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 June 30, 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~~ ~~September 30, 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.)~~

~~3095 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 ~~October 25, 2021, 49,785,109~~July 22, 2022, 49,845,663 shares of common stock were outstanding.

~~Index~~Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

~~ALLIANCE DATA SYSTEMS CORPORATION~~

INDEX

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

	~~Condensed Consolidated Balance Sheets as of September 30, 2021 and December 31, 2020~~		3

		Condensed Consolidated Statements of Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021				4
			16
			Condensed Consolidated Statements of Comprehensive Income for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021				517
			Condensed Consolidated Balance Sheets as of June 30, 2022 and December 31, 2021				18
			Condensed Consolidated Statements of Stockholders’ Equity for the three and ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021				6
			19
			Condensed Consolidated Statements of Cash Flows for the ~~nine~~six months ended ~~September~~June 30, ~~2021~~2022 and ~~2020~~2021				8
			21
			Notes to Condensed Consolidated Financial Statements				9
			22
Item 2.			Management’s Discussion and Analysis of Financial Condition and Results of Operations (MD&A)				37
			1
Item 3.			Quantitative and Qualitative Disclosures About Market Risk				48
			41
Item 4.			Controls and Procedures				4841

			Part II:II: OTHER INFORMATION

Item 1.			Legal Proceedings				49
			42
Item 1A.			Risk Factors				49
			42
Item 2.			Unregistered Sales of Equity Securities and Use of Proceeds				50
			42
Item 3.			Defaults Upon Senior Securities				50
			42
Item 4.			Mine Safety Disclosures				50
			42
Item 5.			Other Information				50
			42
Item 6.			Exhibits				51
			43
SIGNATURES							5345

Table of Contents

PART 1: FINANCIAL INFORMATION

Item 2.

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

The following discussion should be read in conjunction with the unaudited Condensed Consolidated Financial Statements and related notes thereto presented in this quarterly report and the audited Consolidated Financial Statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission (the SEC) on February 25, 2022 (the 2021 Form 10-K). Some of the information contained in this discussion and analysis constitutes forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those discussed in these forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements” included elsewhere in this quarterly report. Factors that could cause or contribute to these differences include, but are not limited to, those discussed below and those set forth in the Risk Factors section in our 2021 Form 10-K, and in subsequent filings we make with the SEC.

OVERVIEW

We are a tech-forward financial services company providing simple, personalized payment, lending and saving solutions. We create opportunities for our customers and partners through digitally enabled choices that offer ease, empowerment, financial flexibility and exceptional customer experiences. Driven by a digital-first approach, data insights and white-label technology, we deliver growth for our partners through a comprehensive product suite, including private label and co-brand credit cards, installment lending and buy now, pay later (split-pay). We also offer direct-to-consumer solutions that give customers more access, choice and freedom through our branded Bread Cashback^TM American Express^® Credit Card and Bread Savings^TM products.

Effective March 23, 2022, Alliance Data Systems Corporation was renamed Bread Financial Holdings, Inc., and on April 4, 2022, our ticker changed from “ADS” to “BFH” on the New York Stock Exchange (NYSE). Neither the name change nor the NYSE ticker change affected our legal entity structure, nor did either change have an impact on our financial statements. On November 5, 2021, our LoyaltyOne segment was spun off into an independent public company Loyalty Ventures Inc. (traded on The Nasdaq Stock Market LLC under the ticker “LYLT”) and therefore is reflected herein as Discontinued Operations.

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

NON-GAAP FINANCIAL MEASURES

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

Table of Contents

BUSINESS ENVIRONMENT

This Business Environment section provides an overview of our results of operations and financial position for the second quarter of 2022, as well as our related outlook for the remainder of 2022 and certain of the uncertainties associated with achieving that outlook. This section should be read in conjunction with the other information included or incorporated by reference in this Form 10-Q, including “Consolidated Results of Operations,” “Risk Factors” included in our most recent Annual Report on Form 10-K and in subsequent filings we make with the SEC and “Cautionary Note Regarding Forward-Looking Statements”, which provides further discussion of variances in our results of operations over the periods of comparison, along with other factors that could impact future results and the Company achieving its outlook. Unless otherwise specified, the commentary herein is for the three months ended June 30, 2022 compared with the same period in the prior year.

For the quarter ended June 30, 2022, Credit sales increased from the prior year period as consumer spending remained strong. Net interest income for the quarter increased 20% 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 write-down of our equity method investment in Loyalty Ventures Inc. We continue to be vigilant in monitoring macroeconomic conditions and the impact on consumers and our brand partners, with the increasing probability of a recession due to these macroeconomic and other conditions, including persistently high inflation and the ongoing effects of the global COVID-19 pandemic, all of which remain difficult to predict and therefore could have an impact on our outlook throughout the remainder of 2022. We anticipate Total net interest and non-interest income growth will be aligned with growth in average Total credit card and other loans, with potential upside from an improved full year net interest margin. We expect ongoing interest rate increases by the Board of Governors of the Federal Reserve System (the Federal Reserve) throughout the remainder of 2022; our models indicate these increases would result in a nominal benefit to Net interest income, which is included in our 2022 outlook.

Second quarter 2022 average Total credit card and other loans of $17.0 billion were up 11% from the prior year period, with the end-of-period balance being up 13%. Our outlook for growth in average Total credit card and other loans in 2022, which is based on our new and renewed business announcements including our agreement to acquire AAA’s existing credit card portfolio in the fourth quarter, visibility into our pipeline and the current economic outlook, is in the low-double-digit range relative to 2021. Payment rate variability is a key determinant for achieving this 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 second quarter of 2022, BJ’s branded co-brand accounts generated approximately 9% of Total net interest and non-interest income. As of June 30, 2022, BJ’s branded co-brand accounts were responsible for approximately 12% of Total credit card and other loans.

Provision for credit losses increased relative to the second 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. The increase is also driven by an increase in Credit card and other loans, as well as from economic scenario weightings in our credit reserve modeling reflecting the increasing probability of a recession and other macroeconomic factors including the increasing interest rate environment and persistent inflation. Our Allowance for credit losses increased compared to year-end 2021, with a reserve rate of 11.2% in the second quarter of 2022 and 10.5% at year-end 2021. Notwithstanding the foregoing, our credit metrics continue to remain strong, with our delinquency and net loss rates remaining below the historical averages with a delinquency rate of 4.4% and a net loss rate of 5.6% for the second quarter of 2022. We believe these low rates are the result of our disciplined, proactive risk management, and strong consumer payment behavior. Our outlook assumes a normalization of consumer payment behavior throughout the remainder of 2022, and we continue to expect a net loss rate in the low-to-mid 5% range for 2022 as credit metrics normalize from historically low rates due to the expiration of federal stimulus and assistance programs.

With regard to our expenses, Total non-interest expenses for the second quarter of 2022 were up 12% from the prior year period, due primarily to increased marketing expenses, employee compensation and benefit costs and overall technology modernization expenses. As a result of ongoing investment in technology modernization, digital advancement, marketing, and product innovation, along with strong portfolio growth, we continue to anticipate Total non-interest expenses will increase in 2022. The pace and timing of our investments will be calibrated to align with our full year revenue growth outlook, including our planned incremental investment of more than $125 million in digital and product innovation, marketing, brand and technology enhancements during 2022.

~~Index~~Table of Contents

~~PART I~~Overall, our results for the second quarter of 2022 demonstrated the benefits of the strategic actions we have implemented over the last few years, and our business transformation efforts continue to enable sustainable, profitable growth.

~~Item 1.~~~~Financial Statements.~~CONSOLIDATED RESULTS OF OPERATIONS

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

~~ALLIANCE DATA SYSTEMS CORPORATION~~Table 1: Summary of Our Financial Performance

~~UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS~~

September 30,

December 31,

2021

2020

(in millions, except per share amounts)
ASSETS

Cash and cash equivalents

$
3,172.2

$
3,081.5
Accounts receivable, net, less allowance for doubtful accounts ($7.1 million and $4.0 million at September 30, 2021 and December 31, 2020, respectively)

371.5

383.8
Credit card and loan receivables:

Credit card and loan receivables – restricted for securitization investors

10,102.7

11,208.5
Other credit card and loan receivables

5,587.2

5,575.9
Total credit card and loan receivables

15,689.9

16,784.4
Allowance for loan loss

(1,644.8)

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

14,045.1

14,776.4
Inventories

192.3

164.3
Other current assets

872.3

534.9
Redemption settlement assets, restricted

734.0

693.5
Total current assets

19,387.4

19,634.4
Property and equipment, net

292.2

310.9
Right of use assets - operating

208.0

233.2
Deferred tax asset, net

337.9

359.2
Intangible assets, net

64.1

81.7
Goodwill

1,342.7

1,369.6
Other non-current assets

625.0

558.1
Total assets

$
22,257.3

$
22,547.1
LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable

$
365.6

$
328.2
Accrued expenses

387.9

444.7
Current operating lease liabilities

21.9

23.6
Current portion of deposits

7,762.6

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

3,094.6

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

101.3

101.4
Other current liabilities

276.2

220.9
Deferred revenue

924.3

898.5
Total current liabilities

12,934.4

10,421.9
Deferred revenue

96.6

105.5
Long-term operating lease liabilities

249.9

276.4
Deposits

2,122.9

3,238.7
Non-recourse borrowings of consolidated securitization entities

1,494.1

3,859.2
Long-term and other debt

2,632.6

2,704.3
Other liabilities

481.2

419.5
Total liabilities

20,011.7

21,025.5
Commitments and contingencies (Note 14)

Stockholders’ equity:

Common stock, $0.01 par value; authorized, 200.0 million shares; issued, 49.8 million and 117.1 million shares at September 30, 2021 and December 31, 2020, respectively

0.5

1.2
Additional paid-in capital

2,170.8

3,427.2
Treasury stock, at cost, 0 shares and 67.4 million shares at September 30, 2021 and December 31, 2020, respectively

—

(6,733.9)
Retained earnings

130.5

4,832.1
Accumulated other comprehensive loss

(56.2)

(5.0)
Total stockholders’ equity

2,245.6

1,521.6
Total liabilities and stockholders’ equity

$
22,257.3

$
22,547.1

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


	Three Months Ended June 30,								Six Months Ended June 30,
	2022			2021			$ Change	% Change	2022			2021			$ Change	% Change
(Millions, except per share amounts and percentages)
Total net interest and non-interest income	$	893		$	764		129	17	$	1,814		$	1,566		248	16
Provision for credit losses		404			(14)		418	*		598			19		579	*
Total non-interest expenses		473			424		49	12		897			826		71	9
Income from continuing operations before income taxes		16			354		(338)	(95)		319			721		(402)	(56)
Provision for income taxes		4			91		(87)	(96)		95			190		(95)	(50)
Income from continuing operations		12			263		(251)	(95)		224			531		(307)	(58)
(Loss) income from discontinued operations, net of taxes		—			11		(11)	*		(1)			29		(30)	*
Net income		12			274		(262)	(95)		223			560		(337)	(60)

Net income per diluted share	$	0.25		$	5.47		(5.22)	(95)	$	4.46		$	11.21		(6.75)	(60)
Income from continuing operations per diluted share	$	0.25		$	5.25		(5.00)	(95)	$	4.47		$	10.63		(6.16)	(58)
Net interest margin ⁽¹⁾		18.6	%		17.3	%		1.3		19.0	%		17.5	%		1.5
Return on average equity ⁽²⁾		2.2	%		56.4	%		(54.2)		19.9	%		61.0	%		(41.1)
Effective income tax rate - continuing operations		22.7	%		25.7	%		(3.0)		29.9	%		26.3	%		3.6

(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

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF INCOME~~Table 2: Summary of Total Net Interest and Non-interest Income, After Provision for Credit Losses

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020

2021

2020

(in millions, except per share amounts)
Revenues

Services

$
10.5

$
24.7

$
70.4

$
109.2
Redemption, net

97.1

113.1

280.8

318.6
Finance charges, net

991.7

912.7

2,845.3

2,983.7
Total revenue

1,099.3

1,050.5

3,196.5

3,411.5
Operating expenses

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

489.2

482.7

1,481.1

1,474.7
Provision for loan loss

161.1

207.7

180.3

1,113.7
General and administrative

34.5

29.0

78.6

73.2
Depreciation and other amortization

18.9

18.4

61.7

56.2
Amortization of purchased intangibles

12.8

21.7

35.5

64.1
Total operating expenses

716.5

759.5

1,837.2

2,781.9
Operating income

382.8

291.0

1,359.3

629.6
Interest expense

Securitization funding costs

26.0

37.5

89.9

130.1
Interest expense on deposits

37.3

52.9

124.7

172.1
Interest expense on long-term and other debt, net

28.8

24.7

87.9

79.1
Total interest expense, net

92.1

115.1

302.5

381.3
Income before income taxes

290.7

175.9

1,056.8

248.3
Provision for income taxes

67.0

42.6

273.4

46.6
Net income

$
223.7

$
133.3

$
783.4

$
201.7

Net income per share (Note 3):

Basic

$
4.50

$
2.79

$
15.75

$
4.23
Diluted

$
4.47

$
2.79

$
15.68

$
4.23

Weighted average shares (Note 3):

Basic

49.8

47.7

49.7

47.7
Diluted

50.0

47.8

50.0

47.7

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2022		2021		$ Change	% Change	2022		2021		$ Change	% Change
(Millions, except percentages)
Interest income
Interest and fees on loans	$	1,064	$	913	151	17	$	2,130	$	1,854	276	15
Interest on cash and investment securities		9		2	7	401		11		3	8	230
Total interest income		1,073		915	158	17		2,141		1,857	284	15
Interest expense
Interest on deposits		41		43	(2)	(4)		76		90	(14)	(17)
Interest on borrowings		54		57	(3)	(6)		98		117	(19)	(16)
Total interest expense		95		100	(5)	(5)		174		207	(33)	(16)
Net interest income		978		815	163	20		1,967		1,650	317	19
Non-interest income
Interchange revenue, net of retailer share arrangements		(102)		(85)	(17)	19		(198)		(153)	(45)	29
Other		17		34	(17)	(49)		45		69	(24)	(35)
Total non-interest income		(85)		(51)	(34)	65		(153)		(84)	(69)	82
Total net interest and non-interest income		893		764	129	17		1,814		1,566	248	16
Provision for credit losses		404		(14)	418	*		598		19	579	*
Total net interest and non-interest income, after provision for credit losses	$	489	$	778	(289)	(37)	$	1,216	$	1,547	(331)	(21)

* Not meaningful

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

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

Interest income: Total interest income increased in the three and six months ended June 30, 2022, primarily resulting from Interest and fees on loans. The increase in each period, relative to the prior year, was due to increases in average credit card and other loans driven by new originations, and increases in finance charge yields of approximately 114 and 145 basis points for the three and six months periods, respectively, increasing revenue by $48 million and $122 million over the prior year periods of comparison, respectively.

Interest expense: Total interest expense decreased in the three and six months ended June 30, 2022, due to the following:

●

Interest on deposits decreased due to lower average interest rates resulting from the mix of deposits outstanding, which decreased interest expense by approximately $6 million and $21 million for the three and six month periods, respectively; partially offset by higher average balances outstanding.

●

Interest on borrowings decreased due primarily to a $3 million and $17 million decrease related to secured borrowings resulting from lower average interest rates for both the three and six month periods.

Non-interest income: Total non-interest income decreased for the three and six months ended June 30, 2022, due to the following:

●

Interchange revenue, net of retailer share arrangements increased for the three and six month periods, respectively, due to increased sales and new retailer share arrangements, resulting in increased interchange revenue, which was more than offset by increases in our brand partners’ share of the economics under the new retailer share arrangements.

●

Other decreased due to the write-down of our equity method investment in Loyalty Ventures Inc. of $21 million and $33 million for the three and six month periods, respectively; partially offset by an increase in ancillary

~~Index~~Table of Contents

revenue, in particular revenue from payment protection products, of $6 million and $9 million over these same periods of comparison, respectively.

~~ALLIANCE DATA SYSTEMS CORPORATION~~

Provision for credit losses: Provision for credit lossesincreased in the three and six months ended June 30, 2022, driven by reserve releases of $208 million and $373 million, respectively, from the Allowance for credit losses in the prior year periods associated with an improving macroeconomic outlook at such times and lower volumes of Credit card and other loans relative to the current year periods, as well as a reserve build of $166 million in the second quarter 2022, driven by a 6% higher end-of period loan balance and a higher reserve rate due to economic scenario weightings reflecting the increasing probability of a recession and other macroeconomic factors, including the increasing interest rate environment and persistent inflation.

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME~~Table 3: Summary of Total Non-interest Expenses

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020

2021

2020

(in millions)
Net income

$
223.7

$
133.3

$
783.4

$
201.7

Other comprehensive income (loss):

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

(3.5)

3.9

(14.2)

20.1
Tax benefit (expense)

0.2

0.1

1.4

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

(3.3)

4.0

(12.8)

19.0

Unrealized gain on cash flow hedges

1.2

0.7

2.1

—
Tax expense

(0.3)

(0.2)

(0.4)

—
Unrealized gain on cash flow hedges, net of tax

0.9

0.5

1.7

—

Foreign currency translation adjustments (inclusive of deconsolidation of $3.8 million for the nine months ended September 30, 2020 related to the sale of a business)

(20.7)

35.3

(40.1)

33.2

Other comprehensive (loss) income, net of tax

(23.1)

39.8

(51.2)

52.2

Total comprehensive income, net of tax

$
200.6

$
173.1

$
732.2

$
253.9

~~See accompanying notes~~


	Three Months Ended June 30,						Six Months Ended June 30,
	2022		2021		$ Change	% Change	2022		2021		$ Change	% Change
(Millions, except percentages)
Non-interest expenses
Employee compensation and benefits	$	191	$	162	29	18	$	370	$	320	50	16
Card and processing expenses		84		83	1	1		166		161	5	3
Information processing and communication		61		55	6	11		117		106	11	10
Marketing expenses		50		35	15	41		80		77	3	4
Depreciation and amortization		30		22	8	36		51		47	4	8
Other		57		67	(10)	(15)		113		115	(2)	—
Total non-interest expenses	$	473	$	424	49	12	$	897	$	826	71	9

Total Non-interest Expenses

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

Non-interest expenses: Total non-interest expenses increased in the three and six months ended June 30, 2022, due to ~~unaudited condensed consolidated financial statements.~~the following:

●

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

●

Information processing and communication increased due to an increase in data processing expense driven by the Fiserv core processing platform migration.

●

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

●

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

●

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

Income Taxes

Provision for income taxes decreased in the three and six months ended June 30, 2022, primarily driven by the decrease in Income from continuing operations before income taxes. The effective tax rate was 22.7% and 25.7% for the three months ended June 30, 2022 and 2021, respectively, and 29.9% and 26.3% for the six months ended June 30, 2022 and 2021, respectively. The decrease in the effective tax rate for the three month period primarily related to a discrete benefit in the current period, partially offset by increases in nondeductible items over those in the prior year period. The increase in the effective tax rate for the six month period was primarily driven by the decrease in Income from continuing operations before income taxes and increases in nondeductible items over those in the prior year period.

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~Table 4: Summary Financial Highlights – Continuing Operations

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

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Treasury

Retained

Comprehensive

Stockholders’
Three Months Ended September 30, 2021

Shares

Amount

Capital

Stock

Earnings

Loss

Equity

(in millions)
Balance at July 1, 2021

117.1

$
1.2

$
3,442.9

$
(6,733.9)

$
5,370.8

$
(33.1)

$
2,047.9
Net income

—

—

—

—

223.7

—

223.7
Other comprehensive loss

—

—

—

—

—

(23.1)

(23.1)
Stock-based compensation

—

—

8.6

—

—

—

8.6
Dividends and dividend equivalent rights declared ($0.21 per common share)

—

—

—

—

(10.6)

—

(10.6)
Retirement of treasury stock

(67.4)

(0.7)

(1,279.8)

6,733.9

(5,453.4)

—

—
Other

0.1

—

(0.9)

—

—

—

(0.9)
Balance at September 30, 2021

49.8

$
0.5

$
2,170.8

$
—

$
130.5

$
(56.2)

$
2,245.6

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Treasury

Retained

Comprehensive

Stockholders’
Three Months Ended September 30, 2020

Shares

Amount

Capital

Stock

Earnings

Loss

Equity

(in millions)
Balance at July 1, 2020

115.1

$
1.2

$
3,267.7

$
(6,733.9)

$
4,707.1

$
(87.5)

$
1,154.6
Net income

—

—

—

—

133.3

—

133.3
Other comprehensive income

—

—

—

—

—

39.8

39.8
Stock-based compensation

—

—

5.3

—

—

—

5.3
Dividends and dividend equivalent rights declared ($0.21 per common share)

—

—

—

—

(10.1)

—

(10.1)
Other

—

—

(0.3)

—

—

—

(0.3)
Balance at September 30, 2020

115.1

$
1.2

$
3,272.7

$
(6,733.9)

$
4,830.3

$
(47.7)

$
1,322.6

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



	As of or for the Three Months Ended June 30,							As of or for the Six Months Ended June 30,

	2022			2021			% Change	2022			2021			% Change
(Millions, except per share amounts and percentages)
Credit sales	$	8,140		$	7,401		10	$	15,028		$	13,445		12
PPNR⁽¹⁾		420			340		24		917			740		24
Average credit card and other loans		17,003			15,282		11		16,827			15,533		8
End-of-period credit card and other loans		17,769			15,724		13		17,769			15,724		13
End-of-period direct-to-consumer deposits		4,191			2,398		75		4,191			2,398		75

Return on average assets⁽²⁾		0.2	%		4.8	%	(4.6)		2.1	%		4.9	%	(2.8)
Return on average equity⁽³⁾		2.2	%		56.4	%	(54.2)		19.9	%		61.0	%	(41.1)

Net interest margin⁽⁴⁾		18.6	%		17.3	%	1.3		19.0	%		17.5	%	1.5
Loan yield⁽⁵⁾		25.0	%		23.9	%	1.1		25.3	%		23.9	%	1.4

Efficiency ratio⁽⁶⁾		52.9	%		55.5	%	(2.6)		49.5	%		52.7	%	(3.2)

Tangible common equity / tangible assets ratio (TCE/TA)⁽⁷⁾		7.5	%		6.4	%	1.1		7.5	%		6.4	%	1.1
Tangible book value per common share⁽⁸⁾	$	31.75		$	27.12		17	$	31.75		$	27.12		17
Cash dividend per common share	$	0.21		$	0.21		—	$	0.42		$	0.42		—

Delinquency rate		4.4	%		3.3	%	1.1		4.4	%		3.3	%	1.1
Net loss rate ⁽⁹⁾		5.6	%		5.1	%	0.5		5.2	%		5.0	%	0.2
Reserve rate		11.2	%		10.4	%	0.8		11.2	%		10.4	%	0.8

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

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

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

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

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

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

(7)

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

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

(9)

The three and six months ended June 30, 2022 Net loss rates include 30 basis point and 15 basis point increases, respectively, from the effects of the purchase of previously written-off accounts that were sold to a third-party debt collection agency; this matter remains subject to an ongoing legal dispute with the debt collection agency.

