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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

☒            QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2022

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or

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☐            TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

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Commission file number 001-15749

BREAD FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

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(614) 729-4000

(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

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Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

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Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

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Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

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Large accelerated filer ⌧ Accelerated filer ◻ Non-accelerated filer ◻ Smaller reporting company ☐ Emerging growth company ☐

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If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻

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Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ⌧

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As of April 22, 2022, 49,775,721 shares of common stock were outstanding.

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BREAD FINANCIAL HOLDINGS, INC.

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INDEX

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PART 1: FINANCIAL INFORMATION

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The following discussion should be read in conjunction with the unaudited condensed consolidated financial statements and related notes thereto presented in this quarterly report and the audited consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 25, 2022 (the 2021 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. See “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this quarterly report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and those set forth in the Risk Factors section in our 2021 Form 10-K, as supplemented by those factors set forth below in Part II, Item 1A, Risk Factors, of this quarterly report.

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OVERVIEW

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We are a tech-forward financial services company providing 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, installment lending and buy now, pay later (split-pay). 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.

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Effective March 23, 2022, Alliance Data Systems Corporation was renamed Bread Financial Holdings, Inc, and on April 4, 2022 our ticker changed from “ADS” to “BFH” on the New York Stock Exchange (NYSE). Neither the name change nor the NYSE ticker change affected the legal entity structure, nor did it have an impact on the financial statements. On November 5, 2021, our 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.

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Throughout this report, unless stated or the context implies otherwise, the terms “Bread Financial,” the “Company,” “we,” “our” or “us” refer to Bread Financial Holdings, Inc. and its subsidiaries on a consolidated basis. References to “Parent Company” refer to Bread Financial Holdings, Inc. on a parent-only standalone basis. In addition, in this report, we refer to the retailers and other companies with whom we do business as our “partners” or “clients”; provided that the use of the term “partner” or “partnering” does not mean or imply a formal legal partnership, and is not meant in any way to alter the terms of Bread Financial’s relationship with any third parties. Bread Financial is also used in this report to include references to transactions and arrangements occurring prior to the name change.

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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-Q 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 (PPNR) is calculated by increasing Income from continuing operations before income taxes by Provision for credit losses. We use PPNR internally as a metric to evaluate our results of operations before income taxes, excluding the volatility that can occur within 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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BUSINESS ENVIRONMENT

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This Business Environment section provides an overview of our results of operations and financial position for the first quarter of 2022, as well as our related outlook for the remainder of 2022 and certain of the uncertainties associated with achieving that outlook. This section should be read in conjunction with the other information included or incorporated by

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reference in this Form 10-Q, 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 periods of comparison and other factors impacting those future results.

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Our results for the first quarter of 2022 demonstrated significant progress on our strategic transformation and highlighted our focus on profitable growth. As part of our transformation efforts we successfully re-branded to Bread Financial during the first quarter and expanded our direct-to-consumer and technology offerings.

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For the quarter ended March 31, 2022, Credit sales were up from the prior year period as consumer spending remained strong. Net interest income for the quarter increased 18% year-over-year and Interchange revenue, net of retailer share arrangements increased in correlation with Credit sales, while Other non-interest income decreased due to a loss from our equity method investment in Loyalty Ventures Inc. We remain vigilant in monitoring macroeconomic conditions and the impact on consumers and our brand partners resulting from the increasing interest rate environment, inflation, consumer spending and savings trends, the war in Ukraine and the ongoing effects of the global COVID-19 pandemic, all of which remain difficult to predict and therefore could have an impact on our outlook throughout the remainder of 2022. We anticipate Total net interest and non-interest income growth will be aligned with growth in average Total credit card and other loans, with potential upside from an improved net interest margin. We expect multiple interest rate increases by the Board of Governors of the Federal Reserve System (the Federal Reserve) throughout the remainder of 2022; our models indicate that these increases would result in a nominal benefit to Net interest income, which is included in our 2022 outlook.

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Provision for credit losses increased relative to the first quarter of 2021 due primarily to a large reserve release from the Allowance for credit losses in the prior year period associated with the improved macroeconomic outlook and lower volumes of Credit card and other loans. The increase from the prior period is also driven from maintaining conservative economic scenario weightings in our credit reserve modeling given unknown impacts from the increasing interest rate environment and elevated inflation. Our credit metrics continue to remain strong, with a delinquency rate of 4.1% and a net loss rate of 4.8% for the first quarter of 2022. These low rates are the result of our proactive risk management, as well as slower than expected payment normalization and resilient consumer health. Our outlook assumes a moderation in the consumer payment rate throughout the remainder of 2022, and we continue to 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 to the expiration of federal stimulus and assistance programs.

