What changed in this filing

/stocks — the workspaceLOADING

Item 7. Management’s Discussion and Analysis

2023-02-28 compared with 2022-02-25 · 353 added, 337 removed, 167 unchanged (81% of the section changed)

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.

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

The following discussion and analysis of our results of operations and financial condition 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.

1 unchanged sentence

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, 2022 and 2021 and for years ended December 31, 2022 , 2021 and 2020.

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

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.

We are a tech-forward financial services company that provides simple, personalized payment, lending and saving solutions.

We create opportunities for our customers and partners through digitally enabled choices that offer ease, empowerment, financial flexibility and exceptional customer experiences.

Driven by a digital-first approach, data insights and white-label technology, we deliver growth for our partners through a comprehensive product suite, including private label and co-brand credit cards and buy now, pay later products such as installment loans and our “split-pay” offerings.

We also offer direct-to-consumer solutions that give customers more access, choice and freedom through our branded Bread Cashback TM American Express ® Credit Card and Bread Savings TM products.

Effective March 23, 2022, we changed our corporate name to Bread Financial Holdings, Inc.

from Alliance Data Systems Corporation, and on April 4, 2022, we changed our ticker to “BFH” from “ADS” on the NYSE.

Neither the name change nor the NYSE ticker change affected our legal entity structure, nor did either change have an impact on our Consolidated Financial Statements.

On November 5, 2021, our former LoyaltyOne segment was spun off into an independent public company Loyalty Ventures Inc.

(traded on The Nasdaq Stock Market LLC under the ticker “LYLT”) and therefore is reflected herein as Discontinued Operations.

Our primary source of revenue is from Interest and fees on loans from our various credit card and other loan products, and to a lesser extent from contractual relationships with our brand partners.

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.

However, certain information included within this Annual Report on 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.

In particular, Pretax pre-provision earnings (PPNR) is calculated by increasing/decreasing Income from continuing operations before income taxes by the net provision/release in Provision for credit losses.

We use PPNR as a metric to evaluate our results of operations before income taxes, excluding the volatility that can occur within Provision for credit losses.

Tangible common equity over Tangible assets (TCE/TA) represents Total stockholders’ equity reduced by Goodwill and intangible assets, net, (TCE) divided by Tangible assets (TA), which is Total assets reduced by Goodwill and intangible assets, net.

We use TCE/TA as a metric to evaluate the Company’s capital adequacy and estimate its ability to cover potential losses.

Tangible book value per common share represents TCE divided by shares outstanding.

We use Tangible book value per common share as a metric to estimate the Company’s potential value in relation to tangible assets per share.

We believe the use of these non-GAAP financial measures provide additional clarity in understanding our results of operations and trends.

For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, please see “Table 6:

Reconciliation of GAAP to Non-GAAP Financial Measures” that follows.

BUSINESS ENVIRONMENT

This Business Environment section provides an overview of our results of operations and financial position for 2022, as well as our related outlook for 2023 and certain of the uncertainties associated with achieving that outlook.

This section should be read in conjunction with the other information appearing in this Annual Report on Form 10-K, including “Consolidated Results of Operations”, “Risk Factors”, and “Cautionary Note Regarding Forward-Looking Statements”, which provides further discussion of variances in our results of operations over the years of comparison, along with other factors that could impact future results and the Company achieving its outlook.

Tabl e of Contents

2022 was a transformational year in which we rebranded to Bread Financial Holdings, Inc.

in March, and executed on our strategic objectives, including expanding our product offerings with the launch of the Bread Cashback TM American Express ® Credit Card, securing new diverse program agreements and long-term renewals with iconic brands, and advancing our technology modernization through major enhancements to our core platform and surrounding digital assets.

Credit sales of $32.9 billion were up 11% when compared with 2021, driven by organic growth from our existing brand partners, as well as the addition of our new brand partners and new product offerings.

Average credit card and other loans of $17.8 billion grew 13%, with End-of-period loan balances up 23%.

Growth in Total net interest and non-interest income of 17% exceeded the growth in average Credit card and other loans, compared with 2021;

in particular Total interest income increased from the prior year due to higher average loan balances and improved loan yields.

