Quarterly Report (10-q)

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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 September 30, 2022

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

Commission file number 001-15749

BREAD FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


Delaware		31-1429215
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

3095 Loyalty Circle		43219
Columbus, Ohio		(Zip Code)
(Address of principal executive offices)

(614) 729-4000

(Registrant’s telephone number, including area code)

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


Title of each class	Trading symbol	Name of each exchange on which registered
Common stock, par value $0.01 per share	BFH	New York Stock Exchange

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 ◻

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 ◻

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.

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

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. ◻

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

As of October 21, 2022, 49,853,068 shares of common stock were outstanding.

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BREAD FINANCIAL HOLDINGS, INC.

INDEX


		Page Number
	Part I: FINANCIAL INFORMATION
Item 1.	Financial Statements (unaudited)
	Condensed Consolidated Statements of Income for the three and nine months ended September 30, 2022 and 2021		17
	Condensed Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2022 and 2021		18
	Condensed Consolidated Balance Sheets as of September 30, 2022 and December 31, 2021		19
	Condensed Consolidated Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021		20
	Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2022 and 2021		22
	Notes to Condensed Consolidated Financial Statements		23
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)		1
Item 3.	Quantitative and Qualitative Disclosures About Market Risk		42
Item 4.	Controls and Procedures		42

	Part II: OTHER INFORMATION
Item 1.	Legal Proceedings		43
Item 1A.	Risk Factors		43
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		43
Item 3.	Defaults Upon Senior Securities		43
Item 4.	Mine Safety Disclosures		43
Item 5.	Other Information		43
Item 6.	Exhibits		44
SIGNATURES			46

Table of Contents

PART 1: FINANCIAL INFORMATION

Item 2.

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

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 (the SEC) 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, subsequent Quarterly Reports on Form 10-Q and other filings we make with the SEC.

OVERVIEW

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.

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 our legal entity structure, nor did either change have an impact on our 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.

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 may 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”, “partnering” or any similar term 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.

NON-GAAP FINANCIAL MEASURES

We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (GAAP). However, certain information included within this Form 10-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, Pretax pre-provision earnings (PPNR) is calculated by increasing/decreasing Income from continuing operations before income taxes by the net provision/release in Provision for credit losses. We use PPNR as a metric to evaluate our results of operations before income taxes, excluding the volatility that can occur within Provision for credit losses. Tangible common equity over Tangible assets (TCE/TA) represents Total stockholders’ equity reduced by Goodwill and intangible assets, net, (TCE) divided by Tangible assets (TA), which is Total assets reduced by Goodwill and intangible assets, net. We use TCE/TA as a metric to evaluate the Company’s capital adequacy and estimate its ability to cover potential losses. Tangible book value per common share represents TCE divided by shares outstanding. We use Tangible book value per common share as a metric to estimate the Company’s potential value in relation to tangible assets per share. We believe the use of these non-GAAP financial measures provides additional clarity in understanding our results of operations and trends. For a reconciliation of these non-GAAP financial measures to the most directly comparable GAAP measures, please see “Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures” that follows.

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BUSINESS ENVIRONMENT

This Business Environment section provides an overview of our results of operations and financial position for the third 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 reference in this Form 10-Q, including “Consolidated Results of Operations,” “Risk Factors” included in our most recent Annual Report on Form 10-K, subsequent Quarterly Reports on Form 10-Q and other filings we make with the SEC and “Cautionary Note Regarding Forward-Looking Statements”, which provides further discussion of variances in our results of operations over the periods of comparison, along with other factors that could impact future results and the Company achieving its outlook. Unless otherwise specified, the discussion included herein is for the three months ended September 30, 2022, compared with the same period in the prior year.

