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


~~(Mark One)~~

☑	~~QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934~~ or ☐

	~~For the quarterly period ended~~ ~~March 31, 2021~~

OR

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

	~~For the transition period from~~to

Commission ~~File Number:~~file number 001-15749

~~ALLIANCE DATA SYSTEMS CORP~~~~ORATION~~BREAD FINANCIAL HOLDINGS, INC.

(Exact name of registrant as specified in its charter)


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

~~3075 Loyalty Circle~~

~~Columbus~~, ~~Ohio~~~~43219~~

~~(Address of principal executive office, including zip code)~~

(~~614~~) ~~729-4000~~

~~(Registrant’s telephone number, including area code)~~

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


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	~~ADS~~BFH	New York Stock Exchange

Indicate by check mark whether the ~~registrant:~~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 þ⌧ 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 þ⌧ 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 ~~the~~ 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~~ þ	~~Accelerated filer~~ ◻
	Large accelerated filer ⌧ Accelerated filer ◻Non-accelerated filer ◻ Smaller reporting company ☐ Emerging growth company ☐	~~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 þ⌧

As of April 22, ~~2021, 49,723,638~~2022, 49,775,721 shares of common stock were outstanding.

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~BREAD FINANCIAL HOLDINGS, INC.

INDEX

				Page Number
					~~Part I~~: ~~FINANCIAL INFORMATION~~
						Page Number
			Part I: FINANCIAL INFORMATION
Item 1.			Financial Statements (unaudited)

	~~Condensed Consolidated Balance Sheets as of March 31, 2021 and December 31, 2020~~		3

		Condensed Consolidated Statements of Income for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021				4
			15
			Condensed Consolidated Statements of Comprehensive Income for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021				516
			Condensed Consolidated Balance Sheets as of March 31, 2022 and December 31, 2021				17
			Condensed Consolidated Statements of Stockholders’ Equity for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021				6
			18
			Condensed Consolidated Statements of Cash Flows for the three months ended March 31, ~~2021~~2022 and ~~2020~~2021				7
			19
			Notes to Condensed Consolidated Financial Statements				8
			20
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)				32
			1
Item 3.			Quantitative and Qualitative Disclosures About Market Risk				40
			38
Item 4.			Controls and Procedures				4038

			Part II:II: OTHER INFORMATION

Item 1.			Legal Proceedings				41
			39
Item 1A.			Risk Factors				41
			39
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds				41
			39
Item 3.			Defaults Upon Senior Securities				41
			40
Item 4.			Mine Safety Disclosures				41
			40
Item 5.			Other Information				41
			40
Item 6.			Exhibits				42
			41
SIGNATURES							4443

~~Index~~

~~PART I~~

~~Item 1.~~~~Financial Statements.~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS~~

March 31,

December 31,

2021

2020

(in millions, except per share amounts)
ASSETS

Cash and cash equivalents

$
2,858.6

$
3,081.5
Accounts receivable, net, less allowance for doubtful accounts ($5.3 million and $4.0 million at March 31, 2021 and December 31, 2020, respectively)

351.9

383.8
Credit card and loan receivables:

Credit card and loan receivables – restricted for securitization investors

10,221.3

11,208.5
Other credit card and loan receivables

5,315.3

5,575.9
Total credit card and loan receivables

15,536.6

16,784.4
Allowance for loan loss

(1,843.3)

(2,008.0)
Credit card and loan receivables, net

13,693.3

14,776.4
Inventories, net

146.0

164.3
Other current assets

519.9

534.9
Redemption settlement assets, restricted

725.7

693.5
Total current assets

18,295.4

19,634.4
Property and equipment, net

296.4

310.9
Right of use assets - operating

218.1

233.2
Deferred tax asset, net

383.5

359.2
Intangible assets, net

74.9

81.7
Goodwill

1,351.1

1,369.6
Other non-current assets

543.5

558.1
Total assets

$
21,162.9

$
22,547.1
LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable

$
331.9

$
328.2
Accrued expenses

447.1

444.7
Current operating lease liabilities

22.7

23.6
Current portion of deposits

6,787.4

6,553.9
Current portion of non-recourse borrowings of consolidated securitization entities

1,862.6

1,850.7
Current portion of long-term and other debt

101.4

101.4
Other current liabilities

266.6

220.9
Deferred revenue

920.4

898.5
Total current liabilities

10,740.1

10,421.9
Deferred revenue

102.2

105.5
Long-term operating lease liabilities

262.5

276.4
Deposits

3,169.5

3,238.7
Non-recourse borrowings of consolidated securitization entities

1,983.2

3,859.2
Long-term and other debt

2,681.5

2,704.3
Other liabilities

459.6

419.5
Total liabilities

19,398.6

21,025.5
Commitments and contingencies (Note 14)

Stockholders’ equity:

Common stock, $0.01 par value; authorized, 200.0 million shares; issued, 117.1 million shares at each of March 31, 2021 and December 31, 2020

1.2

1.2
Additional paid-in capital

3,431.3

3,427.2
Treasury stock, at cost, 67.4 million shares at each of March 31, 2021 and December 31, 2020

(6,733.9)

(6,733.9)
Retained earnings

5,108.0

4,832.1
Accumulated other comprehensive loss

(42.3)

(5.0)
Total stockholders’ equity

1,764.3

1,521.6
Total liabilities and stockholders’ equity

$
21,162.9

$
22,547.1

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME~~

Three Months Ended

March 31,

2021

2020

(in millions, except per share amounts)
Revenues

Services

$
39.4

$
46.6
Redemption, net

104.9

120.9
Finance charges, net

940.6

1,214.3
Total revenue

1,084.9

1,381.8
Operating expenses

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

497.5

499.2
Provision for loan loss

33.4

655.9
General and administrative

16.9

23.9
Depreciation and other amortization

22.9

17.4
Amortization of purchased intangibles

11.1

21.4
Total operating expenses

581.8

1,217.8
Operating income

503.1

164.0
Interest expense

Securitization funding costs

33.6

49.9
Interest expense on deposits

45.5

60.3
Interest expense on long-term and other debt, net

29.6

28.4
Total interest expense, net

108.7

138.6
Income before income taxes

394.4

25.4
Provision (benefit) for income taxes

108.2

(4.6)
Net income

$
286.2

$
30.0

Net income per share (Note 3):

Basic

$
5.76

$
0.63
Diluted

$
5.74

$
0.63

Weighted average shares (Note 3):

Basic

49.7

47.6
Diluted

49.8

47.7

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~

Three Months Ended

March 31,

2021

2020

(in millions)
Net income

$
286.2

$
30.0

Other comprehensive loss:

Unrealized (loss) gain on securities available-for-sale

(9.0)

2.7
Tax benefit (expense)

0.7

(1.1)
Unrealized (loss) gain on securities available-for-sale, net of tax

(8.3)

1.6

Unrealized gain on cash flow hedges

1.1

0.4
Tax expense

(0.2)

(0.1)
Unrealized gain on cash flow hedges, net of tax

0.9

0.3

Foreign currency translation adjustments (inclusive of deconsolidation of $3.8 million for the three months ended March 31, 2020 related to the sale of a business)

(29.9)

(20.1)

Other comprehensive loss, net of tax

(37.3)

(18.2)

Total comprehensive income, net of tax

$
248.9

$
11.8

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY~~

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Treasury

Retained

Comprehensive

Stockholders’
Three Months Ended March 31, 2021

Shares

Amount

Capital

Stock

Earnings

Loss

Equity

(in millions)
Balance at December 31, 2020

117.1

$
1.2

$
3,427.2

$
(6,733.9)

$
4,832.1

$
(5.0)

$
1,521.6
Net income

—

—

—

—

286.2

—

286.2
Other comprehensive loss

—

—

—

—

—

(37.3)

(37.3)
Stock-based compensation

—

—

6.8

—

—

—

6.8
Dividends and dividend equivalent rights declared ($0.21 per common share)

—

—

—

—

(10.3)

—

(10.3)
Other

—

—

(2.7)

—

—

—

(2.7)
Balance at March 31, 2021

117.1

$
1.2

$
3,431.3

$
(6,733.9)

$
5,108.0

$
(42.3)

$
1,764.3

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Treasury

Retained

Comprehensive

Stockholders’
Three Months Ended March 31, 2020

Shares

Amount

Capital

Stock

Earnings

Loss

Equity

(in millions)
Balance at December 31, 2019

115.0

$
1.1

$
3,257.7

$
(6,733.9)

$
5,163.3

$
(99.9)

$
1,588.3
Net income

—

—

—

—

30.0

—

30.0
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-13

—

—

—

—

(485.0)

—

(485.0)
Other comprehensive loss

—

—

—

—

—

(18.2)

(18.2)
Stock-based compensation

—

—

4.7

—

—

—

4.7
Dividends and dividend equivalent rights declared ($0.63 per common share)

—

—

—

—

(29.5)

—

(29.5)
Other

—

0.1

(2.7)

—

—

—

(2.6)
Balance at March 31, 2020

115.0

$
1.2

$
3,259.7

$
(6,733.9)

$
4,678.8

$
(118.1)

$
1,087.7

~~See accompanying notes to unaudited condensed consolidated financial statements.~~

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~

Three Months Ended

March 31,

2021

2020

(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$
286.2

$
30.0
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

34.0

38.8
Deferred income taxes

(25.8)

(158.7)
Provision for loan loss

33.4

655.9
Non-cash stock compensation

6.8

4.7
Amortization of deferred financing costs

8.5

9.5
Change in other operating assets and liabilities, net of sale of business

154.9

8.6
Other

19.2

(16.3)
Net cash provided by operating activities

517.2

572.5

CASH FLOWS FROM INVESTING ACTIVITIES:

Change in redemption settlement assets

(13.1)

1.0
Change in credit card and loan receivables

1,034.6

1,446.7
Proceeds from sale of business

—

25.4
Proceeds from sale of credit card portfolio

—

289.5
Capital expenditures

(12.2)

(15.7)
Purchases of other investments

(22.3)

(14.0)
Maturities/sales of other investments

22.1

13.2
Other

(0.1)

0.2
Net cash provided by investing activities

1,009.0

1,746.3

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under debt agreements

—

500.0
Repayments of borrowings

(25.4)

(275.4)
Non-recourse borrowings of consolidated securitization entities

175.0

350.0
Repayments/maturities of non-recourse borrowings of consolidated securitization entities

(2,039.1)

(1,275.0)
Net increase (decrease) in deposits

162.2

(769.4)
Payment of deferred financing costs

(0.2)

(0.6)
Dividends paid

(10.7)

(30.3)
Other

(2.6)

(2.7)
Net cash used in financing activities

(1,740.8)

(1,503.4)

Effect of exchange rate changes on cash, cash equivalents and restricted cash

(1.7)

(7.6)

Change in cash, cash equivalents and restricted cash

(216.3)

807.8
Cash, cash equivalents and restricted cash at beginning of period

3,463.2

3,958.1
Cash, cash equivalents and restricted cash at end of period

$
3,246.9

$
4,765.9

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid

$
103.4

$
138.3
Income taxes paid, net

$
20.5

$
44.6

~~See accompanying notes to unaudited condensed consolidated financial statements~~.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~PART 1: FINANCIAL INFORMATION

~~Basis of Presentation~~

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 ~~herein have been prepared by Alliance Data Systems Corporation (“ADSC” or, including its consolidated subsidiaries and variable interest entities (“VIEs”),~~in our Annual Report on Form 10-K for the ~~“Company”), without audit, pursuant to the rules and regulations of~~year ended December 31, 2021, filed with the Securities and Exchange Commission ~~(“SEC”)~~on February 25, 2022 (the 2021 Form 10-K). ~~Certain~~Some of the information contained in this discussion and ~~footnote disclosures normally~~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.

OVERVIEW

We are a tech-forward financial ~~statements prepared~~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 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.

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.

NON-GAAP FINANCIAL MEASURES

We prepare our Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America ~~(“GAAP”) have been condensed or omitted pursuant~~(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 ~~such rules~~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 ~~regulations. However,~~trends. For a reconciliation of this non-GAAP financial measure to the ~~Company believes~~most directly comparable GAAP measure, please see the financial tables and information that follows.

BUSINESS ENVIRONMENT

This Business Environment section provides an overview of our results of operations and financial position for the ~~disclosures are adequate to make~~first quarter of 2022, as well as our related outlook for the ~~information presented not misleading. These unaudited condensed consolidated financial statements~~remainder of 2022 and certain of the uncertainties associated with achieving that outlook. This section should be read in conjunction with the ~~consolidated financial statements~~other information included or incorporated by

Table of Contents

reference in this Form 10-Q, including “Consolidated Results of Operations,” “Risk Factors” and ~~the notes thereto included~~“Cautionary Note Regarding Forward-Looking Statements”, which provides further discussion of variances in ~~the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021.~~

The unaudited condensed consolidated financial statements included herein reflect all adjustments (consisting of normal, recurring adjustments) which are, in the opinion of management, necessary to state fairly the results for the interim periods presented. Theour results of operations ~~for~~over the ~~interim~~ periods ~~presented are not necessarily indicative~~ of ~~the operating results to be expected for any subsequent interim period or for the fiscal year.~~

~~The preparation of financial statements in conformity with GAAP requires management to make estimates~~comparison and assumptions that affect (1) the reported amounts of assets; (2) liabilities and disclosure of contingent assets and liabilities at the date of the financial statements; and (3) the reported amounts of revenues and expenses during the reporting period. Actual results could differ fromother factors impacting those ~~estimates.~~future results.

~~Recently Issued Accounting Standards~~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.

For the quarter ended March ~~2020,~~31, 2022, Credit sales were up from the ~~Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Facilitation~~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 ~~Effects~~global COVID-19 pandemic, all of ~~Reference Rate Reform~~which remain difficult to predict and therefore could have an impact on ~~Financial Reporting.” This ASU provides optional expedients~~our outlook throughout the remainder of 2022. We anticipate Total net interest and ~~exceptions for applying GAAP to contracts, hedging relationships,~~non-interest income growth will be aligned with growth in average Total credit card and other ~~transactions affected~~loans, with potential upside from an improved net interest margin. We expect multiple interest rate increases by ~~reference~~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.

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 ~~reform if certain criteria~~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 ~~met. The amendments~~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 ~~this ASU apply only~~the consumer payment rate throughout the remainder of 2022, and we continue to ~~contracts and hedging relationships that reference~~expect a net loss rate in the ~~London Interbank Offered Rate (“LIBOR”) or another reference rate expected~~low-to-mid 5% range for 2022 as credit metrics begin to ~~be discontinued~~normalize from historically low rates due to ~~reference~~the expiration of federal stimulus and assistance programs.

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 ~~reform.~~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.

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 ~~expedients~~pace and ~~exceptions provided by~~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.

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 ~~amendments do not apply~~periods ahead. We are committed to ~~contract modifications made~~ensuring our investments deliver long-term stockholder value and ~~hedging relationships entered into or evaluated after December 31, 2022. This ASU is elective~~we remain confident in our ability to responsibly execute on our growth strategy and ~~is effective upon issuance for all entities. The Company is evaluating the impact that adoption of ASU 2020-04 will have on its consolidated~~achieve our financial ~~statements.~~

~~Recently Adopted Accounting Standards~~

In December 2019, the FASB issued ASU 2019-12, “Simplifying the Accounting for Income Taxes.” ASU 2019-12 eliminated certain exceptions within Accounting Standards Codification (“ASC”) 740, “Income Taxes,” and clarified certain aspects of ASC 740 to promote consistency among reporting entities. Most amendments within the standard were required to be applied on a prospective basis, while certain amendments must be applied on a retrospective or modified retrospective basis. The Company’s adoption of this standard on January 1, 2021 did not have a material impact on its consolidated financial statements.targets.

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED~~ CONSOLIDATED ~~FINANCIAL STATEMENTS – (CONTINUED)~~RESULTS OF OPERATIONS

~~2. REVENUE~~

~~The Company’s products and services are reported under 2 segments—LoyaltyOne and Card Services, as shown below. The following tables present revenue disaggregated by major source:~~

Corporate/

Three Months Ended March 31, 2021

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program

$
66.8

$
—

$
—

$
66.8
Short-term loyalty programs

106.3

—

—

106.3
Servicing fees, net

—

(32.3)

—

(32.3)
Revenue from contracts with customers

$
173.1

$
(32.3)

$
—

$
140.8

Finance charges, net

—

940.6

—

940.6
Investment income

3.5

—

—

3.5
Total

$
176.6

$
908.3

$
—

$
1,084.9

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.

Corporate/

Three Months Ended March 31, 2020

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program

$
71.3

$
—

$
—

$
71.3
Short-term loyalty programs

120.3

—

—

120.3
Servicing fees, net

—

(30.7)

—

(30.7)
Other

3.3

—

0.1

3.4
Revenue from contracts with customers

$
194.9

$
(30.7)

$
0.1

$
164.3

Finance charges, net

—

1,214.3

—

1,214.3
Investment income

3.2

—

—

3.2
Total

$
198.1

$
1,183.6

$
0.1

$
1,381.8

~~The following tables present revenue disaggregated by geographic region based on the location~~Table 1: Summary of ~~the subsidiary that generally correlates with the location of the customer:~~Our Financial Performance

Corporate/

Three Months Ended March 31, 2021

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Geographic Region:

United States

$
1.0

$
908.2

$
—

$
909.2
Canada

79.9

0.1

—

80.0
Europe, Middle East and Africa

79.4

—

—

79.4
Asia Pacific

14.9

—

—

14.9
Other

1.4

—

—

1.4
Total

$
176.6

$
908.3

$
—

$
1,084.9


	Three Months Ended March 31,
	2022			2021			% Change

	(in millions, except per share amounts and percentages)
Total net interest and non-interest income	$	921		$	802		15
Provision for credit losses		193			33		*
Total non-interest expenses		426			402		6
Income from continuing operations before income taxes		302			367		(18)
Provision for income taxes		91			99		(7)
Income from continuing operations		211			268		(21)
(Loss) income from discontinued operations, net of taxes		(1)			18		(102)
Net income		210			286		(26)

Net income per diluted share	$	4.20		$	5.74		(27)
Income from continuing operations per diluted share	$	4.21		$	5.38		(22)
Net interest margin ⁽¹⁾		19.4	%		17.7	%	1.7
Return on average equity ⁽²⁾		38.5	%		66.3	%	(27.8)
Effective income tax rate - continuing operations		30.2	%		26.9	%	3.3

(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

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


	Three Months Ended March 31,
	2022		2021		% Change

	(in millions, except percentages)
Interest income
Interest and fees on loans	$	1,066	$	941	13
Interest on cash and investment securities		2		1	53
Total interest income		1,068		942	13
Interest expense
Interest on deposits		34		47	(28)
Interest on borrowings		45		60	(25)
Total interest expense		79		107	(26)
Net interest income		989		835	18
Non-interest income
Interchange revenue, net of retailer share arrangements		(96)		(68)	41
Other		28		35	(21)
Total non-interest income		(68)		(33)	108
Total net interest and non-interest income		921		802	15
Provision for credit losses		193		33	*
Total net interest and non-interest income, after provision for credit losses	$	728	$	769	(5)

* Not meaningful

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

Corporate/

Three Months Ended March 31, 2020

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Geographic Region:

United States

$
2.1

$
1,183.6

$
0.1

$
1,185.8
Canada

79.1

—

—

79.1
Europe, Middle East and Africa

68.6

—

—

68.6
Asia Pacific

37.0

—

—

37.0
Other

11.3

—

—

11.3
Total

$
198.1

$
1,183.6

$
0.1

$
1,381.8

~~Contract Liabilities~~

~~The Company records a contract liability when cash payments are received in advance of its performance, which applies to the service~~Total Net Interest and ~~redemption of an AIR MILES~~^® ~~reward mile and the reward products~~Non-interest Income, After Provision for ~~its short-term loyalty programs.~~

~~A reconciliation of contract liabilities for the AIR MILES Reward Program is as follows:~~

Credit Losses

Deferred Revenue


Service

Redemption

Total

(in millions)
Balance at January 1, 2021

$
247.2

$
756.8

$
1,004.0
Cash proceeds

40.6

65.9

106.5
Revenue recognized ⁽¹⁾

(49.9)

(52.2)

(102.1)
Other

—

0.3

0.3
Effects of foreign currency translation

3.3

10.6

13.9
Balance at March 31, 2021

$
241.2

$
781.4

$
1,022.6
Amounts recognized in the consolidated balance sheets:






Deferred revenue (current)

$
139.0

$
781.4

$
920.4
Deferred revenue (non-current)

$
102.2

$
—

$
102.2

~~(1)~~

~~Reported on a gross basis herein.~~

The deferred redemption obligation associated with the AIR MILES Reward Program is effectively due on demand from the collector base, thus the timing of revenue recognition is based on the redemption by the collector. Service revenue is amortized over the expected life of a mile, with the deferred revenue balance expected to be recognized into revenue in the amount of $113.4 million in ~~2021, $85.1 million in~~ ~~2022, $38.8 million in~~ ~~2023, and $3.9 million in~~ ~~2024~~.

Additionally, contract liabilities for the Company’s short-term loyalty programs are recognized in other current liabilities in the Company’s unaudited condensed consolidated balance sheets. The beginning balance as of January 1, 2021 was $66.9 million and the closing balance as ofThree months ended March 31, ~~2021 was $71.1 million, with the change due~~2022 compared to ~~cash payments received in advance of program performance, offset in part by revenue recognized of approximately $83.2 million during~~ the three months ended March 31, ~~2021.~~2021:

~~Contract Costs~~

~~The Company recognizes an asset~~Interest income: Total interest income increased $126 million, or 13%, to $1,068 million for the ~~incremental costs~~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 ~~obtaining~~approximately 180 basis points, increasing revenue by $73 million.

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

●

Interest on deposits decreased $13 million for the three months ended March 31, 2022, due to lower average interest rates resulting from the mix of deposits outstanding, which decreased interest expense by approximately $15 million; partially offset by higher average balances outstanding.

●

Interest on borrowings decreased $15 million due primarily to a $14 million decrease related to secured borrowings resulting from lower average interest rates, and lower average balances outstanding.

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:

●

Interchange revenue, net of retailer share arrangements increased $28 million as a result of increased sales and new retailer share arrangements.

●

Other decreased $7 million due to a $12 million loss from our equity method investment in Loyalty Ventures Inc. This was partially offset by an increase of $3 million in ancillary revenue, in particular revenue from payment protection products.