Interchange revenue, net of retailer share arrangements increased year-over-year due in part to cardholder and brand partner engagement initiatives, as well as increases in our brand partners’ share of the economics under new retailer share arrangements, while Other non-interest income decreased primarily due to the write-down of our equity method investment in LVI.

Total non-interest expenses increased 15%, driven by portfolio growth and ongoing investments in technology modernization, digital advancement, marketing and product innovation.

Provision for credit losses increased relative to 2021 as a result of a reserve build due to the increase in End-of-period loan balances, including through the acquisition of new portfolios in the year, increased net principal losses and a higher reserve rate.

Our Allowance for credit losses increased, with a reserve rate of 11.5% as of December 31, 2022, relative to 10.5% as of December 31, 2021.

The reserve rate increased due to continued elevated inflation, increasing consumer debt levels and weakening in macroeconomic indicators, negatively affecting our base case scenario outlook, which was partially offset by the addition of higher quality portfolios throughout the year.

Overall, Income from continuing operations of $224 million was down 72% compared with 2021, reflecting a higher Provision for credit losses as discussed previously.

We remained disciplined, generating more than 200 basis points of operating leverage for the year, as we managed our expenses in alignment with our revenue and growth outlook, while continuing to invest in our future.

We also strengthened our balance sheet and bolstered our financial resilience through greater product and funding diversification, and growth in capital and increased tangible book value.

Our 2023 financial outlook assumes a more challenging macroeconomic landscape.

We are closely monitoring the impact of inflation, rising interest rates and other macroeconomic factors on our consumers and partners, which remain difficult to predict and therefore could have an impact on our 2023 outlook.

We are experiencing a shift toward non-discretionary spending with payment rates approaching pre-pandemic levels and expecting the unemployment rate to gradually move to the mid-to-upper 4% range by year-end 2023.

Our outlook assumes additional interest rate increases by the Federal Reserve Board which will result in a nominal benefit to Net interest income.

Our outlook for growth in Average credit card and other loans in 2023, based on our new and renewed brand partner announcements, visibility into our pipeline, the sale of BJ’s, and the current economic outlook, is in the mid-single digit range relative to 2022.

For the year ended December 31, 2022, BJ’s branded co-brand accounts generated approximately 10% of Total net interest and non-interest income.

As of December 31, 2022, BJ’s branded co-brand accounts were responsible for approximately 11% of Total credit card and other loans.

We expect Total net interest and non-interest income growth for 2023, excluding the BJ’s portfolio gain on sale, to be aligned with growth in Average credit card and other loans;

with a full year 2023 Net interest margin expected to be consistent with the 2022 full year rate of 19.2%.

In 2023, as a result of ongoing investments in technology modernization, digital advancement, marketing, and product innovation, along with continued portfolio growth, we anticipate an increase in Total non-interest expenses relative to 2022.

We remain focused on delivering nominal positive operating leverage for 2023 as we manage the pace and timing of our investments to align with our full year revenue and growth outlook.

Our 2023 financial outlook also assumes a net loss rate of approximately 7%, inclusive of impacts from the 2022 transition of our credit card processing services as well as continued pressure on consumers’ ability to pay due to persistent inflation.

Although we recognize the more challenging macroeconomic landscape, we remain focused on executing on our strategic priorities and making the investments that position us to drive sustainable, profitable growth.

Tabl e of Contents

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.

The following discussion provides commentary on the variances in our results of operations for the year ended December 31, 2022, compared with the year ended December 31, 2021, as presented in the accompanying tables.

This discussion should be read in conjunction with the discussion under “Business Environment”, above.

For a discussion of the financial condition and results of operations for 2021 compared with 2020, please refer to Part II, Item 7.

“Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A)” in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the SEC on February 25, 2022, which discussion is incorporated herein by reference.

