million for the year ended December 31, 2020 primarily due to the sale of Precima in January 2020, which resulted in a $79.3 million decrease in revenue as compared to the prior year.

Service revenue also declined by $43.4 million due to lower volumes.

These decreases were offset in part by a $32.6 million increase in merchant fee revenue due to decreased royalty payments to our retailers.

● Redemption .

Revenue decreased $164.2 million, or 26%, to $473.1 million for the year ended December 31, 2020 as redemption revenue from our short-term loyalty programs decreased $158.1 million due to a decline in

programs in markets across most regions due to the impact of COVID-19.

In response to COVID-19, certain of our customers have delayed their short-term loyalty programs.

● Finance charges, net .

Revenue decreased $797.1 million, or 17%, to $3,931.4 million for the year ended December 31, 2020.

The decline was due to a 13% decrease in normalized average receivables that decreased revenue by $617.5 million, and an approximate 110 basis point decrease in finance charge yield, which decreased revenue by $179.6 million.

The decrease in normalized average receivables was due to a 20% decline in credit sales compared to the prior year due to COVID-19 and sales of credit card portfolios.

The decrease in finance charge yield was due primarily to forbearance programs offered, including waivers of late fees, in response to COVID-19, as well as the lowering of market interest rates.

Cost of operations .

Cost of operations decreased $610.5 million, or 23%, to $2,077.3 million for the year ended December 31, 2020 as compared to $2,687.8 million for the year ended December 31, 2019.

The net decrease was due to the following:

● Within the LoyaltyOne segment, cost of operations decreased $270.8 million, including a $149.9 million decrease in cost of redemptions due to the decline in redemption revenue discussed above and restructuring and other charges incurred in the prior year.

Additionally, the sale of Precima in January 2020 resulted in a $78.4 million decrease in cost of operations excluding the gain on sale, and cost of operations decreased due to cost saving initiatives executed in 2019 and 2020, with a reduction of expenses across several categories.

● Within the Card Services segment, cost of operations decreased $339.6 million, including a $182.2 million decrease in valuation adjustments to certain portfolios within credit card receivables held for sale, a $92.1 million decrease in payroll and benefits costs due to cost saving initiatives executed in the fourth quarter of 2019 and in 2020, a $61.3 million decrease in marketing expense due to the decline in volumes, and a $81.7 million decline in various other credit card costs due to reductions in volume, including a reduction in fraud losses, and cost saving initiatives.

These decreases were offset in part by a $23.5 million decrease in gains recognized on sales of credit card portfolios as compared to the prior year and $63.7 million in asset impairment charges recorded in 2020, related to certain deferred contract costs, fixed assets and right of use assets.

Provision for loan loss .

Provision for loan loss increased $78.7 million, or 7%, to $1,266.2 million for the year ended December 31, 2020 as compared to $1,187.5 million for the year ended December 31, 2019, due to a higher allowance for loan loss related to estimated lifetime losses under the CECL model, including the projected impacts of COVID-19.

This was offset in part by the decline in credit card and loan receivables of $2.7 billion.

General and administrative .

General and administrative expenses decreased $44.9 million, or 30%, to $105.7 million for the year ended December 31, 2020 as compared to $150.6 million for the year ended December 31, 2019, due to cost saving initiatives implemented in 2019 and 2020, which among other items included reduced headcount, office space, charitable contributions and overall corporate overhead costs.

In addition, the prior year was impacted by $37.9 million in restructuring charges incurred related to our Corporate reorganization.

Depreciation and other amortization .

Depreciation and other amortization increased $18.6 million, or 23%, to $98.5 million for the year ended December 31, 2020, as compared to $79.9 million for the year ended December 31, 2019, due to $24.7 million in accelerated depreciation expense of fixed assets associated with certain real estate properties that have ceased use but intend to sublease.

See Note 13, “Property and Equipment,” of the Notes to Consolidated Financial Statements for more information.

This increase was offset in part by certain fully amortized capitalized software.

Amortization of purchased intangibles .

Amortization of purchased intangibles decreased $10.9 million, or 11%, to $85.3 million for the year ended December 31, 2020, as compared to $96.2 million for the year ended December 31, 2019, primarily due to certain fully amortized intangible assets, including portfolio premiums.

Loss on extinguishment of debt .

For the year ended December 31, 2019, we recorded a $71.9 million loss on extinguishment of debt resulting from the $49.9 million redemption price of the senior notes and the write-off of $22.0 million of deferred issuance costs related to the July 2019 early extinguishment of $1.9 billion of outstanding senior notes and an amendment to the credit agreement that was effective upon the consummation of the sale of Epsilon.

Interest expense, net .

Total interest expense, net decreased $75.1 million, or 13%, to $493.9 million for the year ended December 31, 2020 as compared to $569.0 million for the year ended December 31, 2019.

The net decrease was due to the following:

● Securitization funding costs .

Securitization funding costs decreased $47.5 million due to lower average borrowings, which decreased funding costs by approximately $55.9 million, offset in part by higher average interest rates, due to the timing of asset-backed debt maturities, which increased funding costs by approximately $8.4 million.

● Interest expense on deposits .

Interest expense on deposits decreased $6.1 million due to lower average balances outstanding, which decreased funding costs by approximately $19.4 million, offset in part by higher average interest rates, due to the maturity of lower rate deposits, which increased funding costs by approximately $13.3 million.

● Interest expense on long-term and other debt, net .

Interest expense on long-term and other debt, net decreased $21.5 million primarily due to a $72.4 million decrease in interest expense on term debt due to lower average borrowings, as well as a result of an amendment to the credit agreement, which included a $493.8 million repayment in September 2020.

This decrease was offset in part by a $48.8 million increase in interest expense due to the issuance of senior notes in December 2019 and September 2020.

Provision for income taxes decreased $66.3 million, or 40%, to $99.5 million for the year ended December 31, 2020 from $165.8 million for the year ended December 31, 2019, primarily related to a $343.9 million reduction in earnings before taxes in the current year.

The effective tax rate for the current year was 25.2% as compared to 22.5% for the prior year.

The lower effective tax rate in the prior year included a decrease in tax reserves resulting from a change in accounting method for tax purposes.

See Note 22, “Income Taxes,” of the Notes to Consolidated Financial Statements for more information.

Loss from discontinued operations, net of taxes .

Loss from discontinued operations, net of taxes was $81.3 million for the year ended December 31, 2020 due to resolution of a loss contingency as described in Note 18, “Commitments and Contingencies,” of the Notes to Consolidated Financial Statements.

Loss from discontinued operations, net of taxes was $294.6 million for the year ended December 31, 2019, due to the after-tax loss on the sale of Epsilon completed July 1, 2019 and a $32.9 million initial estimate for the loss contingency referenced above.

Year ended December 31, 2019 compared to the year ended December 31, 2018

Refer to “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Form 10-K for a discussion of our 2019 results compared to 2018, which discussion is incorporated by reference herein.

Segment Revenue and Adjusted EBITDA, net

Summary of Total Net Interest and Non-interest Income, After Provision for Credit Losses

Years Ended December 31,

(in millions, except percentages)

Card Services

Corporate/Other

Adjusted EBITDA, net:

Card Services

Corporate/Other

Interest income

Interest and fees on loans

Interest on cash and investment securities

Total interest income

Interest expense

Interest on deposits

Interest on borrowings

Total interest expense

Net interest income

Non-interest income

Interchange revenue, net of retailer share arrangements

Total non-interest income

Total net interest and non-interest income

Provision for credit losses

Total net interest and non-interest income, after provision for credit losses

Total Net Interest and Non-interest Income, After Provision for Credit Losses

Year ended December 31, 2021 compared with the year ended December 31, 2020:

Interest income:

Total interest income decreased $84 million, or 2%, to $3,868 million for the year ended December 31, 2021, due to the following:

● Interest and fees on loans decreased $70 million, or 2%, to $3,861 million for the year ended December 31, 2021.

The decline was due to a 4% decrease in average credit card and other loans as payment rates continued to benefit from consumer economic stimulus in response to the global COVID-19 pandemic, resulting in a $193

million decrease;

offset in part by an increase in finance charge yield of approximately 80 basis points that increased revenue by $123 million.

● Interest on cash and investment securities decreased $14 million, or 64%, to $7 million for the year ended December 31, 2021, due to lower interest rates as well as lower average cash and investment securities balances in the current year.

Interest expense:

Total interest expense decreased $116 million, or 23%, to $383 million for the year ended December 31, 2021, due to the following:

● Interest on deposits decreased $71 million due to lower average interest rates, which decreased interest expense by approximately $45 million, and lower average balances outstanding, which decreased interest expense by approximately $26 million.

● Interest on borrowings decreased $45 million due to a $55 million decrease related to secured borrowings, offset in part by a $10 million increase related to unsecured borrowings.