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

Table 3: Summary of Total Non-interest Expenses


	Three Months Ended March 31,
	2022		2021		% Change

	(in millions, except percentages)
Non-interest expenses
Employee compensation and benefits	$	179	$	159	13
Card and processing expenses		82		78	5
Information processing and communication		56		51	8
Marketing expenses		31		42	(27)
Depreciation and amortization		21		25	(16)
Other		57		47	20
Total non-interest expenses	$	426	$	402	6

Total Non-interest Expenses

Three months ended March 31, 2022 compared to the extent it expects to recover those costs, in accordance with ASC 340-40, “Other Assets and Deferred Costs.” Contract costs are deferred and amortized on a straight-line basis that is consistent with the transfer of services, which is generally the term of the contract. Depending on the nature of the contract costs, the amortization is recorded as a reduction to revenue, or costs of operations, in the Company’s unaudited condensed consolidated statements of income. As ofthree months ended March 31, ~~2021 and December~~2021:

Non-interest expenses: Total non-interest expenses increased $24 million, or 6%, to $426 million for the three months ended March 31, ~~2020,~~2022, due to the ~~remaining unamortized contract~~following:

●

Employee compensation and benefits increased $20 million 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 $5 million due to an increase in data processing expense driven by the Fiserv core processing platform migration.

104

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~costs were $296.9 million and $311.1 million, respectively, and are included in other current assets and other non-current assets in the Company’s unaudited condensed consolidated balance sheets.~~

~~3. EARNINGS PER SHARE~~

~~The following table sets forth the computation of basic and diluted net income per share of common stock:~~

Three Months Ended March 31,

2021

2020

(in millions, except per share amounts)
Numerator:

Net income

$
286.2

$
30.0

Denominator:

Weighted average shares, basic

49.7

47.6
Weighted average effect of dilutive securities:

Net effect of dilutive unvested restricted stock ⁽¹⁾

0.1

0.1
Denominator for diluted calculation

49.8

47.7

Basic net income per share:

$
5.76

$
0.63
Diluted net income per share:

$
5.74

$
0.63

~~(1)~~

●

Marketing expenses~~For~~ decreased $11 million due to higher marketing costs related to card program enhancements during the three months ended March 31, 2021, ~~and 2020, 0.2 million and 0.3 million of restricted stock units, respectively, were excluded from~~partially offset by costs in the ~~calculation of weighted average dilutive common shares as the effect would have been anti-dilutive.~~current year period associated with our re-branding to Bread Financial.

~~4. ACQUISITION~~

On September 28, 2020, the Company acquired 3.5 million preferred Series D Shares of Lon Inc., a Delaware corporation (“Bread”), for approximately $25.0 million, which represented an approximate 6% ownership interest in Bread. Bread is a technology-driven digital payments company, offering an omnichannel solution for retailers and platform capabilities to bank partners. On December 3, 2020, the Company acquired the remaining interest in Bread. In accordance with ASC 805, the Company’s approximate 6% interest was remeasured at fair value when control of Bread was obtained on December 3, 2020; 0 gain or loss was recognized on the remeasurement.

Consideration for the 100% ownership of Bread consisted of cash of $275.0 million, equity of $149.2 million with the issuance of 1.9 million shares of the Company’s common stock, and deferred cash consideration of $75.0 million due December 2021, subject to customary closing purchase price adjustments. Consideration, net of cash and restricted cash acquired, was $491.0 million.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

The following table summarizes the allocation of the consideration and the respective fair values of the assets acquired and liabilities assumed in the Bread transaction as of the acquisition date, net of cash acquired:

As of
December 3, 2020

(in millions)
Installment loan receivables

$
111.7
Accounts receivable

0.2
Other current assets

0.6
Property and equipment

0.3
Developed technology

90.7
Right of use assets - operating

3.6
Deferred tax asset, net

7.0
Intangible assets

11.3
Goodwill

369.6
Total assets acquired

595.0

Accounts payable

2.0
Accrued expenses

2.9
Operating lease liabilities

3.5
Non-recourse borrowings of consolidated securitization entities

95.6
Total liabilities assumed

104.0

Net assets acquired, net of cash and restricted cash

$
491.0

●

Other increased $10 million due primarily to legal and other business activity costs.

Income Taxes

~~5. DISPOSITION~~

~~On January 10, 2020, the Company sold Precima~~^®, a provider of retail strategy and customer data applications and analytics, to Nielsen Holdings plc for total consideration of $43.8 million. The purchase and sale agreement provided for $10.0 million in contingent consideration based upon the occurrence of specified events and performance of the business, with 2 earnout determinations in September 2020 and September 2021, respectively. In September 2020, the Company received cash of $5.0 million upon the earnout determination date. AtThree months ended March 31, ~~2021,~~2022 compared to the ~~Company estimated the fair value of the remaining contingent purchase price at approximately $1.5~~three months ended March 31, 2021:

Provision for income taxes decreased $8 million, which is included in the total consideration below. Precima was included in the Company’s LoyaltyOne segment. The pre-tax gain was recorded in cost of operations in the Company’s unaudited condensed consolidated statements of incomeor 7%, to $91 million for the three months ended March 31, ~~2020.~~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.

January 10,

2020

(in millions)
Total consideration ⁽¹⁾

$
43.8
Net carrying value of assets and liabilities (including other comprehensive income)

26.8
Allocation of goodwill

3.2
Strategic transaction costs

5.8
Pre-tax gain on sale of business, net of strategic transaction costs

$
8.0

Table 4: Summary Financial Highlights – Continuing Operations


	Three Months Ended March 31,
	2022			2021			% Change

	(in millions, except per share amounts and percentages)
Credit sales	$	6,887		$	6,043		14
PPNR ⁽¹⁾		495			400		24
Average credit card and other loans		16,650			15,785		5
End-of-period credit card and other loans		16,843			15,537		8
End-of-period direct-to-consumer deposits		3,561			2,152		66

Return on average assets ⁽²⁾		4.0	%		4.9	%	(0.9)
Return on average equity ⁽³⁾		38.5	%		66.3	%	(27.8)

Net interest margin ⁽⁴⁾		19.4	%		17.7	%	1.7
Loan yield ⁽⁵⁾		25.6	%		23.8	%	1.8

Efficiency ratio ⁽⁶⁾		46.2	%		50.1	%	(3.9)

Tangible book value per common share ⁽⁷⁾	$	31.87		$	21.32		50
Tangible common equity / tangible assets ratio (TCE/TA) ⁽⁸⁾		7.8	%		5.2	%	2.6
Cash dividend per common share	$	0.21		$	0.21		—

Delinquency rate		4.1	%		3.8	%	0.3
Net loss rate		4.8	%		5.0	%	(0.2)
Reserve rate		10.8	%		11.9	%	(1.1)

(1)

~~Consideration as defined included cash associated with the sold Precima entities, which was $10.8 million~~PPNR represents Income from continuing operations before income taxes plus Provision for credit losses, and is a non-GAAP measure. See also Table 6: Reconciliation of GAAP to Non-GAAP Financial Measure.

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

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

Table of Contents

Table 5: Net Interest Margin


	Three Months Ended March 31, 2022
	Average Balance		Interest Income / Expense			Average Yield / Rate

	(in millions, except percentages)
Cash and investment securities	$	3,794	$	2			0.26	%
Credit card and other loans		16,650		1,066			25.60	%
Total interest-earning assets		20,444		1,068			20.90	%

Direct-to-consumer deposits (retail)		3,278		6			0.79	%
Wholesale deposits		7,523		28			1.47	%
Interest-bearing deposits		10,801		34			1.26	%

Secured borrowings		4,994		20			1.59	%
Unsecured borrowings		2,004		25			4.97	%
Interest-bearing borrowings		6,998		45			2.56	%
Total interest-bearing liabilities		17,799		79			1.77	%

Net interest income			$	989

Net interest margin ⁽¹⁾				19.4	%


	Three Months Ended March 31, 2021
	Average Balance		Interest Income / Expense			Average Yield / Rate

	(in millions, except percentages)
Cash and investment securities	$	3,107	$	1			0.21	%
Credit card and other loans		15,785		941			23.84	%
Total interest-earning assets		18,892		942			19.95	%

Direct-to-consumer deposits (retail)		1,884		6			1.20	%
Wholesale deposits		8,041		41			2.06	%
Interest-bearing deposits		9,925		47			1.90	%

Secured borrowings		4,621		34			2.91	%
Unsecured borrowings		2,830		26			3.72	%
Interest-bearing borrowings		7,451		60			3.22	%
Total interest-bearing liabilities		17,376		107			2.46	%

Net interest income			$	835

Net interest margin ⁽¹⁾				17.7	%

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

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


	Three Months Ended March 31,
	2022		2021		% Change

	(in millions, except percentages)
Income from continuing operations before income taxes	$	302	$	367	(18)
Provision for credit losses		193		33	*
Pre-tax pre-provision earnings (PPNR)	$	495	$	400	24

* Not meaningful

126

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~ASSET QUALITY

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~6. CREDIT CARD AND LOAN RECEIVABLES~~

~~Quantitative information about~~Given the ~~components~~nature of our business, the ~~Company’s~~quality of our assets, in particular our credit card and ~~loan receivables~~other loans (primarily installment loans), is ~~presented~~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 ~~table below:~~success of our collection and recovery efforts, and, more broadly, the general macroeconomic conditions.

March 31,

December 31,


2021

2020

(in millions)
Credit card receivables

$
15,142.0

$
16,376.4
Installment loan receivables

131.0

118.0
Other

263.6

290.0
Total credit card and loan receivables

15,536.6

16,784.4
Less: Credit card and loan receivables – restricted for securitization investors

10,221.3

11,208.5
Other credit card and loan receivables

$
5,315.3

$
5,575.9

~~Allowance for Loan Loss~~

~~The allowance for loan loss~~Delinquencies: An account is ~~an estimate of expected credit losses, measured over~~contractually delinquent if we do not receive the estimated life of its credit card and loan receivables that considers forecasts of future economic conditions in addition to information about past events and current conditions. The estimate under the current expected credit loss (“CECL”) model is significantly influencedminimum payment due by the ~~composition, characteristics~~specified due date. Our policy is to continue to accrue interest and ~~quality~~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 ~~Company’s portfolio~~account becoming further delinquent; based upon the level of credit card and loan receivables, as well as the prevailing economic conditions and forecasts utilized. The estimate of the allowance for loan loss includes an estimate for uncollectible principal as well as unpaid interest and fees. Charge-offs of principal amounts, net of recoveriesrisk indicated, a collection strategy is deployed. If, after exhausting all in-house collection efforts we are ~~deducted from the allowance. The allowance is maintained through an adjustment~~unable to ~~the provision for loan loss and is evaluated for appropriateness.~~

~~Credit Card Receivables~~

ASC 326, “Financial Instruments—Credit Losses,” requires entities to use a “pooled” approach to estimate expected credit losses for financial assets with similar risk characteristics. To estimate its allowance for loan loss, the Company segregates its credit card receivables into 4 groups with similar risk characteristics,collect on the ~~basis of delinquency status and credit quality risk score, which were determined by~~account, we may engage collection agencies or outside attorneys to continue those efforts, or sell the Company to be the most significant characteristics for estimating expected credit losses. These risk characteristics are evaluated on at least an annual basis, or more frequently as facts and circumstances warrant. The Company’s credit card receivables do not have stated maturities and therefore prepayments are not factored into the determination of the estimated life of the credit card receivables. In determining the estimated life of a credit card receivable, payments were applied to the measurement date balance with 0 payments allocated to future purchase activity. The Company uses a combination of First In First Out (“FIFO”) and the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (“CARD Act”) methodology to model balance paydown.

~~The Company’s groups of pooled financial assets with similar risk characteristics and their estimated life is as follows:~~charged-off balances.


	~~Estimated Life~~
	~~(in months)~~
~~Group A (Current, risk score - high)~~		14
~~Group B (Current, risk score - low)~~		19
~~Group C (Delinquent, risk score - high)~~		17
~~Group D (Delinquent, risk score - low)~~		26

In estimating its allowance for loan loss, for each identified group, management utilizes various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors. These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance. The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors. Management utilizes a third party service to analyze a number of scenarios, but uses one scenario to determine the macroeconomic variables over the forecast period.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

The Company considers the forecast used to be reasonable and supportable over the estimated life of the credit card receivables, with no reversion period. In addition to the quantitative estimate of expected credit losses, the Company also incorporates qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the allowance for loan loss reflects the Company’s best estimate of current expected credit losses. As permitted by ASC 326, the Company excludes unbilled finance charges from its amortized cost basis of credit card and loan receivables. As of March 31, 2021 and December 31, 2020, unbilled finance charges were $201.8 million and $219.4 ~~million, respectively, and are included in other credit card and loan receivables in the Company’s unaudited condensed consolidated balance sheets.~~

~~Installment Loan Receivables~~

The allowance for loan loss for installment loan receivables utilizes a migration model over the remaining life of the loans. The model segments accounts based on three attributes: delinquency, risk score and remaining term. As of March 31, 2021 and December 31, 2020, the allowance for loan loss related to installment loan receivables was $6.5 million and $5.7 million, respectively.

~~Allowance for Loan Loss Rollforward~~

The following table presents the ~~Company’s allowance for loan loss for its~~delinquency trends on our credit card and ~~loan receivables for~~other loans portfolio based on the ~~periods indicated:~~principal balances outstanding as of March 31, 2022 and December 31, 2021:

Three Months Ended March 31,

2021 ⁽¹⁾

2020

(in millions)
Balance at beginning of period

$
2,008.0

$
1,171.1
Adoption of ASC 326 ⁽²⁾

—

644.0
Provision for loan loss

33.4

655.9
Recoveries

50.9

67.9
Principal charge-offs

(249.0)

(388.1)
Balance at end of period

$
1,843.3

$
2,150.8

~~(1)~~

With the acquisition of Bread in December 2020, the Company acquired certain installment loans which represented a separate portfolio segment. As the amount of the allowance for loan loss was immaterial, the amounts were included in the above table.

~~(2)~~

~~Recorded January 1, 2020 through a cumulative-effect adjustment to retained earnings, net of taxes.~~

~~For~~Table 7: Delinquency Trends on Credit Card and Other Loans


	March 31,		% of		December 31,		% of
	2022		Total		2021		Total

	(in millions, except percentages)
Credit card and other loans outstanding ─ principal	$	16,021	100.0	%	$	16,590	100.0	%
Outstanding balances contractually delinquent:
31 to 60 days	$	203	1.3	%	$	219	1.3	%
61 to 90 days		150	0.9			147	0.9
91 or more days		305	1.9			281	1.7
Total	$	658	4.1	%	$	647	3.9	%

As part of our collections strategy, we may offer temporary, short term (six-months or less) loan modifications in order to improve the ~~three months ended March 31, 2021,~~likelihood of collections and meet the ~~decrease~~needs of our customers. Our modifications for customers who have requested assistance and meet certain qualifying requirements, come in the ~~allowance for~~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 ~~loss was due to a decline~~modifications may assist in ~~credit card~~cases where we believe the customer will recover from the short-term hardship and ~~loan receivables due~~resume scheduled payments. Under these forbearance modification programs, those accounts receiving relief may not advance to the ~~pandemic, improvement~~next delinquency cycle, including charge-off, in the ~~macroeconomic outlook and lower principal charge-offs. For~~same time frame that would have occurred had the ~~three months ended March 31, 2020, the increase~~relief not been granted. We evaluate our loan modification programs to determine if they represent a more than insignificant delay in ~~the allowance for loan loss,~~payment, in ~~addition to the impact of the $644.0 million attributable to the adoption of ASC 326, was due to an increase in delinquent amounts and deterioration of the macroeconomic outlook due to COVID-19.~~which case they would then be considered a troubled debt restructuring.

~~Net Charge-offs~~

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 ~~finance charges, net~~Interest and fees on loans while third-party fraud losses are recorded ~~as a cost of operations expense.~~in Card and processing expenses. Credit card ~~receivables,~~loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days ~~contractually~~ past ~~due, except~~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 ~~bankruptcies~~bankruptcy or ~~death. Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days past due. Credit~~death, credit card ~~receivables,~~and other loans, including unpaid interest and fees ~~associated with customer bankruptcies or death~~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 the 180-day contractual time frame. For the three months ended March 31, 2021 and 2020, principal charge-offs, net of recoveries, were $198.1 million and $320.2 million, respectively. Charge-offs for unpaid interest and fees were $130.5 million and $231.9 million for the three months ended March 31, 2021 and 2020, respectively.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~Delinquencies~~

An account is contractually delinquent if the Company does not receive the minimum payment by the specified due date. It is the Company’s policy to continue to accrue interest and fee income on all accounts, except in limited circumstances, until the account balance and all related interest and other fees are paid or charged-off, typically at 180 days ~~delinquent for credit card receivables and 120 days delinquent for installment loan receivables. After an account becomes 30 days~~ past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent. The collection system then recommends a collection strategy for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account. If the Company is unable to make a collection after exhausting all in-house collection efforts, the Company may engage collection agencies and outside attorneys to continue those efforts.

~~The following table presents the amortized cost basis of the aging analysis of the Company’s credit card and loan receivables portfolio:~~

Aging Analysis of Delinquent Amortized Cost
Credit Card and Loan Receivables ⁽¹⁾


31 to 60 days
delinquent

61 to 90 days
delinquent

91 or more days delinquent

Total
delinquent

Current

Total

(in millions)
As of March 31, 2021
$
193.5

$
149.3

$
384.8

$
727.6

$
14,545.4

$
15,273.0

As of December 31, 2020
$
272.5

$
203.3

$
439.8

$
915.6

$
15,578.8

$
16,494.4

~~(1)~~

~~As the amount of the installment loans and associated delinquencies were immaterial, the amounts were included in the above table for both the period ended March 31, 2021 and December 31, 2020.~~

~~Modified Credit Card Receivables~~

~~Forbearance Programs~~

In response to the COVID-19 pandemic, the Company offered forbearance programs, which provided for short-term modifications in the form of payment deferrals and late fee waivers to borrowers who were current with their payments prior to any relief. As of March 31, 2021 and December 31, 2020, the credit card receivables in these deferral forbearance programs were approximately $115.2 million and $157.4 million, respectively. Additionally, the Company instituted 2 short-term programs with durations of ~~three~~ and six months, which provide concessions consisting primarily of a reduced minimum payment and an interest rate reduction, the balances of which were $41.8 million and $67.3 million as of March 31, 2021 and December 31, 2020, respectively.

As these short-term modifications were made in response to COVID-19 to borrowers who were current prior to any relief, these are not considered troubled debt restructurings under the Interagency Statement guidance on certain loan modifications and an interpretation of ASC 310-40, “Receivables—Troubled Debt Restructurings by Creditors.”

~~Troubled Debt Restructurings~~

The Company holds certain credit card receivables for which the terms have been modified. The Company’s modified credit card receivables include credit card receivables for which temporary hardship concessions have been granted and credit card receivables in permanent workout programs. These modified credit card receivables include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs’ concessions remain in place for a period no longer than twelve months, while the permanent programs remain in place through the payoff of the credit card receivables if the credit cardholder complies with the terms of the program. Additionally, the Company instituted 2 temporary hardship programs with durations of ~~three~~ and six months with similar terms to our short-term forbearance programs. As of March 31, 2021 and December 31, 2020, the outstanding balance of credit card receivables in these 2 short-term temporary hardship programs treated as troubled debt restructurings totaled approximately $31.1 million and $39.9 million, respectively.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

Troubled debt restructuring concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments. In the case of the temporary hardship programs, at the end of the concession period, credit card receivable terms revert to standard rates. These arrangements are automatically terminated if the customer fails to make payments in accordance with the terms of the program, at which time their account reverts back to its original terms. Credit card receivables for which temporary hardship and permanent concessions were granted are each considered troubled debt restructurings and are collectively evaluated for impairment.

The Company had $460.6 million and $489.8 million, respectively, as a recorded investment in impaired credit card receivables as of March 31, 2021 and December 31, 2020, respectively, which represented approximately 3% of the Company’s total credit card receivables as of March 31, 2021 and December 31, 2020, respectively. The average recorded investment in impaired credit card receivables was $481.7 million and $314.7 million for the three months ended March 31, 2021 and 2020, respectively.

Interest income on these modified credit card receivables is accounted for in the same manner as other accruing credit card receivables. Cash collections on these modified credit card receivables are allocated according to the same payment hierarchy methodology applied to credit card receivables that are not in such programs. The Company recognized $8.8 million and $5.5 million for the three months ended March 31, 2021 and 2020, respectively, in interest income associated with modified credit card receivables during the period that such credit card receivables were impaired.

The following table provides information on credit card receivables that are considered troubled debt restructurings as described above, which entered into a modification program during the specified periods:

Three Months Ended March 31, 2021

Three Months Ended March 31, 2020

Pre-modification

Post-modification

Pre-modification

Post-modification

Number of

Outstanding

Outstanding

Number of

Outstanding

Outstanding


Restructurings

Balance

Balance

Restructurings

Balance

Balance

(Dollars in millions)
Troubled debt restructurings – credit card receivables

63,628

$
93.2

$
93.0

75,065

$
112.8

$
112.7

~~The table below summarizes troubled debt restructurings that have defaulted in the specified periods where the default occurred within 12 months of their modification date:~~

Three Months Ended March 31, 2021

Three Months Ended March 31, 2020

Number of

Outstanding

Number of

Outstanding


Restructurings

Balance

Restructurings

Balance

(Dollars in millions)
Troubled debt restructurings that subsequently defaulted – credit card receivables

51,009

$
67.0

31,670

$
44.0

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~Credit Quality~~

~~Credit Card Receivables~~

The Company uses proprietary scoring models developed specifically for the purpose of monitoring the Company’s obligor credit quality for its credit card receivables. The proprietary scoring models are used as a tool in the underwriting process and for making credit decisions. The proprietary scoring models are based on historical data and require various assumptions about future performance, which the Company updates periodically. Information regarding customer performance is factored into these proprietary scoring models to determine the probability of an account becoming 91 or more days past due at any time within the next 12 months. Obligor credit quality is monitored at least monthly during the life of an account. The following table reflects the composition of the Company’s credit card receivables by obligor credit quality as of March 31, 2021 and December 31, 2020:

Amortized Cost Revolving Credit Card Receivables

March 31, 2021

December 31, 2020




Percentage of




Percentage of

Amortized

Amortized

Probability of an Account Becoming 91 or More Days Past

Amortized

Cost Basis

Amortized

Cost Basis

Due or Becoming Charged-off (within the next 12 months)

Cost Basis

Outstanding


Cost Basis

Outstanding

(in millions, except percentages)

No Score

$
182.4

1.2
%

$
204.1

1.2
%
27.1% and higher

1,208.3

8.0

1,390.4

8.5

17.1% - 27.0%

780.6

5.2

848.8

5.2

12.6% - 17.0%

841.1

5.6

937.0

5.7

3.7% - 12.5%

6,633.1

43.8

7,305.5

44.6

1.9% - 3.6%

2,633.0

17.4

2,939.5

17.9

Lower than 1.9%

2,863.5

18.8

2,751.1

16.9

Total

$
15,142.0

100.0
%

$
16,376.4

100.0
%

~~Note: The Company’s credit card receivables are revolving receivables as they do not have stated maturities and are exempted from certain vintage disclosures required under ASC 326.~~

The proprietary scoring models are based on historical data and require various assumptions about future performance, which the Company updates periodically. Obligor credit quality is monitored at least monthly during the life of an account.