For the quarter ended September 30, 2022, Credit sales increased from the prior year period driven by new product and brand partner additions, as well as existing partners, partially offset by both the transition of our credit card

processing services and the temporary spike in fuel prices in July. Net interest income and Interchange revenue, net of retailer share arrangements increased year-over-year, while Other non-interest income decreased primarily due to a write-down of our equity method investment in Loyalty Ventures Inc. (LVI). More broadly, we are closely monitoring consumer economic indicators, including how consumers are navigating the changing economic environment, which remains difficult to predict and therefore could have an impact on our outlook for the remainder of the year. In addition, we are working to resolve remaining issues associated with the transitioning of our credit card processing services to ensure that expected platform performance is achieved and that any inconvenience to our cardholders or brand partners is addressed, including through waivers of late fees and other customer-friendly accomodations, and cardholder and brand partner engagement initiatives. We anticipate Total net interest and non-interest income growth will align with growth in average Total credit card and other loans, with slight upside from an improved full year net interest margin versus 2021. We expect further interest rate increases by the Board of Governors of the Federal Reserve System (the Federal Reserve) throughout the remainder of 2022 to result in a nominal benefit to Net interest income, which is factored into our 2022 outlook.

Third quarter 2022 average Total credit card and other loans of $17.6 billion were up 14% from the prior year period, with the end-of-period balance being up 16%. Our outlook for growth in average Total credit card and other loans in 2022 is expected to be low-double-digits relative to 2021, which is based on our new and renewed business announcements, including our acquisition of AAA’s existing credit card portfolio in October 2022, as well as visibility into our pipeline and the current economic outlook. Our outlook also continues to assume a moderation in the consumer payment rate throughout the remainder of 2022. 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 third quarter of 2022, BJ’s branded co-brand accounts generated approximately 10% of Total net interest and non-interest income. As of September 30, 2022, BJ’s branded co-brand accounts were responsible for approximately 13% of Total credit card and other loans.

Provision for credit losses increased relative to the third quarter of 2021 due primarily to an increase in Credit card and other loans, as well as economic scenario weightings in our credit reserve modeling reflecting an increasing probability of a recession, more persistent inflation, and the increased cost of overall consumer debt. Our Allowance for credit losses increased compared to year-end 2021, with a reserve rate of 11.4% in the third quarter of 2022 and 10.5% at year-end 2021. Our Net loss rate also increased relative to the prior year period as consumer payment behavior normalization continues toward pre-pandemic levels. We anticipate higher losses in the fourth quarter of 2022, which is typically the highest quarter of the year for this metric based on historic seasonality. For the full year 2022, we expect a net loss rate at the high end of our previously communicated low-to-mid 5% range.

With regard to our expenses, Total non-interest expenses for the third quarter of 2022 were up 13% from the prior year period, due primarily to increased employee compensation and benefit costs, overall technology modernization expenses, and marketing expenses. As a result of ongoing investment in technology modernization, digital advancement, marketing, and product innovation, along with strong portfolio growth, we expect a sequential increase in Total non-interest expenses for the remainder of 2022. The pace and timing of our investments will be calibrated to align with our full year revenue and growth outlook, including our planned incremental investment of more than $125 million in digital and product innovation, marketing, brand and technology enhancements during 2022.

Although we recognize the macroeconomic headwinds, we remain focused on driving sustainable, profitable growth leveraging our technology enhancements and business development success.

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CONSOLIDATED RESULTS OF OPERATIONS

The following provides commentary on the variances in our results of operations for the three and nine months ended September 30, 2022, compared with the same periods in the prior year, as presented in the accompanying tables. These discussions should be read in conjunction with the discussion under “Business Environment”, above.

Table 1: Summary of Our Financial Performance


	Three Months Ended September 30,								Nine Months Ended September 30,
	2022			2021			$ Change	% Change	2022			2021			$ Change	% Change
(Millions, except per share amounts and percentages)
Total net interest and non-interest income	$	979		$	851		128	15	$	2,793		$	2,416		377	16
Provision for credit losses		304			161		143	89		902			180		722	*
Total non-interest expenses		486			431		55	13		1,383			1,256		127	10
Income from continuing operations before income taxes		189			259		(70)	(27)		508			980		(472)	(48)
Provision for income taxes		55			53		2	2		150			243		(93)	(39)
Income from continuing operations		134			206		(72)	(35)		358			737		(379)	(51)
Income (loss) from discontinued operations, net of taxes		—			18		(18)	*		(1)			46		(47)	*
Net income		134			224		(90)	(40)		357			783		(426)	(54)