The decrease in interest expense on secured borrowings was due to lower average interest rates, which decreased interest expense by approximately $45 million, and lower average balances outstanding, which decreased interest expense by approximately $10 million.

Interest expense on unsecured borrowings increased $25 million due to the issuance of senior notes in September 2020, offset in part by a $14 million decrease in interest expense on term debt due to lower average borrowings.

Non-interest income:

Total non-interest income decreased $58 million, or 38%, to $(213) million for the year ended December 31, 2021, due to the following:

● Interchange revenue, net of retailer share arrangements decreased $37 million due to increased payments to our retailers as credit sales volumes increased from the prior year, which was depressed due to the global COVID-19 pandemic.

● Other income decreased $21 million due to a $15 million decrease in ancillary revenue, in particular revenue from payment protection products.

In addition, we recognized a $10 million gain on the sale of a credit card loan portfolio for the year ended December 31, 2021, as compared to a $20 million gain recognized on the sale of a credit card loan portfolio in the prior year.

Provision for credit losses:

Provision for credit losses decreased $722 million, or 57%, to $544 million for the year ended December 31, 2021 due to lower net charge-offs and a lower overall reserve rate reflective of improving macroeconomic variables and shifting product mix.

For the year ended December 31, 2020, there was a significant increase in the provision due to a reserve build in the Allowance for credit losses associated with the deterioration of the macroeconomic outlook as a result of the global COVID-19 pandemic;

the Allowance for credit losses also reflected a $644 million increase attributable to our adoption of CECL on January 1, 2020.

Year ended December 31, 2020 compared with the year ended December 31, 2019:

Interest income:

Total interest income decreased $875 million, or 18%, to $3,952 million for the year ended December 31, 2020, due to the following:

● Interest and fees on loans decreased $798 million, or 17%, to $3,931 million for the year ended December 31, 2020 as a 13% decrease in normalized average credit card and other loans, which includes loans held for sale, decreased revenue by $618 million, and an approximate 110 basis point decrease in finance charge yield decreased revenue by $180 million.

The decrease in normalized average credit card and other loans was due to a 20% decline in credit sales compared to the prior year due to the global COVID-19 pandemic, as well as sales of credit card loan portfolios.

The decrease in finance charge yield was due primarily to forbearance programs offered, including waivers of late fees, in response to the global COVID-19 pandemic, as well as the lowering of market interest rates as a result of Federal Reserve Bank interest rate cuts.

● Interest on cash and investment securities decreased $77 million, or 79%, to $21 million for the year ended December 31, 2020, as interest income was elevated in the prior year due to investment of the excess cash proceeds received from our sale of our Epsilon business.

Interest expense:

Total interest expense decreased $139 million, or 22%, to $499 million for the year ended December 31, 2020, due to the following:

● Interest on deposits decreased $69 million due to lower average balances outstanding for the year.

● Interest on borrowings decreased $70 million due to a $53 million decrease in interest expense on secured borrowings resulting from lower average borrowings, offset in part by higher average interest rates due to the timing of maturities, and a $17 million decrease in interest expense on unsecured borrowings due to lower average borrowings.

Non-interest income:

Total non-interest income decreased $16 million, or 11%, to $(155) million for the year ended December 31, 2020, due to the following:

● Interchange revenue, net of retailer share arrangements increased $26 million due to a $33 million increase in merchant fee revenue due to decreased royalty payments to our retailers, offset in part by a $7 million decrease in servicing fees due to lower volumes, both as a result of the global COVID-19 pandemic.

● Other income decreased $42 million due to an $18 million decrease in ancillary revenue, in particular revenue from payment protection products.

In addition, we recognized a $20 million gain on the sale of a credit card loan portfolio for the year ended December 31, 2020, as compared to net gains of $44 million recognized on the sale of 13 credit card loan portfolios in the prior year.

Provision for credit losses .

Provision for credit losses increased $78 million, or 7%, to $1,266 million for the year ended December 31, 2020, due to the deterioration of the macroeconomic outlook as a result of the global COVID-19 pandemic;

offset in part by the decline in credit card and other loans of $2.7 billion.

The Allowance for credit losses reflected $644 million attributable to our adoption of CECL on January 1, 2020.

Summary of Total Non-interest Expenses

Years Ended December 31,

(in millions, except percentages)

Non-interest expenses

Employee compensation and benefits

Card and processing expenses

Information processing and communication

Marketing expenses

Depreciation and amortization

Total non-interest expenses

Total Non-interest Expenses

Year ended December 31, 2021 compared with the year ended December 31, 2020:

Non-interest expenses:

Total non-interest expenses decreased $47 million, or 3%, to $1,684 million for the year ended December 31, 2021, due to the following:

● Employee compensation and benefits increased $62 million due to our Bread acquisition in December 2020 and an increase in incentive compensation.

● Card and processing expenses decreased $73 million due to a commensurate reduction in fraud losses for the year ended December 31, 2021.

● Information processing and communication increased $25 million due to an increase in data processing expense driven by the Fiserv core processing platform migration.

● Marketing expenses increased $17 million as the prior year was impacted by a reduction in retailer marketing due to the global COVID-19 pandemic.

● Depreciation and amortization decreased $14 million due to our real estate optimization in 2020 as well as certain fully amortized loan portfolio acquisition premiums, offset in part by an increase in amortization of purchased intangibles associated with the Bread acquisition in December 2020.

● Other expenses decreased $64 million due to a commensurate amount of asset impairment charges recognized in 2020 related to certain deferred contract costs, fixed assets and right of use assets.

There were no such impairment charges in 2021.

Year ended December 31, 2020 compared with the year ended December 31, 2019:

Non-interest expenses:

Total non-interest expenses decreased $469 million, or 21%, to $1,731 million for the year ended December 31, 2020, due to the following:

● Employee compensation and benefits decreased $112 million due to cost saving initiatives executed in the fourth quarter of 2019, including reductions in force.

● Card and processing expenses decreased $83 million due to a $54 million reduction in fraud losses, and a $29 million decrease in other card and processing costs due to the decline in volumes as a result of the global COVID-19 pandemic.

● Information processing and communication increased $4 million due to an increase in software costs.

● Marketing expenses decreased $62 million due to the decline in volumes and a reduction in retailer marketing as a result of the global COVID-19 pandemic.

● Depreciation and amortization increased $10 million due to $25 million in accelerated depreciation expense of fixed assets associated with certain real estate properties, offset in part by certain fully amortized loan portfolio acquisition premiums and capitalized software.

● Other expenses decreased $226 million due primarily to a $182 million decrease in lower of cost or market valuation adjustments on certain loan portfolios held for sale and a $72 million loss recognized on the extinguishment of debt in 2019.

These decreases were offset in part by $64 million in asset impairment charges recognized in 2020 related to certain deferred contract costs, fixed assets and right of use assets.

Year ended December 31, 2021 compared with the year ended December 31, 2020:

Provision for income taxes increased $154 million, or 168%, to $247 million for the year ended December 31, 2021, primarily related to a $743 million increase in earnings before taxes in 2021.

The effective tax rate for year ended December 31, 2021 was 23.7% as compared to 30.7% for the year ended December 31, 2020.

The lower effective tax rate in 2021 included a discrete tax benefit related to a favorable settlement with a state tax authority and a discrete tax benefit triggered by the divestiture of our former LoyaltyOne segment.

The 2020 effective tax rate was unfavorably impacted by lower earnings before taxes.

Year ended December 31, 2020 compared with the year ended December 31, 2019:

Provision for income taxes decreased $63 million, or 41%, to $93 million for the year ended December 31, 2020, primarily related to a $361 million reduction in earnings before taxes in 2020.

The effective tax rate for year ended December 31, 2020 was 30.7% as compared to 23.6% for the year ended December 31, 2019.

The 2020 effective tax rate was unfavorably impacted by lower earnings before taxes.

The lower effective tax rate in 2019 included a decrease in tax reserves resulting from a change in accounting method for tax purposes.

Income from Discontinued Operations, Net of Income Taxes

Year ended December 31, 2021 compared with the year ended December 31, 2020:

Income from discontinued operations, net of income taxes was $4 million for the year ended December 31, 2021 as compared to $6 million for the year ended December 31, 2020, and represents results of operations from our former

LoyaltyOne segment, as well as both direct costs identifiable to the LoyaltyOne segment and allocations of interest expense on corporate debt.

Discontinued operations for the year ended December 31, 2020 also included the resolution of a loss contingency as described in Note 15, “Commitments and Contingencies,” to the Consolidated Financial Statements.

Year ended December 31, 2020 compared with the year ended December 31, 2019:

Income from discontinued operations, net of income taxes was $6 million for the year ended December 31, 2020, which represents results of operations from our former LoyaltyOne segment, as well as both direct costs identifiable to the LoyaltyOne segment and allocations of interest expense on corporate debt.