~~Installment Loan Receivables~~

~~The amortized cost basis of the Company’s installment loan receivables totaled $131.0 million and $118.0 million as of March 31, 2021 and December 31, 2020, respectively. Approximately 86%~~ of these loans were originated by customers with Fair Isaac Corporation (“FICO”) scores of 660 or above, and approximately 14% of these loans were originated by customers with FICO scores below 660 for each of the periods ended March 31, 2021 and December 31, 2020, respectively.

~~Securitized Credit Card Receivables~~

The Company regularly securitizes its credit card and loan receivables through its trusts. The Company continues to own and service the accounts that generate credit card and loan receivables held by the trusts. In its capacity as a servicer, each of the respective entities earns a fee from the trusts to service and administer the credit card and loan receivables, collect payments and charge-off uncollectible receivables. These fees are eliminated and therefore are not reflected in the Company’s unaudited condensed consolidated statements of income for the three months ended March 31, 2021 and 2020.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

The trusts are VIEs and the assets of these consolidated VIEs include certain credit card receivables that are restricted to settle the obligations of those entities and are not expected to be available to the Company or its creditors. The liabilities of the consolidated VIEs include non-recourse secured borrowings and other liabilities for which creditors or beneficial interest holders do not have recourse to the general credit of the Company.

~~The tables below present quantitative information about the components of total securitized credit card receivables, delinquencies and net charge-offs:~~

March 31,

December 31,


2021

2020

(in millions)
Total credit card and loan receivables – restricted for securitization investors

$
10,221.3

$
11,208.5
Principal amount of credit card and loan receivables – restricted for securitization investors, 91 days or more past due

$
174.7

$
200.8

Three Months Ended

March 31,

2021

2020

(in millions)
Net charge-offs of securitized principal

$
131.1

$
239.5

~~7. INVENTORIES, NET~~

Inventories, net of $146.0 million and $164.3 million at March 31, 2021 and December 31, 2020, respectively, primarily consist of finished goods to be utilized as rewards in the Company’s loyalty programs. Inventories, net are stated at the lower of cost and net realizable value and valued primarily on a first-in-first-out basis. The Company records valuation adjustments to its inventories if the cost of inventory exceeds the amount it expects to realize from the ultimate sale or disposal of the inventory. These estimates are based on management’s judgment regarding future market conditions and an analysis of historical experience.

~~8. OTHER INVESTMENTS~~

Other investments consist of marketable securities and U.S. Treasury bonds and are included in other current assets and other non-current assets in the Company’s unaudited condensed consolidated balance sheets. Marketable securities include available-for-sale debt securities, mutual funds and domestic certificate of deposit investments. The principal components of other investments, which are carried at fair value, are as follows:

March 31, 2021

December 31, 2020


Amortized

Unrealized

Unrealized



Amortized

Unrealized

Unrealized



Cost

Gains

Losses

Fair Value

Cost

Gains

Losses

Fair Value

(in millions)
Marketable securities

$
218.2

$
5.5

$
(1.7)

$
222.0

$
219.0

$
6.4

$
—

$
225.4
Total

$
218.2

$
5.5

$
(1.7)

$
222.0

$
219.0

$
6.4

$
—

$
225.4

The following table shows the unrealized losses and fair value for those investments that were in an unrealized loss position as of March 31, 2021, aggregated by investment category and the length of time that individual securities have been in a continuous loss position. Unrealized losses as of December 31, 2020 were de minimis.

March 31, 2021

Less than 12 months

12 Months or Greater

Total




Unrealized



Unrealized



Unrealized


Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(in millions)
Marketable securities

$
41.7

$
(1.7)

$
—

$
—

$
41.7

$
(1.7)
Total

$
41.7

$
(1.7)

$
—

$
—

$
41.7

$
(1.7)

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~The amortized cost and estimated fair value of the marketable securities at March 31, 2021 by contractual maturity are as follows:~~

Amortized

Estimated


Cost

Fair Value

(in millions)
Due in one year or less ⁽¹⁾

$
45.7

$
45.7
Due after one year through five years

0.7

0.7
Due after five years through ten years

—

—
Due after ten years

171.8

175.6
Total

$
218.2

$
222.0

~~(1)~~

~~Includes mutual funds, which do not have a stated maturity.~~

Market values were determined for each individual security in the investment portfolio. For available-for-sale debt securities in which fair value is less than cost, credit-related impairment, if any, is recognized through an allowance for credit losses and adjusted each period for changes in credit risk. The Company typically invests in highly-rated securities with low probabilities of default and has the intent and ability to hold the investments until maturity, and the Company performs an assessment each period for credit-related impairment. As of March 31, 2021, the Company does not consider its investments to be impaired.

~~There were 0 realized gains or losses from the sale of investment securities for the three months ended March 31, 2021 and 2020.~~

~~9. REDEMPTION SETTLEMENT ASSETS~~

Redemption settlement assets consist of restricted cash and securities available-for-sale and are designated for settling redemptions by collectors of the AIR MILES Reward Program in Canada under certain contractual relationships with sponsors of the AIR MILES Reward Program. The principal components of redemption settlement assets, which are carried at fair value, are as follows:

March 31, 2021

December 31, 2020

Amortized

Unrealized

Unrealized

Amortized

Unrealized

Unrealized


Cost

Gains

Losses

Fair Value

Cost

Gains

Losses

Fair Value

(in millions)
Restricted cash

$
71.8

$
—

$
—

$
71.8

$
55.4

$
—

$
—

$
55.4
Mutual funds

26.5

—

—

26.5

26.9

—

—

26.9
Corporate bonds

614.9

14.6

(2.1)

627.4

592.3

19.1

(0.2)

611.2
Total

$
713.2

$
14.6

$
(2.1)

$
725.7

$
674.6

$
19.1

$
(0.2)

$
693.5

The following tables show the unrealized losses and fair value for those investments that were in an unrealized loss position as of March 31, 2021 and December 31, 2020, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

March 31, 2021

Less than 12 months

12 Months or Greater

Total

Unrealized

Unrealized

Unrealized


Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(in millions)
Corporate bonds

$
124.5

$
(2.0)

$
10.5

$
(0.1)

$
135.0

$
(2.1)
Total

$
124.5

$
(2.0)

$
10.5

$
(0.1)

$
135.0

$
(2.1)

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

December 31, 2020

Less than 12 months

12 Months or Greater

Total

Unrealized

Unrealized

Unrealized


Fair Value

Losses

Fair Value

Losses

Fair Value

Losses

(in millions)
Corporate bonds

$
46.2

$
(0.1)

$
10.3

$
(0.1)

$
56.5

$
(0.2)
Total

$
46.2

$
(0.1)

$
10.3

$
(0.1)

$
56.5

$
(0.2)

~~The amortized cost and estimated fair value of the securities at March 31, 2021 by contractual maturity are as follows:~~

Amortized

Estimated


Cost

Fair Value

(in millions)
Due in one year or less ⁽¹⁾

$
139.9

$
140.6
Due after one year through five years

469.7

482.2
Due after five year through ten years

31.8

31.1
Total

$
641.4

$
653.9

~~(1)~~

~~Includes mutual funds, which do not have a stated maturity.~~

~~There were 0 realized gains or losses from the sale of investment securities for the three months ended March 31, 2021 and 2020.~~

~~10. LEASES~~

The Company has operating leases for general office properties, warehouses, data centers, customer care centers, automobiles and certain equipment. As of March 31, 2021, the Company’s leases have remaining lease terms of less than 1 year to 17 years, some of which may include renewal options. For leases in which the implicit rate is not readily determinable, the Company uses its incremental borrowing rate as of the lease commencement date to determine the present value of the lease payments. The incremental borrowing rate is based on the Company’s specific rate of interest to borrow on a collateralized basis, over a similar term and in a similar economic environment as the lease.

Leases with an initial term of 12 months or less are not recognized on the balance sheet; the Company recognizes lease expense for these leases on a straight-line basis over the lease term. Additionally, the Company accounts for lease and nonlease components as a single lease component for its identified asset classes.

~~The components of lease expense were as follows:~~

Three Months Ended

March 31,

2021

2020

(in millions)
Operating lease cost

$
11.1

$
10.2
Short-term lease cost

0.2

0.3
Variable lease cost

1.6

0.2
Total

$
12.9

$
10.7

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~Other information related to leases was as follows:~~

March 31,

March 31,

2021

2020
Weighted-average remaining lease term (in years):

Operating leases

10.7

11.3
Weighted-average discount rate:

Operating leases

5.3%

5.2%

~~Supplemental cash flow information related to leases was as follows:~~

Three Months Ended

March 31,

2021

2020

(in millions)
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases

$
14.3

$
14.4
Right of use assets obtained in exchange for lease obligations:
Operating leases

$
1.7

$
2.6

~~Maturities of the lease liabilities as of March 31, 2021 were as follows:~~

Operating
Year

Leases

(in millions)
2021 (excluding the three months ended March 31, 2021)

$
27.0
2022

39.9
2023

37.0
2024

34.7
2025

33.8
Thereafter

206.7
Total undiscounted lease liabilities

379.1
Less: Amount representing interest

(93.9)
Total present value of minimum lease payments

$
285.2

Amounts recognized in the March 31, 2021 consolidated balance sheet:

Current operating lease liabilities

$
22.7
Long-term operating lease liabilities

262.5
Total

$
285.2

due.

217

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~11. INTANGIBLE ASSETS AND GOODWILL~~

~~Intangible Assets~~

~~Intangible assets consist~~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 ~~following:~~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:

March 31, 2021


Gross

Accumulated





Assets

Amortization

Net

Amortization Life and Method

(in millions)

Definite-Lived Assets

Customer contracts and lists

$
348.9

$
(341.1)

$
7.8

3 years—straight line
Premium on purchased credit card portfolios

137.2

(78.1)

59.1

3-13 years—straight line
Collector database

55.7

(55.3)

0.4

5 years—straight line
Tradenames

33.6

(29.2)

4.4

4-15 years—straight line
Non-compete agreements

2.2

(0.2)

2.0

5 years—straight line

$
577.6

$
(503.9)

$
73.7

Indefinite-Lived Assets

Tradename

1.2

—

1.2

Indefinite life
Total intangible assets

$
578.8

$
(503.9)

$
74.9

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

December 31, 2020


Gross

Accumulated





Assets

Amortization

Net

Amortization Life and Method

(in millions)

Definite-Lived Assets

Customer contracts and lists

$
363.0

$
(354.5)

$
8.5

3-7 years—straight line
Premium on purchased credit card portfolios

137.2

(72.8)

64.4

3-13 years—straight line
Collector database

55.0

(54.5)

0.5

5 years—straight line
Tradenames

35.0

(30.1)

4.9

4-15 years—straight line
Non-compete agreements

2.2

—

2.2

5 years—straight line

$
592.4

$
(511.9)

$
80.5

Indefinite-Lived Assets

Tradename

1.2

—

1.2

Indefinite life
Total intangible assets

$
593.6

$
(511.9)

$
81.7


	Three Months Ended March 31,
	2022			2021

	(in millions, except percentages)
Average credit card and other loans	$	16,650		$	15,785
Net charge-offs of principal balances		199			198
Net charge-offs as a percentage of average credit card and other loans		4.8	%		5.0	%

~~The estimated amortization expense related to intangible assets for the next five years and thereafter is as follows:~~CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

For the Years Ending

December 31,

(in millions)
2021 (excluding the three months ended March 31, 2021)

$
19.2
2022

21.0
2023

16.1
2024

11.2
2025

2.4
Thereafter

3.8

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, 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 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.

Funding Sources

Credit Agreement

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.

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.

Deposits

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

228

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~Goodwill~~

~~The changes~~scheduled maturity date; the Banks also issue certificates of deposit with scheduled maturity dates ranging between April 2022 and March 2027, in ~~the carrying amount~~denominations of ~~goodwill are as follows:~~at least $1,000, on which interest is paid either monthly or at maturity.

LoyaltyOne

Card Services

Total

(in millions)

Balance at January 1, 2021

$
736.0

$
633.6

$
1,369.6

Effects of foreign currency translation

(18.5)

—

(18.5)

Balance at March 31, 2021

$
717.5

$
633.6

$
1,351.1

The ~~Company tests goodwill for impairment annually, or when events~~following table summarizes our retail and ~~circumstances change that would indicate the carrying value may not be recoverable. As~~wholesale deposit products by type and associated attributes, as of March 31, 2022 and December 31, 2021, the Company does not believe it is more likely than not that the fair value of any reporting unit is less than its carrying amount. No further testing of goodwill impairments will be performed until July 1, 2021, unless events occur or circumstances indicate an impairment is probable.

~~12. DEBT~~respectively:

~~Debt consists of the following:~~Table 9: Deposits



	March 31,		December 31,
	2022		2021

	(in millions, except percentages)
Deposits:
Direct-to-consumer	$	3,561	$	3,180
Wholesale		7,059		7,847

Non-maturity deposit products:
Non-maturity deposits	$	5,910	$	5,586
Interest rate range	0.05% to 3.50%		0.05% to 3.50%
Weighted-average interest rate		0.76%		0.68%

Certificates of deposit:
Certificates of deposit	$	4,710	$	5,441
Interest rate range	0.20% to 3.75%		0.20% to 3.75%
Weighted-average interest rate		2.11%		1.91%

Securitization Programs and Conduit Facilities

March 31,

December 31,




Description

2021

2020

Maturity

Interest Rate

(Dollars in millions)

Long-term and other debt:

2017 revolving line of credit

$
0

$
—

December 2022

⁽¹⁾
2017 term loans

1,459.0

1,484.3

December 2022

⁽²⁾
BrandLoyalty credit agreement

0

—

April 2024

⁽³⁾
Senior notes due 2024

850.0

850.0

December 2024

4.750%
Senior notes due 2026

500.0

500.0

January 2026

7.000%
Total long-term and other debt

2,809.0

2,834.3

Less: Unamortized debt issuance costs

26.1

28.6

Less: Current portion

101.4

101.4

Long-term portion

$
2,681.5

$
2,704.3

Deposits:

Certificates of deposit

$
5,732.7

$
6,014.9

Various – Apr 2021 to Mar 2026

0.15% to 3.75%
Money market deposits

4,234.6

3,790.2

Non-maturity

⁽⁴⁾
Total deposits

9,967.3

9,805.1

Less: Unamortized debt issuance costs

10.4

12.5

Less: Current portion

6,787.4

6,553.9

Long-term portion

$
3,169.5

$
3,238.7

Non-recourse borrowings of consolidated securitization entities:

Fixed rate asset-backed term note securities

$
2,898.9

$
3,423.8

Various – Jun 2021 to Sep 2022

2.03% to 3.95%
Conduit asset-backed securities

900.0

2,205.1

Various – Apr 2022 to Oct 2022

⁽⁵⁾
Secured loan facility

52.2

86.3

November 2022

⁽⁶⁾
Total non-recourse borrowings of consolidated securitization entities

3,851.1

5,715.2

Less: Unamortized debt issuance costs

5.3

5.3

Less: Current portion

1,862.6

1,850.7

Long-term portion

$
1,983.2

$
3,859.2

~~(1)~~

~~The interest rate is based upon LIBOR plus an applicable margin.~~

~~(2)~~

~~The interest rate is based upon LIBOR plus an applicable margin. The weighted average interest rate for the term loans was 1.86% and 1.90% at March 31, 2021 and December 31, 2020, respectively.~~

~~(3)~~

~~The interest rate is based upon the Euro Interbank Offered Rate plus an applicable margin.~~

23We 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.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~(4)~~

The interest rates are based on the Federal Funds rate plus an applicable margin. At March 31, 2021, the interest rates ranged from 0.36% to 3.50%. At December 31, 2020, the interest rates ranged from 0.38% to 3.50%.

~~(5)~~

The interest rate is based upon LIBOR or the asset-backed commercial paper costs of each individual conduit provider plus an applicable margin. At March 31, 2021, the interest rates ranged from 1.35% to 1.87%. At December 31, 2020, the interest rates ranged from 1.39% to 1.89%.

~~(6)~~

The interest rate is based upon LIBOR plus an applicable margin. The weighted average interest rate for the secured loan facility was 3.90% at each of March 31, 2021 and December 31, 2020, respectively.

~~At March 31, 2021, the Company was in compliance with its financial covenants.~~

~~Long-term and Other Debt~~

~~Credit Agreement~~

As of March 31, ~~2021, the Company had $1,459.0 million in term loans outstanding with $750.0 million total availability under the revolving line of credit.~~

~~BrandLoyalty Credit Agreement~~

~~As of March 31, 2021, there were 0 amounts outstanding under the BrandLoyalty Credit Agreement.~~

~~Non-Recourse Borrowings of Consolidated Securitization Entities~~

~~Asset-Backed Term Notes~~

In February 2021, $591.5 million of Series 2018-A asset-backed term notes, $66.5 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid.

As of March 31, 2021, the Company collected $294.4 million of principal payments made by its credit cardholders during the accumulation period for the repayment of the Series 2016-A notes, which mature June 15, 2021. The cash is restricted to the securitization investors and is reflected in other current assets in the Company’s unaudited condensed consolidated balance sheet as of March 31, 2021.

~~Conduit Facilities~~

~~The Company has access to committed undrawn capacity through 3 conduit facilities to support the funding of its credit card receivables for certain of its trusts.~~

~~As of March 31, 2021,~~2022, total capacity under ~~the conduit facilities~~our Conduit Facilities was ~~$3.2~~$4.5 billion, of which ~~$900.0 million~~$3.8 billion had been drawn and was included in ~~non-recourse borrowings of~~Debt issued by consolidated ~~securitization~~variable interest entities (VIEs) in the ~~unaudited condensed consolidated balance sheets.~~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.

~~13. DERIVATIVE INSTRUMENTS~~

The Company uses derivatives to manage risks associated with certain assets and liabilities arising from the potential adverse impact of fluctuations in foreign currency exchange rates. Certain derivatives used to manage the Company’s exposure to foreign currency exchange rate movements are not designated as hedges and do not qualify for hedge accounting. The fair value of the Company’s derivative instruments asAs of March 31, ~~2021 was $0.8 million included in other current assets and $1.2 million included in other current liabilities~~2022, we had approximately $10.8 billion of securitized credit card loans. Securitizations require credit enhancements in the ~~Company’s unaudited condensed consolidated balance sheets.~~form of cash, spread deposits, additional loans and subordinated classes. The ~~fair value~~credit enhancement is principally based on the outstanding balances of the ~~Company’s derivative instruments as~~series issued by the Trusts and by the performance of ~~December 31, 2020 was $0.4~~the credit card loans in the Trusts.

249

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

The following table shows the maturities of borrowing commitments as of March 31, 2022, for the Trusts by year:

~~million included in other current assets and $1.5 million included in other current liabilities~~

Table 10: Borrowing Commitment Maturities


	2022		2023		Thereafter		Total

	(in millions)
Fixed rate asset-backed term note securities	$	1,035	$	—	$	—	$	1,035
Conduit facilities ⁽¹⁾		1,725		2,750		—		4,475
Total ⁽²⁾	$	2,760	$	2,750	$	—	$	5,510

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

(2)	Total amounts do not include $1.4 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 ~~Company’s unaudited condensed consolidated balance sheets.~~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.

~~14. COMMITMENTS AND CONTINGENCIES~~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.

~~Regulatory Matters~~

~~On September 10, 2019, Comenity Capital Bank submitted a bank merger application to~~Regulation RR (Credit Risk Retention) adopted by the FDIC, the SEC, the Federal ~~Deposit Insurance Corporation (“FDIC”) seeking~~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 ~~FDIC’s approval~~amount of asset-backed securities we are able to ~~merge Comenity Bank~~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 and into Comenity Capital Bank as the surviving bank entity. On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah Department of Financial Institutions and the Delaware Office of the State Bank Commissioner, respectively, in connection with the proposed merger. On April 20, 2021, Comenity Capital Bank withdrew its bank merger application with the FDIC. On May 3, 2021, each of Comenity Capital Bank and Comenity Bank similarly withdrew their counterpart bank merger applications in Utah and Delaware, respectively.Regulation RR.

~~Indemnification~~

Stock Repurchase Programs

On ~~July 1, 2019, the Company completed the sale~~February 28, 2022, our Board of ~~its Epsilon segment~~Directors approved a stock repurchase program to ~~Publicis Groupe S.A. (“Publicis”). Under the terms~~acquire up to 200,000 shares of the agreement governing that transaction, the Company agreed to indemnify Publicis and its affiliates from and against any losses arising out of or related to a United States Department of Justice (“DOJ”) investigation. The DOJ investigation related to third-party marketers who sent, or allegedly sent, deceptive mailings and the provision of data and services to those marketers by Epsilon’s data practice. Epsilon actively cooperated with the DOJ in connection with the investigation. On January 19, 2021, Epsilon entered into a deferred prosecution agreement (“DPA”) with the DOJ to resolve the matters that were the subject of the investigation. Pursuant to the DPA, Epsilon agreed, among other things, to pay penalties and consumer compensationour outstanding common stock in the ~~aggregate amount of $150.0 million, to be paid in 2 equal installments,~~open market during the first in January 2021 and the second in January 2022. In accordance with ASC 450, “Contingencies,” the Company records a loss contingency when a loss is probable and an amount can be reasonably estimated, and therefore as of December 31, 2020, a $150.0 million liability was recorded. The Company paid $75.0 million to Publicis pursuant to its contractual indemnification obligation in January 2021.one-year period ending on February 28, 2023. As of March 31, ~~2021,~~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 ~~Company has $75.0 million included in accrued expenses in its unaudited condensed consolidated balance sheets.~~

~~15. STOCKHOLDERS’ EQUITY~~approved repurchase program.

~~Stock Compensation Expense~~

~~During~~Dividends

For the three months ended March 31, ~~2021, the Company awarded 611,312 service-based restricted stock units with a weighted average grant date fair value~~2022, we declared cash dividends of $0.21 per share for a total of ~~$86.89 as determined on the date of grant. Service-based restricted stock units typically vest ratably over~~ ~~three years provided that the participant is employed by the Company on each such vesting date.~~

During the three months ended March 31, 2021, the Company awarded 95,762 performance-based restricted stock units with pre-defined vesting criteria that permit a range from 0% to 170% to be earned, subject to a market-based condition. The fair market value of these awards is $92.62$10 million, and ~~was estimated utilizing Monte Carlo simulations of the Company’s stock price correlation, expected volatility~~paid cash dividends and ~~risk-free rate over a three-year time horizon matching the performance period. If the performance targets are met, the restrictions will lapse with respect to the~~ ~~entire award~~ ~~on February 16, 2024, provided that the participant is employed by the Company on the vesting date.~~

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~Stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of income for the three months ended March 31, 2021 and 2020 is as follows:~~dividend equivalents totaling $10 million.