Net income per diluted share	$	2.69		$	4.47		(1.78)	(40)	$	7.15		$	15.68		(8.53)	(54)
Income from continuing operations per diluted share	$	2.69		$	4.11		(1.42)	(35)	$	7.16		$	14.74		(7.58)	(51)
Net interest margin ⁽¹⁾		19.9	%		18.9	%		1.0		19.3	%		18.0	%		1.3
Return on average equity ⁽²⁾		22.8	%		38.0	%		(15.2)		20.9	%		52.2	%		(31.3)
Effective income tax rate - continuing operations		28.9	%		20.7	%		8.2		29.5	%		24.8	%		4.7

(1)	Net interest margin represents annualized Net interest income divided by average Total interest-earning assets. See also Table 5: Net Interest Margin.

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

* Not meaningful

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


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		$ Change	% Change	2022		2021		$ Change	% Change
(Millions, except percentages)
Interest income
Interest and fees on loans	$	1,195	$	992	203	20	$	3,325	$	2,845	480	17
Interest on cash and investment securities		23		2	21	*		34		6	28	*
Total interest income		1,218		994	224	23		3,359		2,851	508	18
Interest expense
Interest on deposits		66		39	27	68		142		130	12	9
Interest on borrowings		67		52	15	30		166		168	(2)	(2)
Total interest expense		133		91	42	47		308		298	10	3
Net interest income		1,085		903	182	20		3,051		2,553	498	20
Non-interest income
Interchange revenue, net of retailer share arrangements		(136)		(97)	(39)	40		(333)		(251)	(82)	33
Other		30		45	(15)	(33)		75		114	(39)	(34)
Total non-interest income		(106)		(52)	(54)	103		(258)		(137)	(121)	90
Total net interest and non-interest income		979		851	128	15		2,793		2,416	377	16
Provision for credit losses		304		161	143	89		902		180	722	*
Total net interest and non-interest income, after provision for credit losses	$	675	$	690	(15)	(2)	$	1,891	$	2,236	(345)	(15)

* Not meaningful

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

Three and nine months ended September 30, 2022, compared with the same periods in the prior year:

Interest income: Total interest income increased in the three and nine months ended September 30, 2022, primarily resulting from Interest and fees on loans. The increase in each period, relative to the prior year, was due to increases in average credit card and other loans driven by new originations and moderation in the consumer payment rate, as well as increases in finance charge yields of approximately 152 and 149 basis points for the three and nine months periods, respectively.

Interest expense: Total interest expense increased in the three and nine months ended September 30, 2022, due to the following:

●

Interest on deposits increased due to higher average balances outstanding and higher average interest rates, which increased interest expense by approximately $27 million and $12 million for the three and nine month periods, respectively.

●

Interest on borrowings increased for the three month period due primarily to a $15 million increase related to higher average interest rates on secured borrowings, and remained relatively flat for the nine month period.

Non-interest income: Total non-interest income increased for the three and nine months ended September 30, 2022, due to the following:

●

Interchange revenue, net of retailer share arrangements increased for the three and nine month periods driven by increased sales and new brand partner retailer share arrangements, which were more than offset by cardholder and brand partner engagement initiatives, as well as increases in our brand partners’ share of the economics under new retailer share arrangements.

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●

Other decreased for the three and nine month periods primarily due to the write-down of our equity method investment in LVI of $11 million and $44 million, respectively.

Provision for credit losses: Provision for credit losses increased for the three months ended September 30, 2022 due primarily to a reserve build of $86 million in the third quarter 2022, driven by a 16% higher end-of period loan balance and a higher reserve rate due to economic scenario weightings in our credit reserve modeling reflecting an increasing probability of a recession, more persistent inflation, and the increased cost of overall consumer debt. In addition to the third quarter 2022 reserve build, the increase in Provision for credit losses for the nine months ended September 30, 2022 was driven by a reserve release in the prior year period of $363 million from the Allowance for credit losses associated with an improving macroeconomic outlook at such time and a lower volume of Credit card and other loans relative to the current year period.