Discontinued operations for the year ended December 31, 2020 also included the resolution of a loss contingency as discussed above.

Loss from discontinued operations, net of income taxes was $228 million for the year ended December 31, 2019 due to the after-tax loss on the sale of Epsilon completed July 1, 2019 and a loss contingency as discussed above.

Summary Financial Highlights – Continuing Operations

Years Ended December 31,

(in millions, except percentages)

Pre-tax pre-provision earnings (PPNR) (1)

Average receivables

End-of-period receivables

End-of-period direct-to-consumer deposits

Return on average assets (2)

Return on average equity (3)

Net interest margin (4)

Loan yield (5)

Risk-adjusted loan yield (6)

Efficiency ratio (7)

Tangible book value per common share (8)

Tangible common equity / tangible assets ratio (TCE/TA) (9)

Cash dividend per common share

Net loss rate

Delinquency rate

(1) PPNR represents Income from continuing operations before income taxes plus Provision for credit losses, and is a non-GAAP measure.

See also Table 5:

Net Interest Margin .

(5) Loan yield represents Interest and fees on loans divided by Average receivables.

(6) Risk-adjusted loan yield represents Loan yield less Net loss rate.

(7) Efficiency ratio represents Total non-interest expenses divided by Total net interest and non-interest income.

(8) Tangible book value per common share represents Total stockholders’ equity less Intangible assets, net, and Goodwill divided by shares outstanding.

(9) Tangible common equity represents Total stockholders’ equity less Intangible assets, net, and Goodwill.

Tangible assets represents Total assets less Intangible assets, net, and Goodwill.

not meaningful

Year ended December 31, 2020 compared to the year ended December 31, 2019

Total revenue decreased $1,059.9 million, or 19%, to $4,521.4 million for the year ended December 31, 2020 from $5,581.3 million for the year ended December 31, 2019.

The decrease was due to the following:

● LoyaltyOne .

Revenue decreased $268.3 million, or 26%, to $764.8 million for the year ended December 31, 2020 as revenue from our short-term loyalty programs decreased $161.4 million due to a decline in programs in markets across most regions due to the impact of COVID-19.

Additionally, the sale of Precima in January 2020 resulted in a $79.3 million decrease in revenue.

Redemption revenue and servicing revenue in our coalition loyalty program were negatively impacted by a 10% decline in AIR MILES reward miles issued and a 29% decline in AIR MILES reward miles redeemed.

● Card Services .

Revenue decreased $791.3 million, or 17%, to $3,756.5 million for the year ended December 31, 2020, driven by a $797.1 million decrease in finance charges, net due to a decline in credit card and loan receivables due to lower sales volumes resulting from COVID-19 and portfolios sold in 2019 and 2020, and a decrease in yield due to forbearance programs offered in response to COVID-19 and interest rate cuts.

Adjusted EBITDA, net .

Adjusted EBITDA, net decreased $499.8 million, or 39%, to $771.5 million for the year ended December 31, 2020 from $1,271.3 million for the year ended December 31, 2019.

The net decrease was due to the following:

● LoyaltyOne .

Adjusted EBITDA, net decreased $58.3 million, or 24%, to $186.2 million for the year ended December 31, 2020, due to lost margin on the revenue declines discussed above, offset in part by improved expense management, including cost saving initiatives executed in 2019.

For the year ended December 31, 2020, the $8.0 million gain on the sale of Precima, net of transaction costs was excluded from adjusted EBITDA, net.

For the year ended December 31, 2019, restructuring and other charges of $50.8 million were excluded from adjusted EBITDA, net.

● Card Services .

Adjusted EBITDA, net decreased $452.7 million, or 40%, to $667.0 million for the year ended December 31, 2020 primarily due to the decrease in revenue as discussed above and a $78.7 million increase in provision for loan loss due to the impact of COVID-19, as well as the implementation of the CECL model, offset in part by a $2.7 billion decline in credit card and loan receivables.

These decreases were offset in part by a $182.2 million decrease in valuation adjustments to certain portfolios within credit card receivables held for sale and reductions in cost of operations due to cost saving initiatives executed in the fourth quarter of 2019 and in 2020.

For the year ended December 31, 2020, asset impairments of $63.7 million were excluded from adjusted EBITDA, net.

For the year ended December 31, 2019, restructuring and other charges of $29.4 million were excluded from adjusted EBITDA, net.

● Corporate/Other .

Adjusted EBITDA, net improved $11.2 million to a loss of $81.7 million for the year ended December 31, 2020 due to cost saving initiatives implemented in 2019 and 2020, which among other items included reduced headcount, office space, charitable contributions and overall corporate overhead costs.

For the year ended December 31, 2020, strategic transaction costs of $15.2 million were excluded from adjusted EBITDA, net.

For the year ended December 31, 2019, loss on extinguishment of debt of $71.9 million, restructuring and other charges of $37.9 million and strategic transaction costs of $10.7 million were excluded from adjusted EBITDA, net.

Year ended December 31, 2019 compared to the year ended December 31, 2018

Refer to “Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2019 Form 10-K for a discussion of our 2019 segment results compared to 2018, which discussion is incorporated by reference herein.

Net Interest Margin

Year Ended December 31, 2021

Average Balance

Interest Income / Expense

Average Yield / Rate

(in millions, except percentages)

Cash and investment securities

Credit card and other loans

Total interest-earning assets

Direct-to-consumer deposits (retail)

Wholesale deposits

Interest-bearing deposits

Secured borrowings

Unsecured borrowings

Total interest-bearing liabilities

Net Interest Income

Net Interest Margin (1)

Year Ended December 31, 2020

Average Balance

Interest Income / Expense

Average Yield / Rate

(in millions, except percentages)

Cash and investment securities

Credit card and other loans

Total interest-earning assets

Direct-to-consumer deposits (retail)

Wholesale deposits

Interest-bearing deposits

Secured borrowings

Unsecured borrowings

Total interest-bearing liabilities

Net Interest Income

Net Interest Margin (1)

(1) Net interest margin represents Net interest income divided by average Total interest-earning assets.

Reconciliation of GAAP to Non-GAAP Financial Measure

Years Ended December 31,

(in millions, except percentages)

Income from continuing operations before income taxes

Provision for credit losses

Pre-tax pre-provision earnings (PPNR)

ASSET QUALITY

Our delinquency and net charge-off rates reflect, among other factors, the credit risk of our credit card and loan receivables, the success of our collection and recovery efforts, and general economic conditions.

Given the nature of our business, the quality of our assets, in particular our credit card and other loans, is a key determinant underlying our ongoing financial performance and overall financial condition.

When it comes to our Credit card and other loans portfolio, we closely monitor two metrics – our delinquency rates and net charge-off rates – which reflect, among other factors, our underwriting, the inherent credit risk in our portfolio, the success of our collection and recovery efforts, and more broadly the general macroeconomic conditions.

Delinquencies :

An account is contractually delinquent if we do not receive the minimum payment by the specified due date.

Our policy is to continue to accrue interest and fee income on all accounts, except in limited circumstances, until the balance and all related interest and other fees are paid or charged-off, typically at 180 days delinquent for credit card receivables and 120 days delinquent for installment loan receivables.

An account is contractually delinquent if we do not receive the minimum payment due by the specified due date.

Our policy is to continue to accrue interest and fee income on all accounts, except in limited circumstances, until the balance and all related interest and fees are paid or charged-off, which is typically at 180 days past due for credit card loans and 120 days past due for installment loans.

After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent.

The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account.

If we are unable to make a collection after exhausting all in-house collection efforts, we may engage collection agencies and outside attorneys to continue those efforts.

The following table presents the delinquency trends of our credit card and loan receivables portfolio based on the principal balances of our credit card and loan receivables:

This collection scoring algorithm then recommends a strategy for collecting on the past due account, including a contact schedule and collections priority.

If, after exhausting all in-house collection efforts, we may engage collection agencies or outside attorneys to continue those efforts, or sell the charged-off balances.

The following table presents the delinquency trends on our credit card and other loans portfolio based on the principal balances outstanding as of December 31:

Delinquency Trends on Credit Card and Other Loans

(in millions, except percentages)

Receivables outstanding ─ principal

Principal receivables balances contractually delinquent:

Credit card and other loans outstanding ─ principal

Outstanding balances contractually delinquent:

31 to 60 days

1 unchanged sentence

91 or more days

In response to the COVID-19 pandemic, we have offered forbearance programs, which provide for short-term modifications in the form of payment deferrals and late fee waivers to borrowers who were current as of their most recent billing cycle prior to the announcement of the forbearance programs.

In response to the global COVID-19 pandemic, we have offered forbearance programs, which provided for short-term modifications in the form of payment deferrals and late fee waivers to borrowers who were current as of their most recent billing cycle, prior to the announcement of the forbearance programs.