Three Months Ended

March 31,

2021

2020

(in millions)
Cost of operations

$
4.0

$
2.7
General and administrative

2.8

2.0
Total

$
6.8

$
4.7

~~Dividends~~

On ~~January~~April 28, ~~2021, the Company’s board~~2022, our Board of ~~directors~~Directors declared a quarterly cash dividend of $0.21 per share on the Company’s common stock to stockholders of record at the close of business on February 12, 2021, resulting in a dividend payment of $10.4 million on March 18, 2021. Additionally, the Company paid $0.3 million in cash related to dividend equivalent rights for the three months ended March 31, 2021.

~~On April 29, 2021, the Company’s board of directors declared a quarterly cash dividend of $0.21 per share on the Company’s~~our common stock, payable on June ~~18, 2021~~17, 2022, to stockholders of record at the close of business on May ~~14, 2021.~~

~~16. ACCUMULATED OTHER COMPREHENSIVE LOSS~~

~~The changes in each component of accumulated other comprehensive loss, net of tax effects, are as follows:~~13, 2022.

Net

Net Unrealized

Net Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

on Net

Translation

Comprehensive
Three Months Ended March 31, 2021

on Securities

Flow Hedges

Investment Hedge

Adjustments ⁽¹⁾

Loss

(in millions)
Balance at December 31, 2020

$
23.2

$
(0.7)

$
(7.5)

$
(20.0)

$
(5.0)
Changes in other comprehensive income (loss)

(8.3)

0.9

—

(29.9)

(37.3)
Balance at March 31, 2021

$
14.9

$
0.2

$
(7.5)

$
(49.9)

$
(42.3)

Contractual Obligations

Net

Net Unrealized

Net Unrealized

Foreign

Accumulated

Unrealized

Gains (Losses)

Gains (Losses)

Currency

Other

Gains (Losses)

on Cash

on Net

Translation

Comprehensive
Three Months Ended March 31, 2020

on Securities

Flow Hedges

Investment Hedge

Adjustments ⁽¹⁾

Loss

(in millions)
Balance at December 31, 2019

$
2.5

$
(0.1)

$
(7.5)

$
(94.8)

$
(99.9)
Changes in other comprehensive income (loss)

1.6

0.3

—

(23.9)

(22.0)
Recognition resulting from the sale of Precima's foreign subsidiaries

—

—

—

3.8

3.8
Balance at March 31, 2020

$
4.1

$
0.2

$
(7.5)

$
(114.9)

$
(118.1)

~~(1)~~

~~Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates.~~

In ~~accordance with ASC 830, “Foreign Currency Matters,” upon~~ the ~~sale~~normal course of ~~Precima on January 10, 2020, $3.8 million~~business, we enter into various contractual obligations that may require future cash payments, the vast majority of ~~accumulated foreign currency translation adjustments attributable~~which relate to ~~Precima’s foreign subsidiaries sold were reclassified from accumulated~~deposits, debt issued by consolidated VIEs, long-term and other ~~comprehensive loss~~debt, and ~~included in the calculation of the gain on sale of Precima. Other reclassifications from accumulated other comprehensive loss into net income for each of the periods presented were not material.~~operating leases.

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

2610

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~17. FINANCIAL INSTRUMENTS~~

Cash Flows

In accordance with ASC 825, “Financial Instruments,” the Company is required to disclose the fair value of financial instruments for which it is practical to estimate fair value. To obtain fair values, observable market prices are used if available. In some instances, observable market prices are not readily available and fair value is determined using present value or other techniques appropriate for a particular financial instrument. These techniques involve judgment and as a result are not necessarily indicative of the amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

~~Fair Value of Financial Instruments~~ — ~~The estimated fair values of the Company’s financial instruments are as follows:~~

March 31, 2021

December 31, 2020

Carrying

Fair

Carrying

Fair


Amount

Value

Amount

Value

(in millions)
Financial assets

Credit card and loan receivables, net

$
13,693.3

$
15,977.1

$
14,776.4

$
17,301.2
Redemption settlement assets, restricted

725.7

725.7

693.5

693.5
Other investments

222.0

222.0

225.4

225.4
Derivative instruments

0.8

0.8

0.4

0.4
Financial liabilities

Derivative instruments

1.2

1.2

1.5

1.5
Deposits

9,956.9

10,146.1

9,792.6

10,015.9
Non-recourse borrowings of consolidated securitization entities

3,845.8

3,903.1

5,709.9

5,783.4
Long-term and other debt

2,782.9

2,870.4

2,805.7

2,875.1

The ~~following techniques and assumptions were used by the Company in estimating fair values of financial instruments as disclosed herein:~~

~~Credit card and loan receivables, net —~~ ~~The Company utilizes a discounted~~table below summarizes our cash flow ~~model using unobservable inputs, including estimated yields (interest and fee income), loss rates, payment rates and discount rates to estimate the fair value measurement~~activity, followed by a discussion of the ~~credit card~~variance drivers impacting our operating, investing and ~~loan receivables~~.

~~Redemption settlement assets, restricted —~~ ~~Redemption settlement assets, restricted are recorded at fair value based on quoted market prices for the same or similar securities.~~

~~Other investments~~ — Other investments consist of marketable securities and are included in other current assets and other non-current assets in the unaudited condensed consolidated balance sheets. Other investments are recorded at fair value based on quoted market prices for the same or similar securities.

~~Deposits~~ — For money market deposits, carrying value approximates fair value due to the liquid nature of these deposits. For certificates of deposit, the fair value is estimated based on the current observable market rates available to the Company for similar deposits with similar remaining maturities.

~~Non-recourse borrowings of consolidated securitization entities~~ — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.

~~Long-term and other debt~~ — The fair value is estimated based on the current observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction.

~~Derivative instruments~~ — The Company’s foreign currency cash flow hedges and foreign currency exchange forward contracts are recorded at fair value based on a discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflected the contractual terms of the derivatives, including the period to maturity, and used observable market-based inputs.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~Financial Assets and Financial Liabilities Fair Value Hierarchy~~

~~ASC 820, “Fair Value Measurement,” establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. These tiers include:~~

●

~~Level 1, defined as observable inputs such as quoted prices in active markets;~~

●

~~Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable; and~~

●

~~Level 3, defined as unobservable inputs where little or no market data exists, therefore requiring an entity to develop its own assumptions.~~

Financial instruments are considered Level 3 when their values are determined using pricing models, discounted cash flow methodologies or similar techniques and at least one significant model assumption or input is unobservable. Level 3 financial instruments also include those for which the determination of fair value requires significant management judgment or estimation. The use of different techniques to determine fair value of these financial instruments could result in different estimates of fair value at the reporting date.

~~The following tables provide information for the assets and liabilities carried at fair value measured on a recurring basis as of March 31, 2021 and December 31, 2020:~~

Fair Value Measurements at

March 31, 2021 Using


Balance at






March 31,


2021

Level 1

Level 2

Level 3

(in millions)
Mutual funds ⁽¹⁾

$
26.5

$
26.5

$
—

$
—
Corporate bonds ⁽¹⁾

627.4

—

627.4

—
Marketable securities ⁽²⁾

222.0

33.8

188.2

—
Derivative instruments ⁽³⁾

0.8

—

0.8

—
Total assets measured at fair value

$
876.7

$
60.3

$
816.4

$
—

Derivative instruments ⁽³⁾

$
1.2

$
—

$
1.2

$
—
Total liabilities measured at fair value

$
1.2

$
—

$
1.2

$
—

Fair Value Measurements at

December 31, 2020 Using


Balance at






December 31,


2020

Level 1

Level 2

Level 3

(in millions)
Mutual funds ⁽¹⁾

$
26.9

$
26.9

$
—

$
—
Corporate bonds ⁽¹⁾

611.2

—

611.2

—
Marketable securities ⁽²⁾

225.4

34.2

191.2

—
Derivative instruments ⁽³⁾

0.4

—

0.4

—
Total assets measured at fair value

$
863.9

$
61.1

$
802.8

$
—

Derivative instruments ⁽³⁾

$
1.5

$
—

$
1.5

$
—
Total liabilities measured at fair value

$
1.5

$
—

$
1.5

$
—

~~(1)~~

~~Amounts are included in redemption settlement assets in the unaudited condensed consolidated balance sheets.~~

~~(2)~~

~~Amounts are included in other current assets and other non-current assets in the unaudited condensed consolidated balance sheets.~~

~~(3)~~

~~Amounts are included in other current assets and other current liabilities in the unaudited condensed consolidated balance sheets.~~

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~Financial Instruments Disclosed but Not Carried at Fair Value~~

~~The following tables provide assets and liabilities disclosed but not carried at fair value as of March 31, 2021 and December 31, 2020:~~

Fair Value Measurements at

March 31, 2021


Total

Level 1

Level 2

Level 3

(in millions)
Financial assets:

Credit card and loan receivables, net

$
15,977.1

$
—

$
—

$
15,977.1
Total

$
15,977.1

$
—

$
—

$
15,977.1

Financial liabilities:

Deposits

$
10,146.1

$
—

$
10,146.1

$
—
Non-recourse borrowings of consolidated securitization entities

3,903.1

—

3,903.1

—
Long-term and other debt

2,870.4

—

2,870.4

—
Total

$
16,919.6

$
—

$
16,919.6

$
—

Fair Value Measurements at

December 31, 2020


Total

Level 1

Level 2

Level 3

(in millions)
Financial assets:

Credit card and loan receivables, net

$
17,301.2

$
—

$
—

$
17,301.2
Total

$
17,301.2

$
—

$
—

$
17,301.2

Financial liabilities:

Deposits

$
10,015.9

$
—

$
10,015.9

$
—
Non-recourse borrowings of consolidated securitization entities

5,783.4

—

5,783.4

—
Long-term and other debt

2,875.1

—

2,875.1

—
Total

$
18,674.4

$
—

$
18,674.4

$
—

~~18. INCOME TAXES~~

For the three months ended March 31, 2021 and 2020, the Company utilized an effective tax rate of 27.4% and (18.1)%, respectively, to calculate its provision for income taxes. The negative effective tax rate in the first quarter of 2020 was primarily related to a discrete tax benefit and reduction of tax reserves following a favorable settlement with a state tax authority.

~~19. SEGMENT INFORMATION~~

Operating segments are defined by ASC 280, “Segment Reporting,” as components of an enterprise about which separate financial information is available that is evaluated regularly by the chief operating decision maker in deciding how to allocate resources and in assessing performance. The operating segments are reviewed separately because each operating segment represents a strategic business unit that generally offers different products and services.

~~The Company operates in the LoyaltyOne and Card Services reportable segments, which consist of the following:~~

●

~~LoyaltyOne provides coalition and short-term loyalty programs through the Company’s Canadian AIR MILES Reward Program and BrandLoyalty; and~~

●

Card Services provides private label, co-brand, general purpose and business credit card programs, digital payments, including Bread, and Comenity-branded financial services. Card Services provides risk management

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)~~

~~solutions, account origination, funding, transaction processing, customer care, collections and marketing services.~~

~~Corporate and other consists of corporate overhead not allocated to either of the Company’s segments.~~

Effective with the first quarter of 2021, the Company changed its measure of segment operating profit from adjusted EBITDA and adjusted EBITDA, net to income before income taxes, as income before income taxes is now the primary performance metric utilized by the chief operating decision maker to allocate resources and assess performance of the segments. Income taxes are not allocated to the segments in the computation of segment operating profit for internal evaluation purposes. Segment operating resultsfinancing activities, for the three months ended March 31, ~~2020 have been presented to align~~2022 compared with the ~~current year presentation. This change had no impact on previously reported financial information.~~three months ended March 31, 2021.

Corporate/

Three Months Ended March 31, 2021

LoyaltyOne

Card Services

Other

Total

(in millions)
Revenues

$
176.6

$
908.3

$
—

$
1,084.9
Other operating expenses

135.9

361.5

17.0

514.4
Provision for loan loss

—

33.4

—

33.4
Depreciation and amortization

9.0

24.4

0.6

34.0
Operating income (loss)

31.7

489.0

(17.6)

503.1
Interest expense, net

—

79.1

29.6

108.7
Income (loss) before income taxes

$
31.7

$
409.9

$
(47.2)

$
394.4

Table 11: Cash Flows

Corporate/

Three Months Ended March 31, 2020

LoyaltyOne

Card Services

Other

Total

(in millions)
Revenues

$
198.1

$
1,183.6

$
0.1

$
1,381.8
Other operating expenses

133.5

365.7

23.9

523.1
Provision for loan loss

—

655.9

—

655.9
Depreciation and amortization

18.2

19.7

0.9

38.8
Operating income (loss)

46.4

142.3

(24.7)

164.0
Interest expense, net

(0.3)

110.2

28.7

138.6
Income (loss) before income taxes

$
46.7

$
32.1

$
(53.4)

$
25.4


	Three Months Ended March 31,
	2022		2021

	(in millions)
Total cash provided by (used in):
Operating activities	$	497	$	517
Investing activities		310		1,009
Financing activities		(1,096)		(1,741)
Effect of foreign currency exchange rates		—		(1)
Net (decrease) in cash, cash equivalents and restricted cash	$	(289)	$	(216)

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.

~~20. SUPPLEMENTAL CASH FLOW INFORMATION~~

~~The following table provides a reconciliation~~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 ~~equivalents~~provided by investing activities was also due to ~~the total of the amounts reported~~seasonal paydowns coupled with an increase in ~~the unaudited condensed consolidated statements of cash flows:~~payment rates that benefitted from government economic stimulus programs.

March 31,

March 31,

2021

2020

(in millions)
Cash and cash equivalents

$
2,858.6

$
4,456.8
Restricted cash included within other current assets ⁽¹⁾

316.5

253.2
Restricted cash included within redemption settlement assets, restricted⁽²⁾

71.8

55.9
Total cash, cash equivalents and restricted cash

$
3,246.9

$
4,765.9

~~(1)~~

Includes cash restricted for principal and interest repayments of non-recourse borrowings of consolidated securitized debt and other restricted cash within other current assets. At March 31, 2021, restricted cash included $294.4 million in principal accumulation for the repayment of non-recourse borrowings of consolidated securitized debt maturing in June 2021. At March 31, 2020, restricted cash included $225.3 million in principal accumulation for the repayment of non-recourse borrowings of consolidated securitized debt that matured in May 2020.

~~(2)~~

~~See Note 9, “Redemption Settlement Assets,” for additional information regarding the nature of restrictions on redemption settlement assets.~~

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.

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 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.

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.

3011

~~Index~~Table of Contents

~~Caution~~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. 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 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:

Table 12: Capital Ratios


					Minimum Ratio to be
			Minimum Ratio for		Well Capitalized under
	Actual		Capital Adequacy		Prompt Corrective
	Ratio		Purposes		Action Provisions
Comenity Bank
Tier 1 Leverage capital ratio ⁽¹⁾	19.4	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	22.5		4.5		6.5
Tier 1 capital ratio ⁽³⁾	22.5		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	23.8		8.0		10.0

Comenity Capital Bank
Tier 1 Leverage capital ratio ⁽¹⁾	17.2	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	19.3		4.5		6.5
Tier 1 capital ratio ⁽³⁾	19.3		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	20.7		8.0		10.0

Combined Banks
Tier 1 Leverage capital ratio ⁽¹⁾	18.2	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	20.8		4.5		6.5
Tier 1 capital ratio ⁽³⁾	20.8		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	22.1		8.0		10.0

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

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

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

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

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

Table of Contents

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.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

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.

RECENTLY ISSUED ACCOUNTING STANDARDS

See the “Recently Issued Accounting Standards” under Note 1, “Description of Business and Basis of Presentation,” to the unaudited condensed consolidated financial statements.

Table of Contents

Cautionary Note Regarding Forward-Looking Statements

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, ~~strategic initiatives, our expected operating results, future economic conditions including currency exchange rates, future dividend declarations~~ and the guidance we give with respect to, our anticipated operating or financial ~~performance.~~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:

●

~~continuing impacts related~~the ongoing effects of the global COVID-19 pandemic, which remain difficult to ~~COVID-19,~~predict;

●

macroeconomic and geopolitical conditions, including, ~~government economic stimulus, relief measures for impacted borrowers~~but not limited to, market conditions, inflation and ~~depositors, labor shortages due to quarantine, reduction~~any impact of the war in ~~demand from clients, supply chain disruption for our reward suppliers and disruptions in the airline or travel industries;~~Ukraine;

●

loss of, or reduction in demand for services from, significant ~~clients;~~customers or partners;

●

increases in fraudulent activity, net charge-offs in credit card and ~~loan receivables~~other loans or increases or volatility in the allowance for ~~loan loss~~credit losses that may result from the application of the current expected credit loss model;

●

failure to identify, complete or successfully integrate or disaggregate business acquisitions or ~~divestitures;~~divestitures, including our ability to realize the intended benefits of the spinoff of our LoyaltyOne segment;

●

continued financial responsibility with respect to a divested business, including required equity ownership, guarantees, indemnities or other financial obligations;

●

the expected tax-free treatment of the distribution effected in the LoyaltyOne spinoff for U.S. federal income tax purposes;

●

increases in the cost of doing business, including market interest rates;

●

inability to access financial or capital markets, including asset-backed securitization funding or deposits markets;

●

~~loss of active AIR MILES~~^®~~Reward Program collectors;~~

●

~~increased redemptions by AIR MILES Reward Program collectors;~~

●

~~unfavorable fluctuations in foreign currency exchange rates;~~restrictions that limit our banks’ ability to pay dividends to us;

●

limitations on consumer credit, loyalty or marketing services from new legislative or regulatory actions related to consumer protection and consumer privacy;

●

increases in ~~Federal Deposit Insurance Corporation, Delaware or Utah~~ regulatory capital requirements or other support for our ~~banks;~~

●

~~failure to maintain exemption from regulation under the Bank Holding Company Act;~~Banks;

●

loss or disruption, due to ~~cyber attack~~cyberattack or other service failures, of data center operations or capacity;

●

loss of consumer information due to compromised physical or cyber security; and

●

those factors set forth in the Risk Factors section in our ~~Annual Report on~~2021 Form 10-K ~~for the most recently ended fiscal year~~ as well as those factors discussed in Item 1A and elsewhere in this Form 10-Q and in the documents incorporated by reference in this Form 10-Q.

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.

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.

3114

~~Index~~Table of Contents

Item ~~2. Management’s Discussion and Analysis~~1. Financial Statements.

BREAD FINANCIAL HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME


	Three Months Ended
	March 31,
	2022		2021

	(in millions, except per share amounts)
Interest income
Interest and fees on loans	$	1,066	$	941
Interest on cash and investment securities		2		1
Total interest income		1,068		942
Interest expense
Interest on deposits		34		47
Interest on borrowings		45		60
Total interest expense		79		107
Net interest income		989		835
Non-interest income
Interchange revenue, net of retailer share arrangements		(96)		(68)
Other		28		35
Total non-interest income		(68)		(33)
Total net interest and non-interest income		921		802
Provision for credit losses		193		33
Total net interest and non-interest income, after provision for credit losses		728		769
Non-interest expenses
Employee compensation and benefits		179		159
Card and processing expenses		82		78
Information processing and communication		56		51
Marketing expenses		31		42
Depreciation and amortization		21		25
Other		57		47
Total non-interest expenses		426		402
Income from continuing operations before income taxes		302		367
Provision for income taxes		91		99
Income from continuing operations		211		268
(Loss) income from discontinued operations, net of income taxes		(1)		18
Net income	$	210	$	286

Basic income per share (Note 13):
Income from continuing operations	$	4.23	$	5.39
(Loss) income from discontinued operations	$	(0.01)	$	0.37
Net income per share	$	4.22	$	5.76

Diluted income per share (Note 13):
Income from continuing operations	$	4.21	$	5.38
(Loss) income from discontinued operations	$	(0.01)	$	0.36
Net income per share	$	4.20	$	5.74

Weighted average shares (Note 13):
Basic		49.9		49.7
Diluted		50.0		49.8

See Notes to Unaudited Condensed Consolidated Financial Statements

Table of Contents

BREAD FINANCIAL HOLDINGS, INC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended
	March 31,
	2022		2021

	(in millions)
Net income	$	210	$	286

Other comprehensive loss:
Unrealized loss on available-for-sale debt securities		(9)		(9)
Tax benefit		2		1
Unrealized loss on available-for-sale debt securities, net of tax		(7)		(8)

Unrealized gain on cash flow hedges		—		1
Tax benefit		—		—
Unrealized gain on cash flow hedges, net of tax		—		1

Foreign currency translation adjustments		—		(30)

Other comprehensive loss, net of tax		(7)		(37)

Total comprehensive income, net of tax	$	203	$	249

See Notes to Unaudited Condensed Consolidated Financial ~~Condition and Results~~Statements.