Table 3: Summary of Total Non-interest Expenses


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022		2021		$ Change	% Change	2022		2021		$ Change	% Change
(Millions, except percentages)
Non-interest expenses
Employee compensation and benefits	$	202	$	168	34	20	$	572	$	489	83	17
Card and processing expenses		82		81	1	2		248		242	6	3
Information processing and communication		75		54	21	39		192		161	31	20
Marketing expenses		44		35	9	24		124		113	11	10
Depreciation and amortization		29		23	6	29		80		70	10	15
Other		54		70	(16)	(22)		167		181	(14)	(8)
Total non-interest expenses	$	486	$	431	55	13	$	1,383	$	1,256	127	10

Total Non-interest Expenses

Three and nine months ended September 30, 2022, compared with the same periods in the prior year:

Non-interest expenses: Total non-interest expenses increased in the three and nine months ended September 30, 2022, due to the following:

●

Employee compensation and benefits increased due to increased salaries, contract labor, which itself was driven by continued digital and technology modernization-related hiring, and incentive compensation, as well as higher volume-related staffing levels.

●

Information processing and communication increased due to an increase in data processing expense driven by the transition of our credit card processing services.

●

Marketing expenses increased due to increased spending associated with higher sales and brand partner joint marketing campaigns, as well as on expanding our new brand, products and direct to consumer offerings.

●

Depreciation and amortization increased due to increased amortization for developed technology associated with the Lon Inc. acquisition, which was completed in December 2020.

●

Other decreased due to decreased legal and other business activity costs.

Income Taxes

Provision for income taxes remained relatively flat for the three months ended September 30, 2022 and decreased for the nine months ended September 30, 2022. The effective tax rate was 28.9% and 20.7% for the three months ended September 30, 2022 and 2021, respectively, and 29.5% and 24.8% for the nine months ended September 30, 2022 and 2021, respectively. Increases in nondeductible items over those in the prior year period, and greater discrete tax benefits recorded in the prior year, as well as a decrease in Income from continuing operations before income taxes, drove the increase in the effective tax rate for the nine month period.

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Table 4: Summary Financial Highlights – Continuing Operations



	As of or for the Three Months Ended September 30,							As of or for the Nine Months Ended September 30,
	2022			2021			% Change	2022			2021			% Change
(Millions, except per share amounts and percentages)
Credit sales	$	7,689		$	7,380		4	$	22,716		$	20,825		9
PPNR ⁽¹⁾		493			420		17		1,410			1,160		21
Average credit card and other loans		17,598			15,471		14		17,084			15,512		10
End-of-period credit card and other loans		18,126			15,690		16		18,126			15,690		16
End-of-period direct-to-consumer deposits		5,176			3,052		70		5,176			3,052		70

Return on average assets ⁽²⁾		2.4	%		3.7	%	(1.3)		2.2	%		4.5	%	(2.3)
Return on average equity ⁽³⁾		22.8	%		38.0	%	(15.2)		20.9	%		52.2	%	(31.3)

Net interest margin ⁽⁴⁾		19.9	%		18.9	%	1.0		19.3	%		18.0	%	1.3
Loan yield ⁽⁵⁾		27.2	%		25.6	%	1.6		25.9	%		24.5	%	1.4

Efficiency ratio ⁽⁶⁾		49.7	%		50.6	%	(0.9)		49.6	%		52.0	%	(2.4)

Tangible common equity / tangible assets ratio (TCE/TA) ⁽⁷⁾		8.0	%		7.2	%	0.8		8.0	%		7.2	%	0.8
Tangible book value per common share ⁽⁸⁾	$	34.30		$	31.18		10	$	34.30		$	31.18		10
Cash dividend per common share	$	0.21		$	0.21		—	$	0.63		$	0.63		—

Delinquency rate ⁽⁹⁾		5.7	%		3.8	%	1.9		5.7	%		3.8	%	1.9
Net loss rate ⁽¹⁰⁾		5.0	%		3.9	%	1.1		5.1	%		4.7	%	0.4
Reserve rate		11.4	%		10.5	%	0.9		11.4	%		10.5	%	0.9

(1)	PPNR is calculated by increasing/decreasing Income from continuing operations before income taxes by the net provision/release in Provision for credit losses. See also Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.

(2)	Return on average assets represents annualized Income from continuing operations divided by average Total assets.

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

(4)	Net interest margin represents annualized Net interest income divided by average Total interest-earning assets. See also Table 5: Net Interest Margin.