Those accounts receiving forbearance relief may not advance to the next delinquency cycle, including eventually to charge-off, in the same timeframe that would have occurred had the forbearance relief not been granted.

As of December 31, 2021 and 2020, the outstanding balance of credit card loans that are under a forbearance program offered by us totaled approximately $86 million and $157 million, respectively.

Net Charge-Offs :

Our net charge-offs include the principal amount of losses that are deemed uncollectible, less recoveries, and exclude charged-off interest, fees and fraud losses.

Charged-off interest and fees reduce finance charges, net while fraud losses are recorded as an expense.

Credit card receivables, including unpaid interest and fees, are charged-off in the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death.

Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days past due.

Credit card receivables, including unpaid interest and fees, associated with customer bankruptcies or death are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case, not later than the 180-day contractual time frame.

The net charge-off rate is calculated by dividing net charge-offs of principal receivables for the period by the average credit card and loan receivables for the period.

Average credit card and loan receivables represent the average balance of the cardholder receivables at the beginning of each month in the periods indicated.

The following table presents our net charge-offs for the periods indicated:

Years Ended December 31,

Charged-off interest and fees reduce Interest and fees on loans while fraud losses are recorded in Card and processing expenses.

Credit card loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days past due.

Installment loans, including unpaid interest, are generally charged-off when a loan becomes 120 days past due.

However, in the case of a customer bankruptcy or death, credit card and other loans, including unpaid interest and fees as applicable, are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case not later than 180 days past due.

The net charge-off rate is calculated by dividing net charge-offs of principal balances for the period by the average credit card and other loans for the same period.

Average credit card and other loans represent the average balance of the loans at the beginning of each month in the periods indicated.

The following table presents our net charge-offs for the years ended December 31:

Net Charge-Offs on Credit Card and Other Loans

(in millions, except percentages)

Average credit card and loan receivables

Net charge-offs of principal receivables

Net charge-offs as a percentage of average credit card and loan receivables

Liquidity and Capital Resources

Our primary sources of liquidity include cash generated from operating activities, our credit agreements and issuances of debt or equity securities, our securitization programs and deposits issued by Comenity Bank and Comenity Capital Bank.

In addition to our efforts to renew and expand our current liquidity sources, we continue to seek new funding sources.

Our primary uses of cash are for ongoing business operations, repayments of our debt, capital expenditures, investments or acquisitions, any stock repurchases and dividends.

Average credit card and other loans

Net charge-offs of principal balances

Net charge-offs as a percentage of average credit card and other loans

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

We maintain a strong focus on liquidity and capital.

Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources to support our daily operations, our business growth, our credit ratings and our regulatory and policy requirements (including certain capital and leverage ratio requirements applicable to our Banks under FDIC regulations discussed elsewhere in this Annual Report) in a cost effective and prudent manner through expected and unexpected market environments.

Our primary sources of liquidity include cash generated from operating activities, our credit agreement and issuances of debt securities, our securitization programs and deposits issued by Comenity Bank and Comenity Capital Bank, in addition to our efforts to renew and expand our current liquidity sources.

Our primary uses of cash are for ongoing and varied lending operations, scheduled payments of principal and interest on our debt, capital expenditures, including digital and product innovation and technology enhancements, and dividends.

We may from time to time seek to retire or purchase our outstanding debt through cash purchases or exchanges for other securities, in open market purchases, privately negotiated transactions or otherwise.

Such repurchases or exchanges, if any, will depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, and may be funded through the issuance of debt securities.

Such repurchases or exchanges would depend on prevailing market conditions, our liquidity requirements, contractual restrictions and other factors, and may be funded through the issuance of debt securities.

The amounts involved may be material.

We believe that internally generated funds and other sources of liquidity discussed below will be sufficient to meet working capital needs, capital expenditures, and other business requirements for at least the next 12 months.

However, continued volatility in the financial and capital markets due to COVID-19 may limit our access to or increase our cost of capital or make capital unavailable on terms acceptable to us or at all.

Cash Flow Activity

Because of the alternatives available to us as discussed above, we believe that our short-term and long-term liquidity are adequate to fund not only our current operations, but also our near-term and long-term funding requirements including dividend payments, debt service obligations and repayment of debt maturities and other amounts that may ultimately be paid in connection with contingencies.

However, volatility in the financial and capital markets due to the global COVID-19 pandemic or otherwise may limit our access to or increase our cost of capital, and could make capital unavailable on terms acceptable to us or at all.

The table below summarizes our cash flows by operating, investing and financing activities, followed by a discussion of the variance drivers for the year ended December 31, 2021 compared with the year ended December 31, 2020.

(in millions)

Total cash provided by (used in):

Operating activities

We generated cash flow from operating activities of $1,882.7 million and $1,217.7 million for the years ended December 31, 2020 and 2019, respectively.

The year-over-year increase in operating cash flows of $665.0 million was due to an increase in working capital and the impact of the sale of Epsilon.

Investing activities

Cash provided by investing activities was $1,774.3 million and $2,860.8 million for the year ended December 31, 2020 and 2019, respectively.

Significant components of investing activities are as follows:

● Credit card and loan receivables.

Cash increased $1,783.5 million for the year ended December 31, 2020 due to a decrease in credit card and loan receivables in 2020 resulting from lower sales volumes due to COVID-19, as strong payment rates were maintained.

Cash decreased $2,586.8 million for the year ended December 31, 2019 due to growth in credit card and loan receivables.

● Proceeds from sale of businesses.

During the year ended December 31, 2020, we received cash consideration of $26.7 million from the sale of Precima.

During the year ended December 31, 2019, we received cash consideration of $4,409.7 million from the sale of Epsilon.

● Payments for acquired businesses.

During the year ended December 31, 2020, we paid cash consideration of $266.8 million for the acquisition of Bread on December 3, 2020.

During the year ended December 31, 2019, we paid cash consideration of $6.7 million for the acquisition of Blispay on February 7, 2019.

● Purchase of credit card portfolios.

During the year ended December 31, 2019, we paid cash consideration of $924.8 million to acquire four credit card portfolios.

No credit card portfolios were acquired in 2020.

● Proceeds from sale of credit card portfolios.

During the year ended December 31, 2020, we received cash consideration of $289.5 million from the sale of a credit card portfolio.

During the year ended December 31, 2019, we received cash consideration of $2,061.8 million from the sale of thirteen credit card portfolios.

● Capital expenditures.

Cash paid for capital expenditures was $54.0 million and $142.3 million for the years ended December 31, 2020 and 2019, respectively.

Capital expenditures for the year ended December 31, 2019 included $55.8 million related to our divested Epsilon segment, which was presented as a discontinued operation in the prior year.

We anticipate capital expenditures to continue to be less than 3% of annual revenue.

Financing activities

Cash used in financing activities was $4,166.5 million and $4,091.7 million for the years ended December 31, 2020 and 2019, respectively.

Significant components of financing activities are as follows:

Cash decreased $44.5 million for the year ended December 31, 2020 due to repayments of our term loans.

In September 2020, we issued $500.0 million in senior notes and used the net proceeds of $493.8 million to make a prepayment of our term debt under our amended credit agreement.

Cash decreased $2,870.5 million as a

result of net repayments for the year ended December 31, 2019, primarily due to the July 2019 early extinguishment of $1.9 billion outstanding senior notes upon consummation of the sale of Epsilon and the mandatory payment of $500.0 million on our revolving credit facility .

In December 2019, we issued $850.0 million in senior notes, of which the net proceeds of $833.0 million were used to make a prepayment of our term debt under the credit agreement.

● Non-recourse borrowings of consolidated securitization entities.

Cash decreased $1,676.5 million and $367.2 million for the years ended December 31, 2020 and 2019, respectively, due to net repayments and maturities under the asset-backed term notes and conduit facilities as well as declines in credit card and loan receivables for the year ended December 31, 2020.

During the year ended December 31, 2020, cash decreased $2,370.0 million due to net maturities of deposits.

During the year ended December 31, 2019, cash increased $355.6 million due to net issuances of deposits.

The volume of deposits as of December 31, 2020 and 2019 was impacted by changes in credit card and loan receivables in the respective years.

Cash paid for quarterly dividends and dividend equivalents was $60.6 million and $127.4 million for the years ended December 31, 2020 and 2019, respectively.

In the second quarter of 2020, the quarterly dividend was reduced from $0.63 to $0.21 per common share.

● Treasury shares.

Cash paid for treasury shares was $976.1 million for the year ended December 31, 2019.

We did not repurchase any shares of our outstanding common stock for the year ended December 31, 2020.

Credit Agreement

In September 2020, we amended our credit agreement to (a) increase the maximum total leverage ratio, (b) decrease the minimum interest coverage ratio, and (c) increase the maximum permitted average delinquency ratios, for the periods ending March 31, 2021 through June 30, 2022, and to make certain other amendments.

