BREAD FINANCIAL HOLDINGS, INC. (BFH) FY 2021 MD&A

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A).

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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.

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OVERVIEW

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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.

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YEAR IN REVIEW

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Spinoff of our LoyaltyOne Segment

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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.

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Financial Statement Presentation

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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.

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Business Environment

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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.

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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.

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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.

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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.

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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.

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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.

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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

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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.

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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.

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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.

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NON-GAAP FINANCIAL MEASURES

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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.

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CONSOLIDATED RESULTS OF OPERATIONS

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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.

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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.

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Table 1: Summary of Our Financial Performance

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Table 2: Summary of Total Net Interest and Non-interest Income, After Provision for Credit Losses

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

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

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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:

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

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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:

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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.

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

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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:

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

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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:

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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.

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Table 3: Summary of Total Non-interest Expenses

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Total Non-interest Expenses

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

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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:

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

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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:

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Income Taxes

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

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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.

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

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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.

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Income from Discontinued Operations, Net of Income Taxes

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

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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

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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.

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

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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.

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Table 4: Summary Financial Highlights – Continuing Operations

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Table 5: Net Interest Margin

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Table 6: Reconciliation of GAAP to Non-GAAP Financial Measure

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ASSET QUALITY

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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.

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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. 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.

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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:

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Table 7: Delinquency Trends on Credit Card and Other Loans

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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.

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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. 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.

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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:

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Table 8: Net Charge-Offs on Credit Card and Other Loans

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CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

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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.

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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.

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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.

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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 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.

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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.

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Cash Flows

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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.

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Table 9: Cash Flows

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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.

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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.

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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.

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Funding Sources

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Credit Agreement

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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).

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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.

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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.

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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.

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Deposits

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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.

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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%.

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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.

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Securitization Programs and Conduit Facilities

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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.

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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.

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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.

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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.

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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.

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

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Table 10: Borrowing Commitment Maturities

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

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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.

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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.

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Stock Repurchase Programs

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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.

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Dividends

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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.

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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.

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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.

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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.

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Contractual Obligations

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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.

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

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INFLATION AND SEASONALITY

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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. 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.

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LEGISLATIVE AND REGULATORY MATTERS

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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. 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 Banks are

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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.

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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.

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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:

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Table 11: Capital Ratios

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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

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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.

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DISCUSSION OF CRITICAL ACCOUNTING ESTIMATES

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

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Allowance for Credit Losses.

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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 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 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.

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Income Taxes.

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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.

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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.

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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.

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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.

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RECENTLY ISSUED ACCOUNTING STANDARDS

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

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