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

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

(7)

Tangible common equity (TCE) represents Total stockholders’ equity reduced by Goodwill and intangible assets, net. Tangible assets (TA) represents Total assets reduced by Goodwill and intangible assets, net. TCE/TA is a non-GAAP financial measure. See also Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.

(8)	Tangible book value per common share represents TCE divided by shares outstanding, and is a non-GAAP financial measure. See also Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures.

(9)	Delinquency rate as of September 30, 2022 was impacted by the transition of our credit card processing services.

(10)	Net loss rate for the three and nine months ended September 30, 2022 was impacted by the transition of our credit card processing services. Excluding this impact, which is timing-related, the Net loss rate for the quarter would have been higher.

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Table 5: Net Interest Margin



	Three Months Ended September 30, 2022								Three Months Ended September 30, 2021
	Average Balance		Interest Income / Expense			Average Yield / Rate			Average Balance		Interest Income / Expense			Average Yield / Rate
(Millions, except percentages)
Cash and investment securities	$	4,235	$	23			2.18	%	$	3,604	$	2			0.23	%
Credit card and other loans		17,598		1,195			27.16	%		15,471		992			25.64	%
Total interest-earning assets		21,833		1,218			22.32	%		19,075		994			20.84	%

Direct-to-consumer (retail) deposits		4,850		25			2.04	%		2,702		5			0.80	%
Wholesale deposits		7,001		41			2.37	%		7,027		34			1.93	%
Interest-bearing deposits		11,851		66			2.23	%		9,729		39			1.62	%

Secured borrowings		4,970		40			3.20	%		4,747		26			2.19	%
Unsecured borrowings		1,953		27			5.63	%		2,778		26			3.68	%
Interest-bearing borrowings		6,923		67			3.89	%		7,525		52			2.74	%
Total interest-bearing liabilities		18,774		133			2.84	%		17,254		91			2.11	%

Net interest income			$	1,085							$	903

Net interest margin ⁽¹⁾				19.9	%							18.9	%



	Nine Months Ended September 30, 2022								Nine Months Ended September 30, 2021
	Average Balance		Interest Income / Expense			Average Yield / Rate			Average Balance		Interest Income / Expense			Average Yield / Rate
(Millions, except percentages)
Cash and investment securities	$	4,001	$	34			1.13	%	$	3,403	$	6			0.21	%
Credit card and other loans		17,084		3,325			25.95	%		15,512		2,845			24.46	%
Total interest-earning assets		21,085		3,359			21.24	%		18,915		2,851			20.09	%

Direct-to-consumer (retail) deposits		3,998		42			1.39	%		2,281		17			0.97	%
Wholesale deposits		7,172		100			1.86	%		7,550		113			2.00	%
Interest-bearing deposits		11,170		142			1.69	%		9,831		130			1.76	%

Secured borrowings		5,098		88			2.29	%		4,615		90			2.60	%
Unsecured borrowings		1,978		78			5.25	%		2,804		78			3.72	%
Interest-bearing borrowings		7,076		166			3.12	%		7,419		168			3.02	%
Total interest-bearing liabilities		18,246		308			2.25	%		17,250		298			2.30	%

Net interest income			$	3,051							$	2,553

Net interest margin ⁽¹⁾				19.3	%							18.0	%

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

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



	As of or for the Three Months Ended September 30,					As of or for the Nine Months Ended September 30,

	2022		2021		% Change	2022		2021		% Change
(Millions, except percentages)
Pretax pre-provision earnings (PPNR)
Income from continuing operations before income taxes	$	189	$	259	(27)	$	508	$	980	(48)
Provision for credit losses		304		161	89		902		180	*
Pretax pre-provision earnings (PPNR)	$	493	$	420	17	$	1,410	$	1,160	21

Tangible common equity (TCE)
Total stockholders' equity		2,399		2,246	7		2,399		2,246	7
Less: Goodwill and intangible assets, net		(690)		(694)	(1)		(690)		(694)	(1)
Tangible common equity (TCE)	$	1,709	$	1,552	10	$	1,709	$	1,552	10

Tangible assets (TA)
Total assets		21,960		22,257	(1)		21,960		22,257	(1)
Less: Goodwill and intangible assets, net		(690)		(694)	(1)		(690)		(694)	(1)
Tangible assets (TA)	$	21,270	$	21,563	(1)	$	21,270	$	21,563	(1)

* Not meaningful

ASSET QUALITY

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 principal loss rates – which reflect, among other factors, our underwriting, the inherent credit risk in our portfolio, the success of our collection and recovery efforts, and more broadly, the general macroeconomic conditions.