The amendment also required us to prepay the term loans upon consummation of the offering of the Senior Notes due 2026 with a prepayment in an amount equal to the net proceeds from the offering, which obligation was satisfied in full with a prepayment of $493.8 million.

The prepayment was first applied to the scheduled quarterly installments payable in September 2020 and December 2020, and second, to the bullet payment of the term loans due at maturity.

See Note 17, “Debt,” of the Notes to Consolidated Financial Statements for additional information.

At December 31, 2020, we had $1,484.3 million in term loans outstanding and a $750.0 million revolving line of credit.

As of December 31, 2020, we had no amounts outstanding under our revolving line of credit and total availability of $750.0 million.

Our total leverage ratio, as defined in our credit agreement, was under 2.5 to 1 at December 31, 2020, as compared to the maximum covenant ratio of 3.5 to 1.

As of December 31, 2020, we were in compliance with our debt covenants.

BrandLoyalty Credit Agreement

In April 2020, BrandLoyalty terminated its existing facility and entered into a new credit agreement that provides for a committed revolving line of credit of €30.0 million ($36.6 million as of December 31, 2020), an uncommitted revolving line of credit of €30.0 million ($36.6 million as of December 31, 2020), and an accordion feature permitting BrandLoyalty to request an increase in either the committed or uncommitted line of credit up to €80.0 million ($97.7 million as of December 31, 2020) in aggregate.

The revolving lines of credit mature in April 2023, subject to BrandLoyalty’s request to extend for two additional one-year terms at the absolute discretion of the lenders at the time of such requests.

As of December 31, 2020, there were no amounts outstanding under these revolving lines of credit.

In September 2020, we issued and sold $500.0 million aggregate principal amount of 7.000% senior notes due January 15, 2026.

The Senior Notes due 2026 accrue interest on the principal amount at the rate of 7.000% per annum from September 22, 2020, payable semi-annually in arrears, on March 15 and September 15 of each year, beginning on

March 15, 2021.

The Senior Notes due 2026 will mature on January 15, 2026, subject to earlier repurchase or redemption.

See Note 17, “Debt,” of the Notes to Consolidated Financial Statements for additional information regarding our debt.

Effect of foreign currency exchange rates

Net increase (decrease) in cash, cash equivalents and restricted cash

Cash Flows from Operating Activities:

We generated cash flow from operating activities of $1,543 million and $1,883 million for the years ended December 31, 2021 and 2020, respectively.

The year-over-year decrease in operating cash flows was primarily due to an increase in working capital.

Cash Flows from Investing Activities:

Cash used in investing activities was $1,691 million for the year ended December 31, 2021, and cash provided by investing activities was $1,774 million for the year ended December 31, 2020.

The year-over-year decrease in investing cash flows was primarily due to the change in credit card and other loans, as cash decreased $1,805 million in the current year due to growth in the portfolio;

however, cash increased $1,784 million in the prior year due to a decrease in credit card and other loans resulting from lower sales volumes due to the global COVID-19 pandemic.

Cash Flows from Financing Activities:

Cash provided by financing activities was $608 million for the year ended December 31, 2021, and cash used in financing activities was $4,167 million for the year ended December 31, 2020.

The year-over-year increase in financing cash flows was primarily due to the change in deposits, as well as net long-debt debt repayments in the prior year.

Funding Sources

We utilize money market deposits and certificates of deposit to finance the operating activities, including funding for our non-securitized credit card and loan receivables, and fund securitization enhancement requirements of our bank subsidiaries, Comenity Bank and Comenity Capital Bank.

In April 2019, Comenity Capital Bank launched a consumer retail deposit platform, Comenity Direct™, to the public;

retail deposits comprised approximately $1.7 billion of our $9.8 billion deposits outstanding at December 31, 2020.

Comenity Bank and Comenity Capital Bank offer non-maturity deposit programs through contractual arrangements with various financial counterparties.

As of December 31, 2020, Comenity Bank and Comenity Capital Bank had $3.8 billion in money market deposits outstanding with interest rates ranging from 0.38% to 3.50%.

Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.

Comenity Bank and Comenity Capital Bank issue certificates of deposit in denominations of at least $100,000 and $1,000, respectively, in various maturities ranging between January 2021 and December 2025 and with effective annual interest rates ranging from 0.15% to 3.75%.

As of December 31, 2020, we had $6.0 billion of certificates of deposit outstanding.

Certificate of deposit borrowings are subject to regulatory capital requirements.

Securitization Programs

We sell a majority of the credit card receivables originated by Comenity Bank and Comenity Capital Bank to certain master trusts.

These securitization programs are a principal vehicle through which we finance Comenity Bank’s and Comenity Capital Bank’s credit card receivables.

Historically, we have used both public and private term asset-backed securitization transactions as well as private conduit facilities as sources of funding for our securitized credit card receivables.

Private conduit facilities have been used to accommodate seasonality needs and to bridge to completion of asset-backed securitization transactions.

During the year ended December 31, 2020, $1.7 billion of asset-backed term notes matured and were repaid, of which $228.2 million were retained by us and eliminated from the consolidated balance sheets.

We have access to committed undrawn capacity through three conduit facilities to support the funding of our credit card and loan receivables through the trusts.

During the year ended December 31, 2020, we reduced the commitments under our conduit facilities by $1.5 billion and extended the respective maturities to April 2022 and October 2022.

As of December 31, 2020, total capacity under the conduit facilities was $3.2 billion, of which $2.2 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the consolidated balance sheets.

With the acquisition of Bread in December 2020, we assumed two warehouse facilities used to fund their securitized loan receivables.

In December 2020, one of the warehouse facilities was terminated and we repaid $28.5 million owed under the agreement.

The second warehouse facility was amended to a secured loan facility with an outstanding balance of $86.3 million at December 31, 2020.

The secured loan facility accrues interest on the principal amount at the rate of LIBOR plus an applicable margin.

The principal amount is due upon maturity in November 2022, with prepayment permitted.

As of December 31, 2020, we had approximately $11.2 billion of securitized credit card and loan receivables.

Securitizations require credit enhancements in the form of cash, spread deposits, additional receivables and subordinated classes.

The credit enhancement is principally based on the outstanding balances of the series issued by the trusts and by the performance of the credit card and loan receivables in the trusts.

Credit Agreement

At December 31, 2020, our credit agreement, as amended, provided for $1,484 million in term loans outstanding (the term loans), subject to certain principal repayments, and a $750 million revolving credit facility (the revolving line of credit).

In July 2021, we amended the credit agreement to, among other things, (i) provide consent by the lenders to the spinoff or sale of our LoyaltyOne segment, (ii) extend the maturity date of the revolving loans and approximately 86% of the term loans from December 31, 2022 to July 1, 2024, (iii) revise the method of determining interest rates and commitment fees to be charged in connection with the loans, (iv) modify the financial and operational covenants and certain other provisions in the credit agreement to reflect our business and operations after giving effect to the LoyaltyOne spinoff, including a financial covenant that Comenity Bank and Comenity Capital Bank each maintain a common equity tier 1 capital ratio of at least 11% at all times there are term loans outstanding (or at least 10% if no term loans are outstanding), (v) require a prepayment of certain of the loans in an amount equal to the net proceeds from the LoyaltyOne spinoff or sale, including any net proceeds from debt that is distributed to us minus, in the case of the first transaction associated with the divestiture of the LoyaltyOne spinoff or sale, $25 million and (vi) add Lon Inc.

and Lon Operations LLC acquired in our acquisition of Bread as additional guarantors.

Following our receipt of $750 million in connection with the spinoff of our former LoyaltyOne segment in November 2021, we used $725 million of such amount to repay term loans under our credit agreement, as required by the July 2021 amendment, and used the remaining $25 million to make our scheduled fourth quarter amortization payment with respect to such loans.

At December 31, 2021, we had $658 million aggregate principal amount of term loans outstanding and a $750 million revolving line of credit;

we had no borrowings on our revolving line of credit.

The credit agreement includes various restrictive financial and non-financial covenants.

If we do not comply with these covenants, the maturity of amounts outstanding under the credit agreement may be accelerated and become payable and the commitments may be terminated.

We were in compliance with all of these covenants at December 31, 2021.

We utilize a variety of deposit products to finance our operating activities, including as funding for our non-securitized credit card and other loans, and to fund securitization enhancement requirements of the Banks.

We offer both direct-to-consumer retail deposit products as well as deposits sourced through contractual arrangements with various financial counterparties.

Direct-to-consumer retail deposits comprised approximately $3.2 billion and $1.7 billion of total deposits outstanding at December 31, 2021 and 2020, respectively.