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY – (CONTINUED)~~Table 5: Net Interest Margin

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Treasury

Retained

Comprehensive

Stockholders’
Nine Months Ended September 30, 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

—

—

—

—

783.4

—

783.4
Other comprehensive loss

—

—

—

—

—

(51.2)

(51.2)
Stock-based compensation

—

—

24.6

—

—

—

24.6
Dividends and dividend equivalent rights declared ($0.21 per common share)

—

—

—

—

(31.6)

—

(31.6)
Retirement of treasury stock

(67.4)

(0.7)

(1,279.8)

6,733.9

(5,453.4)

—

—
Other

0.1

—

(1.2)

—

—

—

(1.2)
Balance at September 30, 2021

49.8

$
0.5

$
2,170.8

$
—

$
130.5

$
(56.2)

$
2,245.6



	Three Months Ended June 30, 2022								Three Months Ended June 30, 2021
	Average Balance		Interest Income / Expense			Average Yield / Rate			Average Balance		Interest Income / Expense			Average Yield / Rate
(Millions, except percentages)
Cash and investment securities	$	3,975	$	9			0.84	%	$	3,498	$	2			0.19	%
Credit card and other loans		17,003		1,064			25.04	%		15,282		913			23.90	%
Total interest-earning assets		20,978		1,073			20.45	%		18,780		915			19.48	%

Direct-to-consumer (retail) deposits		3,865		10			1.07	%		2,255		5			0.98	%
Wholesale deposits		6,994		31			1.78	%		7,580		38			2.00	%
Interest-bearing deposits		10,859		41			1.53	%		9,835		43			1.76	%

Secured borrowings		5,331		28			2.11	%		4,478		31			2.72	%
Unsecured borrowings		1,978		26			5.15	%		2,805		26			3.74	%
Interest-bearing borrowings		7,309		54			2.93	%		7,283		57			3.11	%
Total interest-bearing liabilities		18,168		95			2.09	%		17,118		100			2.34	%

Net interest income			$	978							$	815

Net interest margin ⁽¹⁾				18.6	%							17.3	%

Accumulated

Additional

Other

Total

Common Stock

Paid-In

Treasury

Retained

Comprehensive

Stockholders’
Nine Months Ended September 30, 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

—

—

—

—

201.7

—

201.7
Cumulative effect adjustment to retained earnings in accordance with ASU 2016-13

—

—

—

—

(485.0)

—

(485.0)
Other comprehensive income

—

—

—

—

—

52.2

52.2
Stock-based compensation

—

—

��
16.2

—

—

—

16.2
Dividends and dividend equivalent rights declared ($0.63 per common share for the three months ended March 31, 2020 and $0.21 per common share for both the three months ended June 30, 2020 and September 30, 2020)

—

—

—

—

(49.7)

—

(49.7)
Other

0.1

0.1

(1.2)

—

—

—

(1.1)
Balance at September 30, 2020

115.1

$
1.2

$
3,272.7

$
(6,733.9)

$
4,830.3

$
(47.7)

$
1,322.6

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



	Six Months Ended June 30, 2022								Six Months Ended June 30, 2021
	Average Balance		Interest Income / Expense			Average Yield / Rate			Average Balance		Interest Income / Expense			Average Yield / Rate
(Millions, except percentages)
Cash and investment securities	$	3,884	$	11			0.56	%	$	3,302	$	3			0.20	%
Credit card and other loans		16,827		2,130			25.32	%		15,533		1,854			23.87	%
Total interest-earning assets		20,711		2,141			20.67	%		18,835		1,857			19.72	%

Direct-to-consumer (retail) deposits		3,572		17			0.94	%		2,070		11			1.08	%
Wholesale deposits		7,258		59			1.62	%		7,811		79			2.03	%
Interest-bearing deposits		10,830		76			1.39	%		9,881		90			1.83	%

Secured borrowings		5,162		48			1.86	%		4,550		64			2.82	%
Unsecured borrowings		1,991		50			5.06	%		2,817		53			3.73	%
Interest-bearing borrowings		7,153		98			2.75	%		7,367		117			3.17	%
Total interest-bearing liabilities		17,983		174			1.93	%		17,248		207			2.40	%

Net interest income			$	1,967							$	1,650

Net interest margin ⁽¹⁾				19.0	%							17.5	%

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

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS~~Table 6: Reconciliation of GAAP to Non-GAAP Financial Measures

Nine Months Ended

September 30,

2021

2020

(in millions)
CASH FLOWS FROM OPERATING ACTIVITIES:

Net income

$
783.4

$
201.7
Adjustments to reconcile net income to net cash provided by operating activities:

Depreciation and amortization

97.2

120.3
Deferred income taxes

20.0

(157.7)
Provision for loan loss

180.3

1,113.7
Non-cash stock compensation

24.6

16.2
Amortization of deferred financing costs

23.5

26.6
Asset impairment charges

—

34.2
Change in other operating assets and liabilities, net of sale of business

25.4

121.6
Other

53.6

12.0
Net cash provided by operating activities

1,208.0

1,488.6

CASH FLOWS FROM INVESTING ACTIVITIES:

Change in redemption settlement assets

(47.3)

(31.3)
Change in credit card and loan receivables

87.9

3,107.8
Proceeds from sale of business

—

26.7
Proceeds from sale of credit card portfolio

512.2

289.5
Purchase of credit card portfolios

(99.5)

—
Capital expenditures

(58.8)

(37.9)
Purchases of other investments

(77.4)

(22.5)
Maturities/sales of other investments

60.7

57.5
Other

2.9

(25.0)
Net cash provided by investing activities

380.7

3,364.8

CASH FLOWS FROM FINANCING ACTIVITIES:

Borrowings under debt agreements

38.0

1,150.0
Repayments of borrowings

(114.1)

(1,194.5)
Non-recourse borrowings of consolidated securitization entities

2,767.5

435.0
Repayments/maturities of non-recourse borrowings of consolidated securitization entities

(3,891.2)

(3,380.0)
Net increase (decrease) in deposits

88.4

(2,012.0)
Payment of deferred financing costs

(13.0)

(16.2)
Dividends paid

(31.6)

(50.5)
Other

(1.1)

3.9
Net cash used in financing activities

(1,157.1)

(5,064.3)

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

(4.2)

3.7

Change in cash, cash equivalents and restricted cash

427.4

(207.2)
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

$
3,890.6

$
3,750.9

SUPPLEMENTAL CASH FLOW INFORMATION:

Interest paid

$
292.6

$
379.5
Income taxes paid, net

$
247.2

$
108.4



	As of or for the Three Months Ended June 30,					As of or for the Six Months Ended June 30,

	2022		2021		% Change	2022		2021		% Change
(Millions, except percentages)
Pretax pre-provision earnings (PPNR)
Income from continuing operations before income taxes	$	16	$	354	(95)	$	319	$	721	(56)
Provision for credit losses		404		(14)	*		598		19	*
Pretax pre-provision earnings (PPNR)	$	420	$	340	24	$	917	$	740	24

Tangible common equity (TCE)
Total stockholders' equity		2,275		2,048	11		2,275		2,048	11
Less: Goodwill and intangible assets, net		(694)		(699)	(1)		(694)		(699)	(1)
Tangible common equity (TCE)	$	1,581	$	1,349	17	$	1,581	$	1,349	17

Tangible assets (TA)
Total assets		21,811		21,812	—		21,811		21,812	—
Less: Goodwill and intangible assets, net		(694)		(699)	(1)		(694)		(699)	(1)
Tangible assets (TA)	$	21,117	$	21,113	—	$	21,117	$	21,113	—

* Not meaningful

ASSET QUALITY

~~See accompanying notes~~

Given the nature of our business, the quality of our assets, in particular our credit card and other loans (primarily installment loans), is a key determinant underlying our ongoing financial performance and overall financial condition. When it comes to ~~unaudited condensed consolidated financial statements~~our Credit card and other loans portfolio, we closely monitor two metrics – delinquency rates and net principal loss rates – which reflect, among other factors, our underwriting, the inherent credit risk in our portfolio, the success of our collection and recovery efforts, and more broadly, the general macroeconomic conditions.

Delinquencies: An account is contractually delinquent if we do not receive the minimum payment due by the specified due date. Our policy is to continue to accrue interest and fee income on all accounts, except in limited circumstances, until the balance and all related interest and fees are paid or charged-off. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent; based upon the level of risk indicated, a collection strategy is deployed. If after exhausting all in-house collection efforts we are unable to collect on the account, we may engage collection agencies or outside attorneys to continue those efforts, or sell the charged-off balances.

The following table presents the delinquency trends on our credit card and other loans portfolio based on the principal balances outstanding as of June 30, 2022 and December 31, 2021:

Table 7: Delinquency Trends on Credit Card and Other Loans


	June 30,		% of		December 31,		% of
	2022		Total		2021		Total
(Millions, except percentages)
Credit card and other loans outstanding ─ principal	$	16,825	100.0	%	$	16,590	100.0	%
Outstanding balances contractually delinquent
31 to 60 days	$	262	1.6	%	$	219	1.3	%
61 to 90 days		169	1.0			147	0.9
91 or more days		306	1.8			281	1.7
Total	$	737	4.4	%	$	647	3.9	%

~~Index~~Table of Contents

~~ALLIANCE DATA SYSTEMS CORPORATION~~

~~NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS~~

~~1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES~~As part of our collections strategy, we may offer temporary, short term (six-months or less) loan modifications in order to improve the likelihood of collections and meet the needs of our customers. Our modifications for customers who have requested assistance and meet certain qualifying requirements, come in the form of reduced or deferred payment requirements, interest rate reductions and late fee waivers. We do not offer programs involving the forgiveness of principal. These temporary loan modifications may assist in cases where we believe the customer will recover from the short-term hardship and resume scheduled payments. Under these forbearance modification programs, those accounts receiving relief may not advance to the next delinquency cycle, including charge-off, in the same time frame that would have occurred had the relief not been granted. We evaluate our loan modification programs to determine if they represent a more than insignificant delay in payment, in which case they would then be considered a troubled debt restructuring. For additional information, see Note 2, “Credit Card and Other Loans – Modified Credit Card Loans,” to our unaudited Condensed Consolidated Financial Statements.

~~Basis~~

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

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

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


	Three Months Ended June 30,						Six Months Ended June 30,
	2022			2021			2022			2021
(Millions, except percentages)
Average credit card and other loans	$	17,003		$	15,282		$	16,827		$	15,533
Net principal losses		238			194			438			392
Net principal losses as a percentage of average credit card and other loans		5.6	%		5.1	%		5.2	%		5.0	%

CONSOLIDATED LIQUIDITY AND CAPITAL RESOURCES

We maintain a strong focus on liquidity and capital. Our funding, liquidity and capital policies are designed to ensure that our business has the liquidity and capital resources necessary to support our daily operations, our business growth, our credit ratings, and meet our regulatory and policy requirements (including capital and leverage ratio requirements applicable to Comenity Bank and Comenity Capital Bank (collectively referred to herein as the Banks) under Federal Deposit Insurance Corporation (FDIC) regulations) in a cost effective and prudent manner through expected and unexpected market environments.

Our primary sources of liquidity include cash generated from operating activities, our Credit Agreement and issuances of debt securities, 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

Table of Contents

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

Funding Sources

Credit Agreement

As of June 30, 2022, we had $607 million in aggregate principal amount of term loans outstanding under our Credit Agreement, as amended, and a $750 million revolving line of credit under which we had no amounts drawn.

The Credit Agreement includes various restrictive financial and non-financial covenants. If we do not comply with these covenants, the maturity of amounts outstanding under the Credit Agreement may be accelerated and become payable, and the associated commitments may be terminated. As of June 30, 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 the securitization enhancement requirements of the Banks. We offer both direct-to-consumer retail deposit products as well as deposits sourced through contractual arrangements with various financial counterparties (often referred to as wholesale deposits). Across both our retail and wholesale deposits, the Banks offer various non-maturity deposit products that are generally redeemable on demand by the customer, and as such have no scheduled maturity date; the Banks also issue certificates of deposit with scheduled maturity dates ranging between July 2022 and June 2027, in denominations of at least $1,000, on which interest is paid either monthly or at maturity.

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

Table 9: Deposits



	June 30,		December 31,
	2022		2021
(Millions, except percentages)
Deposits
Direct-to-consumer (retail)	$	4,191	$	3,180
Wholesale		6,808		7,847

Non-maturity deposit products
Non-maturity deposits	$	6,360	$	5,586
Interest rate range	0.70% – 3.50%		0.05% – 3.50%
Weighted-average interest rate		1.66%		0.68%

Certificates of deposit
Certificates of deposit	$	4,639	$	5,441
Interest rate range	0.25% – 3.75%		0.20% – 3.75%
Weighted-average interest rate		2.27%		1.91%

Securitization Programs and Conduit Facilities

We sell the majority of the credit card loans originated by the Banks to certain of our master trusts (the Trusts). These securitization programs are a principal vehicle through which we finance the Banks’ credit card loans. We use a combination of public term asset-backed notes and private conduit facilities for this purpose. During the six months ended June 30, 2022, $962 million of asset-backed term notes matured and were repaid, of which $43 million were previously retained by us and therefore eliminated from the Consolidated Balance Sheets.

As of June 30, 2022, total capacity under our Conduit Facilities was $5.5 billion, of which $4.8 billion had been drawn and was included in Debt issued by consolidated ~~financial statements included herein have been prepared by Alliance Data Systems Corporation (“ADSC” or, including its consolidated subsidiaries and~~ variable interest entities ~~(“VIEs”),~~(VIEs) in the ~~“Company”), without audit, pursuant~~Consolidated Balance Sheet. In

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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 ~~rules~~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 ~~regulations~~extending the maturity to July 2023.

As of June 30, 2022, we had approximately $12.4 billion of securitized credit card loans. Securitizations require credit enhancements in the form of cash, spread deposits, additional loans and subordinated classes. The credit enhancement is principally based on the outstanding balances of the ~~Securities~~series issued by the Trusts and ~~Exchange Commission (“SEC”). Certain information~~by the performance of the credit card loans in the Trusts.

The following table shows the maturities of borrowing commitments as of June 30, 2022, for the Trusts by year:

Table 10: Borrowing Commitment Maturities


	2022		2023		Thereafter		Total
(Millions)
Fixed rate asset-backed term note securities	$	653	$	—	$	—	$	653
Conduit facilities ⁽¹⁾		—		5,525		—		5,525
Total ⁽²⁾	$	653	$	5,525	$	—	$	6,178

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

(2)	Total amounts do not include $1.8 billion of debt issued by the Trusts, which was retained by us as a credit enhancement and therefore has been eliminated from the Total.

Early amortization events as defined within each asset-backed securitization transaction are generally driven by asset performance. We do not believe it is reasonably likely that an early amortization event will occur due to asset performance. However, if an early amortization event were declared for a Trust, the trustee of that particular trust would retain the interest in the loans along with the excess spread that would otherwise be paid to our Bank subsidiary until the investors were fully repaid. The occurrence of an early amortization event would significantly limit or negate our ability to securitize additional credit card loans.

We have secured and ~~footnote disclosures normally included~~continue to secure the necessary commitments to fund our credit card and other loans. However, certain of these commitments are short-term in ~~financial statements prepared~~nature and subject to renewal. There is no guarantee that these funding sources, when they mature, will be renewed on similar terms, or at all, as they are dependent on the availability of the asset-backed securitization and deposit markets at the time.

Regulation RR (Credit Risk Retention) adopted by the FDIC, the SEC, the Federal Reserve and certain other federal regulators mandates a minimum five percent risk retention requirement for securitizations. Such risk retention requirements may limit our liquidity by restricting the amount of asset-backed securities we are able to issue or affecting the timing of future issuances of asset-backed securities. We satisfy such risk retention requirements by maintaining a seller’s interest calculated in accordance with accounting principles generally accepted in the United States of America (“GAAP”) have been condensed or omitted pursuant to such rules and regulations. However, the Company believes that the disclosures are adequate to make the information presented not misleading. These unaudited condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included 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. The results of operations for 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 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 from those estimates.Regulation RR.

~~Planned Spinoff of the LoyaltyOne Segment~~

Stock Repurchase Programs

On ~~October 13, 2021,~~February 28, 2022, the Company’s Board of Directors approved a stock repurchase program to acquire up to 200,000 shares of the ~~previously announced separation (the “Separation”)~~Company’s outstanding common stock in the open market during the one-year period ending on February 28, 2023. As of June 30, 2022, the Company had repurchased all 200,000 shares of its ~~LoyaltyOne segment, consisting~~common stock available under this program for an aggregate of its Canadian AIR MILES® Reward Program and Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company, Loyalty Ventures Inc. listed on Nasdaq under the symbol “LYLT” (“Loyalty Ventures”). The Separation will$12 million. Following their repurchase, these 200,000 shares ceased to be ~~completed through the pro rata distribution of 81% of the~~ outstanding shares of ~~Loyalty Ventures to holders of ADSC’s~~ common stock ~~at the close of business on the record date of October 27, 2021, with ADSC retaining the remaining 19% of the outstanding~~and are now treated as authorized but unissued shares of ~~Loyalty Ventures. ADSC~~common stock.

Dividends

During the three and six months ended June 30, 2022, we paid $11 million and $22 million, respectively, in dividends to our shareholders of common stock. On July 28, 2022, our Board of Directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on September 16, 2022, to stockholders of record at the close of business on October 27, 2021 will receive one share of Loyalty Ventures common stock for every two and one-half (2.5) shares of ADSC common stock. The distribution is expected to qualify as a tax-free reorganization and a tax-free distribution to ADSC and its stockholders for U.S. federal income tax purposes, to be completed on November 5, 2021. At the time of the spinoff, the Company will retain a 19% interest in Loyalty Ventures and historical results of the LoyaltyOne segment will be reflected as discontinued operations in the Company’s consolidated financial statements.

~~Recently Issued Accounting Standards~~August 12, 2022.

In March 2020, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2020-04, “Facilitation of the Effects of Reference Rate Reform on Financial Reporting.” This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions affected by reference rate reform if certain criteria are met. The amendments in this ASU apply only to contracts and hedging relationships that reference the London Interbank Offered Rate (“LIBOR”) or another reference rate expected to be discontinued due to reference rate reform. The expedients and exceptions provided by the amendments do not apply to contract modifications made and hedging relationships entered into or evaluated after December 31, 2022. This ASU is elective 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 financial statements.

911

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Contractual Obligations

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

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

Cash Flows

The table below summarizes our cash flow activity, followed by a discussion of the variance drivers impacting our Operating, Investing and Financing activities, for the six months ended June 30, 2022 compared with the same period in the prior year.

~~ALLIANCE DATA SYSTEMS CORPORATION~~Table 11: Cash Flows


	Six Months Ended June 30,
	2022		2021
(Millions)
Total cash provided by (used in)
Operating activities	$	743	$	733
Investing activities		(897)		535
Financing activities		(72)		(1,365)
Effect of foreign currency exchange rates		—		1
Net decrease in cash, cash equivalents and restricted cash	$	(226)	$	(96)

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 $743 million and $733 million for the six months ended June 30, 2022 and 2021, respectively. In the first half of 2022, the net cash provided by operating activities was primarily driven by cash generated from net income for the period after adjusting for the provision for credit losses, partially offset by a decrease in accounts payable and other liabilities. In the first half of 2021, the net cash provided by operating activities was primarily driven by cash generated from net income.

Cash Flows from Investing Activities primarily include changes in credit card and other loans. Cash used in investing activities was $897 million for the six months ended June 30, 2022, and cash provided by investing activities was $535 million for the six months ended June 30, 2021. In the first half of 2022, the net cash used in investing activities was primarily due to growth in credit sales and the consequential growth in Credit card and other loans, as well as the acquisition of a credit card loan portfolio. In the first half of 2021, the net cash provided by investing activities was due to an increase in payment rates that benefitted from government economic stimulus programs.

Cash Flows from Financing Activities primarily include changes in deposits and long-term debt. Cash used in financing activities was $72 million and $1,365 million for the six months ended June 30, 2022 and 2021, respectively. In the first half of 2022, the net cash used in financing activities was primarily driven by repayments of unsecured borrowings. In the first half of 2021, the net cash used in financing activities was driven by net repayments of asset-backed term notes (securitizations), partially offset by net increases in deposits.

~~NOTES TO~~ INFLATION AND SEASONALITY

Although we cannot precisely determine the impact of inflation on our operations, we do not believe, at this time, that we have been significantly affected by inflation. For the most part we have relied on operating efficiencies from scale, technology and expansion in lower cost jurisdictions in select circumstances, as well as decreases in technology and communication costs, to offset increased costs of employee compensation and other operating expenses. We also recognize that a customer’s ability and willingness to repay us can be negatively impacted by factors such as inflation, which may result in greater delinquencies that lead to greater credit losses. If the efforts to control inflation in the U.S. and globally are not successful and inflationary pressures persist, they could magnify the slowdown in the domestic and global economies and increase the risk of a recession, which may adversely impact our business, results of operations

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and financial condition. See Item 1A “Risk Factors” in our 2021 Form 10-K and other filings with the SEC 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.