Delinquencies: An account is contractually delinquent if we do not receive the minimum payment due by the specified due date. Our policy is to continue to accrue interest and fee income on all accounts, except in limited circumstances, until the balance and all related interest and fees are paid or charged-off. 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 September 30, 2022 and December 31, 2021:

Table 7: Delinquency Trends on Credit Card and Other Loans


	September 30,		% of		December 31,		% of
	2022		Total		2021		Total
(Millions, except percentages)
Credit card and other loans outstanding ─ principal	$	17,029	100.0	%	$	16,590	100.0	%
Outstanding balances contractually delinquent ⁽¹⁾
31 to 60 days	$	341	2.0	%	$	219	1.3	%
61 to 90 days		210	1.2			147	0.9
91 or more days		419	2.5			281	1.7
Total	$	970	5.7	%	$	647	3.9	%

(1)	As of September 30, 2022 the Outstanding balances contractually delinquent, and the related % of Total (i.e., the Delinquency rate), were impacted by the transition of our credit card processing services.

As part of our collections strategy, we may offer temporary, short term (six-months or less) loan modifications in order to improve the likelihood of collections and meet the needs of our customers. Our modifications for customers who have requested assistance and meet certain qualifying requirements, come in the form of reduced or deferred payment requirements, interest rate reductions and late fee waivers. We do not offer programs involving the forgiveness of principal. These temporary loan modifications may assist in cases where we believe the customer will recover from the short-term hardship and resume scheduled payments. Under these forbearance modification programs, those accounts receiving relief may not advance to the next delinquency cycle, including charge-off, in the same time frame that would have occurred had the relief not been granted. We evaluate our loan modification programs to determine if they represent a more than insignificant delay in payment, in which case they would then be considered a troubled debt restructuring. For additional information, see Note 2, “Credit Card and Other Loans – Modified Credit Card Loans”, to our unaudited Condensed Consolidated Financial Statements.

Net Principal Losses: Our net principal losses include the principal amount of losses that are deemed uncollectible, less recoveries, and exclude charged-off interest, fees and third-party fraud losses (including synthetic fraud). Charged-off interest and fees reduce Interest and fees on loans while third-party fraud losses are recorded in Card and processing expenses. Credit card loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days past due. Installment loans, including unpaid interest, are generally charged-off when a loan becomes 120 days past due. However, in the case of a customer bankruptcy or death, credit card and other loans, including unpaid interest and fees, as applicable, are charged-off in each month subsequent to 60 days after receipt of the notification of the bankruptcy or death, but in no case longer than 180 days past due for credit card loans and 120 days past due for installment loans.

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The net principal loss rate is calculated by dividing net principal losses for the period by the average credit card and other loans for the same period. Average credit card and other loans represent the average balance of the loans at the beginning and end of each month, averaged over the periods indicated. The following table presents our net principal losses for the periods specified:

Table 8: Net Principal Losses on Credit Card and Other Loans


	Three Months Ended September 30,						Nine Months Ended September 30,
	2022			2021			2022			2021
(Millions, except percentages)
Average credit card and other loans	$	17,598		$	15,471		$	17,084		$	15,512
Net principal losses		218			151			656			543
Net principal losses as a percentage of average credit card and other loans ⁽¹⁾		5.0	%		3.9	%		5.1	%		4.7	%

(1)

Net principal losses as a percentage of average credit card and other loans for the three and nine months ended September 30, 2022 were impacted by the transition of our credit card processing services. Excluding this impact, which is timing-related, Net principal losses as a percentage of average credit card and other loans would have been higher.

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources 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.

Our primary sources of liquidity include cash generated from operating activities, our Credit Agreement and issuances of debt securities, and our securitization programs and deposits issued by the Banks, in addition to our ongoing efforts to renew and expand our various sources of liquidity.