Summary of Our Financial Performance

Years Ended December 31,

(in millions, except per share amounts and percentages)

Years Ended December 31, $ Change % Change

2022 2021 2020 2022

(Millions, except per share amounts and percentages)

Total net interest and non-interest income $ 3,826 $ 3,272 $ 3,298 $ 554 $ (26) 17 (1)

1 unchanged sentence

Total non-interest expenses 1,932 1,684 1,731 248 (47) 15 (3)

Income from continuing operations before income taxes

Income from continuing operations before income taxes 300 1,044 301 (744) 743 (71) nm

Provision for income taxes 76 247 93 (171) 154 (69) 168

Income from continuing operations

Income (loss) from discontinued operations, net of taxes

Net income per diluted share

Income from continuing operations per diluted share

Income from continuing operations 224 797 208 (573) 589 (72) nm

(Loss) income from discontinued operations, net of income taxes (1) 4 6 (5) (2) (111) (38)

Net income 223 801 214 (578) 587 (72) nm

Net income per diluted share $ 4.46 $ 16.02 $ 4.46 $ (11.56) $ 11.56 (72) nm

Income from continuing operations per diluted share $ 4.47 $ 15.95 $ 4.35 $ (11.48) $ 11.60 (72) nm

Net interest margin (1)

19.2 % 18.2 % 16.8 % 1.0 1.4

Return on average equity (2)

9.8 % 40.7 % 16.7 % (30.9) 24.0

Effective income tax rate - continuing operations 25.4 % 23.7 % 30.7 % 1.7 (7.0)

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

______________________________

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

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.

(5) Loan yield represents annualized Interest and fees on loans divided by Average credit card and other loans.

(6) 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

(7) Tangible common equity (TCE) represents Total stockholders’ equity reduced by Goodwill and intangible assets, net.

Tangible assets (TA) represents Total assets reduced by Goodwill and intangible assets, net.

TCE/TA is a non-GAAP financial measure.

See “Non-GAAP Financial Measures” and Table 6:

Reconciliation of GAAP to Non-GAAP Financial Measures .

(8) Tangible book value per common share represents TCE divided by shares outstanding and is a non-GAAP financial measure.

See “Non-GAAP Financial Measures” and Table 6:

Reconciliation of GAAP to Non-GAAP Financial Measures .

(9) Payment rate represents consumer payments during the last month of the period, divided by the beginning-of-month credit card and other loans, including held for sale in applicable periods.

(10) Delinquency and Net loss rates as of or for the year ended December 31, 2022 were impacted by the transition of our credit card processing services.

Tabl e of Contents

Net Interest Margin

Year Ended December 31, 2022

Average Balance

Interest Income / Expense

Average Yield / Rate

(in millions, except percentages)

Average Balance* Interest Income / Expense Average Yield / Rate

(Millions, except percentages)

Cash and investment securities $ 3,954 $ 69 1.75 %

1 unchanged sentence

Total interest-earning assets 21,722 4,684 21.56 %

Direct-to-consumer deposits (retail)

Direct-to-consumer (retail) deposits 4,342 81 1.87 %

Wholesale deposits 7,358 162 2.21 %

2 unchanged sentences

Unsecured borrowings 1,966 107 5.46 %

Interest-bearing borrowings 7,055 260 3.68 %

Total interest-bearing liabilities 18,755 503 2.68 %

Net interest income $ 4,181

Net Interest Margin (1)

Net interest margin (NIM) (1)

Year Ended December 31, 2021

Average Balance

Interest Income / Expense

Average Yield / Rate

(in millions, except percentages)

Average Balance* Interest Income / Expense Average Yield / Rate

(Millions, except percentages)

Cash and investment securities $ 3,480 $ 7 0.21 %

6 unchanged sentences

Unsecured borrowings 2,699 104 3.84 %

Interest-bearing borrowings 7,295 216 2.95 %

Total interest-bearing liabilities 17,294 383 2.21 %

Net interest income $ 3,485

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

Net interest margin (NIM) (1)

______________________________

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

Tabl e of Contents

Reconciliation of GAAP to Non-GAAP Financial Measures

Years Ended December 31, % Change

2022 2021 2020 2022

(Millions, except percentages)

Pretax pre-provision earnings (PPNR)

Income from continuing operations before income taxes $ 300 $ 1,044 $ 301 (71) nm

Provision for credit losses 1,594 544 1,266 193 (57)

Pre-tax pre-provision earnings (PPNR)

Pretax pre-provision earnings (PPNR) $ 1,894 $ 1,588 $ 1,567 19 1

Tangible common equity (TCE)