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First quarter 2022 average Total credit card and other loans of $16.7 billion were up 5% from the prior year period, with the end-of-period balance being up 8%. Our Allowance for credit losses was relatively flat compared to year-end 2021, with a reserve rate of 10.8% in the first quarter of 2022 and 10.5% at year-end 2021. Our outlook for growth in average Total credit card and other loans in 2022, which is based on our business development expectations, visibility into our pipeline and the current economic outlook, is in the low-double-digit range compared with 2021. Payment rate variability is a key determinant for achieving full year growth in average Credit card and other loans in 2022, relative to 2021. We expect the sale of the BJ’s Wholesale Club (BJ’s) portfolio to occur in the middle of the first quarter of 2023. For the first quarter of 2022, BJ’s branded co-brand accounts generated approximately 8% of Total net interest and non-interest income. As of March 31, 2022, BJ’s branded co-brand accounts were responsible for approximately 12% of Total credit card and other loans.

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With regard to our expenses, Total non-interest expenses for the first quarter of 2022 were up moderately from the prior year period. As a result of continued investment in technology modernization, digital advancement, marketing, and product innovation, along with strong portfolio growth, we continue to anticipate Total non-interest expenses will increase in 2022. The pace and timing of our investments will be calibrated to align with our revenue growth outlook, including our planned incremental investment of more than $125 million in digital and product innovation, marketing, and technology enhancements during 2022.

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Overall, we are delivering on our business transformation objectives and remain focused on risk-reward tradeoff, which we believe positions us to maintain profitable growth in the periods ahead. We are committed to ensuring our investments deliver long-term stockholder value and we remain confident in our ability to responsibly execute on our growth strategy and achieve our financial targets.

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CONSOLIDATED RESULTS OF OPERATIONS

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The following provides a discussion of the variances in our financial performance when comparing the results of operations for the quarter ended March 31, 2022, with those of the quarter ended March 31, 2021, as presented in the accompanying tables. This variance discussion should be read in conjunction with the discussion in the “Business Environment” section above, which contains further information on the global COVID-19 pandemic and the related impacts on our results of operations.

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Table 1: Summary of Our Financial Performance

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* Not meaningful

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

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* Not meaningful

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

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Three months ended March 31, 2022 compared to the three months ended March 31, 2021:

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Interest income: Total interest income increased $126 million, or 13%, to $1,068 million for the three months ended March 31, 2022, resulting from Interest and fees on loans which increased $125 million, or 13%, to $1,066 million. The increase was due to a 5% increase in average credit card and other loans driven by new originations, and an increase in finance charge yield of approximately 180 basis points, increasing revenue by $73 million.

Interest expense: Total interest expense decreased $28 million, or 26%, to $79 million for the three months ended March 31, 2022, due to the following:

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Non-interest income: Total non-interest income decreased $35 million, or 108%, to $(68) million for the three months ended March 31, 2022, due to the following:

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Provision for credit losses increased $160 million to $193 million for the three months ended March 31, 2022, driven by a reserve release from the Allowance for credit losses in the prior year period associated with the improved macroeconomic outlook and lower volumes of Credit card and other loans.

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Table 3: Summary of Total Non-interest Expenses

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Total Non-interest Expenses

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Three months ended March 31, 2022 compared to the three months ended March 31, 2021:

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Non-interest expenses: Total non-interest expenses increased $24 million, or 6%, to $426 million for the three months ended March 31, 2022, due to the following:

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Income Taxes

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Three months ended March 31, 2022 compared to the three months ended March 31, 2021:

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Provision for income taxes decreased $8 million, or 7%, to $91 million for the three months ended March 31, 2022, primarily driven by the decrease in Income from continuing operations before income taxes. The effective tax rate was 30.2% and 26.9% for the three months ended March 31, 2022 and 2021, respectively. The increase in the effective tax rate for the three month period primarily related to discrete charges in the current period and an increase in nondeductible items over those in the prior year period.

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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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* Not meaningful

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

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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 March 31, 2022 and December 31, 2021:

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Table 7: Delinquency Trends on Credit Card and Other Loans

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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.

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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 third-party fraud losses. 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.

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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 and end of each month in the periods indicated. The following table presents our net charge-offs for the periods specified:

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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 necessary to support our daily operations, our business growth, our credit ratings, and meet our regulatory and policy requirements (including capital and leverage ratio requirements applicable to Comenity Bank and Comenity Capital Bank (collectively referred to herein as the Banks) under Federal Deposit Insurance Corporation (FDIC) regulations) 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 the Banks, in addition to our ongoing efforts to renew and expand our various sources of liquidity.

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Our primary uses of liquidity 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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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 volatility in the financial and capital markets, limiting our access to, or increasing our cost of capital, which could make capital unavailable on terms acceptable to us or at all.

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Funding Sources

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Credit Agreement

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As of March 31, 2022, we had $633 million aggregate principal amount of term loans outstanding under our credit agreement, as amended, and a $750 million revolving line of credit under which we had no amounts drawn.

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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. As of March 31, 2022, we were in compliance with all financial covenants under the credit agreement.

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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 (often referred to as wholesale 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

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scheduled maturity date; the Banks also issue certificates of deposit with scheduled maturity dates ranging between April 2022 and March 2027, in denominations of at least $1,000, on which interest is paid either monthly or at maturity.