LEGISLATIVE AND REGULATORY MATTERS

Comenity Bank is subject to various regulatory capital requirements administered by the State of Delaware and the FDIC. Comenity Capital Bank is also subject to various regulatory capital requirements administered by the FDIC, as well as the State of Utah. Failure to meet minimum capital requirements can trigger certain mandatory and possibly additional discretionary actions by our regulators. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, both Banks must meet specific capital guidelines that involve quantitative measures of their assets and liabilities as calculated under regulatory accounting practices. The capital amounts and classification are also subject to qualitative judgments by these regulators about components, risk weightings and other factors. In addition, both Banks are limited in the amounts they can pay as dividends to the Parent Company. For additional information about legislative and regulatory matters impacting us see “Business–Supervision and Regulation” under Part I of our 2021 Form 10-K.

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Quantitative measures, established by regulations to ensure capital adequacy, require the Banks to maintain minimum amounts and ratios of Tier 1 capital to average assets, and Common equity Tier 1, Tier 1 capital and Total capital, all to risk weighted assets. Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on Comenity Bank’s and/or Comenity Capital Bank’s operating activities, as well as our operating activities. Based on these regulations, as of June 30, 2022 and 2021, each Bank met all capital requirements to which it was subject, and maintained capital ratios in excess of the minimums required to qualify as well capitalized. The Banks are considered well capitalized and seek to maintain capital levels and ratios in excess of the minimum regulatory requirements inclusive of the 2.5% Capital Conservation Buffer. The actual capital ratios and minimum ratios for each Bank, as well as the Combined Banks, as of June 30, 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⁾	19.1	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	22.7		4.5		6.5
Tier 1 capital ratio ⁽³⁾	22.7		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	24.0		8.0		10.0

Comenity Capital Bank
Tier 1 Leverage capital ratio ⁽¹⁾	16.4	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	18.0		4.5		6.5
Tier 1 capital ratio ⁽³⁾	18.0		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	19.4		8.0		10.0

Combined Banks
Tier 1 Leverage capital ratio ⁽¹⁾	17.7	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	20.1		4.5		6.5
Tier 1 capital ratio ⁽³⁾	20.1		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	21.5		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 delayed the effects of CECL on their regulatory capital for two years, until January 1, 2022, after which the effects are phased-in over a three-year period through December 31, 2024. Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period includes both the initial impact of our adoption of CECL as of January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021. 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.

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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, and the guidance we give with respect to, our anticipated operating or financial results, future financial performance and outlook, initiation or completion of strategic initiatives, future dividend declarations and future economic conditions, including, but not limited to, market conditions, inflation and developments in the geopolitical environment. We believe that our expectations are based on reasonable assumptions. Forward-looking statements, however, are subject to a number of risks and uncertainties that could cause actual results to differ materially from the projections, anticipated results or other expectations expressed in this report, and no assurances can be given that our expectations will prove to have been correct. These risks and uncertainties include, but are not limited to, the following:

●

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

●

macroeconomic and geopolitical conditions, including, but not limited to, market conditions, inflation, rising interest rates and the increased probability of a recession, and any impact of the war in Ukraine;

●

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

●

increases in fraudulent activity, net principal losses in credit card and other loans or increases or volatility in the allowance for 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, 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;

●

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, including any such actions that may be taken with respect to late fees or other charges;

●

increases in regulatory capital requirements or other support for our Banks;

●

loss or disruption, due to 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 2021 Form 10-K and our subsequent filings with the SEC as well as those factors discussed 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.

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Item 1. Financial Statements.

BREAD FINANCIAL HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED ~~FINANCIAL~~ STATEMENTS ~~– (CONTINUED)~~OF INCOME

~~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.

~~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:~~


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
(Millions, except per share amounts)
Interest income
Interest and fees on loans	$	1,064	$	913	$	2,130	$	1,854
Interest on cash and investment securities		9		2		11		3
Total interest income		1,073		915		2,141		1,857
Interest expense
Interest on deposits		41		43		76		90
Interest on borrowings		54		57		98		117
Total interest expense		95		100		174		207
Net interest income		978		815		1,967		1,650
Non-interest income
Interchange revenue, net of retailer share arrangements		(102)		(85)		(198)		(153)
Other		17		34		45		69
Total non-interest income		(85)		(51)		(153)		(84)
Total net interest and non-interest income		893		764		1,814		1,566
Provision for credit losses		404		(14)		598		19
Total net interest and non-interest income, after provision for credit losses		489		778		1,216		1,547
Non-interest expenses
Employee compensation and benefits		191		162		370		320
Card and processing expenses		84		83		166		161
Information processing and communication		61		55		117		106
Marketing expenses		50		35		80		77
Depreciation and amortization		30		22		51		47
Other		57		67		113		115
Total non-interest expenses		473		424		897		826
Income from continuing operations before income taxes		16		354		319		721
Provision for income taxes		4		91		95		190
Income from continuing operations		12		263		224		531
Income (loss) from discontinued operations, net of income taxes		—		11		(1)		29
Net income	$	12	$	274	$	223	$	560

Basic income per share (Note 13)
Income from continuing operations	$	0.25	$	5.29	$	4.48	$	10.68
Income (loss) from discontinued operations	$	—	$	0.21	$	(0.01)	$	0.58
Net income per share	$	0.25	$	5.50	$	4.47	$	11.26

Diluted income per share (Note 13)
Income from continuing operations	$	0.25	$	5.25	$	4.47	$	10.63
Income (loss) from discontinued operations	$	—	$	0.22	$	(0.01)	$	0.58
Net income per share	$	0.25	$	5.47	$	4.46	$	11.21

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

Corporate/

Three Months Ended September 30, 2021

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program

$
68.6

$
—

$
—

$
68.6
Short-term loyalty programs

95.8

—

—

95.8
Servicing fees, net

—

(61.7)

—

(61.7)
Other

1.6

—

—

1.6
Revenue from contracts with customers

$
166.0

$
(61.7)

$
—

$
104.3

Finance charges, net

—

991.7

—

991.7
Investment income

3.3

—

—

3.3
Total

$
169.3

$
930.0

$
—

$
1,099.3

Corporate/

Three Months Ended September 30, 2020

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program

$
63.0

$
—

$
—

$
63.0
Short-term loyalty programs

117.4

—

—

117.4
Servicing fees, net

—

(47.0)

—

(47.0)
Other

1.1

—

—

1.1
Revenue from contracts with customers

$
181.5

$
(47.0)

$
—

$
134.5

Finance charges, net

—

912.7

—

912.7
Investment income

3.3

—

—

3.3
Total

$
184.8

$
865.7

$
—

$
1,050.5

See Notes to unaudited Condensed Consolidated Financial Statements

1016

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BREAD FINANCIAL HOLDINGS, INC

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
(Millions)
Net income	$	12	$	274	$	223	$	560

Other comprehensive loss
Unrealized loss on available-for-sale debt securities		(7)		(2)		(16)		(11)
Tax benefit		2		1		4		1
Unrealized loss on available-for-sale debt securities, net of tax		(5)		(1)		(12)		(10)

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

Foreign currency translation adjustments		—		10		—		(19)

Other comprehensive (loss) income, net of tax		(5)		9		(12)		(28)

Total comprehensive income, net of tax	$	7	$	283	$	211	$	532

See Notes to unaudited Condensed Consolidated Financial Statements.

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BREAD FINANCIAL HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS


	June 30,		December 31,
	2022		2021
(Millions, except per share amounts)
ASSETS
Cash and cash equivalents	$	3,111	$	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, $12,369; 2021, $11,215)		17,769		17,399
Allowance for credit losses		(1,992)		(1,832)
Credit card and other loans, net		15,777		15,567
Investment securities		224		239
Property and equipment, net		219		215
Goodwill and intangible assets, net		694		687
Other assets		1,786		1,992
Total assets	$	21,811	$	21,746
LIABILITIES AND STOCKHOLDERS' EQUITY
Deposits		11,028		11,027
Debt issued by consolidated variable interest entities		5,498		5,453
Long-term and other debt		1,939		1,986
Other liabilities		1,071		1,194
Total liabilities		19,536		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 June 30, 2022 and December 31, 2021		1		1
Additional paid-in capital		2,174		2,174
Retained earnings (accumulated deficit)		114		(87)
Accumulated other comprehensive loss		(14)		(2)
Total stockholders’ equity		2,275		2,086
Total liabilities and stockholders’ equity	$	21,811	$	21,746

See Notes to unaudited Condensed Consolidated Financial Statements.

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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 June 30, 2022	Shares	Amount		Capital		Stock		Earnings		Loss		Equity
(Millions)
Balance as of March 31, 2022	49.8	$	1	$	2,163	$	—	$	113	$	(9)	$	2,268
Net income	—		—		—		—		12		—		12
Other comprehensive loss	—		—		—		—		—		(5)		(5)
Stock-based compensation	—		—		9		—		—		—		9
Dividends and dividend equivalent rights declared ($0.21 per common share)	—		—		—		—		(11)		—		(11)
Other	—		—		2		—		—		—		2
Balance as of June 30, 2022	49.8	$	1	$	2,174	$	—	$	114	$	(14)	$	2,275


										Accumulated
				Additional						Other		Total
	Common Stock			Paid-In		Treasury		Retained		Comprehensive		Stockholders’
Three Months Ended June 30, 2021	Shares	Amount		Capital		Stock		Earnings		Loss		Equity
(Millions)
Balance as of March 31, 2021	117.1	$	1	$	3,431	$	(6,734)	$	5,108	$	(42)	$	1,764
Net income	—		—		—		—		274		—		274
Other comprehensive income	—		—		—		—		—		9		9
Stock-based compensation	—		—		9		—		—		—		9
Dividends and dividend equivalent rights declared ($0.21 per common share)	—		—		—		—		(11)		—		(11)
Other	—		—		3		—		—		—		3
Balance as of June 30, 2021	117.1	$	1	$	3,443	$	(6,734)	$	5,371	$	(33)	$	2,048

See Notes to unaudited Condensed Consolidated Financial Statements.

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BREAD FINANCIAL HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (CONTINUED)


										Accumulated
				Additional						Other		Total
	Common Stock			Paid-In		Treasury		Retained		Comprehensive		Stockholders’
Six Months Ended June 30, 2022	Shares	Amount		Capital		Stock		Earnings		Loss		Equity
(Millions)
Balance as of December 31, 2021	49.9	$	1	$	2,174	$	—	$	(87)	$	(2)	$	2,086
Net income	—		—		—		—		223		—		223
Other comprehensive loss	—		—		—		—		—		(12)		(12)
Stock-based compensation			—		15		—		—		—		15
Repurchases of common stock	(0.2)		—		(12)								(12)
Dividends and dividend equivalent rights declared ($0.42 per common share)	—		—		—		—		(22)		—		(22)
Other	0.1		—		(3)		—		—		—		(3)
Balance as of June 30, 2022	49.8	$	1	$	2,174	$	—	$	114	$	(14)	$	2,275


										Accumulated
				Additional						Other		Total
	Common Stock			Paid-In		Treasury		Retained		Comprehensive		Stockholders’
Six Months Ended June 30, 2021	Shares	Amount		Capital		Stock		Earnings		Loss		Equity
(Millions)
Balance as of December 31, 2020	117.1	$	1	$	3,427	$	(6,734)	$	4,832	$	(5)	$	1,521
Net income	—		—		—		—		560		—		560
Other comprehensive loss	—		—		—		—		—		(28)		(28)
Stock-based compensation	—		—		16		—		—		—		16
Dividends and dividend equivalent rights declared ($0.42 per common share)	—		—		—		—		(21)		—		(21)
Balance as of June 30, 2021	117.1	$	1	$	3,443	$	(6,734)	$	5,371	$	(33)	$	2,048

See Notes to unaudited Condensed Consolidated Financial Statements.

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BREAD FINANCIAL HOLDINGS, INC.

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS


	Six Months Ended
	June 30,
	2022		2021
(Millions)
CASH FLOWS FROM OPERATING ACTIVITIES
Net income	$	223	$	560
Adjustments to reconcile net income to net cash provided by operating activities
Provision for credit losses		598		19
Depreciation and amortization		51		66
Deferred income taxes		(102)		22
Non-cash stock compensation		16		16
Amortization of deferred financing costs		12		16
Amortization of deferred origination costs		43		34
Change in other operating assets and liabilities
Change in other assets		(32)		(59)
Change in other liabilities		(106)		54
Other		40		5
Net cash provided by operating activities		743		733

CASH FLOWS FROM INVESTING ACTIVITIES
Change in credit card and other loans		(596)		666
Change in redemption settlement assets		—		(41)
Purchase of credit card loan portfolios		(249)		(32)
Capital expenditures		(43)		(35)
Purchases of investment securities		(23)		(60)
Maturities of investment securities		18		35
Other		(4)		2
Net cash (used in) provided by investing activities		(897)		535

CASH FLOWS FROM FINANCING ACTIVITIES
Unsecured borrowings under debt agreements		218		31
Repayments/maturities of unsecured borrowings under debt agreements		(269)		(82)
Debt issued by consolidated variable interest entities		1,588		2,065
Repayments/maturities of debt issued by consolidated variable interest entities		(1,543)		(3,173)
Net decrease in deposits		(22)		(176)
Payment of deferred financing costs		(7)		(8)
Dividends paid		(22)		(21)
Repurchases of common stock		(12)		—
Other		(3)		(1)
Net cash used in financing activities		(72)		(1,365)

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

Change in cash, cash equivalents and restricted cash		(226)		(96)
Cash, cash equivalents and restricted cash at beginning of period		3,923		3,463
Cash, cash equivalents and restricted cash at end of period	$	3,697	$	3,367

SUPPLEMENTAL CASH FLOW INFORMATION

Cash and cash equivalents reconciliation
Cash and cash equivalents	$	3,111	$	2,788
Restricted cash included within Other assets		586		304
Cash, cash equivalents and restricted cash included within Assets of discontinued operations		—		275
Total cash, cash equivalents and restricted cash	$	3,697	$	3,367

The 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.

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~~ALLIANCE DATA SYSTEMS CORPORATION~~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 Company’s legal entity structure, nor did either change have an impact on the Company’s 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 is 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 Consolidated Financial Statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021, filed with the Securities and Exchange Commission on February 25, 2022; if not significantly different, certain note disclosures included therein have been omitted from these unaudited Condensed Consolidated Financial Statements.

The unaudited Condensed Consolidated Financial 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 entire year.

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and the disclosures of 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 Company’s Allowance for credit losses.

The accompanying unaudited Condensed Consolidated Financial Statements include the accounts of the Company and all subsidiaries in which the Company has a controlling financial interest. All intercompany transactions have been eliminated.

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BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

RECENTLY ISSUED ACCOUNTING STANDARDS

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 principal losses 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.

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 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.

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BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following table presents the Company’s credit card and other loans, as of June 30, 2022 and December 31, 2021, respectively:


	June 30,		December 31,
	2022		2021
(Millions)
Credit card loans	$	17,536	$	17,217
Installment (other) loans		233		182
Total credit card and other loans ⁽¹⁾⁽²⁾		17,769		17,399
Less: Allowance for credit losses		(1,992)		(1,832)
Credit card and other loans, net	$	15,777	$	15,567

(1)	Includes $12.4 billion and $11.2 billion of credit card and other loans available to settle obligations of consolidated VIEs as of June 30, 2022 and December 31, 2021, respectively.

(2)	Includes $243 million and $224 million, of accrued interest and fees that have not yet been billed to cardholders as of June 30, 2022 and December 31, 2021, respectively.

Credit Card and Other Loans Aging

An account is contractually delinquent if the Company does not receive the minimum payment due by the specified due date. 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 fees are paid or charged-off. After an account becomes 30 days past due, a proprietary collection scoring algorithm automatically scores the risk of the account becoming further delinquent; based upon the level of risk indicated, a collection strategy is deployed. If after exhausting all in-house collection efforts the Company is unable to collect on the account, it may engage collection agencies or outside attorneys to continue those efforts, or sell the charged-off balances.

The following table presents the delinquency trends on the Company’s credit card and other loans portfolio based on the 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
(Millions)
As of June 30, 2022	$	314	$	217	$	435	$	966	$	16,529	$	17,495

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 as of each period presented. As permitted by GAAP, the Company excludes unbilled finance charges from its amortized cost basis of credit card and other loans. As of June 30, 2022 and December 31, 2021, accrued interest and fees that have not yet been billed to cardholders were $243 million and $224 million, respectively, included in Credit card and other loans on the Consolidated Balance Sheets.

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 principal losses. 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 their account balance. Upon re-aging, the outstanding balance of a delinquent account is returned to current status. The Company’s re-aged accounts as a percentage of total credit card and other loans represented 1.6% and 2.1%, for the three months ended June 30, 2022 and 2021, respectively, and 1.6% and 2.3% for the six months ended June 30, 2022 and 2021, respectively. The Company’s re-aging practices comply with regulatory guidelines.

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BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Net Principal Losses

The Company’s net principal losses include the principal amount of losses that are deemed uncollectible, less recoveries, and exclude charged-off interest, fees and third-party fraud losses (including synthetic fraud). Charged-off interest and fees reduce Interest and fees on loans, while third-party fraud losses are recorded in Card and processing expenses. Credit card loans, including unpaid interest and fees, are generally charged-off in the month during which an account becomes 180 days past due. Installment loans, including unpaid interest, are generally charged-off when a loan becomes 120 days past due. However, in the case of a customer bankruptcy or death, credit card and other loans, including unpaid interest and fees as applicable, are charged-off in each month subsequent to 60 days after the receipt of notification of the bankruptcy or death, but in any case not later than 180 days past due for credit card loans and 120 days past due for installment loans. The Company records the actual losses for unpaid interest and fees as a reduction to Interest and fees on loans, which were $148 million and $114 million for the three months ended June 30, 2022 and 2021, respectively, and $284 million and $245 million for the six months ended June 30, 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) forbearance programs in order to improve the likelihood of collections and 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 to charge-off, in the same time frame that would have occurred had the relief not been granted. The Company evaluates its forbearance 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 the 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 2% of total credit card loans as of both June 30, 2022 and December 31, 2021. As of those same dates, the Company’s recorded investment in impaired credit card loans was $252 million and $281 million, respectively, with an associated allowance

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BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

for credit losses of $66 million and $81 million, respectively. The average recorded investment in impaired credit card loans was $258 million and $415 million for the three months ended June 30, 2022 and 2021, respectively and $265 million and $449 million for the six months ended June 30, 2022 and 2021, respectively.

Interest income on these impaired credit card loans is accounted for in the same manner as non-impaired credit card loans, and cash collections are allocated according to the same payment hierarchy methodology applied for credit card loans not in modification programs. The Company recognized $3 million and $7 million for the three months ended June 30, 2022 and 2021, respectively, and $7 million and $16 million for the six months ended June 30, 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 June 30, 2022

Six Months Ended June 30, 2022

Pre-modification

Post-modification

Pre-modification

Post-modification

Number of

Outstanding

Number of

Outstanding

Restructurings

Balance

Restructurings

Balance

(Millions, except for Number of restructurings)

Troubled debt restructurings – credit card loans

32,216

70,214

102

Three Months Ended June 30, 2021

Six Months Ended June 30, 2021

Pre-modification

Post-modification

Pre-modification

Post-modification

Number of

Outstanding

Number of

Outstanding

Restructurings

Balance

Restructurings

Balance

(Millions, except for Number of restructurings)

Troubled debt restructurings – credit card loans

33,061

96,689

145

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			Six Months Ended
	June 30, 2022			June 30, 2022
	Number of	Outstanding		Number of	Outstanding
	Restructurings	Balance		Restructurings	Balance
(Millions, except for Number of restructurings)
Troubled debt restructurings that subsequently defaulted	18,037	$	25	39,960	$	54


	Three Months Ended			Six Months Ended
	June 30, 2021			June 30, 2021
	Number of	Outstanding		Number of	Outstanding
	Restructurings	Balance		Restructurings	Balance
(Millions, except for Number of restructurings)
Troubled debt restructurings that subsequently defaulted	31,727	$	42	82,736	$	109

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

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BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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 0.3% and 0.1% of the total credit card loans balance as of June 30, 2022 and December 31, 2021, respectively, 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:



	June 30,						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	%

Installment Loans

The amortized cost basis of the Company’s installment loans totaled $233 million and $182 million as of June 30, 2022 and December 31, 2021, respectively. As of June 30, 2022, approximately 86% of these loans were originated with customers with Fair Isaac Corporation (FICO) scores of 660 or above, and correspondingly approximately 14% of these loans were originated with customers with FICO scores below 660. Similarly, as of December 31, 2021, approximately 84% and 16% of these loans were originated with 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 $99.5 billion and $112.1 billion as of June 30, 2022 and December 31, 2021, respectively. 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 June 30, 2022 and December 31, 2021, there were 0 credit card loans held for sale and 0 portfolio sales were made during the six months ended June 30, 2022 or 2021.

Portfolio Acquisitions

In April 2022, the Company acquired a credit card portfolio for cash consideration of approximately $249 million, which primarily consisted of credit card loans, and also included intangible assets (primarily purchased credit card relationships) and rewards liabilities, and is subject to customary purchase price adjustments.

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BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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 credit reserving methodology referred to as the Current Expected Credit Loss (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. Principal losses, net of recoveries are deducted from the allowance. Principal losses for unpaid interest and fees as well as any adjustments to the allowance associated with unpaid interest and fees are recorded as a reduction to Interest and fees on loans. The allowance is maintained through an adjustment to the Provision for credit losses and is evaluated 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.

Credit Card Loans

The Company uses a “pooled” approach to estimate expected credit losses for financial assets with similar risk characteristics. The Company has evaluated multiple risk characteristics across 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 segments its credit card loans on the basis of delinquency status, credit quality risk score and product. 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.