Table of ~~Operations.~~Contents

BREAD FINANCIAL HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	March 31,		December 31,
	2022		2021

	(in millions, except per share amounts)
ASSETS
Cash and cash equivalents	$	2,930	$	3,046
Credit card and other loans:
Total credit card and other loans (includes loans available to settle obligations of consolidated variable interest entities: 2022, $10,771; 2021, $11,215)		16,843		17,399
Allowance for credit losses		(1,826)		(1,832)
Credit card and other loans, net		15,017		15,567
Investment securities		233		239
Property and equipment, net		220		215
Goodwill and intangible assets, net		682		687
Other assets		1,856		1,992
Total assets	$	20,938	$	21,746
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits		10,646		11,027
Debt issued by consolidated variable interest entities		4,816		5,453
Long-term and other debt		1,962		1,986
Other liabilities		1,246		1,194
Total liabilities		18,670		19,660
Commitments and contingencies (Note 9)
Stockholders’ equity:
Common stock, $0.01 par value; authorized, 200.0 million shares; issued, 49.8 million shares as of both March 31, 2022 and December 31, 2021		1		1
Additional paid-in capital		2,163		2,174
Retained earnings (accumulated deficit)		113		(87)
Accumulated other comprehensive loss		(9)		(2)
Total stockholders’ equity		2,268		2,086
Total liabilities and stockholders’ equity	$	20,938	$	21,746

See Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY


										Accumulated
				Additional						Other		Total
	Common Stock			Paid-In		Treasury		Retained		Comprehensive		Stockholders’
Three Months Ended March 31, 2022	Shares	Amount		Capital		Stock		Earnings		Loss		Equity

	(in millions)
Balance as of December 31, 2021	49.9	$	1	$	2,174	$	—	$	(87)	$	(2)	$	2,086
Net income	—		—		—		—		210		—		210
Other comprehensive loss	—		—		—		—		—		(7)		(7)
Stock-based compensation	—		—		7		—		—		—		7
Repurchases of common stock	(0.2)		—		(12)								(12)
Dividends and dividend equivalent rights declared ($0.21 per common share)	—		—		—		—		(10)		—		(10)
Other	0.1		—		(6)		—		—		—		(6)
Balance as of March 31, 2022	49.8	$	1	$	2,163	$	—	$	113	$	(9)	$	2,268


										Accumulated
				Additional						Other		Total
	Common Stock			Paid-In		Treasury		Retained		Comprehensive		Stockholders’
Three Months Ended March 31, 2021	Shares	Amount		Capital		Stock		Earnings		Loss		Equity

	(in millions)
Balance as of December 31, 2020	117.1	$	1	$	3,427	$	(6,734)	$	4,832	$	(5)	$	1,521
Net income	—		—		—		—		286		—		286
Other comprehensive loss	—		—		—		—		—		(37)		(37)
Stock-based compensation	—		—		7		—		—		—		7
Dividends and dividend equivalent rights declared ($0.21 per common share)	—		—		—		—		(10)		—		(10)
Other	—		—		(3)		—		—		—		(3)
Balance as of March 31, 2021	117.1	$	1	$	3,431	$	(6,734)	$	5,108	$	(42)	$	1,764

See Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Three Months Ended
	March 31,
	2022		2021

	(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income	$	210	$	286
Adjustments to reconcile net income to net cash provided by operating activities:
Provision for credit losses		193		33
Depreciation and amortization		21		34
Deferred income taxes		(48)		(26)
Non-cash stock compensation		7		7
Amortization of deferred financing costs		6		8
Amortization of deferred origination costs		21		16
Change in other operating assets and liabilities:
Change in other assets		(2)		60
Change in other liabilities		73		95
Other		16		4
Net cash provided by operating activities		497		517

CASH FLOWS FROM INVESTING ACTIVITIES:
Change in credit card and other loans		339		1,034
Change in redemption settlement assets		—		(13)
Capital expenditures		(20)		(12)
Purchases of investment securities		(18)		(22)
Maturities of investment securities		12		22
Other		(3)		—
Net cash provided by investing activities		310		1,009

CASH FLOWS FROM FINANCING ACTIVITIES:
Unsecured borrowings under debt agreements		175		—
Repayments/maturities of unsecured borrowings under debt agreements		(200)		(25)
Debt issued by consolidated variable interest entities		525		175
Repayments/maturities of debt issued by consolidated variable interest entities		(1,162)		(2,039)
Net (decrease) increase in deposits		(405)		162
Dividends paid		(10)		(11)
Repurchases of common stock		(12)		—
Other		(7)		(3)
Net cash used in financing activities		(1,096)		(1,741)

Effect of foreign currency exchange rates on cash, cash equivalents and restricted cash		—		(1)

Change in cash, cash equivalents and restricted cash		(289)		(216)
Cash, cash equivalents and restricted cash at beginning of period		3,923		3,463
Cash, cash equivalents and restricted cash at end of period	$	3,634	$	3,247

SUPPLEMENTAL CASH FLOW INFORMATION:

Cash and cash equivalents reconciliation:
Cash and cash equivalents	$	2,930	$	2,634
Restricted cash included within Other assets		704		314
Cash, cash equivalents and restricted cash included within Assets of discontinued operations		—		299
Total cash, cash equivalents and restricted cash	$	3,634	$	3,247

The ~~following discussion~~Unaudited Condensed Consolidated Statements of Cash Flows are presented with the combined cash flows from continuing and discontinued operations.

See Notes to Unaudited Condensed Consolidated Financial Statements.

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION

DESCRIPTION OF THE BUSINESS

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

Bread Financial Holdings, Inc. (BFH or, including its consolidated subsidiaries and variable interest entities (VIEs), the Company) is a tech-forward financial services company providing simple, personalized payment, lending and saving solutions. The Company creates opportunities for its 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, the Company delivers growth for its partners through a comprehensive product suite, including private label and co-brand credit cards, installment lending, and buy now, pay later (split-pay). The Company also offers direct-to-consumer solutions that give customers more access, choice and freedom through its branded Bread Cashback^TM American Express^® Credit Card and Bread Savings^TM products.

BASIS OF PRESENTATION

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States of America (GAAP). For purposes of comparability, certain prior period amounts have been reclassified to conform to the current presentation, in particular, as a result of the spinoff of its LoyaltyOne segment and its classification as discontinued operations, the Company has adjusted the presentation of its Consolidated Financial Statements from its historical approach under SEC Regulation S-X Article 5, which is broadly applicable to all “commercial and industrial companies,” to Article 9, which is applicable to “bank holding companies.” While neither the Company nor any of its subsidiaries are considered a “bank” within the meaning of the Bank Holding Company Act, the changes from the historical presentation, to the bank holding company presentation, the most significant of which reflect a reclassification of Interest expense within Net interest income, are intended to reflect the Company’s operations going forward and better align the Company with its peers for comparability purposes.

The unaudited Condensed Consolidated Financial Statement should be read in conjunction with the ~~unaudited condensed consolidated financial statements~~Consolidated Financial Statements and ~~related notes thereto presented in this quarterly report and the consolidated financial statements and related~~ notes thereto included in ~~our~~the Company’s Annual Report on Form 10-K for the year ended December 31, ~~2020,~~2021, filed with the Securities and Exchange Commission ~~or SEC,~~ on February ~~26, 2021.~~25, 2022; if not significantly different, certain note disclosures included therein have been omitted from these unaudited Condensed Consolidated Financial Statements.

~~2021 First Quarter~~

The unaudited Condensed Consolidated Financial ~~Highlights~~

Statements included herein reflect all adjustments, which consist of normal, recurring adjustments that are, in the opinion of management, necessary to state fairly the results for the interim periods presented. Results of operations reported for interim periods are not necessarily indicative of results for the ~~first quarter~~entire year.

The preparation of ~~2021 continued~~financial statements in conformity with GAAP requires management to ~~be impacted by~~make estimates and assumptions that affect the ~~COVID-19 pandemic; however, we continue to see improvement in key credit metrics~~reported amounts of assets, liabilities, revenue and ~~continued sequential improvement in business conditions. Financial highlights for~~expenses, and the ~~first quarter~~disclosures of ~~2021 as compared~~contingent assets and liabilities. These accounting estimates and assumptions reflect the best judgement of management, but actual results could differ. The most significant of those estimates and assumptions relate to the ~~corresponding prior year period are as follows:~~

●

~~For the three months ended March 31, 2021, as compared to the three months ended March 31, 2020:~~

●

~~Revenue decreased $296.9 million, or 21%, to $1,084.9 million.~~

●

~~Provision for loan loss decreased $622.5 million, or 95%, to $33.4 million~~

●

~~Income before income taxes increased $369.0 million, or 1,452%, to $394.4 million.~~

●

~~Net income increased $256.2 million, or 854%, to $286.2 million.~~

●

~~We paid dividends and dividend equivalent rights of $10.7 million for the three months ended March 31, 2021.~~

●

On April 14, 2021, the Company announced that Perry Beberman will be named Executive Vice President and Chief Financial Officer, effective July 6, 2021. Mr. Beberman served most recently as Senior Vice President and Finance Executive for Bank of America’s Consumer and Wealth Management Lending Products. He succeeds Mr. King who resigned as Executive Vice President and Chief Financial Officer on April 13, 2021.

~~COVID-19 Update~~Company’s Allowance for credit losses.

On March 11, 2020, the World Health Organization declared the current coronavirus, or COVID-19, outbreak to be a global pandemic. In response to this declaration and the rapid spread of COVID-19, international, provincial, federal, state and local government or other authorities have imposed varying degrees of restrictions on social and commercial activity in an effort to improve health and safety. As the global COVID-19 pandemic has continued to evolve, our priority has been and continues to be, the health and safety of our employees, with the vast majority of our employees continuing to work from home.

The ~~effects~~accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the ~~COVID-19 pandemic impacted our results~~Company and ~~year-over-year comparisons; however, credit metrics~~all subsidiaries in which the Company has a controlling financial interest. All intercompany transactions have remained resilient, with a net loss rate of 5.0% for the three months ended March 31, 2021, and a delinquency rate of 3.8% for the period ended March 31, 2021. Improvement in the net loss rate is a result of prudent risk management strategy changes, deliberate underwriting actions, and direct consumer stimulus payments. Credit sales year-over-year performance strengthened versus the previous quarter. The majority of the credit sales improvement can be attributed to in‐store sales, which have benefitted from increased consumer confidence and mobility. However, redemptions in our AIR MILES Reward Program declined 26% largely due to the downturn in the travel market as a result of the pandemic and related restrictions such as border closures repressing travel-related redemptions. The AIR MILES Reward Program continues to pivot the rewards portfolio to emphasize more non‐travel options, driving higher merchandise redemptions. In addition, the AIR MILES Reward Program is working with airline partners to plan for the eventual return of airline travel with optimism for the second half of the year. At BrandLoyalty, uncertainty remains with many European countries still in lockdown; however, new program activity is increasing with consumers actively engaged in loyalty campaigns, with particular success in products focused on the home.been eliminated.

Despite the emergence of vaccines, surges in COVID-19 cases, including variants of the strain, may cause people to self-quarantine or governments to shut down nonessential businesses again. The broad availability of COVID-19 vaccines and the willingness of individuals to be vaccinated are difficult to predict. The pace and shape of the COVID-19 recovery as well as the impact and extent of potential resurgences is not presently known. We continue to evaluate the nature and extent of changes to the market and economic conditions related to the COVID-19 pandemic and current and potential impact on our business and financial position. However, given the dynamic nature of this situation, we cannot reasonably estimate the impacts of COVID-19 on our future results of operations or cash flows at this time.

3220

~~Index~~Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~Consolidated Results of Operations~~RECENTLY ISSUED ACCOUNTING STANDARDS

Three Months Ended March 31,


2021

2020

% Change


(in millions, except percentages)
Revenues

Services

$
39.4

$
46.6

(15)
%
Redemption, net

104.9

120.9

(13)

Finance charges, net

940.6

1,214.3

(23)

Total revenue

1,084.9

1,381.8

(21)

Operating expenses

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

497.5

499.2

—

Provision for loan loss

33.4

655.9

(95)

General and administrative

16.9

23.9

(29)

Depreciation and other amortization

22.9

17.4

31

Amortization of purchased intangibles

11.1

21.4

(48)

Total operating expenses

581.8

1,217.8

(52)

Operating income

503.1

164.0

207

Interest expense

Securitization funding costs

33.6

49.9

(33)

Interest expense on deposits

45.5

60.3

(25)

Interest expense on long-term and other debt, net

29.6

28.4

5

Total interest expense, net

108.7

138.6

(22)

Income before income taxes

394.4

25.4

1,452

Provision (benefit) for income taxes

108.2

(4.6)

nm
*
Net income

$
286.2

$
30.0

854
%

Key Operating Metrics:

Credit sales

$
6,043.3

$
6,099.1

(1)
%
Average credit card and loan receivables

$
15,785.0

$
18,294.4

(14)
%
AIR MILES reward miles issued

1,111.6

1,315.8

(16)
%
AIR MILES reward miles redeemed

739.4

994.0

(26)
%

In March 2022, the Financial Accounting Standards Board issued new accounting and disclosure guidance for troubled debt restructurings effective January 1, 2023, with early adoption permitted. Specifically, the new guidance eliminates the previous recognition and measurement guidance for troubled debt restructurings while enhancing the disclosure requirements for certain loan modifications, including requiring disclosure of gross charge-offs by year of loan origination. The Company is evaluating the new guidance and any impacts on its financial position, results of operations and regulatory risk-based capital, none of which are expected to be material, along with any anticipated impacts on its operational processes, controls and governance.

~~not meaningful~~

~~Three months ended March 31, 2021 compared~~

2. CREDIT CARD AND OTHER LOANS

The Company’s payment and lending solutions result in the generation of credit card and other loans, which are recorded at the time a cardholder enters into a point-of-sale transaction with a merchant. Credit card loans represent revolving amounts due and have a range of terms that include credit limits, interest rates and fees, which can be revised over time based on new information about the cardholder, in accordance with applicable regulations and the governing terms and conditions. Cardholders choosing to make a payment of less than the full balance due, instead of paying in full, are subject to finance charges and are required to make monthly payments based on pre-established amounts. Other loans, which are primarily installment loans offered to customers, have a range of fixed terms such as interest rates, fees and repayment periods, and borrowers are required to make pre-established monthly payments over the term of the loan in accordance with the applicable terms and conditions. Credit card and other loans are presented on the Consolidated Balance Sheets net of the Allowance for credit losses, and include principal and any related accrued interest and fees. The Company continues to accrue interest and fee income on all accounts, except in limited circumstances, until the related balance and all related interest and fees are paid or charged-off; an Allowance for credit losses is established for uncollectable interest and fees.

Primarily, the Company classifies its credit card and other loans as held for investment. The Company sells a majority of its credit card loans originated by Comenity Bank and by Comenity Capital Bank, which together are referred to herein as the “Banks,” to securitization master trusts, which are themselves consolidated VIEs, and therefore these loans are restricted for securitization investors. All new originations of credit card and other loans are determined to be held for investment at origination because the Company has the intent and ability to hold them for the foreseeable future. In determining what constitutes the foreseeable future, the Company considers the average life and homogenous nature of its credit card and other loans. In assessing whether its credit card and other loans continue to be held for investment, the Company also considers capital levels and scheduled maturities of funding instruments used. The assertion regarding the intent and ability to hold credit card and other loans for the foreseeable future can be made with a high degree of certainty given the maturity distribution of the Company’s direct-to-consumer deposits and other funding instruments; the demonstrated ability to replace maturing time-based deposits and other borrowings with new deposits or borrowings; and historic payment activity on its credit card and other loans. Due to the ~~three months ended March 31, 2020~~homogenous nature of the Company’s credit card loans, amounts are classified as held for investment on a brand partner portfolio basis. From time to time certain credit card loans are classified as held for sale, as determined on a brand partner basis. The Company carries these assets at the lower of aggregate cost or fair value, and continues to recognize finance charges on an accrual basis. Cash flows associated with credit card and other loans originated or purchased for investment are classified as Cash flows from investing activities, regardless of any subsequent change in intent and ability.

~~Revenue~~. Total revenue decreased $296.9 million, or 21%, to $1,084.9 million for the three months ended March 31, 2021 from $1,381.8 million for the three months ended March 31, 2020. The decrease was due to the following:

●

~~Services~~. Revenue decreased $7.2 million, or 15%, to $39.4 million for the three months ended March 31, 2021 due to an $8.4 million decrease in other servicing fees charged to cardholders due to a decline in revenue from certain payment protection products driven by lower volumes. Additionally, the sale of Precima in January 2020 resulted in a $1.9 million decrease in revenue as compared to the prior year. These decreases were offset in part by an increase in merchant fee revenue due to decreased royalty payments to our retailers.

●

~~Redemption, net~~. Revenue decreased $16.0 million, or 13%, to $104.9 million for the three months ended March 31, 2021 as redemption revenue from our short-term loyalty programs decreased $14.3 million due to a decline in programs in markets across most regions due to the impact of COVID-19. In response to COVID-19, certain of our customers have delayed their short-term loyalty programs.

●

~~Finance charges, net~~. Revenue decreased $273.7 million, or 23%, to $940.6 million for the three months ended March 31, 2021. The decline was due to a 15% decrease in average credit card and loans including those held for sale, which decreased revenue by $181.2 million, and an approximate 230 basis point decrease in finance charge yield, which decreased revenue by $92.5 million. The decrease in credit card and loan receivables was due to increases in payment rates that benefitted from government economic stimulus programs, a 1% decline in credit sales as a result of COVID-19 and the sale of a credit card portfolio in 2020. The decrease in finance charge yield was due to lower late fees resulting from a lower level of delinquencies, and the reduction in market interest rates in 2020.

3321

~~Index~~Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~Cost~~The Company’s credit card and other loans were as follows, as of ~~operations~~~~. Cost of operations decreased $1.7 million to $497.5 million for the three months ended~~ March 31, 2022 and December 31, 2021, ~~as compared to $499.2 million for the three months ended March 31, 2020. The net decrease was due to the following:~~respectively:


	March 31,		December 31,
	2022		2021

	(in millions)
Credit card loans	$	16,651	$	17,217
Installment (other) loans		192		182
Total credit card and other loans ⁽¹⁾⁽²⁾		16,843		17,399
Less: Allowance for credit losses		(1,826)		(1,832)
Credit card and other loans, net	$	15,017	$	15,567

●(1)

~~Within the LoyaltyOne segment, cost~~Includes $10.8 billion and $11.2 billion of ~~operations increased $2.4 million due~~credit card and other loans available to ~~the gain on sale~~settle obligations of ~~Precima in January 2020 that did not recur in the current year quarter, offset in part by a $7.5 million decrease in cost~~consolidated VIEs as of ~~redemptions due to the decline in redemption revenue discussed above.~~March 31, 2022 and December 31, 2021, respectively.

●(2)

~~Within the Card Services segment, cost~~Includes $228 million and $224 million, of ~~operations decreased $4.1 million due~~accrued interest and fees that have not yet been billed to a $47.2 million decline in various credit card costs due to reductions in volume and operational improvements, which included a $37.0 million reduction in fraud losses, and a $4.2 million decline in valuation adjustments related to certain portfolios within credit card receivables held for sale in the prior year quarter. These decreases were offset in part by a $27.7 million increase in payroll and benefits costs primarily due to an increase in incentive compensation and the acquisitioncardholders as of ~~Bread in December 2020, and a $20.4 million gain on sale of a credit card portfolio for the three months ended~~ March 31, ~~2020 that did not recur in the current year quarter.~~2022 and December 31, 2021, respectively.

~~Provision for loan loss~~. Provision for loan loss decreased $622.5 million, or 95%, to $33.4 million for the three months ended March 31, 2021 as compared to $655.9 million for the three months ended March 31, 2020. The decrease in the provision for loan loss in the current year quarter was due to improved credit performance, lower net-charge-offs

Credit Card and improving macroeconomic indicators. In the first quarter of 2020 there was a significant increase in the provision due to a reserve build in the allowance for loan loss due to the deterioration of the global macroeconomic outlook as a result of the onset of COVID-19.

~~General and administrative~~. General and administrative expenses decreased $7.0 million, or 29%, to $16.9 million for the three months ended March 31, 2021 as compared to $23.9 million for the three months ended March 31, 2020, due to a decrease in payroll and benefits expense due to lower medical claims.

~~Depreciation and other amortization~~. Depreciation and other amortization increased $5.5 million, or 31%, to $22.9 million for the three months ended March 31, 2021 as compared to $17.4 million for the three months ended March 31, 2020, primarily due to $4.9 million in accelerated depreciation expense of fixed assets resulting from the Company’s real estate optimization plans.

~~Amortization of purchased intangibles~~. Amortization of purchased intangibles decreased $10.3 million, or 48%, to $11.1 million for the three months ended March 31, 2021, as compared to $21.4 million for the three months ended March 31, 2020, primarily due to certain fully amortized intangible assets, including BrandLoyalty customer contracts, offset in part by $5.4 million in amortization of purchased intangibles associated with the acquisition of Bread in December 2020.

~~Interest expense, net~~. Total interest expense, net decreased $29.9 million, or 22%, to $108.7 million for the three months ended March 31, 2021 as compared to $138.6 million for the three months ended March 31, 2020. The net decrease was due to the following:

●

~~Securitization funding costs~~. Securitization funding costs decreased $16.3 million due to lower average borrowings, which decreased funding costs by approximately $12.6 million, and lower average interest rates, which decreased funding costs by approximately $3.7 million.Other Loans Aging

●

~~Interest expense on deposits~~. Interest expense on deposits decreased $14.8 million due to lower average balances outstanding, which decreased funding costs by approximately $10.0 million, and lower average interest rates, which decreased funding costs by approximately $4.8 million.

●

~~Interest expense on long-term and other debt, net~~. Interest expense on long-term and other debt, net increased $1.2 million primarily due to an $8.8 million increase in interest expense due to the issuance of senior notes in September 2020 and a $0.6 million increase in amortization of debt issuance costs. This was offset in part by an $8.9 million decrease in interest expense on term debt due to lower average borrowings.

~~Taxes.~~ Provision for income taxes was $108.2 million for the three months ended March 31, 2021, while the income tax benefit was $4.6 million for the three months ended March 31, 2020. The effective tax rate for the three months ended March 31, 2021 was 27.4% as compared to (18.1)% for the prior year quarter. The increase in tax expense in the first quarter of 2021 was primarily related to an increase in taxable income in the first quarter of 2021. In addition, the

~~Index~~

~~effective tax rate for the first quarter of 2020 was impacted by a discrete tax benefit and reduction of tax reserves following a favorable settlement with a state tax authority.~~

~~Segment Revenue and Income (Loss) Before Income Taxes~~

Three Months Ended March 31,


2021

2020

% Change


(in millions, except percentages)
Revenue:

LoyaltyOne

$
176.6

$
198.1

(11)
%
Card Services

908.3

1,183.6

(23)

Corporate/Other

—

0.1

nm
*
Total

$
1,084.9

$
1,381.8

(21)
%

Income (Loss) Before Income Taxes

LoyaltyOne

$
31.7

$
46.7

(32)
%
Card Services

409.9

32.1

1,179

Corporate/Other

(47.2)

(53.4)

(12)

Total

$
394.4

$
25.4

1,452
%

*	~~not meaningful~~

~~Three months ended March 31, 2021 compared to the three months ended March 31, 2020~~

●

~~LoyaltyOne~~. Revenue decreased $21.5 million, or 11%, to $176.6 million for the three months ended March 31, 2021 as revenue from our short-term loyalty programs decreased $15.3 million due to a decline in programs in markets across most regions due to the impact of COVID-19. Redemption revenue and servicing revenue in our coalition loyalty program were negatively impacted by a 16% decline in AIR MILES reward miles issued and a 26% decline in AIR MILES reward miles redeemed. Additionally, the sale of Precima in January 2020 resulted in a $1.9 million decrease in revenue.

●

~~Card Services~~. Revenue decreased $275.3 million, or 23%, to $908.3 million for the three months ended March 31, 2021, driven by a $273.7 million decrease in finance charges, net due to a decline in credit card and loan receivables resulting from higher payment rates, lower sales volumes resulting from COVID-19 and the sale of a credit card portfolio in 2020, and a decrease in yield due to lower late fees resulting from a lower level of delinquencies, and interest rate cuts in 2020.

~~Income Before Income Taxes~~. Income before income taxes increased $369.0 million, or 1,452%, to $394.4 million for the three months ended March 31, 2021 from $25.4 million for the three months ended March 31, 2020. The net increase was due to the following:

●

~~LoyaltyOne~~. Income before income taxes decreased $15.0 million, or 32%, to $31.7 million for the three months ended March 31, 2021. The decline in income before income taxes was due to lost margin from the decline in revenue discussed above and the gain on sale of Precima in January 2020 that did not recur in the current year quarter, offset in part by improved expense management and an $11.4 million decrease in amortization of purchased intangibles due to certain fully amortized intangible assets.

●

~~Card Services~~. Income before income taxes increased $377.8 million, or 1,179%, to $409.9 million for the three months ended March 31, 2021 due to a $622.5 million decrease in the provision for loan loss due to the decline in credit card and loan receivables and the change in the reserve rate and a $31.1 million decrease in interest expense, net due to lower average balances, offset in part by the decrease in revenue discussed above.