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

Because of the alternatives available to us as discussed above, we believe our short-term and long-term sources of liquidity are adequate to fund not only our current operations, but also our near-term and long-term funding requirements including dividend payments, debt service obligations and repayment of debt maturities and other amounts that may ultimately be paid in connection with contingencies. However, the adequacy of our liquidity could be impacted by various sources, including volatility in the financial and capital markets, limiting our access to or increasing our cost of capital, which could make capital unavailable or unavailable on terms acceptable to us. For additional information regarding the factors that could impact the adequacy of our liquidity, see the risk factors under the heading “Liquidity, Market and Credit Risk” in our 2021 Form 10-K, subsequent Quarterly Reports on Form 10-Q and our other filings with the SEC.

Funding Sources

Credit Agreement

As of September 30, 2022, we had $582 million in 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.

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 associated commitments may be terminated. As of September 30, 2022, we were in compliance with all financial covenants under the Credit Agreement.

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Deposits

We utilize a variety of deposit products to finance our operating activities, including funding for our non-securitized credit card and other loans, and to fund the securitization enhancement requirements of the Banks. We offer both direct-to-consumer retail deposit products as well as deposits sourced through contractual arrangements with various financial counterparties (often referred to as wholesale deposits). Across both our retail and wholesale deposits, the Banks offer various non-maturity deposit products that are generally redeemable on demand by the customer, and as such have no scheduled maturity date; the Banks also issue certificates of deposit with scheduled maturity dates ranging between October 2022 and September 2027, in denominations of at least $1,000, on which interest is paid either monthly or at maturity.

The following table summarizes our retail and wholesale deposit products by type and associated attributes, as of September 30, 2022 and December 31, 2021:

Table 9: Deposits



	September 30,		December 31,
	2022		2021
(Millions, except percentages)
Deposits
Direct-to-consumer (retail)	$	5,176	$	3,180
Wholesale		7,231		7,847

Non-maturity deposit products
Non-maturity deposits	$	6,710	$	5,586
Interest rate range	0.70% – 3.50%		0.05% – 3.50%
Weighted-average interest rate		2.09%		0.68%

Certificates of deposit
Certificates of deposit	$	5,697	$	5,441
Interest rate range	0.30% – 4.16%		0.20% – 3.75%
Weighted-average interest rate		2.71%		1.91%

Securitization Programs and Conduit Facilities

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 nine months ended September 30, 2022, $1.6 billion of asset-backed term notes matured and were repaid, of which $74 million were previously retained by us and therefore eliminated from the Consolidated Balance Sheets.

As of September 30, 2022, total capacity under our Conduit Facilities was $5.5 billion, of which $4.0 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.

As of September 30, 2022, we had approximately $12.6 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 September 30, 2022, for the Trusts by year:

Table 10: Borrowing Commitment Maturities


	2022		2023		Thereafter		Total
(Millions)
Conduit facilities ⁽¹⁾		—		5,525		—		5,525
Total ⁽²⁾	$	—	$	5,525	$	—	$	5,525

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

(2)	Total amounts do not include $1.5 billion of debt issued by the Trusts, which was retained by us as a credit enhancement and therefore has been eliminated from the Total.

Early amortization events as defined within each asset-backed securitization transaction are generally driven by asset performance. We do not believe it is reasonably likely that an early amortization event will occur due to asset performance. However, if an early amortization event were declared 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.

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.

Regulation RR (Credit Risk Retention) adopted by the FDIC, the SEC, the Federal Reserve and certain other federal regulators mandates a minimum five percent risk retention requirement for securitizations. Such risk retention requirements may limit our liquidity by restricting the amount of asset-backed securities we are able to issue or affecting the timing of future issuances of asset-backed securities. We satisfy such risk retention requirements by maintaining a seller’s interest calculated in accordance with Regulation RR.

Stock Repurchase Programs

On February 28, 2022, the Company’s Board of Directors approved a stock repurchase program to acquire up to 200,000 shares of our outstanding common stock in the open market during the one-year period ending on February 28, 2023. As of September 30, 2022, we had repurchased all 200,000 shares of our common stock available under this program for an aggregate of $12 million. Following their repurchase, these 200,000 shares ceased to be outstanding shares of common stock and are now treated as authorized but unissued shares of common stock.