Installment Loans

The Company measures its allowance for credit losses on installment loans using a statistical model to estimate projected losses over the remaining terms 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 June 30, 2022 and December 31, 2021, the Allowance for credit losses on installment loans was $17 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 Lon, Inc. in December 2020, the Company acquired certain installment loans which represented a separate

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BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

portfolio segment; the amount of the related Allowance for credit losses is insignificant and therefore has been included in the table below.


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
(Millions)
Beginning balance	$	1,826	$	1,843	$	1,832	$	2,008

Provision for credit losses ⁽¹⁾		404		(14)		598		19
Net principal losses ⁽²⁾		(238)		(194)		(438)		(392)
Ending balance	$	1,992	$	1,635	$	1,992	$	1,635

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

(2)	Principal losses are presented net of recoveries of $36 million and $41 million for the three months ended June 30, 2022 and 2021, respectively, and $79 million and $92 million for the six months ended June 30, 2022 and 2021, respectively.

For the three and six months ended June 30, 2022, the factors that influenced the increase in the Allowance for credit losses are the current year periods economic scenario weightings in the Company’s credit reserve modeling reflecting the increasing probability of a recession and other macroeconomic factors, including the increasing interest rate environment and persistent inflation.

4. SECURITIZATIONS

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 loans held by the Trusts. In its capacity as a servicer, the Company administers the loans, collects payments and 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 finance their activities – being the issuance of debt securities and notes, collateralized by the underlying credit card loans. Because the Company performs the decision making and servicing for the Trusts, it has the power to direct the activities that most significantly impact the Trusts’ economic performance (the collection of 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 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 a maximum specified amount each month) is either distributed to the investors or held in an account until it accumulates to the total amount due, at which time it is paid to the investors in a lump sum.

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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 and six months ended June 30, 2022 and 2021, no such triggering events occurred.

The following tables provide the total securitized credit card loans and related delinquencies, and net principal losses of securitized credit card loans for the periods specified:


	June 30,		December 31,
	2022		2021
(Millions)
Total credit card loans – available to settle obligations of consolidated VIEs	$	12,369	$	11,215
Of which: principal amount of credit card loans 91 days or more past due	$	172	$	159


	Three Months Ended June 30,				Six Months Ended June 30,
	2022		2021		2022		2021
(Millions)
Net principal losses of securitized credit card loans	$	125	$	125	$	240	$	256

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. The Company also holds equity securities within its investment securities portfolio. Collectively, 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 investment securities, using the specific identification method. The table below reflects unrealized gains and losses as of June 30, 2022 and December 31, 2021, respectively:


	June 30, 2022								December 31, 2021
	Amortized		Unrealized		Unrealized				Amortized		Unrealized		Unrealized
	Cost		Gains		Losses		Fair Value		Cost		Gains		Losses		Fair Value
(Millions)
Available-for-sale securities	$	171	$	—	$	(15)	$	156	$	173	$	4	$	(2)	$	175
Equity securities		68		—		—		68		64		—		—		64
Total	$	239	$	—	$	(15)	$	224	$	237	$	4	$	(2)	$	239

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The following table provides information about the Company’s AFS debt securities with gross unrealized losses and the length of time that individual securities have been in a continuous unrealized loss position, as of June 30, 2022 and December 31, 2021, respectively.


	June 30, 2022
	Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
(Millions)
Available-for-sale securities	$	131	$	(10)	$	25	$	(5)	$	156	$	(15)
Total	$	131	$	(10)	$	25	$	(5)	$	156	$	(15)


	December 31, 2021
	Less than 12 months				12 Months or Greater				Total
			Unrealized				Unrealized				Unrealized
	Fair Value		Losses		Fair Value		Losses		Fair Value		Losses
(Millions)
Available-for-sale securities	$	57	$	(1)	$	15	$	(1)	$	72	$	(2)
Total	$	57	$	(1)	$	15	$	(1)	$	72	$	(2)

As of June 30, 2022, the amortized cost and estimated fair value of the Company’s AFS debt securities, which are mortgage-backed securities with no stated maturities, was $171 million and $156 million, respectively.

There were 0 realized gains or losses from the sale of any investment securities for the three and six months ended June 30, 2022 and 2021.

Corporate/

Nine Months Ended September 30, 2021

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program

$
203.9

$
—

$
—

$
203.9
Short-term loyalty programs

278.7

—

—

278.7
Servicing fees, net

—

(145.5)

—

(145.5)
Other

3.9

—

—

3.9
Revenue from contracts with customers

$
486.5

$
(145.5)

$
—

$
341.0

Finance charges, net

—

2,845.3

—

2,845.3
Investment income

10.2

—

—

10.2
Total

$
496.7

$
2,699.8

$
—

$
3,196.5

6. DEPOSITS

Corporate/

Nine Months Ended September 30, 2020

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program

$
195.9

$
—

$
—

$
195.9
Short-term loyalty programs

322.5

—

—

322.5
Servicing fees, net

—

(106.2)

—

(106.2)
Other

5.9

—

0.1

6.0
Revenue from contracts with customers

$
524.3

$
(106.2)

$
0.1

$
418.2

Finance charges, net

—

2,983.7

—

2,983.7
Investment income

9.6

—

—

9.6
Total

$
533.9

$
2,877.5

$
0.1

$
3,411.5

~~The following tables present revenue disaggregated by geographic region based on the location~~As of ~~the subsidiary that generally correlates with the location of the customer:~~June 30, 2022 and December 31, 2021, deposits were categorized as interest-bearing or non-interest-bearing as follows:

Corporate/

Three Months Ended September 30, 2021

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Geographic Region:

United States

$
0.1

$
929.8

$
—

$
929.9
Canada

75.8

0.2

—

76.0
Europe, Middle East and Africa

68.1

—

—

68.1
Asia Pacific

23.0

—

—

23.0
Other

2.3

—

—

2.3
Total

$
169.3

$
930.0

$
—

$
1,099.3



	June 30,		December 31,
	2022		2021
(Millions)
Interest-bearing	$	10,999	$	11,027
Non-interest-bearing (including cardholder credit balances)		29		—
Total deposits	$	11,028	$	11,027

Corporate/

Three Months Ended September 30, 2020

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Geographic Region:

United States

$
3.3

$
865.7

$
—

$
869.0
Canada

70.3

—

—

70.3
Europe, Middle East and Africa

76.9

—

—

76.9
Asia Pacific

12.6

—

—

12.6
Other

21.7

—

—

21.7
Total

$
184.8

$
865.7

$
—

$
1,050.5

Deposits by deposit type as of June 30, 2022 and December 31, 2021 were as follows:


	June 30,		December 31,
	2022		2021
(Millions)
Savings accounts
Direct-to-consumer (retail)	$	2,684	$	1,713
Wholesale		3,676		3,873
Certificates of deposit
Direct-to-consumer (retail)		1,507		1,467
Wholesale		3,132		3,974
Cardholder credit balances		29		—
Total deposits	$	11,028	$	11,027

1131

~~Index~~Table of Contents

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

The scheduled maturities of certificates of deposit as of June 30, 2022 were as follows:



(Millions)
2022⁽¹⁾	$	1,334
2023		2,009
2024		854
2025		233
2026		111
Thereafter		98
Total certificates of deposit		4,639

(1)	The 2022 balance includes $7 million in unamortized debt issuance costs, which are associated with the entire portfolio of certificates of deposit.

As of June 30, 2022 and December 31, 2021, certificates of deposit that exceeded applicable FDIC insurance limits, which are generally $250,000 or more, in the aggregate, were $538 million and $500 million, respectively.

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

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
(Millions)
Payment protection products	$	38	$	33	$	77	$	68
Loss from equity method investment		(21)		—		(33)		—
Other		—		1		1		1
Total other non-interest income	$	17	$	34	$	45	$	69

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


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2022		2021		2022		2021
(Millions)
Professional services and regulatory fees	$	38	$	35	$	69	$	66
Occupancy expense		6		7		12		15
Other⁽¹⁾		13		25		32		34
Total other non-interest expenses	$	57	$	67	$	113	$	115

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

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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.

The Company monitors the market conditions and evaluates the fair value hierarchy levels quarterly. For the three and six months ended June 30, 2022 and 2021, there were 0 transfers into or out of Level 3, and 0 transfers between Levels 1 and 2.

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


	June 30, 2022				December 31, 2021
	Carrying		Fair		Carrying		Fair
	Amount		Value		Amount		Value
(Millions)
Financial assets
Credit card and other loans, net	$	15,777	$	18,156	$	15,567	$	17,989
Investment securities		224		224		239		239
Financial liabilities
Deposits		11,028		11,005		11,027		11,135
Debt issued by consolidated VIEs		5,498		5,498		5,453		5,467
Long-term and other debt		1,939		1,870		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).

Table of Contents

BREAD FINANCIAL HOLDINGS, INC.

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

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.

Corporate/

Nine Months Ended September 30, 2021

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Geographic Region:

United States

$
2.6

$
2,699.5

$
—

$
2,702.1
Canada

229.3

0.3

—

229.6
Europe, Middle East and Africa

200.0

—

—

200.0
Asia Pacific

57.7

—

—

57.7
Other

7.1

—

—

7.1
Total

$
496.7

$
2,699.8

$
—

$
3,196.5

Corporate/

Nine Months Ended September 30, 2020

LoyaltyOne

Card Services

Other

Total

(in millions)
Disaggregation of Revenue by Geographic Region:

United States

$
9.6

$
2,877.5

$
0.1

$
2,887.2
Canada

214.1

—

—

214.1
Europe, Middle East and Africa

196.2

—

—

196.2
Asia Pacific

63.0

—

—

63.0
Other

51.0

—

—

51.0
Total

$
533.9

$
2,877.5

$
0.1

$
3,411.5

~~Contract Liabilities~~

Debt issued by consolidated VIEs: The Company records ~~a contract liability when cash payments are received in advance of~~debt issued by its ~~performance, which applies~~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 ~~service and redemption of an AIR MILES reward mile and the reward products~~Company for ~~its short-term loyalty programs.~~

~~A reconciliation of contract liabilities~~similar debt instruments with similar remaining maturities or quoted market prices for the ~~AIR MILES Reward Program is as follows:~~same transaction (i.e., Level 2 inputs).

Deferred Revenue


Service

Redemption

Total

(in millions)
Balance at January 1, 2021

$
247.2

$
756.8

$
1,004.0
Cash proceeds

129.0

206.7

335.7
Revenue recognized ⁽¹⁾

(148.4)

(175.7)

(324.1)
Other

—

1.2

1.2
Effects of foreign currency translation

1.3

2.8

4.1
Balance at September 30, 2021

$
229.1

$
791.8

$
1,020.9
Amounts recognized in the consolidated balance sheets:






Deferred revenue (current)

$
132.5

$
791.8

$
924.3
Deferred revenue (non-current)

$
96.6

$
—

$
96.6

~~(1)~~

~~Reported on a gross basis herein.~~

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).

The ~~deferred redemption obligation associated with~~following tables summarize the ~~AIR MILES Reward Program is effectively due~~Company’s financial assets and financial liabilities measured at fair value on ~~demand from the collector base, thus the timing of revenue recognition is based on the redemption~~a recurring basis, categorized 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~~fair value hierarchy described in the ~~amount of $44.5 million in~~ preceding paragraphs:


	June 30, 2022
	Total		Level 1		Level 2		Level 3
(Millions)
Investment securities	$	224	$	45	$	179	$	—
Total assets measured at fair value	$	224	$	45	$	179	$	—

~~2021~~


	December 31, 2021
	Total		Level 1		Level 2		Level 3
(Millions)
Investment securities	$	239	$	48	$	191	$	—
Total assets measured at fair value	$	239	$	48	$	191	$	—

~~, $109.5 million in~~ ~~2022, $57.6 million in~~ ~~2023, and $17.5 million in~~ ~~2024~~.

Financial Instruments Disclosed but Not Carried at Fair Value

~~Additionally, contract liabilities for~~The following tables summarize the Company’s ~~short-term loyalty programs~~financial assets and financial liabilities that are ~~recognized in other current liabilities in the Company’s unaudited condensed consolidated balance sheets. The beginning balance~~measured at amortized cost, and not required to be carried at fair value on a recurring basis, as of ~~January 1,~~June 30, 2022 and December 31, 2021 respectively. The fair values of these financial instruments are estimates as of June 30, 2022 and December 31, 2021, and require management’s judgment; therefore, these figures may not be indicative of future fair values, nor can the fair value of the Company be estimated by aggregating all of the amounts presented.


	June 30, 2022
	Fair Value		Level 1		Level 2		Level 3
(Millions)
Financial assets
Credit card and other loans, net	$	18,156	$	—	$	—	$	18,156
Total	$	18,156	$	—	$	—	$	18,156

Financial liabilities
Deposits	$	11,005	$	—	$	11,005	$	—
Debt issued by consolidated VIEs		5,498		—		5,498		—
Long-term and other debt		1,870		—		1,870		—
Total	$	18,373	$	—	$	18,373	$	—

1234

~~Index~~Table of Contents

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

2021 was $66.9 million and the closing balance as of September 30, 2021 was $107.2 million, with the change due to cash payments received in advance of program performance, offset in part by revenue recognized of approximately $226.9 million during the nine months ended September 30, 2021.

~~Contract Costs~~

The Company recognizes an asset for the incremental costs of obtaining or fulfilling a contract with the retailer for a credit card program agreement 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 of September 30, 2021 and December 31, 2020, the remaining unamortized contract costs were $361.0 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 September 30,

Nine Months Ended September 30,


2021

2020

2021

2020

(in millions, except per share amounts)
Numerator:

Net income

$
223.7

$
133.3

$
783.4

$
201.7

Denominator:

Weighted average shares, basic

49.8

47.7

49.7

47.7
Weighted average effect of dilutive securities:

Net effect of dilutive unvested restricted stock ⁽¹⁾

0.2

0.1

0.3

—
Denominator for diluted calculation

50.0

47.8

50.0

47.7

Basic net income per share:

$
4.50

$
2.79

$
15.75

$
4.23
Diluted net income per share:

$
4.47

$
2.79

$
15.68

$
4.23

~~(1)~~

For both the three and nine months ended September 30, 2021, the number of restricted stock units excluded from the calculation of weighted average dilutive common shares as the effect would have been anti-dilutive were de minimis. For both the three and nine months ended September 30, 2020, 0.3 million of restricted stock units were excluded from the calculation of weighted average dilutive common shares as the effect would have been anti-dilutive.

~~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

~~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 contingent consideration of $10.0 million based upon the occurrence of specified events and performance of the business, of which $5.0 million was achieved in 2020. The Company estimated the fair value of the contingent purchase price, 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 income for the nine months ended September 30, 2020.

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

~~(1)~~

~~Consideration as defined included cash associated with the sold Precima entities, which was $10.8 million~~.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~6. CREDIT CARD AND LOAN RECEIVABLES~~

~~Quantitative information about the components of the Company’s credit card and loan receivables is presented in the table below:~~

September 30,

December 31,


2021

2020

(in millions)
Credit card receivables

$
15,271.0

$
16,376.4
Installment loan receivables

160.8

118.0
Other

258.1

290.0
Total credit card and loan receivables

15,689.9

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

10,102.7

11,208.5
Other credit card and loan receivables

$
5,587.2

$
5,575.9

~~Allowance for Loan Loss~~

The allowance for loan loss is an estimate of expected credit losses, measured over the estimated life of the Company’s 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 influenced by the composition, characteristics and quality of its portfolio 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 recoveries are deducted from the allowance. The allowance is maintained through an adjustment 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, on the basis of delinquency status and credit quality risk score, which were determined by 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:~~


	~~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 September 30, 2021 and December 31, 2020, unbilled finance charges were $208.4 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 September 30, 2021 and December 31, 2020, the allowance for loan loss related to installment loan receivables was $7.8 million and $5.7 million, respectively.

~~Allowance for Loan Loss Rollforward~~

~~The following table presents the Company’s allowance for loan loss for its credit card and loan receivables for the periods indicated:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021 ⁽¹⁾

2020

2021 ⁽¹⁾

2020

(in millions)
Balance at beginning of period

$
1,635.3

$
2,096.3

$
2,008.0

$
1,171.1
Adoption of ASC 326 ⁽²⁾

—

—

—

644.0
Provision for loan loss

161.1

207.7

180.3

1,113.7
Recoveries

36.2

45.5

127.9

170.3
Principal charge-offs

(187.8)

(268.6)

(671.4)

(1,018.2)
Balance at end of period

$
1,644.8

$
2,080.9

$
1,644.8

$
2,080.9

~~(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 the nine months ended September 30, 2021, the decrease in the allowance for loan loss was due to improved credit performance, lower net charge-offs and improving macroeconomic variables. In addition, improvements in customer payment behavior, which include the effects of government stimulus actions, have contributed to a reduction in credit card receivables and delinquencies, which also contributed to the reduction in the allowance for loan loss. For the nine months ended September 30, 2020, the increase in the allowance for loan loss was due to a $644.0 million cumulative-effect adjustment for the adoption of ASC 326 as well as deterioration of the macroeconomic outlook due to COVID-19.

~~Net Charge-offs~~

Net charge-offs include the principal amount of losses that are deemed uncollectible, less recoveries and exclude charged-off interest, fees and fraud losses. Charged-off interest and fees reduce finance charges, net while fraud losses are recorded as a cost of operations expense. Credit card receivables, including unpaid interest and fees, are charged-off in the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days past due, including in the case of customer bankruptcies or death. Credit card receivables, including unpaid interest and fees, associated with customer bankruptcies or death 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. Principal charge-offs, net of

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

recoveries, were $151.5 million and $223.1 million for the three months ended September 30, 2021 and 2020, respectively, and $543.5 million and $847.9 million for the nine months ended September 30, 2021 and 2020, respectively. Charge-offs for unpaid interest and fees were $90.7 million and $142.3 million for the three months ended September 30, 2021 and 2020, respectively, and $335.1 million and $571.9 million for the nine months ended September 30, 2021 and 2020, respectively.

~~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 September 30, 2021
$
230.8

$
160.1

$
346.6

$
737.5

$
14,694.3

$
15,431.8

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 September 30, 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 September 30, 2021 and December 31, 2020, the credit card receivables in these deferral forbearance programs were approximately $79.4 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 $13.3 million and $67.3 million as of September 30, 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

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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


	December 31, 2021
	Fair Value		Level 1		Level 2		Level 3
(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	$	—

~~through~~

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 fair value adjustments in certain circumstances, such as upon impairment. The Company recognized a write-down of its equity method investment in Loyalty Ventures Inc. of $21 million during 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~~ended June 30, 2022. The fair value and carrying amount of ~~September~~its investment was $17 million as of June 30, 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 $9.5 million and $39.9 million, respectively.

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.

2022. The Company had $311.8 million and $489.8 million, respectively, as a recorded investment in impaired credit card receivables as of September 30, 2021 and December 31, 2020, respectively, which represented approximately 3% of the Company’s total credit card receivables as of September 30, 2021 and December 31, 2020, respectively. The average recorded investment in impaired credit card receivables was $338.8 million and $459.7 milliondid 0t have any impairments for the three and six months ended ~~September~~June 30, ~~2021 and 2020, respectively, and $411.9 million and $387.3 million for the nine months ended September 30, 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 $5.3 million and $8.5 million for the three months ended September 30, 2021 and 2020, respectively, and $21.2 million and $21.0 million for the nine months ended September 30, 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:2021.

Three Months Ended September 30, 2021

Nine Months Ended September 30, 2021

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

37,379

$
54.6

$
54.5

134,068

$
199.8

$
199.6

Three Months Ended September 30, 2020

Nine Months Ended September 30, 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

131,919

$
170.3

$
169.0

302,438

$
439.3

$
437.6

~~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:~~

9. COMMITMENTS AND CONTINGENCIES

Three Months Ended

Nine Months Ended

September 30, 2021

September 30, 2021

Number of

Outstanding

Number of

Outstanding


Restructurings

Balance

Restructurings

Balance

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

19,888

$
27.0

102,624

$
136.4

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, the Company has in the past been, and expects in the future to 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 Tier 1 capital to average assets, Common equity tier 1, Tier 1 capital and Total capital, all to risk weighted assets. Failure to meet these minimum capital requirements can result in certain mandatory, and possibly additional discretionary actions by the Banks’ regulators that if undertaken, could have a direct material effect on Comenity Bank’s and/or Comenity Capital Bank’s operating activities, as well as those of the Company. Based on these regulations, as of June 30, 2022, 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.

1835

~~Index~~Table of Contents

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

Three Months Ended

Nine Months Ended

September 30, 2020

September 30, 2020

Number of

Outstanding

Number of

Outstanding


Restructurings

Balance

Restructurings

Balance

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

28,724

$
37.8

82,000

$
113.1

~~Credit Quality~~

~~Credit Card Receivables~~

The ~~Company uses proprietary scoring models developed specifically~~actual capital ratios and minimum ratios 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 September 30, 2021 and December 31, 2020:

Amortized Cost Revolving Credit Card Receivables

September 30, 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

$
172.4

1.1
%

$
204.1

1.2
%
27.1% and higher

1,036.0

6.8

1,390.4

8.5

17.1% - 27.0%

739.8

4.8

848.8

5.2

12.6% - 17.0%

843.5

5.5

937.0

5.7

3.7% - 12.5%

6,889.9

45.1

7,305.5

44.6

1.9% - 3.6%

2,752.4

18.0

2,939.5

17.9

Lower than 1.9%

2,837.0

18.7

2,751.1

16.9

Total

$
15,271.0

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.~~

In addition, as part of the Company’s credit risk management activities, the Company also assesses overall credit quality by reviewing information related to the performance of a credit cardholder’s account,each Bank, as well as ~~information from credit bureaus relating to~~ the cardholder’s broader credit performance. The credit scores obtained by the Company are Vantage scores, which is one of several credit scoring models used by industry participants. The Company uses these credit scores as one of its tools in its underwriting and credit decision process. Credit scores are obtained at origination of the account and refreshed monthly thereafter.