Total stockholders’ equity $ 2,265 $ 2,086 $ 1,522 9 37

Goodwill and intangible assets, net (799) (687) (710) 16 (3)

Tangible common equity (TCE) $ 1,466 $ 1,399 $ 812 5 72

Tangible assets (TA)

Total assets $ 25,407 $ 21,746 $ 22,547 17 (4)

Goodwill and intangible assets, net (799) (687) (710) 16 (3)

Tangible assets (TA) $ 24,608 $ 21,059 $ 21,837 17 (4)

______________________________

(nm) Not meaningful

ASSET QUALITY

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.

When it comes to our Credit card and other loans portfolio, we closely monitor two metrics – Delinquency rates and Net principal loss 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 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.

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.

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

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.

based upon the level of risk indicated, a collection strategy is deployed.

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

The Delinquency rate is calculated by dividing outstanding balances that are contractually delinquent (i.e., balances greater than 30 days past due) as of the end of the period, by the outstanding principal amount of credit cards and other loans as of the same period-end.

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:

Tabl e of Contents

Delinquency Trends on Credit Card and Other Loans

(in millions, except percentages)

Total 2021 % of

(Millions, except percentages)

Credit card and other loans outstanding ─ principal $ 20,107 100.0 % $ 16,590 100.0 %

3 unchanged sentences

91 or more days 515 2.6 281 1.7

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 Interest and fees on loans while fraud losses are recorded in Card and processing expenses.

Total $ 1,112 5.5 % $ 647 3.9 %

______________________________

(1) As of December 31, 2022 the Outstanding balances contractually delinquent, and the related % of Total (i.e., the Delinquency rate), were impacted by the transition of our credit card processing services.

As part of our collections strategy, we may offer temporary, short term (six-months or less) loan modifications in order to improve the likelihood of collections and meet the needs of our customers.

Our modifications for customers who have requested assistance and meet certain qualifying requirements, come in the form of reduced or deferred payment requirements, interest rate reductions and late fee waivers.

We do not offer programs involving the forgiveness of principal.

These temporary loan modifications may assist in cases where we believe the customer will recover from the short-term hardship and resume scheduled payments.

Under these forbearance modification programs, those accounts receiving relief may not advance to the next delinquency cycle, including charge-off, in the same time frame that would have occurred had the relief not been granted.

We evaluate our loan modification programs to determine if they represent a more than insignificant delay in payment, in which case they would then be considered a troubled debt restructuring.

For additional information, see Note 2 “Credit Card and Other Loans – Modified Credit Card Loans”, to the Consolidated Financial Statements.

Net Principal Losses:

Our net principal losses include the principal amount of losses that are deemed uncollectible, less recoveries, and exclude charged-off interest, fees and third-party fraud losses (including synthetic fraud).

Charged-off interest and fees reduce Interest and fees on loans while third-party 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)

BNPL 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 receipt of the notification of the bankruptcy or death, but in no case longer than 180 days past due for credit card loans and 120 days past due for BNPL loans.

The net principal loss rate is calculated by dividing net principal losses 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 and end of each month, averaged over the periods indicated.

The following table presents our net principal losses for the years ended December 31:

Net Principal Losses on Credit Card and Other Loans

2022 2021 2020

(Millions, except percentages)

Average credit card and other loans $ 17,768 $ 15,656 $ 16,367

Net charge-offs of principal balances

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

Net principal losses 968 720 1,083

Net principal losses as a percentage of average credit card and other loans (1)

5.4 % 4.6 % 6.6 %

______________________________

(1) Net principal losses as a percentage of Average credit card and other loans for the year ended December 31, 2022 was impacted by the transition of our credit card processing services.

Tabl e of Contents

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.

Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources necessary to support our daily operations, our business growth, our credit ratings related to our secured financings, and meet our regulatory and policy requirements (including capital and leverage ratio requirements applicable to CB and CCB under FDIC regulations) 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, and our securitization programs and deposits issued by the Banks, in addition to our ongoing efforts to renew and expand our various sources of liquidity.

Our primary uses of liquidity are for ongoing and varied lending operations, scheduled payments of principal and interest on our debt, operational expenses, 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.