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

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Table 9: Deposits

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Securitization Programs and Conduit Facilities

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We sell the 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. We use a combination of public term asset-backed notes and private conduit facilities for this purpose. During the three months ended March 31, 2022, $563 million of asset-backed term notes matured and were repaid, of which $25 million were previously retained by us and therefore eliminated from the Consolidated Balance Sheets.

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As of March 31, 2022, total capacity under our Conduit Facilities was $4.5 billion, of which $3.8 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.

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As of March 31, 2022, we had approximately $10.8 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 March 31, 2022, 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 for a Trust, the trustee of that 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 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.

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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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On February 28, 2022, our 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 200,000 shares of our common stock under this program for $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. As of March 31, 2022, we had no shares remaining for repurchase under the approved repurchase program.

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Dividends

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For the three months ended March 31, 2022, we declared cash dividends of $0.21 per share for a total of $10 million, and paid cash dividends and dividend equivalents totaling $10 million.

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On April 28, 2022, our Board of Directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on June 17, 2022, to stockholders of record at the close of business on May 13, 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 VIEs, 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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Cash Flows

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The table below summarizes our cash flow activity, followed by a discussion of the variance drivers impacting our operating, investing and financing activities, for the three months ended March 31, 2022 compared with the three months ended March 31, 2021.

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Table 11: Cash Flows

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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 $497 million and $517 million for the three months ended March 31, 2022 and 2021, respectively. In the first quarter of 2022, the net cash provided by operating activities was primarily driven by cash generated from net income for the period, and increases in accounts payable and other liabilities. In the first quarter of 2021, the net cash provided by operating activities was also driven by cash generated from net income for the period, as well as favorable changes in working capital.

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Cash Flows from Investing Activities primarily include changes in credit card and other loans. Cash provided by investing activities was $310 million and $1,009 million for the three months ended March 31, 2022 and 2021, respectively. In the first quarter of 2022, the net cash provided by investing activities was primarily due to seasonal paydowns of credit card and other loans. In the first quarter of 2021, the net cash provided by investing activities was also due to seasonal paydowns coupled with an increase in payment rates that benefitted from government economic stimulus programs.

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Cash Flows from Financing Activities primarily include changes in deposits and long-term debt. Cash used in financing activities was $1,096 million and $1,741 million for the three months ended March 31, 2022 and 2021, respectively. In the first quarter of 2022, the net cash used in financing activities was primarily driven by net repayments of asset-backed term notes and debt issued by consolidated VIEs (securitizations) and lower deposits. In the first quarter of 2021, the net cash used in financing activities was also driven by net repayments of asset-backed term notes (securitizations) offset by net increases in deposits.

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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, at this time, that we have been significantly affected by inflation to date. 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. We also recognize that a customer’s ability and willingness to repay us can be negatively impacted by factors such as inflation, which may result in greater delinquencies that lead to greater credit losses. See Item 1A “Risk Factors” in our 2021 Form 10-K for further information on the risks of inflation on our Company.

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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 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 our 2021 Form 10-K.

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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, 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 Comenity Bank’s and/or Comenity Capital Bank’s operating activities, as well as our operating activities. Based on these regulations, as of March 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 March 31, 2022, are as follows:

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Table 12: Capital Ratios

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The Banks adopted the option provided by the interim final rule issued by joint federal bank regulatory agencies, which largely delays 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

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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. We began to phase-in these effects on January 1, 2022.

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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There have been no significant changes to our critical accounting policies and estimates from the information provided in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A),” included in our 2021 Form 10-K.

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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 Basis of Presentation,” to the unaudited condensed consolidated financial statements.

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Cautionary Note Regarding Forward-Looking Statements

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This Form 10-Q and the documents incorporated by reference herein contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements give our expectations or forecasts of future events and can generally be identified by the use of words such as “believe,” “expect,” “anticipate,” “estimate,” “intend,” “project,” “plan,” “likely,” “may,” “should” or other words or phrases of similar import. Similarly, statements that describe our business strategy, outlook, objectives, plans, intentions or goals also are forward-looking statements. Examples of forward-looking statements include, but are not limited to, statements we make regarding, and the guidance we give with respect to, our anticipated operating or financial results, future financial performance and outlook, initiation or completion of strategic initiatives, future dividend declarations and future economic conditions, including, but not limited to, market conditions, inflation and developments in the geopolitical environment. We believe that our expectations are based on reasonable assumptions. Forward-looking statements, however, are subject to a number of risks and uncertainties that could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this report, and no assurances can be given that our expectations will prove to have been correct. These risks and uncertainties include, but are not limited to, the following:

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If one or more of these or other risks or uncertainties materialize, or if our underlying assumptions prove to be incorrect, actual results may vary materially from what we projected. Further risks and uncertainties include, but are not limited to, the impact of strategic initiatives on us or our business if any transactions are undertaken, and whether the anticipated benefits of such transactions can be realized.

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Any forward-looking statements contained in this Form 10-Q speak only as of the date made, and we undertake no obligation, other than as required by applicable law, to update or revise any forward-looking statements, whether as a result of new information, subsequent events, anticipated or unanticipated circumstances or otherwise.

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Item 1. Financial Statements.

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BREAD FINANCIAL HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME

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