~~The following table reflects the distribution of the Company’s credit card receivables by credit score~~Combined Banks, as of ~~September~~June 30, ~~2021 and December 31, 2020:~~

September 30,

December 31,

2021

2020

Greater than 660
61.9
%

59.8
%
601-660
26.3

27.8

600 or below
11.8

12.4

Total ⁽¹⁾
100.0
%

100.0
%

⁽¹⁾	Balances for which no credit score is available have been excluded from the table above and represent 0.1% of the credit card receivable balances as of both September 30, 2021 and December 31, 2020, respectively.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~Installment Loan Receivables~~

The amortized cost basis of the Company’s installment loan receivables totaled $160.8 million and $118.0 million as of September 30, 2021 and December 31, 2020, respectively. As of September 30, 2021, approximately 84% of these loans were originated by customers with Fair Isaac Corporation (“FICO”) scores of 660 or above, and approximately 16% of these loans were originated by customers with FICO scores below 660. As of December 31, 2020, approximately 86% of these loans were originated by customers with FICO scores of 660 or above, and approximately 14% of these loans were originated by customers with FICO scores below 660.

~~Portfolio Sale~~

~~In August 2021, the Company sold~~ a credit card portfolio for cash consideration of approximately $512.2 million and recognized a gain of approximately $10.2 million on the transaction, which was recorded in cost of operations in the Company’s consolidated statements of income.

~~Portfolio Acquisitions~~

~~In April 2021, the Company acquired~~ a ~~credit card portfolio for cash consideration of approximately $31.5 million, which consisted of approximately $29.9 million of credit card receivables and $1.6 million of intangible assets.~~

In July 2021, the Company acquired 2 credit card portfolios for cash consideration of approximately $68.0 million, which consisted of approximately $65.1 million of credit card receivables and $2.9 million of intangible assets.

~~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 and nine months ended September 30, 2021 and 2020.

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:~~

September 30,

December 31,


2021

2020

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

$
10,102.7

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

$
139.5

$
200.8

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020

2021

2020

(in millions)
Net charge-offs of securitized principal

$
90.6

$
148.1

$
346.8

$
602.7

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~7. INVENTORIES~~

Inventories of $192.3 million and $164.3 million at September 30, 2021 and December 31, 2020, respectively, primarily consist of finished goods to be utilized as rewards in the Company’s loyalty programs. Inventories 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,2022, are as follows:

September 30, 2021

December 31, 2020


Amortized

Unrealized

Unrealized



Amortized

Unrealized

Unrealized



Cost

Gains

Losses

Fair Value

Cost

Gains

Losses

Fair Value

(in millions)
Marketable securities

$
233.6

$
4.7

$
(1.4)

$
236.9

$
219.0

$
6.4

$
—

$
225.4
Total

$
233.6

$
4.7

$
(1.4)

$
236.9

$
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 September 30, 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.

September 30, 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

$
57.8

$
(1.3)

$
3.4

$
(0.1)

$
61.2

$
(1.4)
Total

$
57.8

$
(1.3)

$
3.4

$
(0.1)

$
61.2

$
(1.4)

~~The amortized cost and estimated fair value of the marketable securities at September 30, 2021 by contractual maturity are as follows:~~

Amortized

Estimated


Cost

Fair Value

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

$
62.5

$
62.5
Due after one year through five years

0

0
Due after five years through ten years

—

—
Due after ten years

171.1

174.4
Total

$
233.6

$
236.9


					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⁾	19.1	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	22.7		4.5		6.5
Tier 1 capital ratio ⁽³⁾	22.7		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	24.0		8.0		10.0

Comenity Capital Bank
Tier 1 Leverage capital ratio ⁽¹⁾	16.4	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	18.0		4.5		6.5
Tier 1 capital ratio ⁽³⁾	18.0		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	19.4		8.0		10.0

Combined Banks
Tier 1 Leverage capital ratio ⁽¹⁾	17.7	%	4.0	%	5.0	%
Common Equity Tier 1 capital ratio ⁽²⁾	20.1		4.5		6.5
Tier 1 capital ratio ⁽³⁾	20.1		6.0		8.0
Total Risk-based capital ratio ⁽⁴⁾	21.5		8.0		10.0

~~(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 September 30, 2021, the Company does not consider its investments to be impaired.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~There were 0 realized gains or losses from the sale of investment securities for the three and nine months ended September 30, 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:

September 30, 2021

December 31, 2020

Amortized

Unrealized

Unrealized

Amortized

Unrealized

Unrealized


Cost

Gains

Losses

Fair Value

Cost

Gains

Losses

Fair Value

(in millions)
Restricted cash

$
58.2

$
—

$
—

$
58.2

$
55.4

$
—

$
—

$
55.4
Mutual funds

26.2

—

—

26.2

26.9

—

—

26.9
Corporate bonds

641.8

10.3

(2.5)

649.6

592.3

19.1

(0.2)

611.2
Total

$
726.2

$
10.3

$
(2.5)

$
734.0

$
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 September 30, 2021 and December 31, 2020, aggregated by investment category and the length of time that individual securities have been in a continuous loss position:

September 30, 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

$
178.2

$
(2.3)

$
14.2

$
(0.2)

$
192.4

$
(2.5)
Total

$
178.2

$
(2.3)

$
14.2

$
(0.2)

$
192.4

$
(2.5)

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 September 30, 2021 by contractual maturity are as follows:~~

Amortized

Estimated


Cost

Fair Value

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

$
158.1

$
159.2
Due after one year through five years

506.0

512.6
Due after five year through ten years

3.9

4.0
Total

$
668.0

$
675.8

~~(1)~~

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

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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 September 30, 2021, the Company does not consider its investments to be impaired.

Losses from the sale of investment securities were $0.2 million for the nine months ended September 30, 2021. There were 0 realized gains or losses from the sale of investment securities for the three months ended September 30, 2021 and the three and nine months ended September 30, 2020.

~~10. LEASES~~

The Company has operating leases for general office properties, warehouses, data centers, customer care centers, automobiles and certain equipment. As of September 30, 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

Nine Months Ended

September 30,

September 30,

2021

2020

2021

2020

(in millions)
Operating lease cost

$
8.5

$
10.0

$
30.5

$
30.2
Short-term lease cost

0.1

0.2

0.4

0.7
Variable lease cost

1.5

1.3

4.6

4.4
Total

$
10.1

$
11.5

$
35.5

$
35.3

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

September 30,

September 30,

2021

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

Operating leases

10.3

11.0
Weighted-average discount rate:

Operating leases

5.3%

5.2%

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

Three Months Ended

Nine Months Ended

September 30,

September 30,

2021

2020

2021

2020

(in millions)
Cash paid for amounts included in the measurement of lease liabilities:

Operating cash flows from operating leases

$
9.4

$
10.0

$
33.8

$
35.7
Right of use assets obtained in exchange for lease obligations:

Operating leases

$
0.2

$
0.5

$
4.5

$
3.3

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~Maturities of the lease liabilities as of September 30, 2021 were as follows:~~

Operating
Year

Leases

(in millions)
2021 (excluding the nine months ended September 30, 2021)

$
6.7
2022

38.5
2023

37.2
2024

35.4
2025

34.7
Thereafter

205.8
Total undiscounted lease liabilities

358.3
Less: Amount representing interest

(86.5)
Total present value of minimum lease payments

$
271.8

Amounts recognized in the September 30, 2021 consolidated balance sheet:

Current operating lease liabilities

$
21.9
Long-term operating lease liabilities

249.9
Total

$
271.8

~~11. INTANGIBLE ASSETS AND GOODWILL~~

~~Intangible Assets~~

~~Intangible assets consist of the following:~~

September 30, 2021


Gross

Accumulated





Assets

Amortization

Net

Amortization Life and Method

(in millions)

Definite-Lived Assets

Customer contracts and lists

$
8.8

$
(2.4)

$
6.4

3 years—straight line
Premium on purchased credit card portfolios

132.1

(81.2)

50.9

1-13 years—straight line
Collector database

55.2

(55.1)

0.1

5 years—straight line
Tradenames

33.2

(29.5)

3.7

4-15 years—straight line
Non-compete agreements

2.2

(0.4)

1.8

5 years—straight line

$
231.5

$
(168.6)

$
62.9

Indefinite-Lived Assets

Tradename

1.2

—

1.2

Indefinite life
Total intangible assets

$
232.7

$
(168.6)

$
64.1

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

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

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

For the Years Ending

December 31,

(in millions)
2021 (excluding the nine months ended September 30, 2021)

$
8.0
2022

21.4
2023

16.1
2024

11.2
2025

2.4
Thereafter

3.8

~~Goodwill~~

~~The changes in the carrying amount of goodwill are as follows:~~

LoyaltyOne

Card Services

Total

(in millions)

Balance at January 1, 2021

$
736.0

$
633.6

$
1,369.6

Effects of foreign currency translation

(26.9)

—

(26.9)

Balance at September 30, 2021

$
709.1

$
633.6

$
1,342.7

The Company tests goodwill for impairment annually, as of July 1, or when events and circumstances change that would indicate the carrying value may not be recoverable. As of September 30, 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. However, with the COVID-19 pandemic and current uncertainty in the macroeconomic environment, future deterioration in the economy could adversely impact the Company’s reporting units and result in a goodwill impairment.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~12. DEBT~~

~~Debt consists of the following:~~

September 30,

December 31,




Description

2021

2020

Maturity

Interest Rate

(Dollars in millions)

Long-term and other debt:

2017 revolving line of credit

$
0

$
0

July 2024

⁽¹⁾
2017 term loans

1,408.3

1,484.3

December 2022, July 2024

⁽²⁾
BrandLoyalty credit agreement

0

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

2,758.3

2,834.3

Less: Unamortized debt issuance costs

24.4

28.6

Less: Current portion

101.3

101.4

Long-term portion

$
2,632.6

$
2,704.3

Deposits:

Certificates of deposit

$
4,968.0

$
6,014.9

Various – Oct 2021 to Sep 2026

0.20% to 3.75%
Money market deposits

4,925.5

3,790.2

Non-maturity

⁽⁴⁾
Total deposits

9,893.5

9,805.1

Less: Unamortized debt issuance costs

8.0

12.5

Less: Current portion

7,762.6

6,553.9

Long-term portion

$
2,122.9

$
3,238.7

Non-recourse borrowings of consolidated securitization entities:

Fixed rate asset-backed term note securities

$
1,894.0

$
3,423.8

Various – Oct 2021 to Sep 2022

2.21% to 3.95%
Conduit asset-backed securities

2,697.5

2,205.1

Various – Aug 2022 to Oct 2023

⁽⁵⁾
Secured loan facility

0

86.3

Total non-recourse borrowings of consolidated securitization entities

4,591.5

5,715.2

Less: Unamortized debt issuance costs

2.8

5.3

Less: Current portion

3,094.6

1,850.7

Long-term portion

$
1,494.1

$
3,859.2

(1)	The ~~interest rate is based upon LIBOR plus an applicable margin.~~Tier 1 Leverage capital ratio represents tier 1 capital divided by total average assets, after certain adjustments.

(2)

The ~~interest rate is based upon LIBOR plus an applicable margin. The weighted average interest rate for the term loans was 1.83% and 1.90% at September 30, 2021 and December 31, 2020, respectively.~~Common Equity Tier 1 capital ratio represents common equity tier 1 capital divided by total risk-weighted assets.

(3)	The ~~interest rate is based upon the Euro Interbank Offered Rate plus an applicable margin.~~Tier 1 capital ratio represents tier 1 capital divided by total risk-weighted assets.

(4)

The interest rates are primarily based on the Federal Funds rate plus an applicable margin. At September 30, 2021, the interest rates ranged from 0.37% to 3.50%. At December 31, 2020, the interest rates ranged from 0.38% to 3.50%.Total Risk-based capital ratio represents total capital divided by total risk-weighted assets.

~~(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 September 30, 2021, the interest rates ranged from 0.86% to 0.92%. At December 31, 2020, the interest rates ranged from 1.39% to 1.89%.

~~At September 30, 2021, the Company was in compliance with its financial covenants.~~

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~Long-term and Other Debt~~

~~Credit Agreement~~

In July 2021, the Company amended its credit agreement to, among other things, (i) provide consent by the lenders to the spinoff or sale of the Company’s LoyaltyOne segment, (ii) extend the maturity date of the revolving loans and approximately 86% of the term loans from December 31, 2022 to July 1, 2024, (iii) revise the method of determining interest rates and commitment fees to be charged in connection with the loans, (iv) modify the financial and operational covenants and certain other provisions in the credit agreement to reflect the Company’s business and operations after giving effect to the LoyaltyOne spinoff or sale, (v) require a prepayment of certain of the loans in an amount equal to the net proceeds from the LoyaltyOne spinoff or sale, including any net proceeds from debt that is distributed to the Company minus, in the case of the first transaction associated with the divestiture of the LoyaltyOne spinoff or sale, $25.0 million and (vi) add Lon Inc. and Lon Operations LLC acquired in the Company’s acquisition of Bread as additional guarantors.

~~As of September 30, 2021, the Company had $1,408.3 million in term loans outstanding with $750.0 million total availability under the revolving line of credit.~~

~~BrandLoyalty Credit Agreement~~

~~As of September 30, 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.

In June 2021, $866.7 million of Series 2016-A asset-backed term notes, $184.2 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid.

In September 2021, $337.5 million of Series 2018-B asset-backed term notes, $15.2 million of which were retained by the Company and eliminated from the Company’s unaudited condensed consolidated balance sheets, matured and were repaid.

~~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.~~

In June 2021, Master Trust I amended its 2009-VFN conduit facility, increasing the capacity from $1.0 billion to $2.75 billion and extending the maturity to October 2023. In June 2021, Master Trust III amended its 2009-VFC conduit facility, decreasing the capacity from $700.0 million to $225.0 million and extending the maturity to August 2022. In June 2021, the WFC Trust amended its 2009-VFN conduit facility, extending the maturity to August 2022.

As of September 30, 2021, total capacity under the conduit facilities was $4.5 billion, of which $2.7 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the unaudited condensed consolidated balance sheets.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~Secured Loan Facility~~

~~In August 2021, the Company repaid its outstanding secured loan facility, which was originally scheduled to mature on November 19, 2022, with prepayment permitted.~~

~~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 as of September 30, 2021 was $1.9 million included in other current assets and $0.8 million included in other current liabilities in the Company’s unaudited condensed consolidated balance sheets. The fair value of the Company’s derivative instruments as of December 31, 2020 was $0.4 million included in other current assets and $1.5 million included in other current liabilities in the Company’s unaudited condensed consolidated balance sheets.

~~14. COMMITMENTS AND CONTINGENCIES~~

~~Regulatory Matters~~

On September 10, 2019, Comenity Capital Bank submitted a bank merger application to the Federal Deposit Insurance Corporation (“FDIC”) seeking the FDIC’s approval to merge Comenity Bank with and into Comenity Capital Bank as the surviving bank entity. On the same date, Comenity Capital Bank and Comenity Bank each submitted counterpart bank merger applications to the Utah Department of Financial Institutions and the Delaware Office of the State Bank Commissioner, respectively, in connection with the proposed merger. On April 20, 2021, Comenity Capital Bank withdrew its bank merger application with the FDIC. On May 3, 2021, each of Comenity Capital Bank and Comenity Bank similarly withdrew their counterpart bank merger applications in Utah and Delaware, respectively.

Indemnification

On July 1, 2019, the Company completed the sale of its Epsilon segment to Publicis Groupe S.A. ~~(“Publicis”)~~(Publicis). Under the terms 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”)~~(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”)~~(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 ~~$150.0~~$150 million, to be paid in 2 equal installments, the first in January 2021 and the second in January 2022. ~~In accordance with ASC 450, “Contingencies,” the Company records a~~A $150 million loss contingency ~~when a loss is probable and an amount can be reasonably estimated, and therefore~~was recorded as of December 31, ~~2020, a $150.0 million liability was recorded.~~2020. The Company paid ~~$75.0~~$75 million to Publicis pursuant to its contractual indemnification obligation in January 2021. ~~As of September 30, 2021,~~In January 2022, the Company ~~has $75.0~~paid the second remaining $75 million ~~included in accrued expenses in~~installment to Publicis pursuant to its ~~unaudited condensed consolidated balance sheets.~~

~~15. STOCKHOLDERS’ EQUITY~~contractual indemnification obligation.

~~Stock Compensation Expense~~

~~During the nine months ended September 30, 2021,~~Legal Proceedings

From time to time the Company ~~awarded 656,924 service-based restricted stock units~~is involved in various claims and lawsuits and other proceedings, arising in the ordinary course of business that it believes will not have a material adverse effect on its business, consolidated financial condition or liquidity, including claims and lawsuits alleging breaches of the Company’s contractual obligations, arbitrations, class actions and other litigation, arising in connection with ~~a weighted average grant date fair value per share of $88.22 as determined on the date of grant. Service-based restricted stock units typically vest ratably over~~ ~~three years provided that the participant~~its business activities. The Company is ~~employed~~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 ~~on each such vesting date.~~to significant fines,

2836

~~Index~~Table of Contents

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

penalties, obligations to change its business practices or other requirements resulting in increased expenses, diminished income and damage to the Company’s reputation.

During the nine months ended September 30, 2021, the Company awarded 98,883 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 and was estimated utilizing Monte Carlo simulations of the Company’s stock price correlation, expected volatility 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 and July 15, 2024, provided that the participant is employed by the Company on the vesting date.~~

~~Stock-based compensation expense recognized in the Company’s unaudited condensed consolidated statements of income for the three and nine months ended September 30, 2021 and 2020 is as follows:~~

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020

2021

2020

(in millions)
Cost of operations

$
5.4

$
3.4

$
14.9

$
9.4
General and administrative

3.2

1.9

9.7

6.8
Total

$
8.6

$
5.3

$
24.6

$
16.2

~~Dividends~~

On January 28, 2021, the Company’s board of 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 an aggregate dividend payment of $10.4 million on March 18, 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 common stock to stockholders of record at the close of business on May 14, 2021, resulting in an aggregate dividend payment of $10.4 million on June 18, 2021.

On July 29, 2021, the Company’s board of 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 August 13, 2021, resulting in an aggregate dividend payment of $10.4 million on September 17, 2021.

~~Additionally, the Company paid $0.2 million in cash related to dividend equivalent rights for the nine months ended September 30, 2021.~~

On October 28, 2021, the Company’s board of directors declared a quarterly cash dividend of $0.21 per share on the Company’s common stock, payable on December 17, 2021 to stockholders of record at the close of business on November 12, 2021.

~~Treasury Stock~~

On July 30, 2021, the Company retired its 67.4 million shares of treasury stock outstanding, which increased treasury stock by $6,733.9 million, reduced retained earnings by $5,453.4 million, reduced additional paid-in capital by $1,279.8 million and reduced common stock by $0.7 million, with no impact to total stockholders’ equity, in the Company’s unaudited condensed consolidated balance sheets.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~16.~~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		Net		Net Unrealized		Net Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other		Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive		Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Three Months Ended September 30, 2021	on Securities		Flow Hedges		Investment Hedge		Adjustments ⁽¹⁾		Loss

	(in millions)
Balance at June 30, 2021	$	13.7	$	0.1	$	(7.5)	$	(39.4)	$	(33.1)
Changes in other comprehensive income (loss)		(3.3)		0.9		—		(20.7)		(23.1)
Balance at September 30, 2021	$	10.4	$	1.0	$	(7.5)	$	(60.1)	$	(56.2)
Three Months Ended June 30, 2022											on AFS Securities		Flow Hedges		Investment Hedge		Adjustments		Loss
(Millions)
Balance as of March 31, 2022											$	(6)	$	—	$	—	$	(3)	$	(9)
Changes in other comprehensive loss												(5)		—		—		—		(5)
Balance as of June 30, 2022											$	(11)	$	—	$	—	$	(3)	$	(14)


	Net		Net Unrealized		Net Unrealized		Foreign		Accumulated		Net		Net Unrealized		Net Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other		Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive		Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Three Months Ended September 30, 2020	on Securities		Flow Hedges		Investment Hedge		Adjustments ⁽¹⁾		Loss

	(in millions)
Balance at June 30, 2020	$	17.5	$	(0.6)	$	(7.5)	$	(96.9)	$	(87.5)
Changes in other comprehensive income (loss)		4.0		0.5		—		35.3		39.8
Balance at September 30, 2020	$	21.5	$	(0.1)	$	(7.5)	$	(61.6)	$	(47.7)
Three Months Ended June 30, 2021											on Securities		Flow Hedges		Investment Hedge		Adjustments ⁽¹⁾		Loss
(Millions)
Balance as of March 31, 2021											$	15	$	—	$	(7)	$	(50)	$	(42)
Changes in other comprehensive (loss) income												(1)		—		—		10		9
Balance as of June 30, 2021											$	14	$	—	$	(7)	$	(40)	$	(33)

					��
	Net		Net Unrealized		Net Unrealized		Foreign		Accumulated		Net		Net Unrealized		Net Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other		Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive		Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Nine Months Ended September 30, 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)		(12.8)		1.7		—		(40.1)		(51.2)
Balance at September 30, 2021	$	10.4	$	1.0	$	(7.5)	$	(60.1)	$	(56.2)
Six Months Ended June 30, 2022											on Securities		Flow Hedges		Investment Hedge		Adjustments		Loss
(Millions)
Balance as of December 31, 2021											$	1	$	—	$	—	$	(3)	$	(2)
Changes in other comprehensive loss												(12)		—		—		—		(12)
Balance as of June 30, 2022											$	(11)	$	—	$	—	$	(3)	$	(14)


	Net		Net Unrealized		Net Unrealized		Foreign		Accumulated		Net		Net Unrealized		Net Unrealized		Foreign		Accumulated
	Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other		Unrealized		Gains (Losses)		Gains (Losses)		Currency		Other
	Gains (Losses)		on Cash		on Net		Translation		Comprehensive		Gains (Losses)		on Cash		on Net		Translation		Comprehensive
Nine Months Ended September 30, 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)		19.0		—		—		29.4		48.4
Recognition resulting from the sale of Precima's foreign subsidiaries		—		—		—		3.8		3.8
Balance at September 30, 2020	$	21.5	$	(0.1)	$	(7.5)	$	(61.6)	$	(47.7)
Six Months Ended June 30, 2021											on Securities		Flow Hedges		Investment Hedge		Adjustments ⁽¹⁾		Loss
(Millions)
Balance as of December 31, 2020											$	23	$	(1)	$	(7)	$	(20)	$	(5)
Changes in other comprehensive (loss) income												(9)		1		—		(20)		(28)
Balance as of June 30, 2021											$	14	$	—	$	(7)	$	(40)	$	(33)

(1)

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

~~In accordance with ASC 830, “Foreign Currency Matters,” upon~~

11. STOCKHOLDERS’ EQUITY

Stock Repurchase Programs

On February 28, 2022, the ~~sale~~Company’s Board of ~~Precima on January 10, 2020, $3.8 million~~Directors approved a stock repurchase program to acquire up to 200,000 shares of ~~accumulated foreign currency translation adjustments attributable to Precima’s foreign subsidiaries sold were reclassified from accumulated other comprehensive loss and included~~the Company’s outstanding common stock in the ~~calculation~~open market during the one-year period ending on February 28, 2023. As of June 30, 2022, the ~~gain on sale~~Company had repurchased all 200,000 shares of ~~Precima. Other reclassifications from accumulated other comprehensive loss into net income for each of the periods presented were not material.~~its common stock available under

3037

~~Index~~Table of Contents

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

this program for an aggregate of $12 million. Following their repurchase, these 200,000 shares ceased to be outstanding shares of common stock and are now treated as authorized but unissued shares of common stock.