1 unchanged sentence

The amounts involved may be material.

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

Investing activities

Financing activities

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.

We will also need additional financing in the future to repay or refinance the existing debt at maturity or otherwise and to fund our growth.

Given the maturities of our current outstanding debt and the current macroeconomic conditions, it is possible that we will be required to repay or refinance some or all of our maturing debt in volatile and/or unfavorable markets.

Because of the alternatives available to us as discussed above, we believe our short-term and long-term sources of 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, the adequacy of our liquidity could be impacted by various factors, including macroeconomic conditions and volatility in the financial and capital markets, limiting our access to or increasing our cost of capital, which could make capital unavailable or available on terms that are unfavorable to us.

These factors could significantly reduce our financial flexibility and cause us to contract or not grow our business, which could have a material adverse effect on our results of operations and financial condition.

Funding Sources

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;

Parent Company, as borrower, and certain of our non-Bank wholly-owned subsidiaries, as guarantors, are party to our Credit Agreement with various agents and lenders dated June 14, 2017, as amended.

As of December 31, 2022, we had $556 million aggregate principal amount of term loans outstanding and a $750 million revolving line of credit under the Credit Agreement;

we had no borrowings on our revolving line of credit.

The Credit Agreement matures on July 1, 2024.

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.

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 associated commitments may be terminated.

As of December 31, 2022, we were in compliance with all financial covenants under the Credit Agreement.

The Credit Agreement was amended in December 2022 to index borrowings to the Secured Overnight Financing Rate (SOFR) with the discontinuation of the London Interbank Offered Rate (LIBOR).

SOFR is based on short-term repurchase agreements that are backed by Treasury securities.

Tabl e of Contents

We utilize a variety of deposit products to finance our operating activities, including funding for our non-securitized credit card and other loans, and to fund the 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 (often referred to as wholesale or brokered deposits).

Across both our retail and wholesale deposits, 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;

the Banks also issue certificates of deposit with scheduled maturity dates ranging between January 2023 and December 2027, in denominations of at least $1,000, on which interest is paid either monthly or at maturity.

The following table summarizes our retail and wholesale deposit products by type and associated attributes, as of December 31, 2022 and December 31, 2021:

December 31, 2022 December 31, 2021

(Millions, except percentages)

Direct-to-consumer (retail) $ 5,466 $ 3,180

Wholesale 8,321 7,847

Non-maturity deposit products

Non-maturity deposits $ 6,736 $ 5,586

Interest rate range 0.70% - 4.70% 0.05% - 3.50%

Weighted-average interest rate 2.56 % 0.68 %

Certificates of deposit

Certificates of deposit $ 7,051 $ 5,441

Interest rate range 0.40% - 4.95% 0.20% - 3.75%

Weighted-average interest rate 3.11 % 1.91 %

Securitization Programs and Conduit Facilities

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

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

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

1 unchanged sentence

During the year ended December 31, 2022, $1.6 billion of asset-backed term notes matured and were repaid, of which $74 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.

During the year ended December 31, 2022, we obtained increased lender commitments under our private conduit facilities of $2.1 billion and extended the various maturities to June 2023 and July 2023.

As of December 31, 2022, total capacity under the conduit facilities was $6.5 billion, of which $6.1 billion had been drawn and was included in Debt issued by consolidated variable interest entities (VIEs) in the Consolidated Balance Sheet.

In April 2022, the World Financial Network Credit Card Master Trust III amended its 2009-VFC conduit facility, increasing the capacity from $225 million to $275 million and extending the maturity to July 2023.

In addition, in April 2022, the World Financial Capital Master Note Trust amended its 2009-VFN conduit facility, increasing the capacity from $1.5 billion to $2.5 billion and extending the maturity to July 2023.

In June 2022, the Comenity Capital Asset Securitization Trust was formed for the purpose of funding a portfolio acquisition completed in October 2022.

The capacity was negotiated to be $1.0 billion and the maturity was set as June 2023.