Other third-party sourced deposits (often referred to as wholesale deposits) comprised approximately $7.8 billion and $8.1 billion of total deposits outstanding at December 31, 2021 and 2020, respectively.

The Banks offer various non-maturity deposit products that are generally redeemable on demand by the customer and, as such, have no scheduled maturity date.

As of December 31, 2021, the Banks had $5.6 billion in non-maturity deposits outstanding with annual interest rates ranging from 0.05% to 3.50%, with a weighted average interest rate of 0.68%.

As of December 31, 2020, the Banks had $3.8 billion in non-maturity deposits outstanding with annual interest rates ranging from 0.38% to 3.50%, with a weighted average interest rate of 1.00%.

The Banks issue certificates of deposit in denominations of at least $1,000, in various maturities ranging between January 2022 and December 2026 and with effective annual interest rates ranging from 0.20% to 3.75%, with a weighted average interest rate of 1.91%, at December 31, 2021.

At December 31, 2020, interest rates ranged from 0.15% to 3.75%, with a weighted average interest rate of 2.58%.

Interest is paid either monthly or at maturity.

Securitization Programs and Conduit Facilities

We sell a majority of the credit card loans originated by the Banks to certain master trusts.

These securitization programs are a principal vehicle through which we finance the Banks’ credit card loans.

We use a combination of public term asset-backed notes and private conduit facilities for this purpose.

During the year ended December 31, 2021, $2.1 billion of asset-backed term notes matured and were repaid, of which $281 million were previously retained by us and therefore eliminated from the Consolidated Balance Sheets.

During the year ended December 31, 2021, we obtained increased lender commitments under our conduit facilities of $1.3 billion and extended the respective maturities to August 2022 and October 2023.

As of December 31, 2021, total capacity under the conduit facilities was $4.5 billion, of which $3.9 billion had been drawn and was included in Debt issued by consolidated variable interest entities in the Consolidated Balance Sheet.

At December 31, 2020, we had a secured loan facility related to the acquisition of Bread, with an outstanding balance of $86 million that was set to mature in November 2022, with prepayment permitted.

In August 2021, we repaid this outstanding secured loan facility in full.

As of December 31, 2021, we had approximately $11.2 billion of securitized credit card loans.

Securitizations require credit enhancements in the form of cash, spread deposits, additional loans and subordinated classes.

The credit enhancement is principally based on the outstanding balances of the series issued by the trusts and by the performance of the credit card loans in the trusts.

The following table shows the maturities of borrowing commitments as of December 31, 2021 for the trusts by year:

Borrowing Commitment Maturities

(in millions)

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Conduit facilities (1)

Secured loan facility

(1) Amount represents borrowing capacity, not outstanding borrowings.

(2) Total amounts do not include $1.1 billion of debt issued by the trusts, which was retained by us and has been eliminated in the consolidated financial statements.

(2) Total amounts do not include $1.5 billion of debt issued by the trusts, which was retained by us as a credit enhancement and has been eliminated in the Consolidated Financial Statements.

Early amortization events as defined within each asset-backed securitization transaction are generally driven by asset performance.

We do not believe it is reasonably likely that an early amortization event will occur due to asset performance.

However, if an early amortization event were declared, the trustee of the particular trust would retain the interest in the receivables along with the excess interest income that would otherwise be paid to our bank subsidiary until the investors were fully repaid.

The occurrence of an early amortization event would significantly limit or negate our ability to securitize additional credit card and loan receivables.

We have secured and continue to secure the necessary commitments to fund our credit card and loan receivables.

However, if an early amortization event were declared, the trustee of the particular trust would retain the interest in the loans along with the excess spread that would otherwise be paid to our bank subsidiary until the investors were fully repaid.

The occurrence of an early amortization event would significantly limit or negate our ability to securitize additional credit card loans.

We have secured and continue to secure the necessary commitments to fund our credit card and other loans.

However, certain of these commitments are short-term in nature and subject to renewal.

There is not a guarantee that these funding sources, when they mature, will be renewed on similar terms, or at all, as they are dependent on the availability of the asset-backed securitization and deposit markets at the time.

See Note 17, “Debt,” of the Notes to Consolidated Financial Statements for additional information regarding our securitized debt.

Regulation RR (Credit Risk Retention) adopted by the FDIC, the SEC, the Federal Reserve and certain other federal regulators mandates a minimum five percent risk retention requirement for securitizations.

Such risk retention requirements may limit our liquidity by restricting the amount of asset-backed securities we are able to issue or affecting the timing of future issuances of asset-backed securities;

we satisfy such risk retention requirements by maintaining a seller’s interest calculated in accordance with Regulation RR.

Stock Repurchase Programs

We had an authorized stock repurchase program to acquire up to $1.1 billion of our outstanding common stock from July 5, 2019 through June 30, 2020.

At December 31, 2019, we had $347.8 million remaining under the stock repurchase program.

The stock repurchase program expired on June 30, 2020, and $347.8 million of this program expired unused.

During 2020, the Company did not repurchase any shares of its outstanding common stock under its authorized stock repurchase program.

For the year ended December 31, 2020, we paid quarterly cash dividends of $0.63 per share for the three months ended March 31, 2020 and $0.21 per share for each of the three months ended June 30, 2020, September 30, 2020 and December 31, 2020 of $60.1 million and $0.5 million in cash related to dividend equivalent rights, for a total of $60.6 million.

For the year ended December 31, 2019, we paid quarterly cash dividends of $0.63 per share of $126.3 million and $1.1 million in cash related to dividend equivalent rights, for a total of $127.4 million.

We had an authorized stock repurchase program that expired on June 30, 2020.

No shares of our outstanding common stock were repurchased by us in 2020 or 2021.

For the year ended December 31, 2021, we declared cash dividends of $0.84 per share for a total of $42 million, and paid cash dividends and dividend equivalents totaling $42 million.

For the year ended December 31, 2020, we declared cash dividends of $1.26 per share for a total of $60 million, and paid cash dividends and dividend equivalents totaling $61 million.

For the year ended December 31, 2019, we declared cash dividends of $2.52 per share for a total of $127 million, and paid cash dividends and dividend equivalents totaling $127 million.

On January 27, 2022, our Board of Directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on March 18, 2022 to stockholders of record at the close of business on February 11, 2022.

Contractual Obligations

In the normal course of business, we enter into various contractual obligations that may require future cash payments.

Our future cash payments associated with our contractual obligations and commitments to make future payments by type and period as of December 31, 2020 are summarized below:

(in millions)

Non-recourse borrowings of consolidated securitization entities (1)

Long-term and other debt (1)

Operating leases

Software licenses

ASC 740 obligations (2)

Purchase obligations (3)

(1) The deposits, non-recourse borrowings of consolidated securitization entities and long-term and other debt represent our estimated debt service obligations, including both principal and interest.

Interest was based on the interest rates in effect as of December 31, 2020, applied to the contractual repayment period.

(2) ASC 740 obligations do not reflect unrecognized tax benefits of $314.2 million, of which the timing remains uncertain.

(3) Purchase obligations are defined as an agreement to purchase goods or services that is enforceable and legally binding and specifying all significant terms, including the following:

fixed or minimum quantities to be purchased;

fixed, minimum or variable price provisions;

and approximate timing of the transaction.

The purchase obligation amounts disclosed above represent estimates of the minimum for which we are obligated and the time period in which cash outflows will occur.

Purchase orders and authorizations to purchase that involve no firm commitment from either party are excluded from the above table.

Purchase obligations include sponsor commitments under our AIR MILES Reward Program, minimum payments under support and maintenance contracts and agreements to purchase other goods and services.

In the normal course of business, we enter into various contractual obligations that may require future cash payments, the vast majority of which relate to deposits, debt issued by consolidated variable interest entities, long-term and other debt and operating leases.

We believe that we will have access to sufficient resources to meet these commitments.

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For the most part, we have relied on operating efficiencies from scale, technology and expansion in lower cost jurisdictions in select circumstances, as well as decreases in technology and communication costs, to offset increased costs of employee compensation and other operating expenses.

With respect to seasonality, our revenues, earnings and cash flows are affected by increased consumer spending patterns leading up to and including the holiday shopping period in the fourth quarter and, to a lesser extent, during the first quarter as credit card and loan receivable balances are paid down.

LEGISLATIVE AND REGULATORY MATTERS

Comenity Bank is subject to various regulatory capital requirements administered by the State of Delaware and the FDIC.

Comenity Capital Bank is subject to regulatory capital requirements administered by both the FDIC and the State of Utah.

Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by regulators.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both Comenity Bank and Comenity Capital Bank must meet specific capital guidelines that involve quantitative measures of its assets and liabilities as calculated under regulatory accounting practices.

Comenity Capital Bank is also subject to various regulatory capital requirements administered by the FDIC, as well as the State of Utah.

Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by our regulators.

Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both Banks must meet specific capital guidelines that involve quantitative measures of their assets and liabilities as calculated under regulatory accounting practices.

The capital amounts and classification are also subject to qualitative judgments by these regulators about components, risk weightings and other factors.

Both Comenity Bank and Comenity Capital Bank are limited in the amounts that they can pay as dividends to ADSC.

Both Banks are

limited in the amounts that they can pay as dividends to Alliance Data Systems Corporation (ADSC).

See “Business–Supervision and Regulation” under Part I of this Annual Report on Form 10-K for additional information about legislative and regulatory matters impacting us.

On September 10, 2019, Comenity Capital Bank submitted a bank merger application to the FDIC seeking the FDIC’s approval to merge Comenity Bank with and into Comenity Capital Bank as the surviving bank entity.

On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah Department of Financial Institutions and the Delaware Office of the State Bank Commissioner, respectively, in

connection with the proposed merger.

The merger application remains subject to regulatory review and approval and no guarantee can be provided as to the outcome or timing of such review.

Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank to maintain minimum amounts and ratios of Common Equity Tier 1, Tier 1 and total capital to risk weighted assets and of Tier 1 capital to average assets.

Comenity Bank and Comenity Capital Bank are considered well capitalized.

The actual capital ratios and minimum ratios as of December 31, 2020 are as follows:

On April 20, 2021, Comenity Capital Bank withdrew its bank merger application with the FDIC.

On May 3, 2021, each of Comenity Capital Bank and Comenity Bank similarly withdrew their counterpart bank merger applications in Utah and Delaware, respectively.

Quantitative measures established by regulations to ensure capital adequacy require the Banks to maintain minimum amounts and ratios of Tier 1 capital to average assets, Common equity tier 1, Tier 1 capital and Total capital, all to risk weighted assets.

Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on Comenity Bank’s and/or Comenity Capital Bank’s operating activities, as well as our operating activities.

Based on these regulations, as of December 31, 2021 and 2020, each Bank met all capital requirements to which it was subject, and maintained capital ratios in excess of the minimums required to qualify as well capitalized.

The Banks are considered well capitalized and seek to maintain capital levels and ratios in excess of the minimum regulatory requirements inclusive of the 2.5% Capital Conservation Buffer.

The actual capital ratios and minimum ratios for each Bank, as well as the Combined Banks, as of December 31, 2021, are as follows:

Capital Ratios

Minimum Ratio to be

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Total capital to risk-weighted assets (4)

Combined Banks

Tier 1 capital to average assets (1)

Common Equity Tier 1 capital to risk-weighted assets (2)

Tier 1 capital to risk-weighted assets (3)

Total capital to risk-weighted assets (4)

(1) Tier 1 capital to average assets ratio represents tier 1 capital divided by total assets for leverage ratio.

(2) Common Equity Tier 1 capital to risk-weighted assets ratio represents common equity tier 1 capital divided by total risk-weighted assets.

(3) Tier 1 capital to risk-weighted assets ratio represents tier 1 capital divided by total risk-weighted assets.

(4) Total capital to risk-weighted assets ratio represents total capital divided by total risk-weighted assets.

Comenity Bank and Comenity Capital Bank have adopted the option provided by the interim final rule issued by joint federal bank regulatory agencies, which largely delays the effects of CECL on its regulatory capital for two years, after which the effects will be phased-in over a three-year period from January 1, 2022, through December 31, 2024.

Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period includes both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.

Regulation RR adopted by the FDIC, the SEC, the Federal Reserve and certain other federal regulators mandates a minimum five percent risk retention requirement for securitizations.

we satisfy such risk retention requirements by maintaining a seller’s interest calculated in accordance with Regulation RR.

Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period includes

both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.

DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES

Our discussion and analysis of our financial condition and results of operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting policies that are described in the Notes to Consolidated Financial Statements.

The preparation of the consolidated financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We continually evaluate our judgments and estimates in determination of our financial condition and operating results.

Our discussion and analysis of our results of operations and overall financial condition is based upon our Consolidated Financial Statements, which have been prepared in accordance with the accounting policies described in the Notes to the Consolidated Financial Statements.

The preparation of Consolidated Financial Statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.

We continually evaluate our judgments and estimates in determination of our financial position and operating results.

Estimates are based on information available as of the date of the financial statements and, accordingly, actual results could differ from these estimates, sometimes materially.

Critical accounting estimates are defined as those that are both most important to the portrayal of our financial condition and operating results and require management’s most subjective judgments.

The primary critical accounting estimates are described below.

Allowance for Loan Loss.

Effective January 1, 2020, we adopted ASC 326 on a modified retrospective approach and applied a CECL model to determine our allowance for loan loss.

The allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of our credit card and loan receivables that considers forecasts of future economic conditions in addition to information about past events and current conditions.

The estimate under the CECL model is significantly influenced by the composition, characteristics and quality of our portfolio of credit card and loan receivables, as well as the prevailing economic conditions and forecasts utilized.

The estimate of the allowance for loan loss includes an

estimate for uncollectible principal as well as unpaid interest and fees.

Critical accounting estimates are defined as those that are both most important to the portrayal of our financial position and operating results and require management’s most subjective judgments, which for us is our Allowance for Credit Losses.

Allowance for Credit Losses.

Effective January 1, 2020, we adopted ASC 326 on a modified retrospective approach and applied a CECL model to determine our Allowance for credit losses.

The Allowance for credit losses is an estimate of expected credit losses, measured over the estimated life of our credit card and other loans that considers forecasts of future economic conditions in addition to information about past events and current conditions.

The estimate under the CECL model is significantly influenced by the composition, characteristics and quality of our portfolio of credit card and other loans, as well as the prevailing economic conditions and forecasts utilized.

The estimate of the Allowance for credit losses includes an estimate for uncollectible principal as well as unpaid interest and fees.

Charge-offs of principal amounts, net of recoveries are deducted from the Allowance.

The allowance is maintained through an adjustment to the provision for loan loss and is evaluated for appropriateness.

Prior to January 1, 2020, our allowance for loan loss was determined utilizing an incurred loss model under ASC 450, “Contingencies.”

In estimating our allowance for loan loss, for each identified group, we utilize various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors.

The Allowance is maintained through an adjustment to the Provision for credit losses and is evaluated for appropriateness.

Prior to January 1, 2020, our Allowance for credit losses was determined utilizing an incurred loss model under ASC 450, “Contingencies.”

In estimating our Allowance for credit losses, for each identified group, we utilize various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors.

These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance.

Our quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors.

We consider the forecast used to be reasonable and supportable over the estimated life of the credit card and loan receivables, with no reversion period.

In addition to the quantitative estimate of expected credit losses, we also incorporate qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the allowance for loan loss reflects our best estimate of current expected credit losses.

If we used different assumptions in estimating current expected credit losses, the impact to the allowance for loan loss could have a material effect on our consolidated financial condition and results of operations.

For example, a 100 basis point increase in the allowance as a percentage of the amortized cost of our credit card and loan receivables could have resulted in a change of approximately $164.9 million in the allowance for loan loss at December 31, 2020, with a corresponding change in the provision for loan loss.

Revenue Recognition.

We recognize revenue when control of the promised goods or services is transferred to the customer, in an amount that reflects the consideration we expect to be entitled to in exchange for those goods or services.

In that determination, under ASC 606, we follow a five-step model that includes:

(1) determination of whether a contract, an agreement between two or more parties that creates legally enforceable rights and obligations, exists;

(2) identification of the performance obligations in the contract;

(3) determination of the transaction price;

(4) allocation of the transaction price to the performance obligations in the contract;

and (5) recognition of revenue when (or as) the performance obligation is satisfied.

We enter into contracts with customers that may include multiple performance obligations.

The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis.

If the standalone selling price is not directly observable, we estimate the standalone selling price based on either the adjusted market assessment or cost plus a margin approach.

Certain of our contracts may provide for variable consideration.

We estimate these amounts based on either the expected amount or most likely amount to be provided to the customer to determine the transaction price for the contract.

The estimation method is consistent for contracts with similar terms and is applied consistently throughout each contract.

The estimates of variable consideration and determination of whether to include estimated amounts in the transaction price are based largely on an assessment of the anticipated performance and all information that is reasonably available.

AIR MILES Reward Program.

The AIR MILES Reward Program collects fees from its sponsors based on the number of AIR MILES reward miles issued and, in limited circumstances, the number of AIR MILES reward miles redeemed.

Because management has determined that the earnings process is not complete at the time an AIR MILES reward mile is issued, the recognition of redemption and service revenue is deferred.

Under certain of our contracts, a portion of the consideration is paid to us upon the issuance of AIR MILES reward miles and a portion is paid at the time of redemption and therefore, we do not have a redemption obligation related to these contracts.