●

~~Corporate/Other~~~~. Loss before income taxes decreased $6.2 million for the three months ended March 31, 2021 due to a decrease in payroll and benefits expense from lower medical claims.~~

~~Index~~

~~Asset Quality~~

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

~~Delinquencies~~. An account is contractually delinquent if ~~we do~~the Company does not receive the minimum payment due by the specified due date. ~~Our~~The Company’s policy is to continue to accrue interest and fee income on all accounts, except in limited circumstances, until the balance and all related interest and ~~other~~ fees are paid or ~~charged-off, typically at 180 days delinquent for credit card receivables and 120 days delinquent for installment loan receivables.~~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. The collection system then recommends~~delinquent; based upon the level of risk indicated, a collection strategy ~~for the past due account based on the collection score and account balance and dictates the contact schedule and collections priority for the account.~~is deployed. If, ~~we are unable to make a collection~~ after exhausting all in-house collection efforts, wethe Company is unable to collect on the account, it may engage collection agencies ~~and~~or outside attorneys to continue those ~~efforts.~~efforts, or sell the charged-off balances and accompanying account(s).

The following table presents the delinquency trends ~~of our~~on the Company’s credit card and ~~loan receivables~~other loans portfolio based on the ~~principal balances~~amortized cost:


	Aging Analysis of Delinquent Amortized Cost Credit Card and Other Loans ⁽¹⁾
	31 to 60 days delinquent		61 to 90 days delinquent		91 or more days delinquent		Total delinquent		Current		Total

	(in millions)
As of March 31, 2022	$	241	$	190	$	435	$	866	$	15,709	$	16,575

As of December 31, 2021	$	262	$	186	$	401	$	849	$	16,284	$	17,133

(1)	Installment loan delinquencies have been included with credit card loan delinquencies in the table above, as amounts were insignificant at each period presented.

From time to time the Company may re-age cardholders’ accounts, which is intended to assist delinquent cardholders who have experienced financial difficulties but who demonstrate both an ability and willingness to repay the amounts due; this practice affects credit card loan delinquencies and charge-offs. Accounts meeting specific defined criteria are re-aged when the cardholder makes one or more consecutive payments aggregating to a certain pre-defined amount of ~~our~~their account balance. Upon re-aging, the outstanding balance of a delinquent account is returned to current status. For the three months ended March 31, 2022 and 2021, the Company’s re-aged accounts represented 1.6% and 2.8%, respectively, of total credit card and ~~loan receivables:~~other loans. The Company’s re-aging practices comply with regulatory guidelines.

March 31,

% of

December 31,

% of


2021

Total

2020

Total

(in millions, except percentages)

Receivables outstanding ─ principal

$
14,805.4

100.0
%
$
15,963.3

100.0
%
Principal receivables balances contractually delinquent:

31 to 60 days

$
164.1

1.1
%
$
229.9

1.4
%
61 to 90 days

120.3

0.8

162.8

1.0

91 or more days

280.0

1.9

315.2

2.0

Total

$
564.4

3.8
%
$
707.9

4.4
%

Net ~~Charge-Offs~~~~. Our~~Principal Charge-offs

The Company’s 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 ~~finance charges, net~~Interest and fees on loans, while third-party fraud losses are recorded ~~as an expense.~~in Card and processing expenses. Credit card ~~receivables,~~loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days ~~contractually~~ past ~~due, except~~due.

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Installment loans, including unpaid interest, are generally charged-off when a loan becomes 120 days past due. However, in the case of a customer ~~bankruptcies~~bankruptcy or ~~death. Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days past due. Credit~~death, credit card ~~receivables,~~and other loans, including unpaid interest and fees ~~associated with customer bankruptcies or death~~as applicable, are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case not later than 180 days past due. The Company records the ~~180-day contractual time frame.~~

The net charge-off rate is calculated by dividing net charge-offs of principal receivables for the period by the average credit card and loan receivables for the period. Average credit card and loan receivables represent the average balance of the cardholder receivables at the beginning of each month in the periods indicated. The following table presents our netactual charge-offs for ~~the periods indicated:~~

Three Months Ended

March 31,


2021

2020


(in millions, except percentages)
Average credit card and loan receivables

$
15,785.0

$
18,294.4

Net charge-offs of principal receivables

198.1

320.2

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

5.0
%

7.0
%

~~Index~~

~~Liquidity~~unpaid interest and ~~Capital Resources~~

~~Our primary sources of liquidity include cash generated from operating activities, our credit agreements~~fees as a reduction to Interest and issuances of debt or equity securities, our credit card securitization program and deposits issued by Comenity Bank and Comenity Capital Bank. In addition to our efforts to renew and expand our current liquidity sources, we continue to seek new funding sources. We introduced a consumer retail deposit platform in 2019, and retail deposits comprised approximately $2.2 billion of our $10.0 billion in deposits outstanding at March 31, 2021.

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

We believe that internally generated funds and other sources of liquidity discussed below will be sufficient to meet working capital needs, capital expenditures, and other business requirements for at least the next 12 months. However, continued volatility in the financial and capital markets due to COVID-19 may limit our access to or increase our cost of capital or make capital unavailablefees on ~~terms acceptable to us or at all.~~

~~Cash Flow Activity~~

~~Operating Activities.~~ ~~We generated cash flow from operating activities of $517.2~~loans, which were $136 million and ~~$572.5~~$131 million for the three months ended March 31, 2022 and 2021, respectively.

Modified Credit Card Loans

Forbearance Programs

As part of the Company’s collections strategy, the Company may offer temporary, short term (six-months or less) loan modifications in order to improve the likelihood of collections and ~~2020,~~meet the needs of the Company’s customers. The Company’s 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. The Company does not offer programs involving the forgiveness of principal. These temporary loan modifications may assist in cases where the Company believes 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. The Company evaluates its 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 (TDR). Loans in these short term programs that are determined to be TDR’s, will be included as such in the disclosures below.

Credit Card Loans Modified as TDRs

The Company considers impaired loans to be loans for which it is probable that it will be unable to collect all amounts due according to the original contractual terms of the cardholder agreement, including credit card loans modified as TDRs. In instances where cardholders are experiencing financial difficulty, the Company may modify its credit card loans with the intention of minimizing losses and improving collectability, while providing cardholders with financial relief; such credit card loans are classified as TDRs, exclusive of forbearance programs described above. Modifications, including for temporary hardship and permanent workout programs, include concessions consisting primarily of a reduced minimum payment and an interest rate reduction. The temporary programs’ concessions remain in place for a period no longer than twelve months, while the permanent programs remain in place through the payoff of the credit card loans if the cardholder complies with the terms of the program.

TDR concessions do not include the forgiveness of unpaid principal, but may involve the reversal of certain unpaid interest or fee assessments, and the cardholder’s ability to make future purchases is either limited, or suspended until the cardholder successfully exits from the modification program. In accordance with the terms of the Company’s temporary hardship and permanent workout programs, the credit agreement reverts back to its original contractual terms (including the contractual interest rate) when the customer exits the program, which is either when all payments have been made in accordance with the program, or when the customer defaults out of the program.

TDRs are collectively evaluated for impairment on a pooled basis. In measuring the appropriate allowance for credit losses, these modified credit card loans are included in the general pool of credit card loans, with the allowance determined under a contingent loss model. The Company’s impaired credit card loans represented less than 3% of total credit card loans as of both March 31, 2022 and December 31, 2021. As of those same dates, the Company’s recorded investment in impaired credit card loans was $264 million and $281 million, respectively, with an associated allowance for credit losses of $88 million and $81 million, respectively. The ~~year-over-year decrease~~average recorded investment in ~~operating cash flows of $55.3 million~~impaired credit card loans was ~~impacted by the provision for loan loss, offset in part by an increase in working capital.~~

~~Investing Activities~~~~. Cash provided by investing activities was $1,009.0~~$272 million and ~~$1,746.3~~$482 million for the three months ended March 31, 2022 and 2021, respectively.

Interest income on these impaired credit card loans is accounted for in the same manner as other non-impaired credit card loans, and ~~2020,~~cash collections are allocated according to the same payment hierarchy methodology applied for credit card loans not in modification programs. The Company recognized $4 million and $9 million for the three months ended

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

March 31, 2022 and 2021, respectively, in interest income associated with credit card loans in modification programs, during the period that such loans were impaired.

The following table provides additional information regarding credit card loans modified as TDRs during the specified periods:

Three Months Ended March 31, 2022

Three Months Ended March 31, 2021

Pre-modification

Post-modification

Pre-modification

Post-modification

Number of

Outstanding

Number of

Outstanding

Restructurings

Balance

Restructurings

Balance

(Dollars in millions)

Troubled debt restructurings – credit card loans

37,998

63,628

The following table provides additional information regarding credit card loans modified as TDRs that have subsequently defaulted within 12 months of their modification dates during the specified periods; the probability of default is factored into the allowance for credit losses:



	Three Months Ended March 31, 2022			Three Months Ended March 31, 2021
	Number of	Outstanding		Number of	Outstanding
	Restructurings	Balance		Restructurings	Balance

	(Dollars in millions)
Troubled debt restructurings that subsequently defaulted	21,653	$	29	51,009	$	67

Credit Quality

Credit Card Loans

As part of the Company’s credit risk management activities, the Company assesses overall credit quality by reviewing information related to the performance of a credit cardholder’s account, as well as information from credit bureaus relating to the cardholder’s broader credit performance. The Company utilizes VantageScore (Vantage) credit scores to assist in its assessment of credit quality. Vantage credit scores are obtained at origination of the account and are refreshed monthly thereafter to assist in predicting customer behavior. The Company categorizes these Vantage credit scores into the following three credit score categories: (i) 661 or higher, which are considered the strongest credits and therefore have the lowest credit risk; (ii) 601 to 660, considered to have moderate credit risk; and (iii) 600 or less, which are considered weaker credits and therefore have the highest credit risk. In certain limited circumstances there are customer accounts for which a Vantage score is not available and the Company uses alternative sources to assess credit risk and predict behavior. The table below excludes 0.1% of the total credit card loans balance at each of March 31, 2022 and December 31, 2021, representing those customer accounts for which a Vantage credit score is not available. The following table reflects the distribution of the Company’s credit card loans by Vantage score during the specified periods:


	Vantage
	March 31,						December 31,
	2022						2021
	661 or		601 to		600 or		661 or		601 to		600 or
	Higher		660		Less		Higher		660		Less
Credit card loans	61	%	27	%	12	%	62	%	26	%	12	%

Note: The Company’s credit card loans are revolving as they do not have stated maturities, and therefore are exempted from certain vintage disclosures otherwise required under GAAP.

Installment Loans

The amortized cost basis of the Company’s installment loans totaled $192 million and $182 million as of March 31, 2022 and December 31, 2021, respectively. ~~Significant components~~As of ~~investing activities~~March 31, 2022, approximately 85% of these loans were originated by customers with Fair Isaac Corporation (FICO) scores of 660 or above, and approximately 15% of these loans were

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

originated by customers with FICO scores below 660. Similarly, as of December 31, 2021, approximately 84% and 16% of these loans were originated by customers with FICO scores of 660 or above, and below 660, respectively.

Unfunded Loan Commitments

The Company is active in originating private label and co-brand credit cards in the United States. The Company manages potential credit risk in its unfunded lending commitments by reviewing each potential customer’s credit application and evaluating the applicant’s financial history and ability and perceived willingness to repay. Credit card loans are made primarily on an unsecured basis. Cardholders reside throughout the United States and are not significantly concentrated in any one area.

The Company manages its potential risk in credit commitments by limiting the total amount of credit, both by individual customer and in total, by monitoring the size and maturity of its portfolios and applying consistent underwriting standards. The Company has the unilateral ability to cancel or reduce unused credit card lines at any time. Unused credit card lines available to cardholders totaled approximately $112.0 billion as of both March 31, 2022 and December 31, 2021. While this amount represented the total available unused credit card lines, the Company has not experienced and does not anticipate that all cardholders will access their entire available line at any given point in time.

Portfolio Sales

As of March 31, 2022 and December 31, 2021, there were 0 credit card loans held for sale and 0 portfolio sales were made during either of the three months ended March 31, 2022 or 2021.

Portfolio Acquisitions

NaN portfolio acquisitions were made during either of the three months ended March 31, 2022 or 2021.

3. ALLOWANCE FOR CREDIT LOSSES

The allowance for credit losses is an estimate of expected credit losses, measured over the estimated life of its credit card and other loans that considers forecasts of future economic conditions in addition to information about past events and current conditions. The estimate under the CECL model is significantly influenced by the composition, characteristics and quality of the Company’s portfolio of credit card and other loans, as well as the prevailing economic conditions and forecasts utilized. The estimate of the allowance for credit losses includes an estimate for uncollectible principal as well as unpaid interest and fees. Charge-offs of principal amounts, net of recoveries are deducted from the allowance. Charge-offs for unpaid interest and fees as well as any adjustments to the allowance associated with unpaid interest and fees are recorded as a reduction to Interest and fees on loans. The allowance is maintained through an adjustment to the Provision for credit losses and is evaluated for appropriateness.

In estimating its allowance for credit losses, for each identified group, management utilizes various models and estimation techniques based on historical loss experience, current conditions, reasonable and supportable forecasts and other relevant factors. These models utilize historical data and applicable macroeconomic variables with statistical analysis and behavioral relationships with credit performance. The Company’s quantitative estimate of expected credit losses under CECL is impacted by certain forecasted economic factors. The Company considers the forecast used to be reasonable and supportable over the estimated life of the credit card and other loans, with no reversion period. In addition to the quantitative estimate of expected credit losses, the Company also incorporates qualitative adjustments for certain factors such as Company-specific risks, changes in current economic conditions that may not be captured in the quantitatively derived results, or other relevant factors to ensure the allowance for credit losses reflects the Company’s best estimate of current expected credit losses. As permitted by GAAP, the Company excludes unbilled finance charges from its amortized cost basis of credit card and other loans. As of March 31, 2022 and December 31, 2021, accrued interest and fees that have not yet been billed to cardholders were $228 million and $224 million, respectively, and included in Credit card and other loans on the Consolidated Balance Sheets.

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Credit Card Loans

The Company uses a “pooled” approach to estimate expected credit losses for financial assets with similar risk characteristics. As part of its CECL implementation, the Company evaluated multiple risk characteristics of its credit card loans portfolio, and determined delinquency status and credit quality to be the most significant characteristics for estimating expected credit losses. To estimate its allowance for credit losses, the Company segregates its credit card loans into 4 groups with similar risk characteristics, on the basis of delinquency status and credit quality risk score. These risk characteristics are evaluated on at least an annual basis, or more frequently as facts and circumstances warrant. In determining the estimated life of the Company’s credit card loans, payments were applied to the measurement date balance with 0 payments allocated to future purchase activity. The Company uses a combination of First In First Out (FIFO) and the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (CARD Act) methodology to model balance paydown.

The Company’s groups of pooled financial assets with similar risk characteristics and their estimated life is as follows:

	●	~~Credit card and loan receivables.~~ ~~Cash increased $1,034.6~~
		Estimated Life
		(in months)
Group A (Current, risk score - high)			14
Group B (Current, risk score - low)			19
Group C (Delinquent, risk score - high)			17
Group D (Delinquent, risk score - low)			26

Installment Loans

The Company measures its allowance for credit losses on installment loans using a statistical model to estimate projected losses over the remaining term of the loans, inclusive of an assumption for prepayments. The model is based on the historical statistical relationship between loan loss performance and certain macroeconomic data pooled based on credit quality risk score, term of the underlying loans, vintage and geographic location. As of March 31, 2022 and December 31, 2021, the allowance for credit losses on installment loans was $15 million and $14 million, respectively.

Allowance for Credit Losses Rollforward

The following table presents the Company’s allowance for credit losses for its credit card and other loans. With the acquisition of Bread in December 2020, the Company acquired certain installment loans which represented a separate portfolio segment; the amount of the related allowance for credit losses was insignificant and therefore has been included in the table below. The amounts presented are for the three months ended March 31:


	Three Months Ended
	March 31,
	2022		2021

	(in millions)
Beginning balance	$	1,832	$	2,008

Provision for credit losses ⁽¹⁾		193		33
Net principal charge-offs ⁽²⁾		(199)		(198)
Ending balance	$	1,826	$	1,843

(1)	Provision for credit losses includes a build/release for the allowance, as well as replenishment of Net principal charge-offs.

(2)	Principal charge-offs are presented net of recoveries of $43 million and ~~$1,446.7~~$51 million for the three months ended March 31, ~~2021~~2022 and ~~2020, respectively, due to seasonal paydown of credit card and loan receivables.~~

●

~~Proceeds from sale of business.~~ ~~During the three months ended March 31, 2020, we received cash consideration of $25.4 million from the sale of Precima.~~

●

~~Proceeds from sale of credit card portfolio.~~ ~~During the three months ended March 31, 2020, we received cash consideration of $289.5 million from the sale of a credit card portfolio.~~

●

~~Capital expenditures.~~ ~~Cash paid for capital expenditures was $12.2 million and $15.7 million for the three months ended March 31,~~ 2021, ~~and 2020,~~ respectively.

~~Financing Activities~~~~. Cash used in financing activities was $1,740.8 million and $1,503.4 million~~

For the three months ended March 31, 2022, the allowance for credit losses remained relatively flat. For the three months ended March 31, 2021, the decrease in the allowance for credit losses was due to improvement in the macroeconomic outlook, a decline in credit card and ~~2020, respectively. Significant components of financing activities are as follows:~~

●

~~Debt.~~ Cash decreased $25.4 million for the three months ended March 31, 2021 due to repayments of our term loans. Cash increased $224.6 million for the three months ended March 31, 2020 due to net borrowings under the revolving line of credit.

●

~~Non-recourse borrowings of consolidated securitization entities.~~ Cash decreased $1,864.1 million and $925.0 million for the three months ended March 31, 2021 and 2020, respectively, due to net repayments and maturities under the non-recourse borrowings of consolidated securitization entities and lower borrowings due to declines in credit card and loan receivables.

●

~~Deposits.~~ During the three months ended March 31, 2021, cash increased $162.2 million due to net issuances of deposits. During the three months ended March 31, 2020, cash decreased $769.4 million due to net maturities of deposits. The volume of deposits as of March 31, 2021 and 2020 was lower as a result of lower liquidity requirements.

●

~~Dividends.~~ Cash paid for quarterly dividends and dividend equivalents was $10.7 million and $30.3 million for the three months ended March 31, 2021 and 2020, respectively. In the first quarter of 2020, the quarterly dividend was $0.63 as compared to $0.21 per common share in March 2021, as the quarterly dividend was previously reduced in the second quarter of 2020 in response to COVID-19.

other loans due to the pandemic and lower principal charge-offs.

3726

~~Index~~Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~Debt~~

~~Credit Agreement~~

At March 31, 2021, we had $1,459.0 million in term loans outstanding and a $750.0 million revolving line of credit. As of March 31, 2021, we had no amounts outstanding under our revolving line of credit and total availability of $750.0 million. Our total leverage ratio, as defined in our credit agreement, was 1.9 to 1 at March 31, 2021, as compared to the maximum covenant ratio of 4.5 to 1.

~~As of March 31, 2021, we were in compliance with our debt covenants.~~

~~BrandLoyalty Credit Agreement~~

In the first quarter of 2021, BrandLoyalty and certain of its subsidiaries, as borrowers and guarantors, amended its credit agreement to extend the maturity date by one year from April 3, 2023 to April 3, 2024. As of March 31, 2021, we had no amounts outstanding under our BrandLoyalty Credit Agreement.

~~Funding Sources~~

~~Deposits~~

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

As of March 31, 2021, we had $5.7 billion in certificates of deposit outstanding with interest rates ranging from 0.15% to 3.75% and maturities ranging from April 2021 to March 2026. Certificate of deposit borrowings are subject to regulatory capital requirements.

As of March 31, 2021, we had $4.2 billion in money market deposits outstanding with interest rates ranging from 0.36% to 3.50%. Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.

~~Securitization Program~~4. SECURITIZATIONS

~~We sell~~The Company accounts for transfers of financial assets as either sales or financings. Transfers of financial assets that are accounted for as sales are removed from the Consolidated Balance Sheets with any realized gain or loss reflected in the Consolidated Statements of Income during the period in which the sale occurs. Transfers of financial assets that are not accounted for as a sale are treated as a financing.

The Company regularly securitizes the majority of its credit card loans through the transfer of those loans to one of its master trusts (the Trusts). The Company performs the decision making for the Trusts, as well as servicing the cardholder accounts that generate the credit card ~~receivables originated~~loans held by ~~Comenity Bank~~the Trusts. In its capacity as a servicer, the Company administers the loans, collects payments and ~~Comenity Capital Bank~~charges-off uncollectible balances. Servicing fees are earned by a subsidiary of the Company, which are eliminated in consolidation.

The Trusts are consolidated VIEs because they have insufficient equity at risk to ~~certain master trusts. These securitization programs are a principal vehicle through which we~~ finance ~~Comenity Bank’s~~their activities – being the issuance of debt securities and ~~Comenity Capital Bank’s~~notes, collateralized by the underlying credit card ~~receivables. Historically, we have used both public~~loans. Because the Company performs the decision making and ~~private term asset-backed securitization transactions as well as private conduit facilities as sources~~servicing for the Trusts, it has the power to direct the activities that most significantly impact the Trusts’ economic performance (the collection of ~~funding for our~~the underlying credit card loans). In addition, the Company holds all of the variable interests in the Trusts, with the exception of the liabilities held by third-parties. These variable interests provide the Company with the right to receive benefits and the obligation to absorb losses, which could be significant to the Trusts. As a result of these considerations, the Company is deemed to be the primary beneficiary of the Trusts and therefore consolidates the Trusts.

The Trusts issue debt securities and notes, which are non-recourse to the Company. The collections on the securitized credit card ~~receivables. Private conduit facilities have been used~~loans held by the Trusts are available only for payment of those debt securities and notes, or other obligations arising in the securitization transactions. For its securitized credit card loans, during the initial phase of a securitization reinvestment period, the Company generally retains principal collections in exchange for the transfer of additional credit card loans into the securitized pool of assets. During the amortization or accumulation period of a securitization, the investors’ share of principal collections (in certain cases, up to ~~accommodate seasonality needs and~~a maximum specified amount each month) is either distributed to ~~bridge~~the investors or held in an account until it accumulates to ~~completion of asset-backed securitization transactions.~~the total amount due, at which time it is paid to the investors in a lump sum.

The Company is required to maintain minimum interests in its Trusts ranging from 4% to 10% of the securitized credit card loans. This requirement is met through a transferor’s interest and is supplemented through excess funding deposits which represent cash amounts deposited with the trustee of the securitizations. Cash collateral, restricted deposits are generally released proportionately as investors are repaid. Under the terms of the Trusts, the occurrence of certain triggering events associated with the performance of the securitized credit card loans in each Trust could result in certain required actions, including payment of Trust expenses, the establishment of reserve funds, or early amortization of the debt securities and/or notes, in a worst-case scenario. During the three months ended March 31, 2022 and 2021, ~~$591.5 million of asset-backed term notes matured and were repaid, of which $66.5 million were retained by us and eliminated from the consolidated balance sheets.~~no such triggering events occurred.