As of December 31, 2022, we had approximately $15.4 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 credit enhancement is

Tabl e of Contents

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, 2022 for the Trusts by year:

Borrowing Commitment Maturities

(in millions)

Fixed rate asset-backed term note securities

2023 2024 Thereafter Total

Conduit facilities (1)

6,525 — — 6,525

$ 6,525 $ — $ — $ 6,525

______________________________

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

(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.

(2) Total amounts do not include $1.9 billion of debt issued by the Trusts, which was retained by us as a credit enhancement and therefore has been eliminated from the Total.

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 loans along with the excess spread that would otherwise be paid to our bank subsidiary until the investors were fully repaid.

However, if an early amortization event were declared for a Trust, 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.

1 unchanged sentence

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.

There is no 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.

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.

2 unchanged sentences

Stock Repurchase Programs

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 February 28, 2022, the Company’s Board of Directors approved a stock repurchase program to acquire up to 200,000 shares of our outstanding common stock in the open market during the one-year period ending on February 28, 2023.

As of March 31, 2022, we had repurchased all 200,000 shares of our common stock available under this program for an aggregate of $12 million.

Following their repurchase, these 200,000 shares ceased to be outstanding shares of common stock and are now treated as authorized but unissued shares of common stock.

For the years ended December 31, 2022, 2021 and 2020, we paid $43 million, $42 million and $61 million, respectively, in dividends to our shareholders of common stock.

On January 26, 2023, our Board of Directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on March 17, 2023, to stockholders of record at the close of business on February 10, 2023.

Contractual Obligations

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.

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 VIEs, long-term and other debt and operating leases.

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

Tabl e of Contents

The table below summarizes our cash flow activity for the years indicated, followed by a discussion of the variance drivers impacting our Operating, Investing and Financing activities:

2022 2021 2020

Total cash provided by (used in):

Operating activities $ 1,848 $ 1,543 $ 1,883

Investing activities (5,111) (1,691) 1,774

Financing activities 3,267 608 (4,167)

Effect of foreign currency exchange rates — — 15

Net increase (decrease) in cash, cash equivalents and restricted cash $ 4 $ 460 $ (495)

Cash Flows from Operating Activities primarily include net income adjusted for (i) non-cash items included in net income, such as provision for credit losses, depreciation and amortization, deferred taxes and other non-cash items, and (ii) changes in the balances of operating assets and liabilities, which can fluctuate in the normal course of business due to the amount and timing of payments.

We generated cash flows from operating activities of $1,848 million and $1,543 million for the years ended December 31, 2022 and 2021, respectively.

For the years ended December 31, 2022 and 2021, the net cash provided by operating activities was primarily driven by cash generated from net income for the period after adjusting for the provision for credit losses.

Cash Flows from Investing Activities primarily include changes in Credit card and other loans.

Cash used in investing activities was $5,111 million and $1,691 million for the years ended December 31, 2022 and 2021, respective.

For the year ended December 31, 2022, the net cash used in investing activities was primarily due to growth in credit sales and the consequential growth in Credit card and other loans, as well as the acquisition of credit card loan portfolios.

For the year ended December 31, 2021, the net cash used in investing activities was primarily due to growth in Credit card and other loans, partially offset by the sale of a credit card loan portfolio.

Cash Flows from Financing Activities primarily include changes in deposits and long-term debt.

Cash provided by financing activities was $3,267 million and $608 million for the years ended December 31, 2022 and 2021, respectively.

For the year ended December 31, 2022, the net cash provided by financing activities was primarily driven by a net increase in deposits and net borrowings under conduit facilities.

For the year ended December 31, 2021, the net cash provided by financing activities was driven by a net increase in deposits, partially offset by net repayments of securitizations.

Tabl e of Contents

INFLATION AND SEASONALITY

Although we cannot precisely determine the impact of inflation on our operations, we do not believe that we have been significantly affected by inflation.

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.

Although we cannot precisely determine the impact of inflation on our operations, we do not believe, at this time, that we have been significantly affected by inflation.

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

We also recognize that a customer’s ability and willingness to repay us has been negatively impacted by factors such as inflation, which results in greater delinquencies that could lead to greater credit losses, as reflected in our increased Allowance for credit losses.