During the six months ended June 30, 2021, the Company did 0t repurchase any shares of its common stock.

Stock Compensation Expense

During the six months ended June 30, 2022, the Company awarded 616,505 service-based restricted stock units with a weighted average grant date fair value per share of $68.79 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 six months ended June 30, 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 the Company on the vesting date.

For the three months ended June 30, 2022 and 2021, the Company recognized $9 million and $7 million in stock-based compensation expense, respectively. For the six months ended June 30, 2022 and 2021, the Company recognized $16 million and $13 million in stock-based compensation expense, respectively.

Dividends

During the three and six months ended June 30, 2022, the Company paid $11 million and $22 million, respectively, in dividends to its shareholders of common stock. On July 28, 2022, the Company’s Board of Directors declared a quarterly cash dividend of $0.21 per share on its common stock, payable on September 16, 2022, to stockholders of record at the close of business on August 12, 2022.

~~17. FINANCIAL INSTRUMENTS~~12. INCOME TAXES

~~In accordance with ASC 825, “Financial Instruments,”~~The effective tax rate was 22.7% and 25.7% for the ~~Company is required~~three months ended June 30, 2022 and 2021, respectively, and 29.9% and 26.3% for the six months ended June 30, 2022 and 2021, respectively. The decrease in the effective tax rate for the three month period primarily related to ~~disclose~~a discrete benefit in the ~~fair value of financial instruments~~current period, partially offset by increases in nondeductible items over those in the prior year period. The increase in the effective tax rate 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~~the six month period was primarily driven by the decrease in Income from continuing operations before income taxes 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~~increases in nondeductible items over those in 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:~~

prior year period.

September 30, 2021

December 31, 2020

Carrying

Fair

Carrying

Fair


Amount

Value

Amount

Value

(in millions)
Financial assets

Credit card and loan receivables, net

$
14,045.1

$
16,202.0

$
14,776.4

$
17,301.2
Redemption settlement assets, restricted

734.0

734.0

693.5

693.5
Other investments

236.9

236.9

225.4

225.4
Derivative instruments

1.9

1.9

0.4

0.4
Financial liabilities

Derivative instruments

0.8

0.8

1.5

1.5
Deposits

9,885.5

10,027.3

9,792.6

10,015.9
Non-recourse borrowings of consolidated securitization entities

4,588.7

4,616.3

5,709.9

5,783.4
Long-term and other debt

2,733.9

2,816.6

2,805.7

2,875.1

The ~~following techniques~~Company is under examination by the Internal Revenue Service as well as tax authorities in various states. The tax years under examination and ~~assumptions were used~~open for examination vary by jurisdiction, but with some exceptions, the tax returns filed by the Company ~~in estimating fair values of financial instruments as disclosed herein:~~

~~Credit card~~are no longer subject to U.S. federal income tax and ~~loan receivables, net —~~ ~~The Company utilizes a discounted cash flow model using unobservable inputs, including estimated yields (interest~~state and ~~fee income), loss rates, payment rates and discount rates to estimate the fair value measurement of the credit card and loan receivables~~.

~~Redemption settlement assets, restricted —~~ ~~Redemption settlement assets, restricted are recorded at fair value based on quoted market prices~~local examinations for the ~~same~~years before 2015 or ~~similar securities.~~foreign income tax examinations for years before 2018.

~~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.

3138

~~Index~~Table of Contents

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

13. EARNINGS PER SHARE

~~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~~table sets forth the computation of basic and diluted EPS attributable to common stockholders for the ~~assets~~three and ~~liabilities carried at fair value measured on a recurring basis as of September~~six months ended June 30, ~~2021~~2022 and ~~December 31, 2020:~~2021:

Fair Value Measurements at

September 30, 2021 Using


Balance at






September 30,


2021

Level 1

Level 2

Level 3

(in millions)
Mutual funds ⁽¹⁾

$
26.2

$
26.2

$
—

$
—
Corporate bonds ⁽¹⁾

649.6

—

649.6

—
Marketable securities ⁽²⁾

236.9

48.8

188.1

—
Derivative instruments ⁽³⁾

1.9

—

1.9

—
Total assets measured at fair value

$
914.6

$
75.0

$
839.6

$
—

Derivative instruments ⁽³⁾

$
0.8

$
—

$
0.8

$
—
Total liabilities measured at fair value

$
0.8

$
—

$
0.8

$
—


			Fair Value Measurements at						Three Months Ended June 30,				Six Months Ended June 30,
			December 31, 2020 Using						2022		2021		2022		2021
(Millions, except per share amounts)
Numerator
Income from continuing operations									$	12	$	263	$	224	$	531
Income (loss) from discontinued operations, net of income taxes										—		11		(1)		29
Net income									$	12	$	274	$	223	$	560
	Balance at
Denominator
Basic: Weighted average common stock										49.8		49.7		49.8		49.7
Weighted average effect of dilutive securities
Add: net effect of dilutive unvested restricted stock awards ⁽¹⁾										0.1		0.3		0.2		0.2
Diluted										49.9		50.0		50.0		49.9
	December 31,
Basic EPS
Income from continuing operations									$	0.25	$	5.29	$	4.48	$	10.68
Income (loss) from discontinued operations									$	—	$	0.21	$	(0.01)	$	0.58
Net income per share									$	0.25	$	5.50	$	4.47	$	11.26
	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	$	—
Diluted EPS
Income from continuing operations									$	0.25	$	5.25	$	4.47	$	10.63
Income (loss) from discontinued operations									$	—	$	0.22	$	(0.01)	$	0.58
Net income per share									$	0.25	$	5.47	$	4.46	$	11.21

(1)

~~Amounts are included in redemption settlement assets in~~For the ~~unaudited condensed consolidated balance sheets.~~three and six months ended June 30, 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.

~~(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.~~

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 June 30, 2022, the carrying amount of the Company’s ownership interest in Loyalty Ventures, which investment totaled was $17 million, and is included in Other assets in the Consolidated Balance Sheet.

3239

~~Index~~Table of Contents

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

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (CONTINUED)

~~Financial Instruments Disclosed but Not Carried at Fair Value~~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 and six months ended June 30, 2021:




	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021
(Millions)
Total interest income	$	—	$	—
Total interest expense ⁽¹⁾		3		7
Net interest income		(3)		(7)
Total non-interest income		151		327
Total non-interest expenses		130		275
Income before provision from income taxes		18		45
Provision for income taxes		7		16
Income from discontinued operations, net of income taxes	$	11	$	29

(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 ~~tables provide assets~~table summarizes the depreciation and ~~liabilities disclosed but not carried at fair value as~~amortization, and capital expenditures of ~~September~~the Company’s former LoyaltyOne segment for the three and six months ended June 30, ~~2021 and December 31, 2020:~~2021:

Fair Value Measurements at

September 30, 2021


Total

Level 1

Level 2

Level 3

(in millions)
Financial assets:

Credit card and loan receivables, net

$
16,202.0

$
—

$
—

$
16,202.0
Total

$
16,202.0

$
—

$
—

$
16,202.0

Financial liabilities:

Deposits

$
10,027.3

$
—

$
10,027.3

$
—
Non-recourse borrowings of consolidated securitization entities

4,616.3

—

4,616.3

—
Long-term and other debt

2,816.6

—

2,816.6

—
Total

$
17,460.2

$
—

$
17,460.2

$
—

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

$
—





(Millions)	Three Months Ended June 30, 2021		Six Months Ended June 30, 2021
Depreciation and amortization	$	9	$	18
Capital expenditures	$	4	$	9

~~18. INCOME TAXES~~

For the three months ended September 30, 2021 and 2020, the Company utilized an effective tax rate of 23.0% and 24.2%, respectively, to calculate its provision for income taxes. For the nine months ended September 30, 2021 and 2020, the Company utilized an effective tax rate of 25.9% and 18.8~~%, respectively, to calculate its provision for income taxes.~~

The decrease in the effective tax rate for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily due to a discrete tax benefit related to a favorable settlement with a state tax authority in the third quarter of 2021. The increase in the effective tax rate for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily due to greater discrete tax benefits recorded in the prior year, which included the expiration of statutes of limitation related to certain foreign tax matters, a favorable state tax settlement and a benefit related to the issuance of final regulations on the GILTI high tax exception.

~~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.

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

~~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 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 results for the three and nine months ended September 30, 2020 have been presented to align with the current year presentation. This change had no impact on previously reported financial information.

Corporate/

Three Months Ended September 30, 2021

LoyaltyOne

Card Services

Other

Eliminations

Total

(in millions)
Revenues

$
169.3

$
930.0

$
—

$
—

$
1,099.3
Other operating expenses

115.8

369.4

34.4

4.1

523.7
Provision for loan loss

—

161.1

—

—

161.1
Depreciation and amortization

9.1

22.0

0.6

—

31.7
Operating income (loss)

44.4

377.5

(35.0)

(4.1)

382.8
Interest expense, net

(0.1)

63.3

28.9

—

92.1
Income (loss) before income taxes

$
44.5

$
314.2

$
(63.9)

$
(4.1)

$
290.7

Corporate/

Three Months Ended September 30, 2020

LoyaltyOne

Card Services

Other

Eliminations

Total

(in millions)
Revenues

$
184.8

$
865.7

$
—

$
—

$
1,050.5
Other operating expenses

146.4

336.3

29.0

—

511.7
Provision for loan loss

—

207.7

—

—

207.7
Depreciation and amortization

20.3

19.2

0.6

—

40.1
Operating income (loss)

18.1

302.5

(29.6)

—

291.0
Interest expense, net

(0.2)

90.4

24.9

—

115.1
Income (loss) before income taxes

$
18.3

$
212.1

$
(54.5)

$
—

$
175.9

Corporate/

Nine Months Ended September 30, 2021

LoyaltyOne

Card Services

Other

Eliminations

Total

(in millions)
Revenues

$
496.7

$
2,699.8

$
—

$
—

$
3,196.5
Other operating expenses

368.8

1,108.4

78.4

4.1

1,559.7
Provision for loan loss

—

180.3

—

—

180.3
Depreciation and amortization

27.5

68.0

1.7

—

97.2
Operating income (loss)

100.4

1,343.1

(80.1)

(4.1)

1,359.3
Interest expense, net

(0.3)

214.6

88.2

—

302.5
Income (loss) before income taxes

$
100.7

$
1,128.5

$
(168.3)

$
(4.1)

$
1,056.8

~~Index~~

~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

Corporate/

Nine Months Ended September 30, 2020

LoyaltyOne

Card Services

Other

Eliminations

Total

(in millions)
Revenues

$
533.9

$
2,877.5

$
0.1

$
—

$
3,411.5
Other operating expenses

388.6

1,086.1

73.2

—

1,547.9
Provision for loan loss

—

1,113.7

—

—

1,113.7
Depreciation and amortization

56.9

61.0

2.4

—

120.3
Operating income (loss)

88.4

616.7

(75.5)

—

629.6
Interest expense, net

(0.5)

302.2

79.6

—

381.3
Income (loss) before income taxes

$
88.9

$
314.5

$
(155.1)

$
—

$
248.3

~~20. SUPPLEMENTAL CASH FLOW INFORMATION~~

~~The following table provides a reconciliation of cash and cash equivalents to the total of the amounts reported in the unaudited condensed consolidated statements of cash flows:~~

September 30,

September 30,

2021

2020

(in millions)
Cash and cash equivalents

$
3,172.2

$
3,078.4
Restricted cash included within other current assets ⁽¹⁾

660.2

627.1
Restricted cash included within redemption settlement assets, restricted⁽²⁾

58.2

45.4
Total cash, cash equivalents and restricted cash

$
3,890.6

$
3,750.9

~~(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 September 30, 2021, restricted cash included $632.9 million in principal accumulation for the repayment of non-recourse borrowings of consolidated securitized debt that matures in October 2021, February 2022 and June 2022. At September 30, 2020, restricted cash included $603.1 million in principal accumulation for the repayment of non-recourse borrowings of consolidated securitized debt that matured in October 2020.

~~(2)~~

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

~~In July 2021, the Company retired its outstanding treasury stock, which was a non-cash financing activity. See Note 15, “Stockholders' Equity,” for additional information.~~

~~Index~~

~~Caution 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 initiation or completion of strategic initiatives including the planned spinoff of our LoyaltyOne segment, our expected operating results, future economic conditions including currency exchange rates, future dividend declarations and the guidance we give with respect to our anticipated financial performance. 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:

●

~~the spinoff may not be consummated within the anticipated time period or at all;~~

●

~~the distribution to be effected in the spinoff may not be tax-free for U.S. federal income tax purposes;~~

●

disruption to our business or a loss of synergies from separating the businesses that could negatively impact the balance sheet, profit margins or earnings of both businesses or that the companies resulting from the spinoff do not realize all of the expected benefits of the spinoff;

●

~~the combined value of the common stock of the two publicly-traded companies will not be equal to or greater than the value of our common stock had the spinoff not occurred;~~

●

continuing impacts related to COVID-19, including government economic stimulus, relief measures for impacted borrowers and depositors, labor shortages, any government-imposed vaccine mandates, reduction in demand from clients, supply chain disruption for our reward suppliers and disruptions in the airline or travel industries;

●

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

●

increases in fraudulent activity, net charge-offs in credit card and loan receivables or increases or volatility in the allowance for loan loss 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, or complete the spinoff;~~

●

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

●

~~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;~~

●

~~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;~~

●

~~loss or disruption, due to cyber attack 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 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.

~~Index~~

~~Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.~~

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 consolidated financial statements and related notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the Securities and Exchange Commission, or SEC, on February 26, 2021.

~~2021 Recent Developments~~

●

~~For the nine months ended September 30, 2021, as compared to the nine months ended September 30, 2020:~~

●

~~Revenue decreased $215.0 million, or 6%, to $3,196.5 million.~~

●

~~Provision for loan loss decreased $933.4 million, or 84%, to $180.3 million.~~

●

~~Income before income taxes increased $808.5 million, or 326%, to $1,056.8 million.~~

●

~~Net income increased $581.7 million, or 288%, to $783.4 million.~~

●

~~Effective July 6, 2021, Perry Beberman joined the Company as Executive Vice President and Chief Financial Officer.~~

~~Planned Spinoff of our LoyaltyOne Segment~~

On October 13, 2021, the Board of Directors of Alliance Data Systems Corporation, or ADSC, approved the previously announced separation (the “Separation”) of its LoyaltyOne segment, consisting of its Canadian AIR MILES® Reward Program and Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company, Loyalty Ventures Inc. listed on Nasdaq under the symbol “LYLT” (“Loyalty Ventures”). The Separation will be completed through the pro rata distribution of 81% of the outstanding shares of Loyalty Ventures to holders of ADSC’s common stock at the close of business on the record date of October 27, 2021, with ADSC retaining the remaining 19% of the outstanding shares of Loyalty Ventures. ADSC stockholders of record at the close of business on October 27, 2021 will receive one share of Loyalty Ventures common stock for every two and one-half (2.5) shares of ADSC common stock.

The distribution is expected to qualify as a tax-free reorganization and a tax-free distribution to ADSC and its stockholders for U.S. federal income tax purposes and is expected to be completed on November 5, 2021.

The completion of the distribution is subject to a number of customary conditions, including ADSC’s receipt of an opinion from its tax advisor confirming that the distribution qualifies as tax-free for U.S. federal income tax purposes for ADSC and its stockholders (except for cash received in lieu of fractional shares). ADSC has received a private letter ruling from the Internal Revenue Service to this effect. The ADSC Board reserves the right in its discretion to delay the distribution, change any of the terms relating to the distribution, or abandon the distribution.

~~COVID-19 Update~~

Following the declaration by the WHO in the first quarter of 2020 of COVID-19 as a global pandemic 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.

We continue to see sequential improvement in business conditions. Credit performance remained strong, attributable to our prudent risk management strategy changes, deliberate underwriting actions, and direct consumer stimulus payments resulting in greater customer liquidity and ability to pay. For the three months ended September 30, 2021, our net loss rate was 3.9%, with a delinquency rate of 3.8% for the period ended September 30, 2021. For the three months ended September 30, 2020, our net loss rate was 5.8%, with a delinquency rate of 4.7% for the period ended September 30, 2020. For the year ended December 31, 2021, we expect our credit sales to increase at a double-digit growth rate, and we expect a net loss rate in the high 4% range for the year. We expect credit metrics and payment rates to continue to moderate into 2022 as government stimulus programs expire.

~~Index~~

AIR MILES Reward Program issuances and redemptions for the third quarter of 2021 increased 1% and 12%, respectively, as compared to the second quarter of 2021, while issuance declined 7% but redemptions increased 30%, respectively, as compared to the third quarter of 2020. The increase in redemptions can be attributed to the improvement in our travel-related categories. Issuance for the third quarter of 2021 was down due to timing of promotional activity. At BrandLoyalty, new program activity is increasing with consumers actively engaged in loyalty campaigns. However, both the varying degrees of restrictions impacting the U.K. and many Asian and European countries, as well as recent disruptions to port services in southern China amid COVID-19 resurgences exacerbating already challenged global supply chain conditions, have impacted our third quarter results and could negatively impact our results of operations in the fourth quarter of 2021.

Despite the availability of vaccines, surges in COVID-19 cases, including variants of the strain, may adversely impact the economic recovery and our industry outlook. 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.

~~Consolidated Results of Operations~~

Three Months Ended September 30,

Nine Months Ended September 30,


2021

2020

% Change


2021

2020

% Change

(in millions, except percentages)

Revenues

Services

$
10.5

$
24.7

(58)
%

$
70.4

$
109.2

(36)
%
Redemption, net

97.1

113.1

(14)

280.8

318.6

(12)

Finance charges, net

991.7

912.7

9

2,845.3

2,983.7

(5)

Total revenue

1,099.3

1,050.5

5

3,196.5

3,411.5

(6)

Operating expenses

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

489.2

482.7

1

1,481.1

1,474.7

—

Provision for loan loss

161.1

207.7

(22)

180.3

1,113.7

(84)

General and administrative

34.5

29.0

19

78.6

73.2

7

Depreciation and other amortization

18.9

18.4

3

61.7

56.2

10

Amortization of purchased intangibles

12.8

21.7

(41)

35.5

64.1

(45)

Total operating expenses

716.5

759.5

(6)

1,837.2

2,781.9

(34)

Operating income

382.8

291.0

32

1,359.3

629.6

116

Interest expense

Securitization funding costs

26.0

37.5

(31)

89.9

130.1

(31)

Interest expense on deposits

37.3

52.9

(29)

124.7

172.1

(28)

Interest expense on long-term and other debt, net

28.8

24.7

16

87.9

79.1

11

Total interest expense, net

92.1

115.1

(20)

302.5

381.3

(21)

Income before income taxes

290.7

175.9

65

1,056.8

248.3

326

Provision for income taxes

67.0

42.6

57

273.4

46.6

487

Net income

$
223.7

$
133.3

68
%

$
783.4

$
201.7

288
%

Key Operating Metrics:

Credit sales

$
7,380.4

$
6,151.7

20
%

$
20,825.0

$
17,050.1

22
%
Average credit card and loan receivables

$
15,470.5

$
15,299.6

1
%

$
15,512.4

$
16,570.1

(6)
%
AIR MILES reward miles issued

1,155.2

1,239.7

(7)
%

3,406.1

3,608.6

(6)
%
AIR MILES reward miles redeemed

895.8

687.2

30
%

2,435.5

2,289.4

6
%

~~Three months ended September 30, 2021 compared to the three months ended September 30, 2020~~

~~Revenue~~. Total revenue increased $48.8 million, or 5%, to $1,099.3 million for the three months ended September 30, 2021 from $1,050.5 million for the three months ended September 30, 2020. The net increase was due to the following:

●

~~Services~~. Revenue decreased $14.2 million, or 58%, to $10.5 million for the three months ended September 30, 2021 due to a $9.2 million decrease in merchant fee revenue resulting from increased payments to our retailers as volumes increased from the prior year quarter. Additionally, revenue associated with servicing certain third-

~~Index~~

party credit card receivables decreased $4.4 million for the three months ended September 30, 2021 as compared to the prior year quarter due to lower volumes of these third-party credit card receivables.

●

~~Redemption, net~~. Revenue decreased $16.0 million, or 14%, to $97.1 million for the three months ended September 30, 2021, as redemption revenue from our short-term loyalty programs decreased $18.8 million due to the number and timing of programs in market due to the continuing impact of COVID-19.