~~We have access to committed undrawn capacity through three conduit facilities to support~~

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following tables provide the ~~funding of our~~total securitized credit card loans and ~~loan receivables through~~related delinquencies, and net principal charge-offs of securitized credit card loans for the ~~trusts.~~ periods specified:


	March 31,		December 31,
	2022		2021

	(in millions)
Total credit card loans – available to settle obligations of consolidated VIEs	$	10,771	$	11,215
Of which: principal amount of credit card loans 91 days or more past due	$	169	$	159

5. INVESTMENT SECURITIES

The Company’s investment securities consist of available-for-sale (AFS) securities, which are debt securities, U.S. Treasury bonds and mutual funds, as well as equity securities. These investments are carried at fair value on the Consolidated Balance Sheets within Investment securities. For any AFS debt securities in an unrealized loss position, the CECL methodology requires estimation of the lifetime expected credit losses which then would be recognized in the Consolidated Statements of Income by establishing, or adjusting an existing allowance for those credit losses. The Company did not have any such credit losses for the periods presented. Any unrealized gains, or any portion of a security’s non-credit-related unrealized losses are recorded in the Consolidated Statements of Comprehensive Income, net of tax. The Company typically invests in highly-rated securities with low probabilities of default. Gains and losses on investments in equity securities are recorded in Other non-interest expenses in the Consolidated Statements of Income. Realized gains and losses are recognized upon disposition of the securities, using the specific identification method. The table below reflects unrealized gains and losses as of March 31, 2022 and December 31, 2021, respectively:


	March 31, 2022								December 31, 2021
	Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value

	(in millions)
AFS and equity securities	$	241	$	—	$	(8)	$	233	$	237	$	4	$	(2)	$	239
Total	$	241	$	—	$	(8)	$	233	$	237	$	4	$	(2)	$	239

The following table provides information about the Company’s AFS debt securities with gross unrealized losses, as of March 31, 2022 and December 31, 2021, respectively.


	March 31, 2022
	Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

	(in millions)
AFS debt securities	$	107	$	(5)	$	28	$	(3)	$	135	$	(8)
Total	$	107	$	(5)	$	28	$	(3)	$	135	$	(8)


	December 31, 2021
	Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses

	(in millions)
AFS debt securities	$	57	$	(1)	$	15	$	(1)	$	72	$	(2)
Total	$	57	$	(1)	$	15	$	(1)	$	72	$	(2)

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

As of March 31, ~~2021, total capacity under~~2022, the ~~conduit facilities~~amortized cost and estimated fair value of the Company’s AFS debt securities, which are mortgage-backed securities with no stated maturities, was ~~$3.2 billion,~~$175 million and $167 million, respectively.

There were 0 realized gains or losses from the sale of ~~which $900.0 million had been drawn and was included in non-recourse borrowings~~any investment securities for either of ~~consolidated securitization entities in~~ the ~~consolidated balance sheets.~~three months ended March 31, 2022 or 2021.

6. DEPOSITS

As of March 31, 2022 and December 31, 2021, ~~we had approximately $10.2 billion~~deposits were categorized as interest-bearing or non-interest-bearing as follows:



	March 31,		December 31,
	2022		2021

	(in millions)
Interest-bearing	$	10,620	$	11,027
Non-interest-bearing (including cardholder credit balances)		26		—
Total deposits	$	10,646	$	11,027

Deposits by deposit type as of ~~securitized credit card~~March 31, 2022 and ~~loan receivables. Securitizations require credit enhancements~~December 31, 2021 were as follows:


	March 31,		December 31,
	2022		2021

	(in millions)
Savings accounts:
Direct-to-consumer	$	2,045	$	1,713
Wholesale		3,865		3,873
Certificates of deposit:
Direct-to-consumer		1,516		1,467
Wholesale		3,194		3,974
Cardholder credit balances		26		—
Total deposits	$	10,646	$	11,027

The scheduled maturities of certificates of deposit as of March 31, 2022 were as follows:



(in millions)
2022⁽¹⁾	$	2,603
2023		1,329
2024		648
2025		70
2026		48
Thereafter		12
Total certificates of deposit		4,710

(1)	The 2022 balance includes $6 million in unamortized debt issuance costs, which are associated with the entire portfolio of certificates of deposit.

As of March 31, 2022 and December 31, 2021, certificates of deposit that exceeded applicable FDIC insurance limits which are generally $250,000 or more, in the ~~form of cash, spread deposits, additional receivables~~aggregate, were $511 million and subordinated classes. The credit enhancement is principally based on the outstanding balances of the series issued by the trusts and by the performance of the credit card and loan receivables in the trusts.$500 million, respectively.

3829

~~Index~~Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

7. OTHER NON-INTEREST INCOME AND OTHER NON-INTEREST EXPENSES

The following table ~~shows~~provides the components of Other non-interest income:


	Three Months Ended
	March 31,
	2022		2021

	(in millions)
Payment protection products	$	38	$	35
Loss from equity method investment		(12)		—
Other		2		—
Total other non-interest income	$	28	$	35

The following table provides the components of Other non-interest expenses:


	Three Months Ended
	March 31,
	2022		2021

	(in millions)
Professional services and regulatory fees	$	31	$	31
Occupancy expense		6		7
Other⁽¹⁾		20		9
Total other non-interest expenses	$	57	$	47

(1)	Primarily related to costs associated with various other individually insignificant operating activities.

8. FAIR VALUES OF FINANCIAL INSTRUMENTS

Fair value is defined under GAAP as the price that would be required to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date; with such transaction based on the principal market, or in the absence of a principal market the most advantageous market for the specific instrument. GAAP provides for a three-level fair value hierarchy that classifies the inputs to valuation techniques used to measure fair value, defined as follows:

Level 1: Inputs that are unadjusted quoted prices for identical assets or liabilities in active markets that the entity can access.

Level 2: Inputs, other than those included within Level 1, that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the asset or liability, including quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in inactive markets, or inputs other than quoted prices that are observable for the asset or liability.

Level 3: Inputs that are unobservable (e.g., internally derived assumptions) and reflect an entity’s own estimates about estimates market participants would use in pricing the asset or liability based on the best information available under the circumstances. In particular, Level 3 inputs and valuation techniques involve judgment and as a result are not necessarily indicative of amounts the Company would realize in a current market exchange. The use of different assumptions or estimation techniques may have a material effect on the estimated fair value amounts.

We monitor the market conditions and evaluate the fair value hierarchy levels quarterly. For the three months ended March 31, 2022 and 2021, there were 0 transfers into or out of Level 3, and 0 transfers between Levels 1 and 2.

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following table summarizes the carrying values and fair values of the Company’s financial assets and financial liabilities:


	March 31, 2022				December 31, 2021
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value

	(in millions)
Financial assets
Credit card and other loans, net	$	15,017	$	17,308	$	15,567	$	17,989
Investment securities		233		233		239		239
Financial liabilities
Deposits		10,646		10,675		11,027		11,135
Debt issued by consolidated VIEs		4,816		4,820		5,453		5,467
Long-term and other debt		1,962		1,980		1,986		2,053

Valuation Techniques Used in the Fair Value Measurement of Financial Assets and Financial Liabilities

Credit card and other loans, net: The Company’s Credit card and other loans are recorded at historical cost, less an allowance for credit losses, on the Consolidated Balance Sheets. In estimating the fair values, the Company uses a discounted cash flow model (i.e., Level 3 inputs), primarily because a comparable whole loan sales market for similar loans does not exist, and therefore there is a lack of observable pricing inputs. The Company uses various internally derived inputs, including projected income, discount rates and forecasted write-offs; economic value attributable to future loans generated by the cardholder accounts is not included in the fair values.

Investment securities: Investment securities consist of AFS securities, which are debt securities, U.S. Treasury bonds and mutual funds, as well as equity securities, and are recorded at fair value on the Consolidated Balance Sheets. Quoted prices of identical or similar investment securities in active markets are used to estimate the fair values (i.e., Level 1 or Level 2 inputs).

Deposits: Money market and other non-maturity deposits carrying values approximate their fair values because they are short-term in duration and have no defined maturity. Certificates of deposit are recorded at their historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, with fair value being estimated based on the currently observable market rates available to the Company for similar deposits with similar remaining maturities (i.e., Level 2 inputs). Interest payable is included within Other liabilities on the Consolidated Balance Sheets.

Debt issued by consolidated VIEs: The Company records debt issued by its consolidated VIEs at historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, as well as premiums or discounts, as applicable. Interest payable is included within Other liabilities on the Consolidated Balance Sheets. Fair value is estimated based on the currently observable market rates available to the Company for similar debt instruments with similar remaining maturities or quoted market prices for the same transaction (i.e., Level 2 inputs).

Long-term and other debt: The Company records its long-term and other debt at historical issuance cost on the Consolidated Balance Sheets, adjusted for unamortized fees, as well as premiums or discounts, as applicable. Interest payable is included within Other liabilities on the Consolidated Balance Sheets. The fair value is estimated based on the currently observable market rates available to the Company for similar debt instruments with similar remaining maturities, or quoted market prices for the same transaction (i.e., Level 2 inputs).

Table of ~~borrowing commitments~~Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following tables summarize the Company’s financial assets and financial liabilities measured at fair value on a recurring basis, categorized by the fair value hierarchy described in the preceding paragraphs:


	March 31, 2022
	Total		Level 1		Level 2		Level 3

	(in millions)
Investment securities	$	233	$	46	$	187	$	—
Total assets measured at fair value	$	233	$	46	$	187	$	—


	December 31, 2021
	Total		Level 1		Level 2		Level 3

	(in millions)
Investment securities	$	239	$	48	$	191	$	—
Total assets measured at fair value	$	239	$	48	$	191	$	—

Financial Instruments Disclosed but Not Carried at Fair Value

The following tables summarize the Company’s financial assets and financial liabilities that are measured at amortized cost, and not required to be carried at fair value on a recurring basis, as of March 31, 2022 and December 31, 2021 ~~for~~respectively. The fair values of these financial instruments are estimates as of March 31, 2022 and December 31, 2021, and require management’s judgment; therefore, these figures may not be indicative of future fair values, nor can the ~~trusts by year:~~

2021

2022

2023

2024

Thereafter

Total

(in millions)
Fixed rate asset-backed term note securities

$
1,327.2

$
1,571.7

$
—

$
—

$
—

$
2,898.9
Conduit facilities ⁽¹⁾

—

3,200.0

—

—

—

3,200.0
Secured loan facility

—

52.2

—

—

—

52.2
Total ⁽²⁾

$
1,327.2

$
4,823.9

$
—

$
—

$
—

$
6,151.1

~~(1)~~

~~Amount represents borrowing capacity, not outstanding borrowings.~~

~~(2)~~

~~Total amounts do not include $605.8 million of debt issued by the trusts, which was retained by us and eliminated in the unaudited condensed consolidated financial statements.~~

~~See Note 12, “Debt,”~~fair value of the ~~Notes~~Company be estimated by aggregating all of the amounts presented.


	March 31, 2022
	Fair Value		Level 1		Level 2		Level 3

	(in millions)
Financial assets:
Credit card and other loans, net	$	17,308	$	—	$	—	$	17,308
Total	$	17,308	$	—	$	—	$	17,308

Financial liabilities:
Deposits	$	10,675	$	—	$	10,675	$	—
Debt issued by consolidated VIEs		4,820		—		4,820		—
Long-term and other debt		1,980		—		1,980		—
Total	$	17,475	$	—	$	17,475	$	—


	December 31, 2021
	Fair Value		Level 1		Level 2		Level 3

	(in millions)
Financial assets:
Credit card and other loans, net	$	17,989	$	—	$	—	$	17,989
Total	$	17,989	$	—	$	—	$	17,989

Financial liabilities:
Deposits	$	11,135	$	—	$	11,135	$	—
Debt issued by consolidated VIEs		5,467		—		5,467		—
Long-term and other debt		2,053		—		2,053		—
Total	$	18,655	$	—	$	18,655	$	—

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Certain assets and liabilities are recognized or disclosed at fair value on a nonrecurring basis, including property and equipment, right-of-use assets, deferred contract assets, goodwill, and intangible assets. These assets are not measured at fair value on a recurring basis but are subject to ~~Unaudited Condensed Consolidated Financial Statements~~fair value adjustments in certain circumstances, such as upon impairment. The Company did 0t have any impairments for ~~additional information regarding our debt.~~either of the three months ended March 31, 2022 or 2021.

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

9. COMMITMENTS AND CONTINGENCIES

Regulatory Matters

Comenity Bank is regulated, supervised and examined by the State of Delaware and the Federal Deposit Insurance Corporation (FDIC). The Company’s industrial bank, Comenity Capital Bank, is regulated, supervised and examined by the State of Utah and the FDIC. While neither of the Banks is currently subject to regular examinations by the Consumer Financial Protection Bureau (CFPB) due to each Bank’s total assets not having exceeded $10.0 billion for four consecutive quarters, we have in the past been, and may in the future become, subject to supervision and examination by the CFPB with respect to federal consumer protection laws.

Quantitative measures established by regulations to ensure capital adequacy require Comenity Bank and Comenity Capital Bank to maintain minimum amounts and ratios of ~~Common Equity Tier 1, Tier 1 and total capital to risk weighted assets and of~~ Tier 1 capital to average assets, 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 and~~Bank’s and/or Comenity Capital Bank’s operating activities, as well as those of the Company. Based on these regulations, as of March 31, 2022, each Bank ~~are considered~~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 actual capital ratios and minimum ratios for each Bank, as well as the Combined Banks, as of March 31, ~~2021~~2022, are as follows:

Minimum Ratio to be



Minimum Ratio for

Well Capitalized under


Actual

Capital Adequacy

Prompt Corrective


Ratio

Purposes

Action Provisions
Comenity Bank

Tier 1 capital to average assets

20.3
%

4.0
%

5.0
%
Common Equity Tier 1 capital to risk-weighted assets

24.5

4.5

6.5

Tier 1 capital to risk-weighted assets

24.5

6.0

8.0

Total capital to risk-weighted assets

25.8

8.0

10.0

Comenity Capital Bank

Tier 1 capital to average assets

15.0
%

4.0
%

5.0
%
Common Equity Tier 1 capital to risk-weighted assets

17.1

4.5

6.5

Tier 1 capital to risk-weighted assets

17.1

6.0

8.0

Total capital to risk-weighted assets

18.4

8.0

10.0


					Minimum Ratio to be
			Minimum Ratio for		Well Capitalized under
	Actual		Capital Adequacy		Prompt Corrective
	Ratio		Purposes		Action Provisions
Comenity Bank
Tier 1 Leverage capital ratio ⁽¹⁾	19.4	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	22.5		4.5		6.5
Tier 1 capital ratio ⁽³⁾	22.5		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	23.8		8.0		10.0

Comenity Capital Bank
Tier 1 Leverage capital ratio ⁽¹⁾	17.2	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	19.3		4.5		6.5
Tier 1 capital ratio ⁽³⁾	19.3		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	20.7		8.0		10.0

Combined Banks
Tier 1 Leverage capital ratio ⁽¹⁾	18.2	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	20.8		4.5		6.5
Tier 1 capital ratio ⁽³⁾	20.8		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	22.1		8.0		10.0

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

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

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

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

~~Comenity Bank~~Indemnification

On July 1, 2019, the Company completed the sale of its Epsilon segment to Publicis Groupe S.A. (Publicis). Under the terms of the agreement governing that transaction, the Company agreed to indemnify Publicis and ~~Comenity Capital Bank~~its affiliates from and

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

against any losses arising out of or related to a United States Department of Justice (DOJ) investigation. The DOJ investigation related to third-party marketers who sent, or allegedly sent, deceptive mailings and the provision of data and services to those marketers by Epsilon’s data practice. Epsilon actively cooperated with the DOJ in connection with the investigation. On January 19, 2021, Epsilon entered into a deferred prosecution agreement (DPA) with the DOJ to resolve the matters that were the subject of the investigation. Pursuant to the DPA, Epsilon agreed, among other things, to pay penalties and consumer compensation in the aggregate amount of $150 million, to be paid in 2 equal installments, the first in January 2021 and the second in January 2022. A $150 million loss contingency was recorded as of December 31, 2020. The Company paid $75 million to Publicis pursuant to its contractual indemnification obligation in January 2021. In January 2022, the Company paid the second remaining $75 million installment to Publicis pursuant to its contractual indemnification obligation.

Legal Proceedings

From time to time the Company is involved in various claims and lawsuits and other proceedings, arising in the ordinary course of business that it believes will not have ~~adopted~~a material adverse effect on its business, consolidated financial condition or liquidity, including claims and lawsuits alleging breaches of the ~~option~~Company’s contractual obligations, arbitrations, class actions and other litigation, arising in connection with its business activities. The Company is also involved, from time to time, in reviews, investigations, subpoenas and other proceedings (both formal and informal) by governmental agencies regarding its business (collectively, “regulatory matters”), which could subject the Company to significant fines, penalties, obligations to change its business practices or other requirements resulting in increased expenses, diminished income and damage to the Company’s reputation.

10. CHANGES IN ACCUMULATED OTHER COMPREHENSIVE LOSS

The changes in each component of accumulated other comprehensive loss, net of tax effects, are as follows:


	Net		Net Unrealized		Net Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Three Months Ended March 31, 2022	on Securities		Flow Hedges		Investment Hedge		Adjustments		Loss

	(in millions)
Balance as of December 31, 2021	$	1	$	—	$	—	$	(3)	$	(2)
Changes in other comprehensive loss		(7)		—		—		—		(7)
Balance as of March 31, 2022	$	(6)	$	—	$	—	$	(3)	$	(9)


	Net		Net Unrealized		Net Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Three Months Ended March 31, 2021	on Securities		Flow Hedges		Investment Hedge		Adjustments ⁽¹⁾		Loss

	(in millions)
Balance as of December 31, 2020	$	23	$	(1)	$	(7)	$	(20)	$	(5)
Changes in other comprehensive (loss) income		(8)		1		—		(30)		(37)
Balance as of March 31, 2021	$	15	$	—	$	(7)	$	(50)	$	(42)

(1)

Primarily related to the impact of changes in the Canadian dollar and Euro foreign currency exchange rates from the Company’s LoyaltyOne segment, which was spun off in November 2021.

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

11. STOCKHOLDERS’ EQUITY

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 the Company’s outstanding common stock in the open market during the one-year period ending on February 28, 2023. As of March 31, 2022, the Company had repurchased 200,000 shares of its 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, the Company had 0 shares remaining for repurchase under the approved repurchase program.

During the three months ended March 31, 2021, the Company did 0t repurchase any shares of its common stock.

Stock Compensation Expense

During the three months ended March 31, 2022, the Company awarded 531,448 service-based restricted stock units with a weighted average grant date fair value per share of $72.21 as determined on the date of grant. Service-based restricted stock units typically vest ratably over three years provided that the participant is employed by the ~~interim final rule issued~~Company on each such vesting date.

During the three months ended March 31, 2022, the Company awarded 82,513 performance-based restricted stock units with pre-defined vesting criteria that permit a range from 0% to 150% to be earned. The fair market value of these awards is $72.42. If the performance targets are met, the restrictions will lapse (i.e., the awards will vest) with respect to the entire award on February 17, 2025, provided that the participant is employed by ~~joint federal bank regulatory agencies, which largely delays~~ the ~~effects of CECL~~Company on ~~its regulatory capital for two years, after which~~ the ~~effects will be phased-in over a three-year period from January 1,~~vesting date.

For the three months ended March 31, 2022 ~~through December 31, 2024. Under~~and 2021, the ~~interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period includes both the initial impact of our adoption of CECL at January 1, 2020~~Company recognized $7 million and ~~25% of subsequent changes~~$5 million in ~~our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.~~stock-based compensation expense, respectively.

Dividends

On January ~~28, 2021, our board~~27, 2022, the Company’s Board of ~~directors~~Directors declared a quarterly cash dividend of $0.21 per share on ~~our~~the Company’s common stock to stockholders of record at the close of business on February ~~12, 2021,~~11, 2022, resulting in a dividend payment of ~~$10.4~~$10 million on March 18, ~~2021. Additionally, we paid $0.3 million in cash related to dividend equivalent rights for the three months ended March 31, 2021.~~2022.

On April ~~29, 2021, our board~~28, 2022, the Company’s Board of ~~directors~~Directors declared a quarterly cash dividend of $0.21 per share on ~~our~~the Company’s common stock, payable on June ~~18, 2021~~17, 2022, to stockholders of record at the close of business on May ~~14, 2021.~~13, 2022.

12. INCOME TAXES

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 March 31, 2021, respectively. The increase in the effective tax rate primarily related to discrete charges in the current period and an increase in nondeductible items over those in the prior year period.

The Company is under examination by the Internal Revenue Service as well as tax authorities in various states. The tax years under examination and open for examination vary by jurisdiction, but with some exceptions, the tax returns filed by the Company are no longer subject to U.S. federal income tax and state and local examinations for the years before 2015 or foreign income tax examinations for years before 2017.

3935

~~Index~~Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

13. EARNINGS PER SHARE

The following table sets forth the computation of basic and diluted EPS attributable to common stockholders for the three months ended March 31:


	Three Months Ended March 31,
	2022		2021

	(in millions, except per share amounts)
Numerator:
Income from continuing operations	$	211	$	268
(Loss) income from discontinued operations, net of income taxes		(1)		18
Net income	$	210	$	286

Denominator:
Basic: Weighted average common stock		49.9		49.7
Weighted average effect of dilutive securities:
Add: net effect of dilutive unvested restricted stock awards ⁽¹⁾		0.1		0.1
Diluted		50.0		49.8

Basic EPS:
Income from continuing operations	$	4.23	$	5.39
(Loss) income from discontinued operations	$	(0.01)	$	0.37
Net income per share	$	4.22	$	5.76

Diluted EPS:
Income from continuing operations	$	4.21	$	5.38
(Loss) income from discontinued operations	$	(0.01)	$	0.36
Net income per share	$	4.20	$	5.74

(1)	For the three months ended March 31, 2022 and 2021, an insignificant amount of restricted stock awards were excluded from each calculation of weighted average dilutive common shares as the effect would have been anti-dilutive.

14. DISCONTINUED OPERATIONS

LoyaltyOne

On November 5, 2021, the separation of Loyalty Ventures Inc. (Loyalty Ventures) from the Company was completed after market close (the Separation). The Separation, which has been classified as discontinued operations, was achieved through the Company’s distribution of 81% of the shares of Loyalty Ventures common stock to holders of the Company’s common stock as of the close of business on the record date of October 27, 2021. The Company’s stockholders of record received one share of Loyalty Ventures common stock for every two and a half shares of the Company’s common stock. Following this distribution, Loyalty Ventures became an independent, publicly-traded company, in which the Company has retained a 19% ownership interest.