If the efforts to control inflation in the U.S.

and globally are not successful and inflationary pressures continue to persist, they could magnify the slowdown in the domestic and global economies and increase the risk of a recession, which may adversely impact our business, results of operations and financial condition.

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 other loans 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 also subject to various regulatory capital requirements administered by the FDIC, as well as the State of Utah.

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

CCB 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.

1 unchanged sentence

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

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.

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.

In addition, both Banks are limited in the amounts they can pay as dividends to the Parent Company.

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

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, and 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 CB’s and/or CCB’s operating activities, as well as our operating activities.

Based on these regulations, as of December 31, 2022 and 2021, 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:

The actual capital ratios and minimum ratios for each Bank, as well as the Combined Banks, are as follows as of December 31, 2022:

Tabl e of Contents

Capital Ratios

Minimum Ratio to be

Minimum Ratio for

Well Capitalized under

Ratio Minimum Ratio for

Capital Adequacy

Purposes Minimum Ratio to be

Well Capitalized under

Prompt Corrective

1 unchanged sentence

Comenity Bank

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)

Common Equity Tier 1 capital ratio (1)

18.4 % 4.5 % 6.5 %

Tier 1 capital ratio (2)

Total Risk-based capital ratio (3)

19.7 8.0 10.0

Tier 1 Leverage capital ratio (4)

Comenity Capital Bank

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)

Common Equity Tier 1 capital ratio (1)

16.1 % 4.5 % 6.5 %

Tier 1 capital ratio (2)

Total Risk-based capital ratio (3)

17.4 8.0 10.0

Tier 1 Leverage capital ratio (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.

Common Equity Tier 1 capital ratio (1)

17.0 % 4.5 % 6.5 %

Tier 1 capital ratio (2)

Total Risk-based capital ratio (3)

18.3 8.0 10.0

Tier 1 Leverage capital ratio (4)

______________________________

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

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

(3) The Total Risk-based capital ratio represents total capital divided by total risk-weighted assets.

(4) The Tier 1 Leverage capital ratio represents tier 1 capital divided by total average assets, after certain adjustments.

The Banks adopted the option provided by the interim final rule issued by joint federal bank regulatory agencies, which largely delayed the effects of CECL on their regulatory capital for two years, until January 1, 2022, after which the effects are phased-in over a three-year period 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 as of 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.

In accordance with the interim final rule, we began to phase-in these effects on January 1, 2022.

DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES

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 Note 1, “Description of Business and Summary of Significant Accounting Policies” to our Consolidated Financial Statements included as part of this Annual Report on Form 10-K.

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 position and operating results and require management’s most subjective judgments, which for us is our Allowance for Credit Losses.

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

Estimates are based on information available as of the date of the Consolidated 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 position and operating results, and require management’s most subjective judgments, which for us is our Allowance for credit losses and Provision for income taxes.

Tabl e of Contents

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 under the credit reserving methodology referred to as the CECL model is significantly influenced by the composition, characteristics and quality of our Credit card and other loans portfolio, 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 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.

Principal losses, net of recoveries are deducted from the Allowance.

Losses for unpaid interest and fees, as well as any adjustments to the Allowance associated with unpaid interest and fees are recorded as a reduction to Interest and fees on loans.

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

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

These models use historical data and applicable macroeconomic variables, along with statistical analysis and behavioral relationships, to determine expected credit performance.

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

3 unchanged sentences

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.

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

These overlays have changed over the periods since implementation through December 31, 2022 to reflect changes in the macroeconomic environment and the impact on our loan portfolio.

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.

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 $210 million in the Allowance for credit losses as of December 31, 2022, with a corresponding change in the Provision for credit losses.

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.

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 particular with deferred tax assets, 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.

Uncertainties can lead to changes in the ultimate realization of our 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.

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 relevant 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.

Uncertainties can mean the tax

Tabl e of Contents

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.

Actual results may differ from our current judgments due to a variety of factors, including interpretations of law by the relevant 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.

2 unchanged sentences

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.

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

Quantitative and Qualitative Disclosures About Market Risk.

See “Risk Management” section within Item 1A.

See “Risk Management” within Item 1A.

Financial Statements and Supplementary Data.

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

Our Consolidated Financial Statements begin on page F-1 of this Annual Report on 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