●

~~Finance charges, net~~. Revenue increased $79.0 million, or 9%, to $991.7 million for the three months ended September 30, 2021 due to the increase in finance charge yield of approximately 190 basis points, which increased revenue by $72.3 million, resulting from higher late fees as revenue in 2020 was impacted by consumer relief programs, and a decline in charge-offs for unpaid interest and fees of $51.6 million. Additionally, a 1% increase in average credit card and loan receivables including held for sale receivables, increased revenue $6.7 million.

~~Cost of operations~~. Cost of operations increased $6.5 million, or 1%, to $489.2 million for the three months ended September 30, 2021 as compared to $482.7 million for the three months ended September 30, 2020. The net increase was due to the following:

●

Within the LoyaltyOne segment, cost of operations decreased $26.5 million (net of a gain on sale of an investment to an affiliate of the Company which was eliminated upon consolidation) due to a $22.7 million decrease in cost of redemptions resulting from the decline in redemption revenue discussed above and a $2.0 million decrease in payroll and benefits expense.

●

Within the Card Services segment, cost of operations increased $33.1 million due to a $21.2 million increase in professional services expenses related to strategic initiatives, a $10.9 million increase in marketing expense as the prior year quarter was impacted by COVID-19 and an $8.2 million increase in data processing expense due to the processing platform migration. These increases were offset in part by a $10.2 million gain recognized on the sale of a credit card portfolio in August 2021.

~~Provision for loan loss~~. Provision for loan loss decreased $46.6 million, or 22%, to $161.1 million for the three months ended September 30, 2021 as compared to $207.7 million for the three months ended September 30, 2020. The decrease in the provision for loan loss in the current year quarter was due to improved credit performance and lower net charge-offs.

~~General and administrative~~. General and administrative expenses increased $5.5 million, or 19%, to $34.5 million for the three months ended September 30, 2021 as compared to $29.0 million for the three months ended September 30, 2020, due to a $3.3 million increase in payroll and benefits expense for higher medical claims and an increase in professional services expenses associated with the planned spinoff.

~~Depreciation and other amortization~~. Depreciation and other amortization increased $0.5 million, or 3%, to $18.9 million for the three months ended September 30, 2021 as compared to $18.4 million for the three months ended September 30, 2020, primarily due to an increase in amortization related to capitalized software, offset in part by a decrease in depreciation and amortization at our Card Services segment from the Company’s real estate optimization in 2020.

~~Amortization of purchased intangibles~~. Amortization of purchased intangibles decreased $8.9 million, or 41%, to $12.8 million for the three months ended September 30, 2021, as compared to $21.7 million for the three months ended September 30, 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 $23.0 million, or 20%, to $92.1 million for the three months ended September 30, 2021 as compared to $115.1 million for the three months ended September 30, 2020. The net decrease was due to the following:

●

~~Securitization funding costs~~. Securitization funding costs decreased $11.5 million due to lower average borrowings, which decreased funding costs by approximately $11.6 million, offset in part by higher average interest rates, which increased funding costs by approximately $0.1 million.

~~Index~~

●

~~Interest expense on deposits~~. Interest expense on deposits decreased $15.6 million due to lower average interest rates, which decreased funding costs by approximately $10.3 million, and lower average balances outstanding, which decreased funding costs by approximately $5.3 million.

●

~~Interest expense on long-term and other debt, net~~. Interest expense on long-term and other debt, net increased $4.1 million primarily due to an $7.9 million increase in interest expense driven by the issuance of senior notes in September 2020, offset in part by a $2.7 million decrease in interest expense on term debt and a $1.9 million decrease in interest expense on the revolving line of credit due to lower average borrowings.

~~Taxes.~~ Provision for income taxes increased $24.4 million to $67.0 million for the three months ended September 30, 2021 from $42.6 million for the three months ended September 30, 2020 due to an increase in income before income taxes. The effective tax rate for the three months ended September 30, 2021 was 23.0% as compared to 24.2% for the prior year quarter. The decrease in the effective tax rate for the three months ended September 30, 2021 as compared to the three months ended September 30, 2020 was primarily due to a discrete tax benefit related to a favorable settlement with a state tax authority in the third quarter of 2021.

~~Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020~~

~~Revenue~~. Total revenue decreased $215.0 million, or 6%, to $3,196.5 million for the nine months ended September 30, 2021 from $3,411.5 million for the nine months ended September 30, 2020. The decrease was due to the following:

●

~~Services~~. Revenue decreased $38.8 million, or 36%, to $70.4 million for the nine months ended September 30, 2021 due to a $17.6 million decrease in merchant fee revenue due to increased payments to our retailers as volumes increased from the prior year and a $14.7 million decrease in other servicing fees charged to cardholders resulting from a decline in revenue from certain payment protection products.

●

~~Redemption, net~~. Revenue decreased $37.8 million, or 12%, to $280.8 million for the nine months ended September 30, 2021 as redemption revenue from our short-term loyalty programs decreased $38.3 million due to the number and timing of programs in market that continued to be impacted by COVID-19, offset in part by favorability in foreign currency exchange rates.

●

~~Finance charges, net~~. Revenue decreased $138.4 million, or 5%, to $2,845.3 million for the nine months ended September 30, 2021. The decline was due to a 7% decrease in average credit card and loan receivables including held for sale receivables, as payment rates continue to benefit from consumer economic stimulus, that decreased revenue by $212.9 million. This decrease was offset in part by the increase in finance charge yield of approximately 60 basis points, which increased revenue by $74.5 million.

~~Cost of operations~~. Cost of operations increased $6.4 million to $1,481.1 million for the nine months ended September 30, 2021 as compared to $1,474.7 million for the nine months ended September 30, 2020. The net increase was due to the following:

●

Within the LoyaltyOne segment, cost of operations decreased $15.8 million (net of a gain on sale of an investment to an affiliate of the Company which was eliminated upon consolidation) due to a $35.3 million decrease in cost of redemptions due to the decline in redemption revenue discussed above. This decrease was offset in part by the gain on the sale of Precima in January 2020 that did not recur in the current year and a $3.9 million increase in payroll and benefits expense related to higher incentive compensation.

●

Within the Card Services segment, cost of operations increased $22.3 million due to a $47.6 million increase in professional services expenses related to strategic initiatives, a $38.8 million increase in payroll and benefits expense due to our Bread acquisition in December 2020 and an increase in incentive compensation, a $27.3 million increase in marketing expense as the prior year was impacted by COVID-19 and a $16.0 million increase in data processing expense due to the Fiserv core processing platform migration. These increases were offset in part by a $71.2 million reduction in fraud losses and $34.2 million in asset impairment charges recorded in the second quarter of 2020 that did not recur in the current year.

~~Index~~Table of Contents

~~Provision for loan loss~~. Provision for loan loss decreased $933.4 million, or 84%, to $180.3 million for the nine months ended September 30, 2021 as compared to $1,113.7 million for the nine months ended September 30, 2020. The decrease in the provision for loan loss in the current year was due to improved credit performance, lower net charge-offs and improving macroeconomic variables. For the nine months ended September 30, 2020, there was a significant increase in the provision due to a reserve build in the allowance for loan loss associated with the deterioration of the global macroeconomic outlook as a result of the onset of COVID-19.

~~General and administrative~~. General and administrative expenses increased $5.4 million, or 7%, to $78.6 million for the nine months ended September 30, 2021 as compared to $73.2 million for the nine months ended September 30, 2020, due to higher data processing expenses and an increase in professional services expenses associated with the planned spinoff.

~~Depreciation and other amortization~~. Depreciation and other amortization increased $5.5 million, or 10%, to $61.7 million for the nine months ended September 30, 2021 as compared to $56.2 million for the nine months ended September 30, 2020, primarily due to an increase in depreciation and amortization of $5.5 million in our LoyaltyOne segment driven by previous investments in digital technology.

~~Amortization of purchased intangibles~~. Amortization of purchased intangibles decreased $28.6 million, or 45%, to $35.5 million for the nine months ended September 30, 2021, as compared to $64.1 million for the nine months ended September 30, 2020, primarily due to certain fully amortized intangible assets, including BrandLoyalty customer contracts, offset in part by $16.2 million in amortization of purchased intangibles associated with the acquisition of Bread in December 2020.

~~Interest expense, net~~. Total interest expense, net decreased $78.8 million, or 21%, to $302.5 million for the nine months ended September 30, 2021 as compared to $381.3 million for the nine months ended September 30, 2020. The net decrease was due to the following:

●

~~Securitization funding costs~~. Securitization funding costs decreased $40.2 million due to lower average borrowings, which decreased funding costs by approximately $39.0 million, and lower average interest rates, which decreased funding costs by approximately $1.2 million.

●

~~Interest expense on deposits~~. Interest expense on deposits decreased $47.4 million due to lower average balances outstanding, which decreased funding costs by approximately $25.3 million, and lower average interest rates, which decreased funding costs by approximately $22.1 million.

●

~~Interest expense on long-term and other debt, net~~. Interest expense on long-term and other debt, net increased $8.8 million primarily due to a $25.4 million increase in interest expense associated with the issuance of senior notes in September 2020, offset in part by a $16.2 million decrease in interest expense on term debt due to lower average borrowings.

~~Taxes.~~ Provision for income taxes increased $226.8 million to $273.4 million for the nine months ended September 30, 2021 from $46.6 million for the nine months ended September 30, 2020 due to an increase in income before income taxes. The effective tax rate for the nine months ended September 30, 2021 was 25.9% as compared to 18.8% for the prior year. The increase in the effective tax rate for the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020 was primarily due to greater discrete tax benefits recorded in the prior year, which included the expiration of statutes of limitation related to certain foreign tax matters, a favorable state tax settlement and a benefit related to the issuance of final regulations on the Global Intangible Low-Taxed Income, or GILTI, high tax exception.

~~Index~~

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

Three Months Ended September 30,

Nine Months Ended September 30,


2021

2020

% Change


2021

2020

% Change

(in millions, except percentages)

Revenue:

LoyaltyOne

$
169.3

$
184.8

(8)
%

$
496.7

$
533.9

(7)
%
Card Services

930.0

865.7

7

2,699.8

2,877.5

(6)

Corporate/Other

—

—

—

—

0.1

nm
*
Total

$
1,099.3

$
1,050.5

5
%

$
3,196.5

$
3,411.5

(6)
%

Income (Loss) Before Income Taxes

LoyaltyOne

$
44.5

$
18.3

143
%

$
100.7

$
88.9

13
%
Card Services

314.2

212.1

48

1,128.5

314.5

259

Corporate/Other

(63.9)

(54.5)

17

(168.3)

(155.1)

9

Eliminations

(4.1)

—

nm
*

(4.1)

—

nm
*
Total

$
290.7

$
175.9

65
%

$
1,056.8

$
248.3

326
%

*	~~not meaningful~~

~~Three months ended September 30, 2021 compared to the three months ended September 30, 2020~~

●

~~LoyaltyOne~~. Revenue decreased $15.5 million, or 8%, to $169.3 million for the three months ended September 30, 2021, as revenue from our short-term loyalty programs decreased $21.2 million due to the continued impact of the pandemic, offset in part by a $5.7 million increase in revenue from our coalition program driven by a 30% increase in AIR MILES reward miles redeemed.

●

~~Card Services~~. Revenue increased $64.3 million, or 7%, to $930.0 million for the three months ended September 30, 2021, driven by a $79.0 million increase in finance charges, net primarily due to the increase in finance charge yield resulting from higher late fees as revenue in 2020 was impacted by consumer relief programs, and the decline in charge-offs for unpaid interest and fees by $51.6 million. The increase in Card Services revenue was offset in part by a $9.2 million decrease in merchant fee revenue resulting from increased payments to our retailers as both credit sales and volumes increased from the prior year quarter.

~~Income Before Income Taxes~~. Income before income taxes increased $114.8 million, or 65%, to $290.7 million for the three months ended September 30, 2021 from $175.9 million for the three months ended September 30, 2020. The net increase was due to the following:

●

~~LoyaltyOne~~. Income before income taxes increased $26.2 million, or 143%, to $44.5 million for the three months ended September 30, 2021. The increase in income before income taxes was due to a $12.1 million decrease in amortization of purchased intangibles due to certain fully amortized intangible assets, a $4.1 million gain on sale of an investment to an affiliate of the Company that was eliminated upon consolidation and net margin improvement from our short-term loyalty programs, offset in part by the decrease in revenue discussed above.

●

~~Card Services~~. Income before income taxes increased $102.1 million, or 48%, to $314.2 million for the three months ended September 30, 2021 resulting from a $46.6 million decrease in the provision for loan loss due to improved credit performance, a $27.1 million decrease in interest expense, net due to lower average balances and the increase in revenue discussed above.

●

~~Corporate/Other~~. Loss before income taxes increased $9.4 million for the three months ended September 30, 2021 due to an increase in payroll and benefits expense for higher medical claims and an increase in interest expense associated with the issuance of senior notes in September 2020.

~~Index~~

~~Nine months ended September 30, 2021 compared to the nine months ended September 30, 2020~~

●

~~LoyaltyOne~~. Revenue decreased $37.2 million, or 7%, to $496.7 million for the nine months ended September 30, 2021 as revenue from our short-term loyalty programs decreased $44.0 million due to a decline in programs in market across most regions with the impact of COVID-19. This decrease was offset in part by an increase of $6.8 million in revenue from our coalition program driven by a 6% increase in AIR MILES reward miles redeemed and favorability in foreign currency exchange rates.

●

~~Card Services~~. Revenue decreased $177.7 million, or 6%, to $2,699.8 million for the nine months ended September 30, 2021, driven by a $138.4 million decrease in finance charges, net due to a decline in credit card and loan receivables as payment rates continue to benefit from consumer economic stimulus, a $17.6 million decrease in merchant fee revenue due to increased payments to our retailers and a $14.7 million decrease in other servicing fees charged to cardholders, resulting from a decline in revenue from certain payment protection products.

~~Income Before Income Taxes~~. Income before income taxes increased $808.5 million, or 326%, to $1,056.8 million for the nine months ended September 30, 2021 from $248.3 million for the nine months ended September 30, 2020. The net increase was due to the following:

●

~~LoyaltyOne~~. Income before income taxes increased $11.8 million, or 13%, to $100.7 million for the nine months ended September 30, 2021. The increase in income before income taxes was due to a $34.9 million decrease in amortization of purchased intangibles due to certain fully amortized intangible assets, a $4.1 million gain on sale of an investment to an affiliate of the Company that was eliminated upon consolidation and net margin improvement from our short-term loyalty programs, offset in part by the decrease in revenue discussed above.

●

~~Card Services~~. Income before income taxes increased $814.0 million, or 259%, to $1,128.5 million for the nine months ended September 30, 2021 due to a $933.4 million decrease in the provision for loan loss from improved credit performance, improvement in the macroeconomic environment and a decline in credit card and loan receivables. Income before income taxes also benefitted from an $87.6 million decrease in interest expense, net from lower average balances, the effect of which was offset in part by lower revenue as discussed above.

●

~~Corporate/Other~~~~. Loss before income taxes increased $13.2 million for the nine months ended September 30, 2021 due to an increase in interest expense associated with the issuance of senior notes in September 2020.~~

~~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 not receive the minimum payment by the specified due date. Our policy is to continue to accrue interest and fee income on all accounts, except in limited circumstances, until the balance and all related interest and 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 we are unable to make a collection after exhausting all in-house collection efforts, we may engage collection agencies and outside attorneys to continue those efforts.

~~Index~~

~~The following table presents the delinquency trends of our credit card and loan receivables portfolio based on the principal balances of our credit card and loan receivables:~~

September 30,

% of

December 31,

% of


2021

Total

2020

Total

(in millions, except percentages)

Receivables outstanding ─ principal

$
14,939.9

100.0
%
$
15,963.3

100.0
%
Principal receivables balances contractually delinquent:

31 to 60 days

$
192.9

1.3
%
$
229.9

1.4
%
61 to 90 days

126.0

0.9

162.8

1.0

91 or more days

242.7

1.6

315.2

2.0

Total

$
561.6

3.8
%
$
707.9

4.4
%

~~Net Charge-Offs~~. Our net charge-offs include the principal amount of losses that are deemed uncollectible, less recoveries and exclude charged-off interest, fees and fraud losses. Charged-off interest and fees reduce finance charges, net while fraud losses are recorded as an expense. Credit card receivables, including unpaid interest and fees, are charged-off in the month during which an account becomes 180 days contractually past due, except in the case of customer bankruptcies or death. Installment loan receivables, including unpaid interest, are charged-off when a loan is 120 days past due, including in the case of customer bankruptcies or death. Credit card receivables, including unpaid interest and fees, associated with customer bankruptcies or death 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.

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 net charge-offs for the periods indicated:

Three Months Ended

Nine Months Ended

September 30,

September 30,


2021

2020

2021

2020

(in millions, except percentages)

Average credit card and loan receivables

$
15,470.5

$
15,299.6

$
15,512.4

$
16,570.1

Net charge-offs of principal receivables

151.5

223.1

543.5

847.9

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

3.9
%

5.8
%

4.7
%

6.8
%

~~Liquidity and Capital Resources~~

Our primary sources of liquidity include cash generated from operating activities, our credit agreements, 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.

~~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, including the expenses associated with the planned spinoff of our LoyaltyOne segment, 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, increase our cost of capital or make capital unavailable on terms acceptable to us or at all.

~~Cash Flow Activity~~

~~Operating Activities.~~ We generated cash flow from operating activities of $1,208.0 million and $1,488.6 million for the nine months ended September 30, 2021 and 2020, respectively. The year-over-year decrease in operating cash flows of $280.6 million was primarily due to a decline in profitability after adjusting net income for non-cash charges and an increase in working capital.

~~Index~~

~~Investing Activities~~. Cash provided by investing activities was $380.7 million and $3,364.8 million for the nine months ended September 30, 2021 and 2020, respectively. Significant components of investing activities were as follows:

●

~~Credit card and loan receivables.~~ Cash increased $87.9 million for the nine months ended September 30, 2021 due to a decrease in credit card and loan receivables from increases in payment rates that benefitted from government economic stimulus programs. Cash increased $3,107.8 million for the nine months ended September 30, 2020 due to a decrease in credit card and loan receivables as a result of the pandemic-related store closures.

●

~~Proceeds from sale of business.~~ ~~During the nine months ended September 30, 2020, we received cash consideration of $26.7 million from the sale of Precima.~~

●

~~Proceeds from sale of credit card portfolio.~~ ~~During the nine months ended September 30, 2021 and 2020, we received cash consideration of $512.2 million and $289.5 million, respectively, from the sale of a credit card portfolio in each period.~~

●

~~Purchase of credit card portfolios.~~ During the nine months ended September 30, 2021, we paid cash consideration of $99.5 million for the purchase of three credit card portfolios. No portfolios were acquired for the nine months ended September 30, 2020.

●

~~Capital expenditures.~~ Cash paid for capital expenditures was $58.8 million and $37.9 million for the nine months ended September 30, 2021 and 2020, respectively. The year-over-year increase was due to additional investments in internally developed software associated with digital tools.

~~Financing Activities~~. Cash used in financing activities was $1,157.1 million and $5,064.3 million for the nine months ended September 30, 2021 and 2020, respectively. Significant components of financing activities are as follows:

●

~~Debt.~~ Cash decreased $76.1 million and $44.5 million for the nine months ended September 30, 2021 and 2020, respectively, due to net repayments of our term loans. In September 2020, we issued $500.0 million in senior notes and used the net proceeds of $493.8 million to make a prepayment of our term debt under our amended credit agreement.

●

~~Non-recourse borrowings of consolidated securitization entities.~~ Cash decreased $1,123.7 million and $2,945.0 million for the nine months ended September 30, 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 nine months ended September 30, 2021, cash increased $88.4 million due to net issuances of deposits. During the nine months ended September 30, 2020, cash decreased $2,012.0 million due to net maturities of deposits. The volume of deposits as of September 30, 2021 and 2020 was lower as a result of lower liquidity requirements.

●

~~Dividends.~~ Cash paid for quarterly dividends and dividend equivalents was $31.6 million and $50.5 million for the nine months ended September 30, 2021 and 2020, respectively. The quarterly dividend was reduced in the second quarter of 2020 from $0.63 to $0.21 per share in response to COVID-19.

~~Debt~~

~~Credit Agreement~~

In July 2021, we amended our credit agreement to, among other things, (i) provide consent by the lenders to the spinoff or sale of our LoyaltyOne segment, (ii) extend the maturity date of the revolving loans and approximately 86% of the term loans from December 31, 2022 to July 1, 2024, (iii) revise the method of determining interest rates and commitment fees to be charged in connection with the loans, (iv) modify the financial and operational covenants and certain other provisions in the credit agreement to reflect our business and operations after giving effect to the LoyaltyOne spinoff or sale, (v) require a prepayment of certain of the loans in an amount equal to the net proceeds from the LoyaltyOne spinoff or sale, including any net proceeds from debt that is distributed to us minus, in the case of the first transaction associated with the divestiture of the LoyaltyOne spinoff or sale, $25.0 million and (vi) add Lon Inc. and Lon Operations LLC acquired in our acquisition of Bread as additional guarantors.

~~Index~~

At September 30, 2021, we had $1,408.3 million in term loans outstanding and a $750.0 million revolving line of credit. As of September 30, 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 1.5 to 1 at September 30, 2021, as compared to the maximum covenant ratio of 4.5 to 1.

~~As of September 30, 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 September 30, 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 September 30, 2021, we had $5.0 billion in certificates of deposit outstanding with interest rates ranging from 0.20% to 3.75% and maturities ranging from October 2021 to September 2026. Certificate of deposit borrowings are subject to regulatory capital requirements.

As of September 30, 2021, we had $4.9 billion in money market deposits outstanding with interest rates ranging from 0.37% to 3.50%. Money market deposits are redeemable on demand by the customer and, as such, have no scheduled maturity date.