Total consideration from the issuance of AIR MILES reward miles is allocated to three performance obligations:

redemption, service, and brand, based on a relative standalone selling price basis.

The estimated standalone selling price for the redemption and the service performance obligations are based on cost plus a reasonable margin.

The estimated standalone selling price of the brand performance obligation is determined using a relief from royalty approach.

Accordingly, management determines the estimated standalone selling price by considering multiple inputs and methods, including discounted cash flows and available market data in consideration of applicable margins and royalty rates to utilize.

The number of AIR MILES reward miles issued and redeemed are

factored into the estimates, as management estimates the standalone selling prices and volumes over the term of the respective agreements in order to determine the allocation of consideration to each performance obligation delivered.

The redemption performance obligation incorporates the expected number of AIR MILES reward miles to be redeemed, and therefore, the amount of redemption revenue recognized is subject to management’s estimate of breakage, or those AIR MILES reward miles estimated to be unredeemed by the collector base.

Additionally, the estimated life of an AIR MILES reward mile impacts the timing of revenue recognition.

Breakage and the life of an AIR MILES reward mile are based on management’s estimate after viewing and analyzing various historical trends including vintage analysis, current run rates and other pertinent factors, such as the impact of macroeconomic factors and changes in the program structure.

For the years ended December 31, 2018, 2019 and 2020, our estimated breakage rate remained 20%.

Our cumulative redemption rate, which represents program to date redemptions divided by program to date issuance, is 69% as of December 31, 2020.

We expect the ultimate redemption rate will approximate 80% based on our historical redemption patterns, statistical regression models, and consideration of enacted program changes, as applicable.

For the years ended December 31, 2018, 2019 and 2020, our estimated life of an AIR MILES reward mile remained 38 months.

We estimate that a change to the estimated life of an AIR MILES reward mile of one month would impact revenue by approximately $4 million.

Any future changes in collector behavior could result in further changes in our estimates of breakage or life of an AIR MILES reward mile.

As of December 31, 2020, we had $1,004.0 million in deferred revenue related to the AIR MILES Reward Program that will be recognized in the future.

Further information is provided in Note 3, “Revenue,” of the Notes to Consolidated Financial Statements.

We test goodwill for impairment annually, or when events and circumstances change that would indicate the carrying value may not be recoverable.

For the 2020 annual impairment test, we performed a quantitative analysis for the Card Services reporting unit and the reporting units within the LoyaltyOne segment, identified as BrandLoyalty and LoyaltyOne excluding BrandLoyalty.

The fair value of the reporting units was estimated using a discounted cash flow analysis based on management's estimates of forecasted cash flows, with those cash flows discounted to present value using rates commensurate with the risks associated with those cash flows.

The valuation includes assumptions related to revenue growth and profit performance, capital expenditures, the discount rate and other assumptions that are judgmental in nature.

Changes in these estimates and assumptions could materially affect the results of our tests for goodwill impairment.

We determined there was no impairment of goodwill on these reporting units.

As of December 31, 2020, we had goodwill of approximately $1,369.6 million.

The following table presents the percentage by which fair value of the reporting units exceeded carrying value as of the 2020 annual impairment test and goodwill for each respective reporting unit as of December 31, 2020:

Excess Fair Value %

Reporting Unit

as of July 1, 2020

as of December 31, 2020

(in millions)

LoyaltyOne excluding BrandLoyalty

Card Services

As with all assumptions, there is an inherent level of uncertainty and actual results, to the extent they differ from those assumptions, could have a material impact on fair value.

For example, a reduction in customer demand would impact our assumed growth rate resulting in a reduced fair value, or multiples for similar type reporting units could deteriorate due to changes in technology or a downturn in economic conditions.

Potential events or circumstances could

have a negative effect on the estimated fair value.

The loss of a major customer or program could have a significant impact on the future cash flows of the reporting unit(s).

We do not currently believe there is a reasonable likelihood that there will be a material change in estimates or assumptions used to test goodwill and other intangible assets for impairment.

However, due to the COVID-19 pandemic and continuing uncertainty in the macroeconomic environment, future deterioration in the economy could adversely impact our reporting units and result in a goodwill impairment charge that could be material.

We consider the forecast used to be reasonable and supportable over the estimated life of the credit card and other loans, with no reversion period.

In addition to the quantitative estimate of expected credit losses, we also incorporate qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the Allowance for credit losses reflects our best estimate of current expected credit losses.

Since the implementation of the CECL standard, we have maintained a consistent approach to the forecasting of the life of loan losses for purposes of establishing the Allowance for credit losses.

The approach involves the use of third-party projections of economic variables, and applies those projections to their historical correlation to losses in segments of our loan portfolio exhibiting common risk characteristics.

The level of the allowance includes qualitative overlays to the modeled output to address risks not inherently covered by the modeled output as well as management-perceived risks in the economic environment.

These overlays have changed over the periods since implementation through December 31, 2021 to reflect changes in the macroeconomic environment and the impact to our loan portfolio, particularly throughout the global COVID-19 pandemic.

If we used different assumptions in estimating current expected credit losses, the impact on the Allowance for credit losses could have a material effect on our consolidated financial position and results of operations.

For example, a 100 basis point increase in the Allowance as a percentage of the amortized cost of our Credit card and other loans could have resulted in a change of approximately $171 million in the Allowance for credit losses at December 31, 2021, with a corresponding change in the Provision for credit losses.

Income Taxes.

We account for uncertain tax positions in accordance with Accounting Standards Codification, or ASC, 740, “Income Taxes.” The application of income tax law is inherently complex.

Laws and regulations in this area are voluminous and are often ambiguous.

As such, we are required to make many subjective assumptions and judgments regarding our income tax exposures.

Interpretations of, and guidance surrounding, income tax laws and regulations change over time.

Changes in our subjective assumptions and judgments can materially affect amounts recognized in the consolidated balance sheets and statements of income.

See Note 22, “Income Taxes,” of the Notes to Consolidated Financial Statements for additional detail on our uncertain tax positions and further information regarding ASC 740.

Recent Accounting Pronouncements

See “Recently Issued Accounting Standards” under Note 2, “Summary of Significant Accounting Policies,” of the Notes to Consolidated Financial Statements for a discussion of certain accounting standards that we have recently adopted and certain accounting standards that we have not yet been required to adopt and may be applicable to our future financial condition, results of operations or cash flow.

The income tax laws of the United States, as well as its states and municipalities in which we operate, are inherently complex;

the manners in which they apply to our facts is often open to interpretation, and consequentially requires us to make judgments in establishing our Provision for income taxes.

Differences between the Consolidated Financial Statements and tax bases of assets and liabilities give rise to deferred tax assets and liabilities, which measure the future tax effects of items recognized in the Consolidated Financial Statements and require certain estimates and judgments in order to determine whether it is more likely than not that all or a portion of the benefit of a deferred tax asset will not be realized.

In evaluating our deferred tax assets on a quarterly basis as new facts and circumstances emerge, we analyze and estimate the impact of future taxable income, reversing temporary differences and available tax planning strategies.

Uncertainties can lead to changes in the ultimate realization of deferred tax assets.

A liability for unrecognized tax benefits, representing the difference between a tax position taken or expected to be taken in a tax return and the benefit recognized in the Consolidated Financial Statements, inherently requires estimates and judgments.

A tax position is recognized only when it is more likely than not to be sustained, based purely on its technical merits after examination by the taxing authority, and the amount recognized is the benefit we believe is more likely than not to be realized upon ultimate settlement.

We evaluate our tax positions as new facts and circumstances become available, making adjustments to our unrecognized tax benefits as appropriate.

Uncertainties can mean the tax benefits ultimately realized differ from amounts previously recognized, with any differences recorded in Provision for income taxes.

Our assessment of the technical merits and measurement of tax benefits associated with uncertain tax positions is subject to a high degree of judgment and estimation.

Actual results may differ from our current judgments due to a variety of factors, including interpretations of law by taxing authorities that differ from our assessments and results of tax examinations.

We believe we have adequately provided for any reasonably foreseeable outcome related to these matters.

However, our future results may include favorable or unfavorable adjustments to our estimated tax liabilities in the period the assessments are made or resolved, or when statutes of limitation on potential assessments expire.

As of December 31, 2021, we had $288 million in unrecognized tax benefits, including interest and penalties, recorded in Other liabilities on the Consolidated Balance Sheet.

RECENTLY ISSUED ACCOUNTING STANDARDS

See the “Recently Issued Accounting Standards” under Note 1, “Description of Business and Summary of Significant Accounting Policies,” to Consolidated Financial Statements.

Quantitative and Qualitative Disclosures About Market Risk.

See “Risk Management” section within Item 1A.

Financial Statements and Supplementary Data .

Our Consolidated Financial Statements begin on page F-1 of this Form 10-K.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.

Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 7. Management’s Discussion and Analysis