Dividends

During the three and nine months ended September 30, 2022, we paid $10 million and $32 million, respectively, in dividends to our shareholders common stock. On October 27, 2022, our Board of Directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on December 16, 2022, to stockholders of record at the close of business on November 14, 2022.

Contractual Obligations

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

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

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Cash Flows

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 nine months ended September 30, 2022 compared with the same period in the prior year.

Table 11: Cash Flows


	Nine Months Ended September 30,
	2022		2021
(Millions)
Total cash provided by (used in)
Operating activities	$	1,351	$	1,208
Investing activities		(1,488)		381
Financing activities		(178)		(1,157)
Effect of foreign currency exchange rates		—		(4)
Net (decrease) increase in cash, cash equivalents and restricted cash	$	(315)	$	428

Cash Flows from Operating Activities primarily include net income adjusted for (i) non-cash items included in net income, such as provision for credit losses, depreciation and amortization, deferred taxes and other non-cash items, and (ii) changes in the balances of operating assets and liabilities, which can fluctuate in the normal course of business due to the amount and timing of payments. We generated cash flows from operating activities of $1,351 million and $1,208 million for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, the net cash provided by operating activities was primarily driven by cash generated from net income for the period after adjusting for the provision for credit losses and deferred income taxes. For the nine months ended September 30, 2021, the net cash provided by operating activities was primarily driven by cash generated from net income after adjusting for the provision for credit losses, as well as an increase in accounts payable and other liabilities.

Cash Flows from Investing Activities primarily include changes in credit card and other loans. Cash used in investing activities was $1,488 million for the nine months ended September 30, 2022, and cash provided by investing activities was $381 million for the nine months ended September 30, 2021. For the nine months ended September 30, 2022, the net cash used in investing activities was primarily due to growth in credit sales and the consequential growth in Credit card and other loans, as well as the acquisition of a credit card loan portfolio. For the nine months ended September 30, 2021, the net cash provided by investing activities was due to the sale of a credit card loan portfolio as well as an increase in payment rates that benefitted from government economic stimulus programs, resulting in comparably lower Credit card and other loans.

Cash Flows from Financing Activities primarily include changes in deposits and long-term debt. Cash used in financing activities was $178 million and $1,157 million for the nine months ended September 30, 2022 and 2021, respectively. For the nine months ended September 30, 2022, the net cash used in financing activities was primarily driven by net repayments of asset-backed term notes (securitizations), partially offset by net increases in deposits. For the nine months ended September 30, 2021, the net cash used in financing activities was driven by net repayments of securitizations.

INFLATION AND SEASONALITY

Although we cannot precisely determine the impact of inflation on our operations, we do not believe, at this time, that we have been significantly affected by inflation. For the most part we have relied on operating efficiencies from scale, technology 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, as reflected in our increased Allowance for credit losses. If the efforts to control inflation in the U.S. and globally are not successful and inflationary pressures persist, they could magnify the slowdown in the domestic and global economies and increase the risk of a recession, which may adversely impact our business, results of operations and financial condition. See Item 1A “Risk Factors” in our 2021 Form 10-K, subsequent Quarterly Reports on Form 10-Q and our other filings with the SEC 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.

LEGISLATIVE AND REGULATORY MATTERS

Comenity Bank is subject to various regulatory capital requirements administered by the State of Delaware and the FDIC. Comenity Capital Bank is also subject to various regulatory capital requirements administered by the FDIC, as well as the State of Utah. 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. In addition, both Banks are limited in the amounts they can pay as dividends to the Parent Company. For additional information about legislative and regulatory matters impacting us, see “Business–Supervision and Regulation” under Part I of our 2021 Form 10-K.

Quantitative measures, established by regulations to ensure capital adequacy, require the Banks to maintain minimum amounts and ratios of Tier 1 capital to average assets, and Common equity Tier 1, Tier 1 capital and Total capital, all to risk weighted assets. Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on Comenity Bank’s and/or Comenity Capital Bank’s operating activities, as well as our operating activities. Based on these regulations, as of September 30, 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 September 30, 2022, are as follows:

Table 12: Capital Ratios