~~Securitization Program~~

We sell a majority of the credit card receivables originated by Comenity Bank and Comenity Capital Bank to certain master trusts. These securitization programs are a principal vehicle through which we finance Comenity Bank’s and Comenity Capital Bank’s credit card receivables. Historically, we have used both public and private term asset-backed securitization transactions as well as private conduit facilities as sources of funding for our securitized credit card receivables. Private conduit facilities have been used to accommodate seasonality needs and to bridge to completion of asset-backed securitization transactions.

During the nine months ended September 30, 2021, $1.8 billion of asset-backed term notes matured and were repaid, of which $265.9 million were retained by us and eliminated from the consolidated balance sheets.

We have access to committed undrawn capacity through three conduit facilities to support the funding of our credit card and loan receivables through the trusts. As of September 30, 2021, total capacity under the conduit facilities was $4.5 billion, of which $2.7 billion had been drawn and was included in non-recourse borrowings of consolidated securitization entities in the consolidated balance sheets.

As of September 30, 2021, we had approximately $10.1 billion of securitized credit card and loan receivables. Securitizations require credit enhancements in the form of cash, spread deposits, additional receivables 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.

~~Index~~

~~The following table shows the maturities of borrowing commitments as of September 30, 2021 for the trusts by year:~~

2021

2022

2023

2024

Thereafter

Total

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

$
322.3

$
1,571.7

$
—

$
—

$
—

$
1,894.0
Conduit facilities ⁽¹⁾

—

1,725.0

2,750.0

—

—

4,475.0
Total ⁽²⁾

$
322.3

$
3,296.7

$
2,750.0

$
—

$
—

$
6,369.0

~~(1)~~

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

~~(2)~~

~~Total amounts do not include $1,061.8 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,” of the Notes to Unaudited Condensed Consolidated Financial Statements for additional information regarding our debt.~~

~~Regulatory Matters~~

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. Comenity Bank and Comenity Capital Bank are considered well capitalized. The actual capital ratios and minimum ratios as of September 30, 2021 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

23.4
%

4.0
%

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

27.8

4.5

6.5

Tier 1 capital to risk-weighted assets

27.8

6.0

8.0

Total capital to risk-weighted assets

29.1

8.0

10.0

Comenity Capital Bank

Tier 1 capital to average assets

15.7
%

4.0
%

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

17.6

4.5

6.5

Tier 1 capital to risk-weighted assets

17.6

6.0

8.0

Total capital to risk-weighted assets

19.0

8.0

10.0

Comenity Bank and Comenity Capital Bank have adopted the option provided by the interim final rule issued by joint federal bank regulatory agencies, which largely delays the effects of CECL on its regulatory capital for two years, after which the effects will be phased-in over a three-year period from January 1, 2022 through December 31, 2024. Under the interim final rule, the amount of adjustments to regulatory capital deferred until the phase-in period includes both the initial impact of our adoption of CECL at January 1, 2020 and 25% of subsequent changes in our allowance for credit losses during each quarter of the two-year period ended December 31, 2021.

~~Dividends~~

On January 28, 2021, our board of directors declared a quarterly cash dividend of $0.21 per share on our common stock to stockholders of record at the close of business on February 12, 2021, resulting in an aggregate dividend payment of $10.4 million on March 18, 2021.

On April 29, 2021, our board of directors declared a quarterly cash dividend of $0.21 per share on our common stock to stockholders of record at the close of business on May 14, 2021, resulting in an aggregate dividend payment of $10.4 million on June 18, 2021.

On July 29, 2021, our board of directors declared a quarterly cash dividend of $0.21 per share on our common stock to stockholders of record at the close of business on August 13, 2021, resulting in an aggregate dividend payment of $10.4 million on September 17, 2021.

~~Index~~

~~Additionally, we paid $0.2 million in cash related to dividend equivalent rights for the nine months ended September 30, 2021.~~

On October 28, 2021, our board of directors declared a quarterly cash dividend of $0.21 per share on our common stock, payable on December 17, 2021 to stockholders of record at the close of business on November 12, 2021.

~~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, cost of capital 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.~~or other market risks.

Item 4.

~~Item 4.~~ Controls and Procedures.

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

~~As of September 30, 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, ofhas 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 have concluded that, as of ~~September 30, 2021 (the~~the end of ~~our third 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, 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 third~~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.

4841

~~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.

~~Other than as set forth below, there~~

There have been no material changes to the Risk Factors previously disclosed in our Annual Report on Form 10-K for the ~~year ended~~year-ended December 31, ~~2020~~2021 or our Quarterly ~~Reports~~Report on Form 10-Q for the ~~quarters ended~~quarter-ended March 31, ~~2021~~2022. Additional risks and ~~June 30, 2021.~~

~~The planned spinoff~~uncertainties that we are unaware of, or that we currently believe are not material, may also become important factors that adversely affect our ~~LoyaltyOne segment may not be completed on the terms or timeline currently contemplated, if at all, and may not achieve the expected results.~~business.

On October 13, 2021, the Board of Directors of Alliance Data Systems Corporation, or ADSC, approved the previously announced Separation of its LoyaltyOne segment, consisting of its Canadian AIR MILES® Reward Program and Netherlands-based BrandLoyalty businesses, into an independent, publicly traded company, Loyalty Ventures. The Separation will be completed through the pro rata distribution of 81% of the outstanding shares of Loyalty Ventures to holders of the Company’s common stock at the close of business on the record date of October 27, 2021, with ADSC retaining the remaining 19% of the outstanding shares of Loyalty Ventures. ADSC stockholders of record at the close of business on October 27, 2021 will receive one share of Loyalty Ventures common stock for every two and one-half (2.5) shares of ADSC common stock. The distribution is expected to qualify as a tax-free reorganization and a tax-free distribution to ADSC and its stockholders for U.S. federal income tax purposes and is expected to be completed on November 5, 2021.

There are numerous risks associated with the planned spinoff, including, but not limited to, the risk of significant additional costs being incurred to effect the spinoff, particularly if it is delayed or does not occur at all; the risk of disruption to our business in connection with the spinoff negatively impacting our results of operations; the risk that the spinoff will require significant time and attention from our senior management and employees, negatively impacting operations; the risk that we may find it more difficult to attract, retain and motivate employees during the pendency of the spinoff or following its completion; the risk that the companies resulting from the spinoff do not realize all of the expected benefits of the spinoff; the risk that the smaller, independent companies resulting from the spinoff will be less diversified with a narrower business focus that makes one or both more vulnerable to changing market conditions or takeover by third parties; the risk that the spinoff will not be tax-free for U.S. federal income tax purposes; and the risk that there will be a loss of synergies from separating the businesses that could negatively impact the balance sheet, profit margins or earnings of one or both companies. The potential negative impact of the events described above could have a material adverse effect on our business, financial condition, results of operations and prospects, whether we are constituted as two independent publicly-traded companies after the spinoff is completed or as one company as currently constituted.

~~Following the spinoff, the share price for our common stock may fluctuate significantly.~~

We cannot predict the effect of the spinoff on the trading price of shares of our common stock. The trading price of shares of ADSC common stock immediately following the planned spinoff is expected to be lower than immediately prior to the spinoff because the trading price will no longer reflect the value of the LoyaltyOne business. Moreover, we cannot assure you that the combined trading prices of our common stock and Loyalty Ventures’ common stock after the spinoff, as adjusted for any changes in the combined capitalization of both companies, will be equal to or greater than the trading price of our common stock prior to the spinoff. Until the market has fully evaluated our business without

~~Index~~

~~Loyalty Ventures, the price at which our common stock trades may fluctuate significantly. In addition, the trading price of our common stock may be more volatile around the time of the spinoff.~~

Item 2.

~~Item 2.~~ Unregistered Sales 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 ~~September~~June 30, ~~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)						(Millions)
During 2021:
July 1-31	1,907	$	98.08	—	$	—
August 1-31	6,391		93.35	—		—
September 1-30	2,326		101.57	—		—
April 1-30							2,950	$	55.74	—	$	—
May 1-31							2,356		52.28	—		—
June 1-30							3,407		47.34	—		—
Total	10,624	$	96.00	—	$	—	8,713	$	51.52	—	$	—

(1)

During the ~~period represented by the table, 10,624~~periods presented, 8,713 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.~~Plan.

Item 3.

~~Item 3.~~ Defaults Upon Senior Securities.

~~None~~None.

Item 4.Mine Safety ~~Disclosures.~~Disclosures.

Not applicable.

Item 5.

~~Item 5.~~ Other Information.

(a)

None

~~(b)~~ ~~None~~

(b)

None

5042

~~Index~~Table of Contents

Item 6.Exhibits.

~~(a)~~ ~~Exhibits:~~

Exhibits:

EXHIBIT INDEX

			Incorporated by Reference					Incorporated by Reference

HIDDEN_ROW
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	(a)	Seventh Amendment to Amended and Restated Credit Agreement, dated as of July 9, 2021, by and among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors, Wells Fargo Bank, National Association, as administrative agent, and various other agents and lenders.	8-K	10.1	7/14/21	(b) (c) (d)	Fourth Amended and Restated Service Agreement, dated as of June 1, 2022, by and between Comenity Bank and Comenity Servicing LLC.	10-D	99.2	6/15/22

#10.2	(a)	Third Amendment to Private Label Credit Card Program Agreement, dated as of August 1, 2021, by and between Victoria’s Secret Stores, LLC, VS Service Company, LLC by change of name and organizational form from L Brands Direct Marketing, Inc., L Brands Direct Fulfillment, LLC by change of organizational form from L Brands Direct Fulfillment, Inc., VSPR Store Operations, LLC by change of name from Puerto Rico Store Operations, LLC, and Comenity Bank.	10-Q	10.9	8/5/21

10.3	(b) (c) (d)	Sixth Addendum to Appendix A of Third Amended and Restated Service Agreement, as Amended, dated as of August 31, 2021, between Comenity Servicing LLC and Comenity Bank.	8-K	99.1	9/3/21

*10.4	(a)	First Supplemental Indenture, dated as of August 6, 2021, among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors and MUFG Union Bank, N.A., as trustee under the Indenture dated as of December 20, 2019.

*10.5	(a)	First Supplemental Indenture, dated as of August 6, 2021, among Alliance Data Systems Corporation, certain of its subsidiaries as guarantors and MUFG Union Bank, N.A., as trustee under the Indenture dated as of September 22, 2020.

*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 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 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.

*101						(a)	The following financial information from Bread Financial Holdings, Inc.’s Quarterly Report on Form 10-Q for the quarter ended June 30, 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

5143

~~Index~~Table of Contents

** Furnished herewith

(a)

Bread Financial Holdings, Inc.

(b)

WFN Credit Company, LLC

(c)

World Financial Network Credit Card Master Trust

(d)

World Financial Network Credit Card Master Note Trust

Table of Contents

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, 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.

Exhibit No.		~~Filer~~	~~Description~~	~~Exhibit~~
	~~Incorporated by Reference~~

	BREAD FINANCIAL HOLDINGS, INC.

*32.1	DATE:	~~(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.	August 4, 2022

*32.2		~~(a)~~	Certification of Chief Financial 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.

*101		~~(a)~~	The following financial information from Alliance Data Systems Corporation’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2021, formatted in Inline XBRL: (i) Condensed Consolidated Balance Sheets, (ii) Condensed Consolidated Statements of Income, (iii) Condensed Consolidated Statements of Comprehensive Income, (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~~

#	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.

~~(a)~~

~~Alliance Data Systems Corporation~~

~~(b)~~

~~WFN Credit Company, LLC~~

~~(c)~~

~~World Financial Network Credit Card Master Trust~~

~~(d)~~

~~World Financial Network Credit Card Master Note Trust~~

~~Index~~

~~SIGNATURES~~

~~Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.~~

		~~ALLIANCE DATA SYSTEMS CORPORATION~~

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

DATE: August 4, 2022
			~~President and Chief Executive Officer~~

~~Date: November 3, 2021~~
		By:	/s/ PERRY S. BEBERMAN
			Perry S. Beberman
			Executive Vice President and Chief Financial Officer

~~Date: November 3, 2021~~

5345


	September 30,		December 31,
	2021		2020

	(in millions, except per share amounts)
ASSETS
Cash and cash equivalents	$	3,172.2	$	3,081.5
Accounts receivable, net, less allowance for doubtful accounts ($7.1 million and $4.0 million at September 30, 2021 and December 31, 2020, respectively)		371.5		383.8
Credit card and loan receivables:
Credit card and loan receivables – restricted for securitization investors		10,102.7		11,208.5
Other credit card and loan receivables		5,587.2		5,575.9
Total credit card and loan receivables		15,689.9		16,784.4
Allowance for loan loss		(1,644.8)		(2,008.0)
Credit card and loan receivables, net		14,045.1		14,776.4
Inventories		192.3		164.3
Other current assets		872.3		534.9
Redemption settlement assets, restricted		734.0		693.5
Total current assets		19,387.4		19,634.4
Property and equipment, net		292.2		310.9
Right of use assets - operating		208.0		233.2
Deferred tax asset, net		337.9		359.2
Intangible assets, net		64.1		81.7
Goodwill		1,342.7		1,369.6
Other non-current assets		625.0		558.1
Total assets	$	22,257.3	$	22,547.1
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable	$	365.6	$	328.2
Accrued expenses		387.9		444.7
Current operating lease liabilities		21.9		23.6
Current portion of deposits		7,762.6		6,553.9
Current portion of non-recourse borrowings of consolidated securitization entities		3,094.6		1,850.7
Current portion of long-term and other debt		101.3		101.4
Other current liabilities		276.2		220.9
Deferred revenue		924.3		898.5
Total current liabilities		12,934.4		10,421.9
Deferred revenue		96.6		105.5
Long-term operating lease liabilities		249.9		276.4
Deposits		2,122.9		3,238.7
Non-recourse borrowings of consolidated securitization entities		1,494.1		3,859.2
Long-term and other debt		2,632.6		2,704.3
Other liabilities		481.2		419.5
Total liabilities		20,011.7		21,025.5
Commitments and contingencies (Note 14)
Stockholders’ equity:
Common stock, $0.01 par value; authorized, 200.0 million shares; issued, 49.8 million and 117.1 million shares at September 30, 2021 and December 31, 2020, respectively		0.5		1.2
Additional paid-in capital		2,170.8		3,427.2
Treasury stock, at cost, 0 shares and 67.4 million shares at September 30, 2021 and December 31, 2020, respectively		—		(6,733.9)
Retained earnings		130.5		4,832.1
Accumulated other comprehensive loss		(56.2)		(5.0)
Total stockholders’ equity		2,245.6		1,521.6
Total liabilities and stockholders’ equity	$	22,257.3	$	22,547.1


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2021		2020		2021		2020

	(in millions, except per share amounts)
Revenues
Services	$	10.5	$	24.7	$	70.4	$	109.2
Redemption, net		97.1		113.1		280.8		318.6
Finance charges, net		991.7		912.7		2,845.3		2,983.7
Total revenue		1,099.3		1,050.5		3,196.5		3,411.5
Operating expenses
Cost of operations (exclusive of depreciation and amortization disclosed separately below)		489.2		482.7		1,481.1		1,474.7
Provision for loan loss		161.1		207.7		180.3		1,113.7
General and administrative		34.5		29.0		78.6		73.2
Depreciation and other amortization		18.9		18.4		61.7		56.2
Amortization of purchased intangibles		12.8		21.7		35.5		64.1
Total operating expenses		716.5		759.5		1,837.2		2,781.9
Operating income		382.8		291.0		1,359.3		629.6
Interest expense
Securitization funding costs		26.0		37.5		89.9		130.1
Interest expense on deposits		37.3		52.9		124.7		172.1
Interest expense on long-term and other debt, net		28.8		24.7		87.9		79.1
Total interest expense, net		92.1		115.1		302.5		381.3
Income before income taxes		290.7		175.9		1,056.8		248.3
Provision for income taxes		67.0		42.6		273.4		46.6
Net income	$	223.7	$	133.3	$	783.4	$	201.7

Net income per share (Note 3):
Basic	$	4.50	$	2.79	$	15.75	$	4.23
Diluted	$	4.47	$	2.79	$	15.68	$	4.23

Weighted average shares (Note 3):
Basic		49.8		47.7		49.7		47.7
Diluted		50.0		47.8		50.0		47.7


					Corporate/
Three Months Ended September 30, 2021	LoyaltyOne		Card Services		Other		Total

	(in millions)
Disaggregation of Revenue by Major Source:

Coalition loyalty program	$	68.6	$	—	$	—	$	68.6
Short-term loyalty programs		95.8		—		—		95.8
Servicing fees, net		—		(61.7)		—		(61.7)
Other		1.6		—		—		1.6
Revenue from contracts with customers	$	166.0	$	(61.7)	$	—	$	104.3

Finance charges, net		—		991.7		—		991.7
Investment income		3.3		—		—		3.3
Total	$	169.3	$	930.0	$	—	$	1,099.3


	Deferred Revenue
	Service		Redemption		Total

	(in millions)
Balance at January 1, 2021	$	247.2	$	756.8	$	1,004.0
Cash proceeds		129.0		206.7		335.7
Revenue recognized ⁽¹⁾		(148.4)		(175.7)		(324.1)
Other		—		1.2		1.2
Effects of foreign currency translation		1.3		2.8		4.1
Balance at September 30, 2021	$	229.1	$	791.8	$	1,020.9
Amounts recognized in the consolidated balance sheets:
Deferred revenue (current)	$	132.5	$	791.8	$	924.3
Deferred revenue (non-current)	$	96.6	$	—	$	96.6


	Three Months Ended September 30,				Nine Months Ended September 30,
	2021		2020		2021		2020

	(in millions, except per share amounts)
Numerator:
Net income	$	223.7	$	133.3	$	783.4	$	201.7

Denominator:
Weighted average shares, basic		49.8		47.7		49.7		47.7
Weighted average effect of dilutive securities:
Net effect of dilutive unvested restricted stock ⁽¹⁾		0.2		0.1		0.3		—
Denominator for diluted calculation		50.0		47.8		50.0		47.7

Basic net income per share:	$	4.50	$	2.79	$	15.75	$	4.23
Diluted net income per share:	$	4.47	$	2.79	$	15.68	$	4.23


	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


	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 September 30, 2021	$	230.8	$	160.1	$	346.6	$	737.5	$	14,694.3	$	15,431.8

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


	Three Months Ended			Nine Months Ended
	September 30, 2021			September 30, 2021
	Number of	Outstanding		Number of	Outstanding
	Restructurings	Balance		Restructurings	Balance

	(Dollars in millions)
Troubled debt restructurings that subsequently defaulted – credit card receivables	19,888	$	27.0	102,624	$	136.4


	Three Months Ended			Nine Months Ended
	September 30, 2020			September 30, 2020
	Number of	Outstanding		Number of	Outstanding
	Restructurings	Balance		Restructurings	Balance

	(Dollars in millions)
Troubled debt restructurings that subsequently defaulted – credit card receivables	28,724	$	37.8	82,000	$	113.1


	Amortized Cost Revolving Credit Card Receivables
	September 30, 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	$	172.4	1.1	%	$	204.1	1.2	%
27.1% and higher		1,036.0	6.8			1,390.4	8.5
17.1% - 27.0%		739.8	4.8			848.8	5.2
12.6% - 17.0%		843.5	5.5			937.0	5.7
3.7% - 12.5%		6,889.9	45.1			7,305.5	44.6
1.9% - 3.6%		2,752.4	18.0			2,939.5	17.9
Lower than 1.9%		2,837.0	18.7			2,751.1	16.9
Total	$	15,271.0	100.0	%	$	16,376.4	100.0	%


	Amortized		Estimated
	Cost		Fair Value

	(in millions)
Due in one year or less ⁽¹⁾	$	62.5	$	62.5
Due after one year through five years		0		0
Due after five years through ten years		—		—
Due after ten years		171.1		174.4
Total	$	233.6	$	236.9


	Operating
Year	Leases
	(in millions)
2021 (excluding the nine months ended September 30, 2021)	$	6.7
2022		38.5
2023		37.2
2024		35.4
2025		34.7
Thereafter		205.8
Total undiscounted lease liabilities		358.3
Less: Amount representing interest		(86.5)
Total present value of minimum lease payments	$	271.8

Amounts recognized in the September 30, 2021 consolidated balance sheet:
Current operating lease liabilities	$	21.9
Long-term operating lease liabilities		249.9
Total	$	271.8


	September 30, 2021
	Gross		Accumulated
	Assets		Amortization		Net		Amortization Life and Method

	(in millions)
Definite-Lived Assets
Customer contracts and lists	$	8.8	$	(2.4)	$	6.4	3 years—straight line
Premium on purchased credit card portfolios		132.1		(81.2)		50.9	1-13 years—straight line
Collector database		55.2		(55.1)		0.1	5 years—straight line
Tradenames		33.2		(29.5)		3.7	4-15 years—straight line
Non-compete agreements		2.2		(0.4)		1.8	5 years—straight line
	$	231.5	$	(168.6)	$	62.9
Indefinite-Lived Assets
Tradename		1.2		—		1.2	Indefinite life
Total intangible assets	$	232.7	$	(168.6)	$	64.1


	For the Years Ending
	December 31,
	(in millions)
2021 (excluding the nine months ended September 30, 2021)	$	8.0
2022		21.4
2023		16.1
2024		11.2
2025		2.4
Thereafter		3.8


			Fair Value Measurements at
			September 30, 2021 Using
	Balance at
	September 30,
	2021		Level 1		Level 2		Level 3

	(in millions)
Mutual funds ⁽¹⁾	$	26.2	$	26.2	$	—	$	—
Corporate bonds ⁽¹⁾		649.6		—		649.6		—
Marketable securities ⁽²⁾		236.9		48.8		188.1		—
Derivative instruments ⁽³⁾		1.9		—		1.9		—
Total assets measured at fair value	$	914.6	$	75.0	$	839.6	$	—

Derivative instruments ⁽³⁾	$	0.8	$	—	$	0.8	$	—
Total liabilities measured at fair value	$	0.8	$	—	$	0.8	$	—