The Company accounts for its 19% ownership interest in Loyalty Ventures following the equity method of accounting. As of March 31, 2022, the carrying amount of the Company’s ownership interest in Loyalty Ventures, which investment totaled was $38 million, and is included in Other assets in the Consolidated Balance Sheet.

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following table summarizes the results of operations of the Company’s former LoyaltyOne segment, direct costs identifiable to the LoyaltyOne segment, and the allocation of interest expense on corporate debt, for the three months ended March 31, 2021:



(in millions)
Total interest income	$	—
Total interest expense ⁽¹⁾		3
Net interest income		(3)
Total non-interest income		176
Total non-interest expenses		145
Income before provision from income taxes		28
Provision for income taxes		10
Income from discontinued operations, net of income taxes	$	18

(1)	The Company’s credit agreement, as amended, required a $725 million prepayment of term loans in conjunction with the LoyaltyOne spinoff. As a result, the interest expense reflected above is the allocation to discontinued operations of interest on the basis of this $725 million mandatory prepayment.

The following table summarizes the depreciation and amortization, and capital expenditures of the Company’s former LoyaltyOne segment for the three months ended March 31, 2021:


(in millions)
Depreciation and amortization	$	9
Capital expenditures	$	5

~~Critical Accounting Policies and Estimates~~

~~Recently Issued Pronouncements~~

See “Recently Issued Accounting Standards” under Note 1, “Summary of Significant Accounting Policies,” of the Notes to Unaudited Condensed Consolidated Financial Statements for a discussion of certain accounting standards recently issued.

Item 3.Quantitative and Qualitative Disclosures About Market Risk.

Market Risk

Market risk is the risk ~~of loss~~to earnings or asset and liability values resulting from ~~adverse changes~~movements in market ~~prices~~prices. Our principal market risk exposure arises from volatility in interest rates and ~~rates. Our primary market risks include interest rate risk, credit risk,~~their impact on economic value, capitalization levels and ~~foreign currency exchange rate risk.~~earnings.

There has been no material change from our ~~Annual Report on~~2021 Form 10-K ~~for the year ended December 31, 2020~~ related to our exposure to market risk from interest rate ~~risk, credit risk, and foreign currency exchange rate~~ risk.

Item 4.

~~Item 4.~~ Controls and Procedures.

~~Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures~~

~~As of March 31, 2021, we carried out an evaluation, under the supervision and~~Our management, with the participation of ~~our management, including~~ our Chief Executive Officer and Chief Financial Officer, ~~or persons performing similar functions, of~~has evaluated the effectiveness of the design and operation of our disclosure controls and procedures ~~pursuant to Rule 13a-15 of~~(as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of ~~1934.~~1934, as amended (the Exchange Act)) as of the end of the period covered by this Report. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer ~~or persons performing similar functions,~~have concluded that, as of ~~March 31, 2021 (the~~the end of ~~our first fiscal quarter),~~such period, our disclosure controls and procedures are ~~effective. Disclosure controls~~effective and ~~procedures are controls and procedures~~ designed to ensure that the information required to be disclosed in our reports filed or submitted under the ~~Securities~~ Exchange Act ~~of 1934~~ is recorded, processed, summarized and reported within the requisite time periods specified in the ~~SEC’s~~applicable rules and forms, and ~~include controls and procedures designed to ensure~~ that ~~information we are required to disclose in such reports~~it is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, ~~or persons performing similar functions,~~ as appropriate, to allow timely decisions regarding required disclosure.

~~Changes in Internal Control Over Financial Reporting~~

There have not been noany changes in our internal control over financial reporting ~~that occurred~~(as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during ~~our first~~the fiscal quarter ~~2021~~to which this report relates that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

4038

~~Index~~Table of Contents

PART IIII: OTHER INFORMATION

Item 1. Legal Proceedings.

~~From time~~For a description of legal proceedings applicable to ~~time we are involved in various claims and lawsuits arising in the ordinary course of~~ our business, ~~that we believe will not have a material adverse effect on our business or financial condition, including claims~~see Indemnification and ~~lawsuits alleging breaches of our contractual obligations. See~~ ~~Indemnification~~Legal Proceedings in Note ~~14,~~9, “Commitments and ~~Contingencies,”~~Contingencies”, of the Notes to ~~Unaudited~~unaudited Condensed Consolidated Financial Statements.

Item 1A.Risk Factors.

~~There have been no material changes to~~

This section supplements and updates certain of the information found under Part I, Item 1A, Risk Factors, ~~previously disclosed~~of our 2021 Form 10-K. The matters discussed below should be read in conjunction with the risk factors set forth in the 2021 Form 10-K. However, the risks and uncertainties that we face are not limited to those described below and those set forth in the 2021 Form 10-K. Additional risks and uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our ~~Annual Report~~business.

Uncertainty about the financial and geopolitical stability of various regions or countries across the globe, including the related stresses on ~~Form 10-K for~~financial markets, could have a significant adverse effect on our business.

Risks and concerns about the ~~year ended December 31, 2020.~~financial and geopolitical stability of various regions or countries across the globe could have a detrimental impact on economic and market conditions in these or other markets across the world. Foreign market and economic disruptions have affected, and may in the future affect, consumer confidence levels and spending, personal bankruptcy rates, levels of incurrence of and default on consumer debt, and inflationary pressures on prices of gasoline and other products and services. Financial markets may be adversely affected by the current or anticipated impact of military conflict, including current events involving Ukraine and Russia, terrorism or other geopolitical events. The Russia-Ukraine conflict has had, and could continue to have, significant negative effects on regional and global economic and financial markets, including increased volatility, reduced liquidity, supply chain concerns and overall uncertainty. Russia may take additional counter measures or retaliatory actions (including cyberattacks), which could exacerbate negative consequences on global financial markets. The duration of ongoing hostilities and corresponding sanctions and related events cannot be predicted. The foregoing factors may adversely affect certain portions of our business, financial condition, and results of operations, including as a result of adverse impacts to our partners’ businesses and customers’ finances.

~~Item 2. Unregistered Sales~~
Item 2.
Unregistered Sale of Equity Securities and Use of Proceeds.

The following table presents information with respect to purchases of our common stock made during the three months ended March 31, ~~2021:~~2022:


				Total Number of	Approximate Dollar					Total Number of	Approximate Dollar
				Shares Purchased as	Value of Shares that					Shares Purchased as	Value of Shares that
				Part of Publicly	May Yet Be					Part of Publicly	May Yet Be
	Total Number of	Average Price Paid		Announced Plans or	Purchased Under the		Total Number of	Average Price Paid		Announced Plans or	Purchased Under the
Period	Shares Purchased ⁽¹⁾	per Share		Programs	Plans or Programs		Shares Purchased ⁽¹⁾	per Share		Programs	Plans or Programs
					(Dollars in millions)						(Dollars in millions)
During 2021:
January 1-31	3,705	$	71.12	—	$	—	3,047	$	69.16	—	$	—
February 1-28:	5,829		85.76	—		—
February 1-28							4,814		69.60	—		—
March 1-31	6,453		107.63	—		—	205,088		60.97	200,000		—
Total	15,987	$	91.19	—	$	—	212,949	$	61.29	200,000	$	—

(1)

During the period represented by the table, ~~15,987~~12,949 shares of our common stock were purchased by the administrator of our Bread Financial 401(k) ~~and Retirement Savings~~ Plan for the benefit of the employees who participated in that portion of the plan.

Table of Contents

Item 3.
Defaults Upon Senior Securities.

None.

~~Item 3. Defaults Upon Senior Securities.~~
~~None~~
Item 4.Mine Safety ~~Disclosures.~~Disclosures.

Not applicable.

Item 5.
~~Item 5.~~ Other Information.
~~(a)~~ ~~None~~
~~(b)~~ ~~None~~
(a) None
(b) None

4140

~~Index~~Table of Contents

Item 6.Exhibits.
~~(a)~~ ~~Exhibits:~~
a) Exhibits:

EXHIBIT INDEX

Incorporated by Reference

Incorporated by Reference
Exhibit
No.

Filer

Description

Form

Exhibit

Filing
Date

Filer

Description

Form

Exhibit

Filing Date

3.1

(a)

Third Amended and Restated Certificate of Incorporation of the Registrant.

8-K

3.2

6/10/16

(a)

Third Amended and Restated Certificate of Incorporation of the Registrant.

8-K

3.2

6/10/16

3.2

(a)

Certificate of Designations of Series A Preferred Non-Voting Convertible Preferred Stock of the Registrant.

8-K

3.1

4/29/19

(a)

Certificate of Amendment to Third Amended and Restated Certificate of Incorporation of the Registrant.

8-K

3.1

3/24/22

3.3

(a)

Fifth Amended and Restated Bylaws of the Registrant.

8-K

3.1

2/1/16

(a)

Certificate of Designations of Series A Preferred Non-Voting Convertible Preferred Stock of the Registrant.

8-K

3.1

4/29/19

3.4

(a)

Sixth Amended and Restated Bylaws of the Registrant.

8-K

3.2

3/24/22

4

(a)

Specimen Certificate for shares of Common Stock of the Registrant.

10-Q

4

8/8/03

(a)

Specimen Certificate for shares of Common Stock of the Registrant.

10-Q

4

8/8/03

10.1

(b)
(c)
(d)

Third Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of January 26, 2021, between Comenity Servicing LLC and Comenity Bank.

8-K

99.1

1/29/21

(b)
(c)
(d)

Second Amendment to Third Amended and Restated Service Agreement, as Amended, dated as of February 28, 2022, between Comenity Servicing LLC and Comenity Bank.

8-K

99.1

3/3/22

+10.2

(a)

Form of Time-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2020 Omnibus Incentive Plan.

8-K

10.1

2/18/21
#10.2

(a)

Private Label and Co-Brand Credit Card Program Agreement dated as of March 28, 2022, by and between Comenity Bank, Victoria’s Secret Stores, LLC, L Brands Direct Fulfillment, LLC, VSPR Store Operations LLC, Lone Mountain Factoring, LLC and Far West Factoring, LLC.

8-K

10.1

3/29/22

^Ù+10.3

(a)

Form of Performance-Based Restricted Stock Unit Award Agreement under the Alliance Data Systems Corporation 2020 Omnibus Incentive Plan (2021 grant).

8-K

10.2

2/18/21

10.4

(b)
(c)
(d)

Fourth Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of March 31, 2021, between Comenity Servicing LLC and Comenity Bank.

8-K

99.1

4/2/21

*#10.5

(a)

Extension to Secured Facilities Agreement, dated as of January 5, 2021, by and among Brand Loyalty Group B.V. and Coöperatieve Rabobank U.A. (as Agent).

10.3

(b)
(c)
(d)

First Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of March 31, 2022, between Comenity Servicing LLC and Comenity Bank.

8-K

99.1

4/1/22

*31.1

(a)

Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

(a)

Certification of Chief Executive Officer of Bread Financial Holdings, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

*31.2

(a)

Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

(a)

Certification of Chief Financial Officer of Bread Financial Holdings, Inc. pursuant to Rule 13a-14(a) promulgated under the Securities Exchange Act of 1934, as amended.

*32.1

(a)

Certification of Chief Executive Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

**32.1

(a)

Certification of Chief Executive Officer of Bread Financial Holdings, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

*32.2

(a)

Certification of Chief Financial Officer of Alliance Data Systems Corporation pursuant to Rule 13a-14(b) promulgated under the

**32.2

(a)

Certification of Chief Financial Officer of Bread Financial Holdings, Inc. pursuant to Rule 13a-14(b) promulgated under the Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.

4241

~~Index~~Table of Contents


				Incorporated by Reference
Exhibit No.		Filer	Description	Form	Exhibit	Filing Date
	Filing Date
			~~Securities Exchange Act of 1934, as amended, and Section 1350 of Chapter 63 of Title 18 of the United States Code.~~

*101		(a)	The following financial information from ~~Alliance Data Systems Corporation’s~~Bread Financial Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended March 31, ~~2021,~~2022, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income (Loss), (iii) Condensed Consolidated Statements of Comprehensive Income (Loss), (iv) Condensed Consolidated Statements of Stockholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.

*104		(a)	Cover Page Interactive Data File (formatted as Inline XBRL and contained in Exhibit 101).

* Filed herewith

** Furnished herewith

+ Management contract, compensatory plan or arrangement

*#	~~Filed herewith~~

+	~~Management contract, compensatory plan or arrangement~~

^Ù Certain exhibits have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Alliance Data hereby undertakes to furnish supplementally copies of any of the omitted exhibits upon request by the U.S. Securities and Exchange Commission.

# Pursuant to Item 601 (b)(10)(iv) of Regulation S-K, certain identified information has been excluded from this exhibit because it is both not material and would likely cause competitive harm to the registrant if publicly disclosed. Schedules have been omitted pursuant to Item 601(a)(5) of Regulation S-K. Registrant hereby undertakes to furnish supplementally an unredacted copy of the exhibit or a copy of any omitted schedule upon request by the U.S. Securities and Exchange Commission.

~~(a)~~

~~Alliance Data Systems Corporation~~

(a)

Bread Financial Holdings, Inc.

~~(b)~~

(b)

WFN Credit Company,

LLC

~~(c)~~

(c)

World Financial Network Credit Card Master Trust

~~(d)~~

(d)

World Financial Network Credit Card Master Note Trust

4342

~~Index~~Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, ~~the registrant~~Bread Financial Holdings, Inc. has duly caused this quarterly report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.

BREAD FINANCIAL HOLDINGS, INC.

~~ALLIANCE DATA SYSTEMS CORPORATION~~

DATE: May 5, 2022

By:
/s/S/ RALPH J. ANDRETTA

Ralph J. Andretta

President and Chief Executive Officer

DATE: May 5, 2022

~~Date: May 5, 2021~~

By:
/~~s/ LAURA SANTILLAN~~S/ PERRY S. BEBERMAN

~~Laura Santillan~~Perry S. Beberman

~~Senior~~Executive Vice President and Chief ~~Accounting~~Financial Officer

~~Date: May 5, 2021~~

4443


					Corporate/
Three Months Ended March 31, 2021	LoyaltyOne		Card Services		Other		Total

	(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program	$	66.8	$	—	$	—	$	66.8
Short-term loyalty programs		106.3		—		—		106.3
Servicing fees, net		—		(32.3)		—		(32.3)
Revenue from contracts with customers	$	173.1	$	(32.3)	$	—	$	140.8

Finance charges, net		—		940.6		—		940.6
Investment income		3.5		—		—		3.5
Total	$	176.6	$	908.3	$	—	$	1,084.9


					Corporate/
Three Months Ended March 31, 2020	LoyaltyOne		Card Services		Other		Total

	(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program	$	71.3	$	—	$	—	$	71.3
Short-term loyalty programs		120.3		—		—		120.3
Servicing fees, net		—		(30.7)		—		(30.7)
Other		3.3		—		0.1		3.4
Revenue from contracts with customers	$	194.9	$	(30.7)	$	0.1	$	164.3

Finance charges, net		—		1,214.3		—		1,214.3
Investment income		3.2		—		—		3.2
Total	$	198.1	$	1,183.6	$	0.1	$	1,381.8


	Deferred Revenue
	Service		Redemption		Total

	(in millions)
Balance at January 1, 2021	$	247.2	$	756.8	$	1,004.0
Cash proceeds		40.6		65.9		106.5
Revenue recognized ⁽¹⁾		(49.9)		(52.2)		(102.1)
Other		—		0.3		0.3
Effects of foreign currency translation		3.3		10.6		13.9
Balance at March 31, 2021	$	241.2	$	781.4	$	1,022.6
Amounts recognized in the consolidated balance sheets:
Deferred revenue (current)	$	139.0	$	781.4	$	920.4
Deferred revenue (non-current)	$	102.2	$	—	$	102.2


	Three Months Ended March 31,
	2021		2020

	(in millions, except per share amounts)
Numerator:
Net income	$	286.2	$	30.0

Denominator:
Weighted average shares, basic		49.7		47.6
Weighted average effect of dilutive securities:
Net effect of dilutive unvested restricted stock ⁽¹⁾		0.1		0.1
Denominator for diluted calculation		49.8		47.7

Basic net income per share:	$	5.76	$	0.63
Diluted net income per share:	$	5.74	$	0.63


	As of December 3, 2020
	(in millions)
Installment loan receivables	$	111.7
Accounts receivable		0.2
Other current assets		0.6
Property and equipment		0.3
Developed technology		90.7
Right of use assets - operating		3.6
Deferred tax asset, net		7.0
Intangible assets		11.3
Goodwill		369.6
Total assets acquired		595.0

Accounts payable		2.0
Accrued expenses		2.9
Operating lease liabilities		3.5
Non-recourse borrowings of consolidated securitization entities		95.6
Total liabilities assumed		104.0

Net assets acquired, net of cash and restricted cash	$	491.0


	January 10,
	2020
	(in millions)
Total consideration ⁽¹⁾	$	43.8
Net carrying value of assets and liabilities (including other comprehensive income)		26.8
Allocation of goodwill		3.2
Strategic transaction costs		5.8
Pre-tax gain on sale of business, net of strategic transaction costs	$	8.0


	Three Months Ended March 31,
	2021 ⁽¹⁾		2020

	(in millions)
Balance at beginning of period	$	2,008.0	$	1,171.1
Adoption of ASC 326 ⁽²⁾		—		644.0
Provision for loan loss		33.4		655.9
Recoveries		50.9		67.9
Principal charge-offs		(249.0)		(388.1)
Balance at end of period	$	1,843.3	$	2,150.8


	Aging Analysis of Delinquent Amortized Cost Credit Card and Loan Receivables ⁽¹⁾
	31 to 60 days delinquent		61 to 90 days delinquent		91 or more days delinquent		Total delinquent		Current		Total

	(in millions)
As of March 31, 2021	$	193.5	$	149.3	$	384.8	$	727.6	$	14,545.4	$	15,273.0

As of December 31, 2020	$	272.5	$	203.3	$	439.8	$	915.6	$	15,578.8	$	16,494.4


	Amortized Cost Revolving Credit Card Receivables
	March 31, 2021				December 31, 2020
			Percentage of				Percentage of
			Amortized				Amortized
Probability of an Account Becoming 91 or More Days Past	Amortized		Cost Basis		Amortized		Cost Basis
Due or Becoming Charged-off (within the next 12 months)	Cost Basis		Outstanding		Cost Basis		Outstanding

	(in millions, except percentages)
No Score	$	182.4	1.2	%	$	204.1	1.2	%
27.1% and higher		1,208.3	8.0			1,390.4	8.5
17.1% - 27.0%		780.6	5.2			848.8	5.2
12.6% - 17.0%		841.1	5.6			937.0	5.7
3.7% - 12.5%		6,633.1	43.8			7,305.5	44.6
1.9% - 3.6%		2,633.0	17.4			2,939.5	17.9
Lower than 1.9%		2,863.5	18.8			2,751.1	16.9
Total	$	15,142.0	100.0	%	$	16,376.4	100.0	%


	Amortized		Estimated
	Cost		Fair Value

	(in millions)
Due in one year or less ⁽¹⁾	$	45.7	$	45.7
Due after one year through five years		0.7		0.7
Due after five years through ten years		—		—
Due after ten years		171.8		175.6
Total	$	218.2	$	222.0


	Operating
Year	Leases
	(in millions)
2021 (excluding the three months ended March 31, 2021)	$	27.0
2022		39.9
2023		37.0
2024		34.7
2025		33.8
Thereafter		206.7
Total undiscounted lease liabilities		379.1
Less: Amount representing interest		(93.9)
Total present value of minimum lease payments	$	285.2

Amounts recognized in the March 31, 2021 consolidated balance sheet:
Current operating lease liabilities	$	22.7
Long-term operating lease liabilities		262.5
Total	$	285.2


	March 31, 2021
	Gross		Accumulated
	Assets		Amortization		Net		Amortization Life and Method

	(in millions)
Definite-Lived Assets
Customer contracts and lists	$	348.9	$	(341.1)	$	7.8	3 years—straight line
Premium on purchased credit card portfolios		137.2		(78.1)		59.1	3-13 years—straight line
Collector database		55.7		(55.3)		0.4	5 years—straight line
Tradenames		33.6		(29.2)		4.4	4-15 years—straight line
Non-compete agreements		2.2		(0.2)		2.0	5 years—straight line
	$	577.6	$	(503.9)	$	73.7
Indefinite-Lived Assets
Tradename		1.2		—		1.2	Indefinite life
Total intangible assets	$	578.8	$	(503.9)	$	74.9


	For the Years Ending
	December 31,
	(in millions)
2021 (excluding the three months ended March 31, 2021)	$	19.2
2022		21.0
2023		16.1
2024		11.2
2025		2.4
Thereafter		3.8


			Fair Value Measurements at
			March 31, 2021 Using
	Balance at
	March 31,
	2021		Level 1		Level 2		Level 3

	(in millions)
Mutual funds ⁽¹⁾	$	26.5	$	26.5	$	—	$	—
Corporate bonds ⁽¹⁾		627.4		—		627.4		—
Marketable securities ⁽²⁾		222.0		33.8		188.2		—
Derivative instruments ⁽³⁾		0.8		—		0.8		—
Total assets measured at fair value	$	876.7	$	60.3	$	816.4	$	—

Derivative instruments ⁽³⁾	$	1.2	$	—	$	1.2	$	—
Total liabilities measured at fair value	$	1.2	$	—	$	1.2	$	—


			Fair Value Measurements at
			December 31, 2020 Using
	Balance at
	December 31,
	2020		Level 1		Level 2		Level 3

	(in millions)
Mutual funds ⁽¹⁾	$	26.9	$	26.9	$	—	$	—
Corporate bonds ⁽¹⁾		611.2		—		611.2		—
Marketable securities ⁽²⁾		225.4		34.2		191.2		—
Derivative instruments ⁽³⁾		0.4		—		0.4		—
Total assets measured at fair value	$	863.9	$	61.1	$	802.8	$	—

Derivative instruments ⁽³⁾	$	1.5	$	—	$	1.5	$	—
Total liabilities measured at fair value	$	1.5	$	—	$	1.5	$	—


	BREAD FINANCIAL HOLDINGS, INC.
	~~ALLIANCE DATA SYSTEMS CORPORATION~~
DATE: May 5, 2022

		By:	/s/S/ RALPH J. ANDRETTA
			Ralph J. Andretta
			President and Chief Executive Officer

DATE: May 5, 2022
~~Date: May 5, 2021~~
		By:	/~~s/ LAURA SANTILLAN~~S/ PERRY S. BEBERMAN
			~~Laura Santillan~~Perry S. Beberman
			~~Senior~~Executive Vice President and Chief ~~Accounting~~Financial Officer

~~Date: May 5, 2021~~

Three Months Ended March 31,

(in millions)

Net charge-offs of securitized principal